-----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, Q8MyINdvVt6MVynKZho71WlxN1whN/z4SquwUWL07ki9NzpENqVkVvVd4pHSn9bG yG/AtA2hDIyqUIvQ+71wnw== 0000950123-98-007745.txt : 19980819 0000950123-98-007745.hdr.sgml : 19980819 ACCESSION NUMBER: 0000950123-98-007745 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 56 FILED AS OF DATE: 19980818 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: J H HEAFNER CO INC CENTRAL INDEX KEY: 0001068152 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 560754594 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713 FILM NUMBER: 98693499 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPEED MERCHANT INC CENTRAL INDEX KEY: 0000934022 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-01 FILM NUMBER: 98693500 BUSINESS ADDRESS: STREET 1: 1140 CAMPBELL AVE CITY: SAN JOSE STATE: CA ZIP: 95126 BUSINESS PHONE: 4082439800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLIVER & WINSTON INC CENTRAL INDEX KEY: 0001068239 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-02 FILM NUMBER: 98693501 BUSINESS ADDRESS: STREET 1: 900 W ALAMEDA AVENUE CITY: BURBANK STATE: CA ZIP: 91506 BUSINESS PHONE: 8189721200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITCO LOGISTIC CORP CENTRAL INDEX KEY: 0001068240 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-03 FILM NUMBER: 98693502 BUSINESS ADDRESS: STREET 1: 900 W ALAMEDA AVENUE CITY: BURBANK STATE: CA ZIP: 91506 BUSINESS PHONE: 8189721200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITCO HOLDING CO INC CENTRAL INDEX KEY: 0001068241 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-04 FILM NUMBER: 98693503 BUSINESS ADDRESS: STREET 1: P O BOX 837 CITY: LINCOLNTON STATE: NC ZIP: 28092 BUSINESS PHONE: 8189721200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITCO TIRE CO CENTRAL INDEX KEY: 0001068242 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-05 FILM NUMBER: 98693504 BUSINESS ADDRESS: STREET 1: P O BOX 837 CITY: LINCOLNTON STATE: NC ZIP: 28092 BUSINESS PHONE: 8189721200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITCO TIRE CO OF GA CENTRAL INDEX KEY: 0001068243 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-06 FILM NUMBER: 98693505 BUSINESS ADDRESS: STREET 1: P O BOX 837 CITY: LINCOLNTON STATE: NC ZIP: 28092 BUSINESS PHONE: 8189721200 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOENIX RACING INC CENTRAL INDEX KEY: 0001068264 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61713-07 FILM NUMBER: 98693506 BUSINESS ADDRESS: STREET 1: 1140 CAMPBELL AVENUE CITY: SAN JOSE STATE: CA ZIP: 95126 BUSINESS PHONE: 4082433400 S-4 1 THE J.H. HAEFNER COMPANY, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 THE J. H. HEAFNER COMPANY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 5014 56-0754594 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ SEE TABLE OF ADDITIONAL REGISTRANTS 2105 WATER RIDGE PARKWAY, SUITE 500 CHARLOTTE, NORTH CAROLINA 28217 (704) 423-8989 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DONALD C. ROOF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER THE J. H. HEAFNER COMPANY, INC. 2105 WATER RIDGE PARKWAY, SUITE 500 CHARLOTTE, NORTH CAROLINA 28217 (704) 423-8989 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) WITH A COPY TO: SCOTT F. SMITH, ESQ. HOWARD, SMITH & LEVIN LLP 1330 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (212) 841-1000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] - --------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED PER UNIT PRICE(1) REGISTRATION FEE(2) - ------------------------------------------------------------------------------------------------------------------------------ 10% Senior Notes Due 2008......... $100,000,000 $1,000 $100,000,000 $29,500 - ------------------------------------------------------------------------------------------------------------------------------ Subsidiary Guaranties of 10% Senior Notes Due 2008........... -- -- -- (3) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(f)(2) under the Securities Act. (2) Calculated pursuant to Rule 457(f)(2) under the Securities Act. (3) Pursuant to Rule 457(n) under the Securities Act, no registration fee is payable with respect to the Subsidiary Guaranties. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF ADDITIONAL REGISTRANTS
- ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ JURISDICTION OF PRIMARY STANDARD INCORPORATION OR INDUSTRIAL CLASSIFICATION IRS EMPLOYER NAME ORGANIZATION CODE NUMBER IDENTIFICATION NUMBER - ------------------------------------------------------------------------------------------------------------------------ Oliver & Winston, Inc....................... California 5598 95-2407343 - ------------------------------------------------------------------------------------------------------------------------ ITCO Logistics Corporation.................. Delaware 5014 56-2001697 - ------------------------------------------------------------------------------------------------------------------------ ITCO Holding Company, Inc. ................. North Carolina 5014 56-1020830 - ------------------------------------------------------------------------------------------------------------------------ ITCO Tire Company........................... North Carolina 5014 56-1418417 - ------------------------------------------------------------------------------------------------------------------------ ITCO Tire Company of Georgia................ Virginia 5014 54-1260520 - ------------------------------------------------------------------------------------------------------------------------ The Speed Merchant, Inc. ................... California 5014 94-2414221 - ------------------------------------------------------------------------------------------------------------------------ Phoenix Racing, Inc. ....................... California 5598 77-0474076 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
3 CROSS-REFERENCE SHEET PURSUANT TO RULE 404(a) AND ITEM 501 OF REGULATION S-K, SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED TO BE INCLUDED THEREIN IN ACCORDANCE WITH PART I OF FORM S-4
ITEM NUMBER AND HEADING ON FORM S-4 CAPTION OR LOCATION IN PROSPECTUS - ----------------------------------- --------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.............................. Facing Page and Outside Front Cover Page of the Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................................ Inside Front and Outside Back Cover Pages of the Prospectus; Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges, and Other Information..................................... Forepart of Prospectus; Summary; Risk Factors; Summary Historical and Unaudited Pro Forma Financial Data; Selected Historical Condensed Combined Financial Data; The Exchange Offer 4. Terms of the Transaction................................ Summary; The Exchange Offer; Description of the New Notes; Certain U.S. Federal Income Tax Considerations; Risk Factors 5. Pro Forma Financial Information......................... Summary Historical and Unaudited Pro Forma Financial Data; Unaudited Pro Forma Condensed Combined Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations 6. Material Contacts with Company Being Acquired........... * 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters......... * 8. Interests of Named Experts and Counsel.................. * 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................ * 10. Information with Respect to S-3 Registrants............. * 11. Incorporation of Certain Information by Reference....... * 12. Information with Respect to S-2 or S-3 Registrants...... * 13. Incorporation of Certain Information by Reference....... * 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants.................................... Summary; Risk Factors; Summary Historical and Unaudited Pro Forma Financial Data; Selected Historical Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Description of New Credit Facility; Description of the New Notes 15. Information with Respect to S-3 Companies............... * 16. Information with Respect to S-2 or S-3 Companies........ * 17. Information with Respect to Companies Other Than S-3 or S-2 Companies......................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Information if Proxies, Consents or Authorizations Are to be Solicited....................................... * 19. Information if Proxies, Consents or Authorizations Are Not to be Solicited, or in an Exchange Offer.......... Management; Principal Stockholders; Certain Relationships and Related Transactions; The Exchange Offer
- --------------- * Item is inapplicable or response thereto is in the negative. 4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 18, 1998 PROSPECTUS THE J. H. HEAFNER COMPANY, INC. OFFER TO EXCHANGE ITS 10% SENIOR NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 10% SENIOR NOTES DUE 2008 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED The J. H. Heafner Company, Inc., a North Carolina corporation (the "Issuer" and, together with its subsidiaries, the "Company"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange (the "Exchange Offer") $1,000 principal amount of its 10% Senior Notes Due 2008 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for each $1,000 principal amount tendered of its outstanding 10% Senior Notes Due 2008 (the "Old Notes" and, together with the New Notes, the "Notes"), of which $100.0 million aggregate principal amount is outstanding. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes, except for certain transfer restrictions and registration and other rights relating to the exchange of Old Notes for New Notes. The New Notes evidence the same debt as the Old Notes and will be issued under the Indenture (as defined herein) governing the Old Notes. See "The Notes Exchange Offer" and "Description of the New Notes." Interest on the New Notes is payable semi-annually on May 15 and November 15 of each year, commencing November 15, 1998. The Notes are redeemable at the option of the Issuer, in whole or in part, at any time, on or after May 15, 2003 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, up to 35% of the original aggregate principal amount of the Notes may be redeemed from time to time prior to May 15, 2001 at the redemption price set forth herein, plus accrued and unpaid interest, if any, to the date of redemption, with the net proceeds of one or more Public Equity Offerings (as defined), provided that at least $65.0 million principal amount of the Notes remains outstanding immediately after each such redemption. Upon a Change of Control (as defined), each holder of Notes may require the Issuer to repurchase such holder's outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Notes are unsecured, senior obligations of the Issuer and are unconditionally guaranteed on an unsecured, senior basis by all of the Issuer's subsidiaries, other than certain immaterial subsidiaries (the "Subsidiary Guarantors"). The Notes rank pari passu in right of payment with all other existing and future unsecured senior indebtedness of the Issuer and senior in right of payment to any existing and future subordinated indebtedness of the Issuer. The Notes are effectively subordinated to all existing and future secured indebtedness of the Issuer and the Subsidiary Guarantors, including indebtedness under the New Credit Facility (as defined), to the extent of the value of the assets securing such indebtedness. The Notes are structurally subordinated to all existing and future indebtedness of any subsidiary of the Issuer (other than the Subsidiary Guarantors). As of June 30, 1998, the Company had outstanding, either directly or through guarantees, approximately $170.9 million of indebtedness, all of which was senior indebtedness and approximately $66.1 million of which was secured. The Indenture relating to the Notes permits the Company to incur additional indebtedness, including additional senior indebtedness, subject to certain limitations. See "Description of the New Notes." (cover continued on next page) SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE TENDERING NOTES IN THE EXCHANGE OFFER. THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998 5 (cover continued) The Company will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is subject to certain customary conditions. See "The Exchange Offer." Prior to this offering, there has been no public market for the Notes. The Company does not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system. Although there can be no assurance, the New Notes may be made eligible for trading in The PORTAL(SM) Market ("PORTAL"), a subsidiary of The Nasdaq Stock Market, Inc. There can be no assurance that an active market for the New Notes will develop. The New Notes are being offered hereunder in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement (as defined herein). Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to third parties, the Company believes the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than Restricted Holders (as defined herein) or Participating Broker-Dealers (as defined herein)) without compliance with the registration and prospectus delivery requirements of the Securities Act. Any holder who tenders Old Notes in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes or who is an affiliate of the Company may not rely upon such interpretations by the staff of the Commission and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Holders of Notes wishing to accept the Exchange Offer must represent to the Company in the Letter of Transmittal that such conditions have been met. Each broker-dealer (other than a Restricted Holder) that receives New Notes for its own account pursuant to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Any broker-dealer who is an affiliate of the Company may not rely on such no-action letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. See "Plan of Distribution." The Company will not receive any proceeds from this Exchange Offer. No dealer-manager is being used in connection with this Exchange Offer. Interest on the New Notes shall accrue from the last May 15 or November 15 on which interest was paid on the Old Notes so surrendered or, if no interest has been paid, from May 20, 1998. 2 6 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (together with any amendments, exhibits, annexes and schedules thereto, the "Registration Statement,") under the Securities Act with respect to the New Notes being offered by this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed or incorporated by reference as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Registration Statement (including the exhibits and schedules thereto) may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at Seven World Trade Center, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. Upon consummation of the Exchange Offer, the Company will become subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will be required to file periodic reports and other information with the Commission. In the event that the Company is not subject to the reporting requirements of the Exchange Act at any time following consummation of the Exchange Offer, the Company will be required under the Indenture, dated as of May 15, 1998 (the "Indenture"), among the Issuer, the Subsidiary Guarantors and First Union National Bank, as trustee (the "Trustee"), pursuant to which the Old Notes were, and the New Notes will be, issued, to continue to file with the Commission, and to furnish holders of the Notes with (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" with respect to the Company, and, with respect to the annual information only, a report on the financial statements therein by the Company's certified independent accountants, and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, for so long as any of the Old Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Old Notes or beneficial owner of the Old Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act. 3 7 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the related notes, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, (i) the "Issuer" refers to The J.H. Heafner Company, Inc., (ii) "Heafner" refers to the Issuer and its subsidiaries without giving effect to the ITCO Merger and the CPW Acquisition (each as defined), (iii) the "Company" refers to Heafner after giving effect to the ITCO Merger and the CPW Acquisition, (iv) "ITCO Logistics" refers to ITCO Logistics Corporation, (v)"ITCO" refers to ITCO Logistics Corporation and its subsidiaries, (vi) "Speed Merchant" refers to The Speed Merchant, Inc., (vii) "CPW" refers to Speed Merchant, d/b/a Speed Merchant and Competition Parts Warehouse, and its subsidiary and (viii) "New Businesses" refers to ITCO and CPW. The pro forma statements of operations and other sales-related information give effect to the Transactions (as defined) as if the Transactions had occurred at January 1, 1997. For purposes of the financial and other information appearing in this Prospectus, references to a fiscal year relate to a December 31 fiscal year end for the Company, the Issuer and Heafner, to a September 30 fiscal year end for ITCO and to an October 31 fiscal year end for CPW; references to years relate to calendar years. The purchase of the New Businesses, obtaining financing under the New Credit Facility, the offering of the Old Notes (the "Offering"), the application of proceeds of the Old Notes and under the New Credit Facility, the Reclassification (as defined) and the related transactions are collectively referred to in this Prospectus as the "Transactions." THE COMPANY General. The Company is one of the largest independent suppliers of tires to the replacement tire market in the United States. With over 65 distribution centers servicing 20 states, the Company believes that it is the largest independent distributor of new replacement tires in the Southeast and in California. Through this distribution network, the Company's wholesale divisions supplied 9.7 million tires in 1997 and currently serve an average of 20,000 customers each month. The Company's wholesale distribution operations accounted for approximately 82.5% of the Company's total net sales, on a pro forma basis, in 1997. Through its retail division, the Company operates over 215 retail tire and automotive service outlets in California and Arizona which sold over 1.2 million tires in 1997. The Company's Oliver & Winston, Inc. subsidiary ("Winston"), which currently operates 176 of the Company's retail tire and automotive service outlets, was the fourth largest independent tire dealer in the United States in 1997 based on number of locations. The Company generally stocks over 18,000 stock keeping units ("SKUs") of tires in its distribution centers, and supplies premium, economy and private-label brands of tires manufactured by the major tire manufacturers, including Michelin (which manufactures the B.F. Goodrich and Uniroyal brands), Kelly-Springfield (a division of Goodyear), Dunlop, Bridgestone/Firestone and Pirelli. The Company's private-label tires are sold under the Winston and Regul trademarks. In addition to its tire sales, the Company believes that it is a significant independent distributor and retailer of aftermarket wheels, automotive replacement parts and accessories and automotive service equipment. On a pro forma basis, the Company generated net sales and EBITDA of $830.7 million and $28.1 million, respectively, in fiscal 1997. In 1997, on a pro forma basis, sales of tires accounted for approximately 78.6% of the Company's total net sales, sales of automotive service, 7.7%, sales of custom wheels, 6.8%, sales of automotive service equipment, 3.1%, and sales of parts and other products, 3.8%. Industry Overview. Purchasers in the United States spent approximately $18.1 billion on new replacement tires in 1997. Of that amount, passenger tires accounted for approximately 58% of sales, light truck tires accounted for approximately 15%, truck tires accounted for approximately 21% and farm, specialty and other types of tires accounted for approximately 6%. 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 the Company, are the largest point of sale suppliers of new replacement tires to the United States market. Independent tire dealers accounted for approximately 59.5% of retail sales of domestic replacement passenger tires in 1997. 4 8 The replacement tire market for passenger cars and light trucks consists of three primary types of tires: "flag" brands, which are premium tires made by the major tire manufacturers; associate or "house" brands, which are primarily economy brand tires made by the major tire manufacturers; and private-label brands, which are brands made by tire manufacturers generally for independent tire wholesale distributors and retailers. In 1997, flag brands constituted approximately 50.0% of the United States passenger and light truck replacement tire markets, private-label brands constituted approximately 29.9% of those markets and house brands made up approximately 20.1% of those markets. Recent Acquisitions. On May 20, 1998, as part of the Transactions, the Issuer acquired CPW and a wholly owned subsidiary of the Issuer was merged with ITCO. The Company believes that the combination of Heafner, ITCO and CPW represents a distinct opportunity to broaden product offerings, strengthen manufacturer relationships, develop new competencies in its organization and strengthen the Company's presence in the Southeast and the West. The Company believes that the merger with ITCO will enable the Company's Eastern wholesale division to provide more cost-effective service and will increase its distribution capacity, positioning the Company for expansion into new geographic areas. The Company believes that the acquisition of CPW and its distribution facilities will establish a broader supply network with more frequent delivery capabilities for the Company's Winston retail stores, improving the Company's ability to restock inventory and obtain customer-requested products on a more timely basis. In addition, the Company expects to realize significant cost savings and operating efficiencies and improvements that will contribute to its goal of increasing future profitability. COMPETITIVE STRENGTHS AND BUSINESS STRATEGY The Company's strategy is to increase net sales and EBITDA while becoming the leading national distributor of tires and automotive equipment and services through wholesale distribution centers and retail tire outlets. To achieve this objective, the Company intends to continue to build upon the following strengths: Leading Market Positions. The Company believes that it is one of the nation's largest buyers of new replacement passenger and light truck tires, purchasing in excess of 10.9 million tires in 1997, representing approximately 5.2% of the total U.S. replacement tire market. Through its Eastern and Western wholesale divisions, the Company also believes that it is the leading wholesale distributor of tires to the replacement tire market in the Southeast and in California, with over 65 distribution centers servicing 20 states. In addition, through its retail division, the Company currently operates over 215 retail tire and automotive service outlets in California and Arizona, including 176 tire and automotive service outlets operated by Winston. Winston was the fourth largest independent tire dealer in the United States in 1997 based on number of locations. The Company intends to strengthen and expand its existing network of distribution centers and retail outlets by pursuing a strategy of selective expansion and acquisition focusing on geographic areas it does not currently serve. Strong Relationships with Major Tire Manufacturers. The Company has established strong relationships with the major tire manufacturers, including Michelin (which manufactures the B.F. Goodrich and Uniroyal brands), Kelly-Springfield (a division of Goodyear), Dunlop, Bridgestone/Firestone and Pirelli. The Company has conducted business with its major tire suppliers for a combined average of 26 years. In terms of replacement tires purchased, the Company believes that it is the largest U.S. customer of Dunlop, one of the largest U.S. customers of Michelin (including the B.F. Goodrich and Uniroyal brands) and one of the largest U.S. customers of Bridgestone/Firestone. The Company recently negotiated an arrangement with Goodyear for the placement of Goodyear flag-branded products in the Company's Winston retail stores. The Company's network of retail points of sale offers tire manufacturers a desirable platform for their branded products and allows the Company to relay important feedback from tire consumers to the manufacturers. The Company believes that this combination of factors improves tire manufacturers' access to the replacement tire market and, in turn, enhances the Company's relationship with its suppliers. Private-Label Brands. The Company offers two private-label brands of tires, Regul (manufactured by Michelin and Kelly-Springfield) and Winston (manufactured by Kelly-Springfield), which are supplied exclusively by the Company. In general, private-label brands allow the independent wholesale distributor and 5 9 its retail dealer customer to realize higher gross profit margins than are obtainable through sales of flag or house brands. Sales of private-label tires account for a significant portion of the Company's total net sales ($101.0 million on a pro forma basis in 1997). The Company also sells other private-label products, including ICW and Pacer custom wheels and Magnum automotive lifts. The Company intends to continue to build the brand identity of its private-label products through advertising, promotions and continued emphasis on the quality of those products, and plans to introduce its private-label brand tires as leading value-priced products in the new markets it serves. Supply Practices and Customer Service. The Company distributes tires and other products to dealers and other customers generally on a same-day basis and, in certain markets, makes multiple deliveries in a single day. By offering reliable, timely and frequent deliveries and using sophisticated inventory management systems, the Company's wholesale divisions assist customers in reducing investment in inventories while still enabling them to provide a full range of products. In addition, the integration of the New Businesses will allow the Company to implement the best inventory management practices of its existing businesses and those of the New Businesses on a company-wide basis as it continues to emphasize value-added customer service and supply practices in all aspects of its business. The Company believes that its strong inventory management systems and retail expertise will allow it to successfully integrate the New Businesses, expand its customer base and provide a strong platform for future expansion. THE TRANSACTIONS AND USE OF PROCEEDS On May 20, 1998 (the "Closing Date"), a newly formed subsidiary of the Issuer was merged with ITCO Logistics, with ITCO Logistics surviving the merger as a wholly owned subsidiary of the Issuer (the "ITCO Merger"). The total consideration paid to the stockholders of ITCO Logistics in connection with the ITCO Merger consisted of $18.0 million in cash, 1,400,667 newly issued shares of Class B Common Stock, $.01 par value (the "Class B Common Stock"), of the Issuer and $1.4 million payable to holders of ITCO stock appreciation rights upon exercise of such rights. Also on the Closing Date, the Issuer acquired from the stockholders of Speed Merchant all of the issued and outstanding shares of Speed Merchant (the "CPW Acquisition") for aggregate consideration equal to $45.0 million in cash, of which $35.0 million was paid on the Closing Date in exchange for the stock of Speed Merchant, $7.4 million is payable in installments for five years after the Closing Date in exchange for certain non-compete covenants and $2.6 million is payable in the form of other contingent payouts to selling stockholders. Also on the Closing Date, the Issuer applied a portion of the proceeds of the offering of the Old Notes to repay $16.0 million of subordinated debt and $10.3 million outstanding under a term loan of the Issuer outstanding at the Closing Date. Financing necessary to complete the acquisition of the New Businesses and the repayment of Heafner's outstanding subordinated debt was obtained from the proceeds of the offering of the Old Notes on the Closing Date and amounts outstanding under an amended and restated senior revolving credit facility entered into on the Closing Date (the "New Credit Facility"). The New Credit Facility replaced an existing Heafner senior credit facility (the "Old Credit Facility"), under which $33.5 million was outstanding on the Closing Date (without giving effect to the Transactions). An ITCO facility with Fleet Capital Corporation (the "ITCO Facility"), under which $26.3 million was outstanding on the Closing Date, was repaid and terminated on July 15, 1998. For purposes of the financial and other information in this Prospectus, amounts outstanding under the Old Credit Facility and the ITCO Facility have been treated as repaid on the Closing Date and borrowed under the New Credit Facility on the Closing Date. The aggregate amount of commitments under the New Credit Facility is currently $100.0 million. 6 10 The following table sets forth the approximate sources and uses of funds as of the Closing Date (amounts in thousands): SOURCES OF FUNDS New Credit Facility....................................... $ 48,054 Notes..................................................... 100,000 Assumption of indebtedness(a)............................. 11,106 Deferred payments(b)...................................... 11,390 Class B Common Stock...................................... 14,959 -------- Total Sources..................................... $185,509 ======== USES OF FUNDS ITCO Merger(c)............................................ $ 34,349 CPW Acquisition(d)........................................ 45,000 Repayment/refinancing of existing indebtedness(e)......... 87,054 Assumption of indebtedness(a)............................. 11,106 Estimated transaction fees and expenses(f)................ 8,000 -------- Total Uses........................................ $185,509 ========
- --------------- (a) Represents assumption of (i) ITCO building mortgages of $2.5 million and (ii) vendor loans and other amounts at ITCO and CPW. (b) Includes (i) $7.4 million payable in installments over five years after the Closing Date in exchange for certain non-compete covenants of the stockholders of Speed Merchant, (ii) $2.6 million in other contingent payouts to the stockholders of Speed Merchant and (iii) $1.4 million for the exercise of stock appreciation rights by certain employees of ITCO. (c) Includes 1,400,667 shares of Class B Common Stock appraised at approximately $15.0 million and $1.4 million payable to holders of ITCO stock appreciation rights. (d) Includes the amounts described in clauses (i) and (ii) of footnote (b). (e) Represents repayment or refinancing of (i) $59.8 million of long-term indebtedness of Heafner (including $16.0 million of subordinated debt), (ii) $26.3 million of long-term indebtedness of ITCO and (iii) $1.0 million of long-term indebtedness of CPW. (f) Fees and expenses include the Initial Purchasers' (as defined) discount and other fees and expenses of the Offering and other fees and direct expenses incurred in connection with the Transactions, including lenders' fees (including prepayment fees), legal fees, accounting fees and other out-of-pocket expenses. The Company's executive offices are located at 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217, and its telephone number is (704) 423-8989. 7 11 THE OFFERING The Issuer.................... The Old Notes were sold by the Issuer on May 20, 1998 to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance upon Rule 144A under the Securities Act. Registration Rights Agreement..................... In connection with the sale of the Old Notes, the Issuer and the Subsidiary Guarantors entered into a Registration Rights Agreement, dated May 20, 1998 (the "Registration Rights Agreement"), providing for, among other things, the Exchange Offer. THE EXCHANGE OFFER The Exchange Offer............ The Company is offering to exchange up to $100,000,000 aggregate principal amount of New Notes for up to $100,000,000 aggregate principal amount of Old Notes issued in the Offering in reliance upon an exemption from registration under the Securities Act. Upon consummation of the Exchange Offer, the terms of the New Notes (including principal amount, interest rate, maturity and ranking) will be identical in all material respects to the terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the New Notes will have been registered under the Securities Act and therefore will not bear legends restricting their transfer and will not contain terms providing for an increase in the interest rate thereon under certain circumstances described in the Registration Rights Agreement. Based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder thereof (other than a Restricted Holder (as defined) or a Participating Broker-Dealer) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and that such holder is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, the distribution of such New Notes. Any Participating Broker-Dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker or dealer as a result of market- making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with the resale of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The 8 12 Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." Any holder who tenders Old Notes in the Exchange Offer with the intention of participating, or for the purpose of participating, in a distribution of the New Notes may not rely on the position of the staff of the Commission enunciated in no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale. Expiration Date............... 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Conditions to the Exchange Offer......................... The obligation of the Company to consummate the Exchange Offer is subject to certain conditions. See "The Exchange Offer -- Conditions." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Procedures for Tendering Old Notes......................... Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, or transmit an Agent's Message (as defined herein) in connection with a book-entry transfer, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, such facsimile or such Agent's Message, together with the Old Notes and any other required documentation to the exchange agent (the "Exchange Agent") at the address set forth herein. By executing the Letter of Transmittal or Agent's Message, each holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, that neither the holder nor any such other person (i) has any arrangement or understanding with any person to participate in the distribution of such New Notes, (ii) is engaging or intends to engage in the distribution of such New Notes or (iii) is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. See "The Exchange Offer -- Purpose and Effect of the Exchange Offer," "-- Procedures for Tendering" and "Plan of Distribution." Special Procedures for Beneficial Owners............. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Old Notes, either make appropriate arrangements to 9 13 register ownership of the Old Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures.................... Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not entirely available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." Withdrawal Rights............. Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Offer -- Withdrawal of Tenders." Acceptance of Old Notes and Delivery of New Notes......... The Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date and not withdrawn. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent................ The Chase Manhattan Bank is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer -- Exchange Agent." 10 14 THE NEW NOTES The Exchange Offer applies to $100.0 million aggregate principal amount of Old Notes. The terms of the New Notes are identical in all material respects to the Old Notes, except for certain transfer restrictions and registration rights relating to the exchange of Old Notes for New Notes. The New Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture under which the Old Notes were issued and the New Notes will be issued. See "Description of the New Notes." Securities Offered............ $100,000,000 principal amount of 10% Senior Notes Due 2008 of the Issuer. Maturity Date................. May 15, 2008. Interest Payment Dates........ May 15 and November 15 of each year, commencing November 15, 1998. Optional Redemption........... The Notes are redeemable at the option of the Issuer, in whole or in part, at any time, on or after May 15, 2003 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, up to 35% of the original aggregate principal amount of the Notes may be redeemed from time to time prior to May 15, 2001 at the redemption price set forth herein, plus accrued and unpaid interest, if any, to the date of redemption, with the net proceeds of one or more Public Equity Offerings (as defined), provided that at least $65.0 million principal amount of the Notes remains outstanding immediately after each such redemption. See "Description of the New Notes -- Optional Redemption." Change of Control............. Upon a Change of Control (as defined), each holder of Notes may require the Issuer to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that the Issuer will have sufficient funds to purchase all the Notes in the event of a Change of Control. See "Risk Factors -- Limitations on Repurchases of Notes upon Change of Control" and "Description of the New Notes -- Change of Control." Subsidiary Guaranties......... The obligations of the Issuer under the Notes and the Indenture are guaranteed (the "Subsidiary Guaranties") on an unsecured, senior basis by all of the Subsidiary Guarantors. Each Subsidiary Guaranty is irrevocable and unconditional, but limited in amount to the extent required by laws relating to fraudulent transfer or similar laws. See "Description of the New Notes -- Subsidiary Guaranties." Ranking....................... The Notes are unsecured, senior obligations of the Issuer and are unconditionally guaranteed on an unsecured, senior basis by the Subsidiary Guarantors. The Notes rank pari passu in right of payment with all other existing and future unsecured senior indebtedness of the Issuer and senior in right of payment to any existing and future subordinated indebtedness of the Issuer. The Notes are effectively subordinated to all existing and future secured indebtedness of the Issuer and the Subsidiary Guarantors, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such indebtedness. The Notes are structurally subordinated to all existing and future indebtedness of any subsidi- 11 15 ary of the Issuer (other than the Subsidiary Guarantors). The Subsidiary Guaranties are unsecured, senior obligations of the Subsidiary Guarantors and rank pari passu in right of payment with all other senior, unsecured indebtedness of the Subsidiary Guarantors and senior in right of payment to any existing and future subordinated indebtedness of the Subsidiary Guarantors. The Subsidiary Guaranties are effectively subordinated to all existing and future secured indebtedness of the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. As of June 30, 1998, the Company had outstanding, either directly or through guarantees, approximately $170.9 million of indebtedness, all of which was senior indebtedness and approximately $66.1 million of which was secured. The Indenture relating to the Notes permits the Issuer and its subsidiaries to incur additional indebtedness, including senior indebtedness, subject to certain limitations. See "Description of the New Notes -- Ranking." Restrictive Covenants......... The Indenture under which the Notes are issued contains certain covenants that, among other things, will limit (i) the incurrence of additional indebtedness by the Issuer and its Restricted Subsidiaries (as defined), (ii) the payment of dividends and other restricted payments by the Issuer and its Restricted Subsidiaries, (iii) the creation of restrictions on distributions from Restricted Subsidiaries, (iv) asset sales, (v) certain transactions with affiliates, (vi) the incurrence of liens and sale/leaseback transactions and (vii) certain consolidations, mergers and transfers of assets. However, all of these limitations are subject to a number of important qualifications. See "Description of the New Notes -- Certain Covenants." Use of Proceeds............... There will be no proceeds to the Company from any exchange pursuant to the Exchange Offer. Book-Entry Only............... The Notes will be issued in book-entry form through the facilities of The Depository Trust Company ("DTC" or the "Depository") for the accounts of its participants and will trade in DTC's Same-Day Funds Settlement System. For a description of certain procedures relating to clearance and settlement, see "Description of the New Notes -- Book-Entry, Delivery and Form." RISK FACTORS Holders of Notes should carefully consider the specific matters set forth under "Risk Factors" as well as the other information and data included in this Prospectus prior to tendering Old Notes in the Exchange Offer. 12 16 SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA The following summary historical consolidated financial data with respect to Heafner and unaudited pro forma financial data with respect to the Company should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Heafner and the related notes. The consolidated financial statements of Heafner for each of the years in the three-year period ended December 31, 1997 are included elsewhere in this Prospectus and have been audited by Arthur Andersen LLP, independent certified public accountants. The summary historical financial data for the six months ended June 30, 1997 and 1998 have been derived from financial statements that are included elsewhere herein which are unaudited but which, in the opinion of management, include all adjustments, except as otherwise described therein, necessary for the fair presentation of the financial position and results of operations for such period. The pro forma data have been derived from the Unaudited Pro Forma Condensed Combined Financial Data of the Company included elsewhere in this Prospectus. The Unaudited Pro Forma Condensed Combined Financial Data do not purport to represent what the Company's results of operations actually would have been if the transactions referred to therein had been consummated on the date or for the periods indicated, or what such results will be for any future date or any future period.
HEAFNER ---------------------------------------------------- SIX MONTHS ENDED JUNE 30, COMPANY COMPANY PRO FORMA ------------------- PRO FORMA SIX MONTHS ENDED 1995 1996 1997(A) 1997(A) 1998(B) 1997(C) JUNE 30, 1998(C) -------- -------- -------- -------- -------- --------- ----------------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales.................. $169,031 $190,535 $311,839 $127,377 $243,179 $830,749 $453,266 Cost of goods sold......... 140,811 158,880 233,941 99,677 182,131 659,335 354,697 -------- -------- -------- -------- -------- -------- -------- Gross profit............... 28,220 31,655 77,898 27,700 61,048 171,414 98,569 Selling, general and administrative expenses................. 26,584 29,660 74,441 26,128 57,262 160,616 90,149 -------- -------- -------- -------- -------- -------- -------- Income from operations..... 1,636 1,995 3,457 1,572 3,786 10,798 8,420 Interest and other expense, net...................... 946 944 3,710 1,687 5,899 14,486 8,556 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations before provision (benefit) for income taxes and extraordinary charge..... 690 1,051 (253) (115) (2,113) (3,688) (136) Provision (benefit) for income taxes............. -- -- (239) (49) (837) 681 851 -------- -------- -------- -------- -------- -------- -------- Net income (loss) from operations before extraordinary charge..... 690 1,051 (14) (66) (1,276) (4,369) (987) Extraordinary charge....... -- -- -- -- 2,198 -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ 690 $ 1,051 $ (14) $ (66) $ (3,474) $ (4,369) $ (987) ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Depreciation and amortization............. $ 1,062 $ 1,331 $ 5,399 $ 1,551 $ 4,029 $ 16,961 $ 8,737 EBITDA(d).................. 3,060 3,848 9,988 3,108 3,684 28,060 16,583 Capital expenditures....... 2,205 7,865 4,908 2,849 1,905 9,958 2,538 Ratio of earnings to fixed charges(e)............... 1.4x 1.5x -- -- -- -- -- BALANCE SHEET DATA (AT END OF PERIOD): Working capital............ $ 19,148 $ 16,913 $ 20,582 $ 19,905 $ 42,023 Total assets............... 55,458 59,551 146,508 149,390 411,368 Total debt................. 15,632 21,003 64,658 67,072 170,864 Stockholders' equity....... 11,719 11,574 20,296 20,424 31,711
- --------------- (a) In May 1997, Heafner acquired Winston. The transaction was accounted for using the purchase method of accounting. 13 17 (b) In May 1998, the ITCO Merger and the CPW Acquisition occurred. Each transaction was accounted for using the purchase method of accounting. (c) The pro forma statements of operations data for 1997 and for the six months ended June 30, 1998 give effect to: (i) the Winston acquisition; (ii) the ITCO Merger; (iii) the CPW Acquisition; (iv) the completion of the Offering of the Old Notes and the application of the net proceeds; and (v) the initial borrowing under the New Credit Facility, as if each had been consummated on January 1, 1997. (d) EBITDA represents net income plus income taxes, depreciation and amortization and interest expense. EBITDA for the pro forma period ended June 30, 1998 also adds a restructuring charge of $1.4 million and an extraordinary charge of $3.7 million (pre-tax) for the write-off of unamortized financing expenses and discounts and the payment of prepayment penalties. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (e) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the year ended December 31, 1997, the six months ended June 30, 1997 and 1998, and the pro forma periods ended December 31, 1997 and June 30, 1998, earnings were insufficient to cover fixed charges by $253,000, $115,000, $2.1 million, $3.7 million and $136,000, respectively. 14 18 RISK FACTORS Holders of Notes should carefully consider the following Risk Factors, as well as the other information and data included in this Prospectus, prior to tendering Old Notes in the Exchange Offer. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT As of June 30, 1998, the Company had approximately $170.9 million of long-term debt outstanding, approximately $66.1 million of which was secured. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including: (i) the Company's ability to obtain additional financing, whether for working capital, acquisitions, capital expenditures, or other purposes, may be impaired; (ii) a substantial portion of the Company's cash flow from operations will be required for debt service, thereby reducing funds available to the Company for its operations; (iii) certain of the Company's indebtedness contains financial and other restrictive covenants which, if breached, would result in an event of default under such indebtedness; (iv) the Company's flexibility in planning for or reacting to changes in market conditions may be limited; (v) the Company may be more vulnerable upon a downturn in its business or in the industry in which it operates; and (vi) to the extent that the Company incurs any indebtedness at variable rates, including under the New Credit Facility, the Company will be vulnerable to increases in interest rates. The Company's ability to meet its debt service obligations will be dependent upon its future performance which, in turn, will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. Based on the current level of operations, the Company believes that its operating cash flow, together with available borrowings under the New Credit Facility, will be sufficient to meet the debt service requirements on its indebtedness, meet its working capital needs and fund its capital expenditures and other operating expenses for the near future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." However, there can be no assurance that the Company's business will generate cash flow at levels sufficient to meet these requirements. If it is unable to do so, the Company may be required to refinance all or a portion of its indebtedness, including the Notes, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing would be possible, that any assets could be sold (or, if sold, of the timing of such sales and the amount of proceeds realized therefrom) or that additional financing could be obtained. RESTRICTIVE COVENANTS The terms of the New Credit Facility, the Indenture and the other agreements governing the Company's indebtedness impose certain operating and financing restrictions on the Company. Such restrictions affect, and in many respects limit, among other things, the ability of the Company to incur additional indebtedness, make certain payments or investments, loans and guarantees, create liens or other encumbrances, sell assets, or enter into mergers or consolidations. The New Credit Facility requires the Company to comply with certain financial ratios (minimum net worth) and tests (minimum loan availability). The restrictions could limit the ability of the Company to plan for or react to market conditions or meet extraordinary capital needs or otherwise could restrict corporate activities. There can be no assurance that such restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that would be in the interest of the Company. Moreover, a breach of any of these covenants or the inability of the Company to comply with the required financial ratios and tests could result in an event of default under the New Credit Facility or the Indenture. Upon the occurrence of an event of default, the lenders under the New Credit Facility could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable. If the Company were unable to repay such borrowings, such lenders could proceed against the collateral for the New Credit Facility. If the indebtedness under the New Credit Facility were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness and the Notes in full. 15 19 EFFECTIVE SUBORDINATION The Notes and the Subsidiary Guaranties are unsecured, senior obligations of the Issuer and the Subsidiary Guarantors, respectively, and rank pari passu in right of payment with all other existing and future senior indebtedness of the Issuer and the Subsidiary Guarantors and senior in right of payment to any existing and future subordinated indebtedness of the Issuer and the Subsidiary Guarantors, respectively. The Notes and the Subsidiary Guaranties are effectively subordinated to all existing and future secured indebtedness of the Issuer and the Subsidiary Guarantors including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such indebtedness. Indebtedness under the New Credit Facility is secured by a lien on all inventory and accounts receivable of the Issuer and its material subsidiaries (all of which are Subsidiary Guarantors). See "Description of New Credit Facility." Holders of existing or future secured indebtedness of the Issuer and the Subsidiary Guarantors permitted under the Indenture, including holders of indebtedness under the New Credit Facility, will have claims with respect to assets constituting collateral that are prior to the claims of the holders of the Notes. The Notes are and will be structurally subordinated to all existing and future indebtedness of any subsidiary of the Issuer (other than the Subsidiary Guarantors). As of June 30, 1998, the Company had outstanding, either directly or through guarantees, approximately $170.9 million of indebtedness, all of which was senior indebtedness and approximately $66.1 million of which was secured. At August 14, 1998, the Company could have borrowed an additional $34.1 million under the New Credit Facility, all of which would have been secured. See "Description of the New Notes." The Indenture will permit the Company to incur additional indebtedness, including senior indebtedness (some of which may be secured), subject to certain limitations. ABILITY TO INTEGRATE NEW BUSINESSES AND FUTURE ACQUISITIONS Although the Company and the New Businesses have been in operation for some time, there can be no assurance that the Company will be able to successfully integrate the business, operations or assets of either or both of the New Businesses. The integration of the New Businesses may result in unforeseen difficulties that require a disproportionate amount of management's attention and the Company's resources. The ITCO Merger and CPW Acquisition represented the largest acquisitions by the Company to date and the most significant expansion of its business. The Company may face significant challenges in integrating the New Businesses because of their magnitude. There can be no assurance that the Company will be able to achieve the synergies it anticipates from the ITCO Merger and CPW Acquisition. Although the Company has established a reserve of $5.2 million and has taken a restructuring charge of $1.4 million for shut down costs related to the Transactions and a non-recurring extraordinary charge of $3.7 million for the write-off of unamortized financing discounts and payment of prepayment penalties, there can be no assurance that such amounts will be adequate to cover such costs or that the ITCO Merger and CPW Acquisition will not have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the consummation of the Transactions, while the operations of the New Businesses are being integrated into the Company's operations. As part of its business strategy, the Company intends to expand its network of distribution centers and retail stores through selective acquisitions. There can be no assurance that the Company will be able to identify or complete such acquisitions and, if completed, no assurance that the Company will be able to successfully integrate the businesses, operations or assets of acquired companies into its existing operations. In addition, the New Credit Facility will prohibit the Company from committing funds to new acquisitions beyond $25 million in any fiscal year and $40 million during the term of the New Credit Facility. There can be no assurance that the Company would be able to obtain any waiver of such limits in the future. RELIANCE ON VENDORS There are a limited number of tire manufacturers worldwide. Accordingly, the Company relies on a limited number of tire manufacturers for its products. In particular, the Company relied on Michelin and Kelly-Springfield, its top two suppliers, for 35% and 34%, respectively, of the tires it sold in 1997. Although in most cases the Company has long-term relationships with these manufacturers, the Company's contracts with all but one of its suppliers are short-term in nature, and there can be no assurance that these suppliers will continue to supply products to the Company on favorable terms, or at all. Furthermore, although the Company does not believe that it will be materially adversely affected and believes that vendor response has been 16 20 generally positive, the ITCO Merger and CPW Acquisition may cause certain of the Company's vendors to reduce or eliminate the number of product lines or SKUs carried by the Company or otherwise affect the Company's relationship with its suppliers. For example, Tire and Battery Corporation, which had supplied less than 4% of the products sold by the Company, notified the Company that it would be discontinuing its relationship with the Company following the consummation of the ITCO Merger. In addition, in the event that any of the Company's vendors were to experience financial, operational, production, supply or quality assurance difficulties that could result in a reduction or interruption in supply to the Company, or otherwise failed to meet the Company's requirements and specifications, the Company could be materially adversely affected. For example, in 1997, two of the Company's principal suppliers experienced labor strikes. Although the Company was not materially adversely affected by these labor actions, the strikes did affect the Company's suppliers' ability to meet the Company's supply orders. To the extent that the Company would be required to find replacements for its suppliers, a change in suppliers could result in cost increases, time delays in deliveries and a loss of customers, any of which could have a material adverse effect on the Company. Finally, although the majority of tires manufactured by the major tire manufacturers are sold to the replacement tire market, the manufacturers pay disproportionate attention to automobile manufacturers that purchase tires for use as original equipment on vehicles sold to consumers. Increased demand from the original equipment market could also result in cost increases and time delays in deliveries from manufacturers to the Company, any of which could have a material adverse effect on the Company. POSSIBLE LOSS OF CUSTOMERS Although the Company believes that its relationships with its customers are good and that customer response to the ITCO Merger and the CPW Acquisition has been generally positive, the Company could lose some of its customers as a result of the ITCO Merger and the CPW Acquisition. Some of CPW's customers, in particular independent tire dealers, might discontinue their relationships due to CPW's alignment with a chain of retail stores that compete with those customers, even though CPW currently has retail operations itself. In the case of ITCO, some of its customers may prefer to maintain relationships with multiple suppliers. As ITCO and Heafner supply many of the same geographic areas and in some cases share customers, those customers may look to alternative suppliers for a portion of their product needs. COMPETITION The industry in which the Company competes is highly competitive, and many of the Company's competitors have resources significantly greater than the Company's. Tire manufacturers distribute tires to the retail market by direct shipments to independent tire dealers, national retail chains such as Sears and Wal-Mart and manufacturer-owned retail stores as well as through shipments to independent wholesale distributors. A number of independent wholesale tire distributors also compete in the regions in which the Company does business. In its retail business, the Company also faces competition from national chains and department stores, other independent tire stores, tire manufacturer-owned stores, discount and warehouse clubs and other automotive product retailers. Although the Company believes that it has been able to compete successfully in its markets to date, there can be no assurance that it will be able to continue to do so in the future. See "Business -- Competition." ENVIRONMENTAL RISKS 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 the Company could be held strictly, jointly and severally liable for costs associated with the investigation and clean-up of contaminated properties. The nature of the Company'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, the Company handles waste motor oil and hydraulic brake fluid, the storage and disposal of which is strictly regulated by federal and state authorities, in its automotive service operations. The Company contracts with outside services to handle disposal of these materials. Although the Company believes that it complies with all 17 21 relevant environmental regulations and does not incur significant costs maintaining compliance therewith, there can be no assurance that material costs will not be incurred in connection with environmental liabilities or claims or that future events, such as changes in existing laws and regulations or their interpretation, will not give rise to additional compliance costs or liabilities that could have a material adverse effect on the Company. CONSUMER FAIR PRACTICES Retail tire dealers and providers of automotive services have been the subject of scrutiny by state and local officials regarding their sales tactics and pricing practices. For example, in the early 1990s, the California Bureau of Automotive Repair (which is charged with policing improper selling practices by automobile repair shops and investigating companies alleged to have engaged in such improper practices) investigated a number of automobile repair and service centers, including Winston, for unfair consumer practices. That investigation resulted in fines against Winston (in 1993) and others and directly led to a change in Winston's consumer practices. Although the Company believes that it materially complies with applicable laws regarding consumer practices, there can be no assurance that a future investigation will not be conducted or result in disruptions in the Company's operations, changes in practices or fines against the Company. DEPENDENCE ON MANAGEMENT The Company is dependent upon the services of its executive officers for management of the Company. The loss or interruption of the continued full-time services of certain of these executives could have a material adverse effect on the Company, and there can be no assurance that the Company would be able to find replacements with equivalent skills or experience. The success of the Company's integration of the New Businesses may depend on the retention of certain current management of ITCO and CPW. Although the Company intends to retain such employees, substantially all of whom have employment contracts with the Company, there can be no assurance that such individuals will remain with the Company. The Company has no key person life insurance policies with respect to any of its senior executives. SEASONALITY Demand for tires tends to fluctuate from quarter to quarter, with the highest demand generally from March through October of each calendar year and the lowest demand typically from November through February of each calendar year. In addition, the popularity, supply and demand for particular tire products may change from year to year based on consumer confidence, the volume of tires reaching the replacement tire market, the level of personal discretionary income and other factors. Local economic, weather, transportation and other conditions also affect the volume of tire sales, on both a wholesale and retail basis. LIMITATIONS ON REPURCHASES OF NOTES UPON CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined in the Indenture), the holders of the Notes have the right to require the Issuer to offer to purchase all of the outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase. There can be no assurance that the Issuer will have sufficient funds available or will be permitted by its other debt agreements to purchase the Notes upon the occurrence of a Change of Control. In addition, the occurrence of a Change of Control may require the Issuer to offer to purchase other outstanding indebtedness and may cause a default under the New Credit Facility. The inability to purchase all of the tendered Notes would constitute an Event of Default (as defined) under the Indenture. See "Description of the New Notes -- Change of Control." FRAUDULENT CONVEYANCE STATUTES Each of the Issuer and the Subsidiary Guarantors believes that the indebtedness incurred by the Issuer in connection with the issuance of the Notes and the Subsidiary Guaranties given by the Subsidiary Guarantors are being incurred for proper purposes and in good faith and that, based on present forecasts, asset valuations and other financial information, the Issuer and each Subsidiary Guarantor is, after the consummation of the Transactions was, and after the consummation of the Exchange Offer will be, solvent, will have sufficient 18 22 capital for carrying on its business and will be able to pay its debts as they mature. However, if a court of competent jurisdiction were to find that the Issuer or such Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for incurring such indebtedness or obligation (including any guarantee thereof) and, at the time of such incurrence, the Issuer or such Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence or the acquisition of the New Businesses, (iii) was engaged in a business or transaction for which the assets remaining in the Issuer or such Subsidiary Guarantor, as the case may be, constituted unreasonably small capital, or (iv) intended to incur or believed it would incur debts beyond its ability to pay such debts as they mature, such court, subject to applicable statutes of limitation, could, among other things, (a) invalidate, in whole or in part, such indebtedness and obligation (including any guarantee thereof) as fraudulent conveyances, the effect of which could be that the holders of the Notes may not be repaid in full, and/or (b) subordinate such indebtedness and obligation (including any guarantee thereof) to existing or future creditors of the Issuer or such Subsidiary Guarantor, as the case may be, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Notes. If a court were to find that the Issuer or any Subsidiary Guarantor, as the case may be, satisfied the measures of insolvency or capital inadequacy described in (i) through (iv) above, such court could avoid any previous distribution by such entity in respect of such indebtedness (including, without limitation, any payment of principal or interest) or obligation (including any guarantee thereof) and order that it be returned to the Issuer or such Subsidiary Guarantor, as the case may be, or to a fund for the benefit of the creditors of such entity. With respect to each Subsidiary Guaranty, a court may compare its estimate of the value received by each Subsidiary Guarantor with the magnitude of its obligation under such Subsidiary Guaranty. If the value received by the Subsidiary Guarantor is found to be disproportionately small as compared with its obligation under such Subsidiary Guaranty, then, to that extent, there would be a lack of fair consideration for the giving of the Subsidiary Guaranty and if the Subsidiary Guaranty came within any of clauses (i) through (iv) above, such Subsidiary Guaranty could be held invalid to such extent. The obligation of each Subsidiary Guarantor under its Subsidiary Guaranty will be limited in a manner intended to avoid it being deemed a fraudulent conveyance under applicable law. The measure of insolvency for purposes of the foregoing will vary depending on the law of the jurisdiction being applied. Generally, however, the Issuer or any of the Subsidiary Guarantors would be considered insolvent at a particular time if the sum of its debts was then greater than all of its property at a fair valuation or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they became absolute and matured. The Issuer believes, based upon the financial information contained elsewhere in the Prospectus, the recent operating history as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other factors, that, after giving effect to the issuance of the Notes and the Subsidiary Guaranties, none of the Issuer or any of the Subsidiary Guarantors will be rendered insolvent and each such entity will have sufficient capital for the businesses in which it is engaged and will be able to pay its debts as they mature. While the Issuer believes that it is and each Subsidiary Guarantor is, after the consummation of the Transactions was, and after the consummation of the Exchange Offer will be, solvent, there can be no assurance as to whether a court would concur with such beliefs. CONTROL BY PRINCIPAL STOCKHOLDERS The Issuer's Chairperson, Ann H. Gaither, and its President and Chief Executive Officer, William H. Gaither, own or control 71.1% of the combined voting power of the Issuer's outstanding capital stock (including shares of stock held by other members of the Gaither family voted under the voting trust described in the next sentence) on a fully-diluted basis. A Voting Trust Agreement among Ann H. Gaither and William H. Gaither and other members of their immediate family who own shares of common stock also gives Ann H. Gaither and William H. Gaither the right to vote such other stockholders' shares of common stock. Consequently, Ann H. Gaither and William H. Gaither have the ability to control the business and affairs of the Issuer by virtue of their ability to elect a majority of the Issuer's Board of Directors and its voting power with respect to actions requiring stockholder approval. If the Company encounters financial difficulties, or is 19 23 unable to pay certain of its debts as they mature, the interests of the principal stockholders might conflict with those of the holders of the Notes. In addition, the principal stockholders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of the Notes. See "Principal Stockholders." ABSENCE OF PUBLIC MARKET The New Notes are being offered exclusively to holders of the Old Notes. The Old Notes were issued to a limited number of institutional investors on May 20, 1998. There is currently no established market for the New Notes. There can be no assurance as to the liquidity of any markets that may develop for the New Notes, the ability of the holders of the New Notes to sell their Notes or the price at which holders would be able to sell their Notes. Future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Company does not intend to apply for listing of the New Notes on any securities exchange. The liquidity of, and trading market for, the New Notes may also be materially and adversely affected by declines in the market for high yield securities generally. Such a decline may materially and adversely affect such liquidity and trading independent of the financial performance of, and prospects for, the Company. To the extent Old Notes are tendered and accepted in the Exchange Offer, the principal amount of outstanding Old Notes will decrease with a resulting decrease in the liquidity in the market for the Old Notes. Following the consummation of the Exchange Offer, holders of Old Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the Old Notes will be adversely affected. The Old Notes will continue to be eligible for trading in PORTAL. CONSEQUENCES OF FAILURE TO EXCHANGE Issuance of the New Notes in exchange for the Old Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Company of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Old Notes desiring to tender such Old Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to tenders of Old Notes for exchange. Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer, including holders of Old Notes whose Old Notes are tendered but not accepted, will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon and, except in certain limited circumstances, will no longer have any registration rights with respect to the Old Notes. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than Restricted Holders or Participating Broker-Dealers) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder represents, among other things, that such holder is not an "affiliate" of the Company or any Guarantor (as defined in Rule 405 of the Securities Act), that such New Notes are acquired in the ordinary course of such holder's business and that such holder is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, the distribution of such New Notes. Any holder unable to make such representations will not be able to participate in the Exchange Offer and may only sell its Old Notes pursuant to a registration statement and prospectus meeting the requirements of the Securities Act, or pursuant to an exemption from the registration requirements of the Securities Act. Each Participating Broker-Dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that, by so acknowledging and by delivering a 20 24 prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes will be adversely affected. FORWARD-LOOKING STATEMENTS Certain information included in this Prospectus is forward-looking, including statements contained in "Summary," "Risk Factors," "Unaudited Pro Forma Condensed Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and includes statements regarding the intent, belief and current expectations of the Company and its directors and officers. Such forward-looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks and uncertainties include, but are not limited to, the ability of the Company to maintain existing relationships with long-standing vendors or customers, the ability of the Company to successfully implement its business strategy, the ability of the Company to integrate the New Businesses and the ability of the Company to market and sell new products and to continue to comply with environmental laws, rules and regulations. Other risks and uncertainties include uncertainties relating to economic conditions, acquisitions and divestitures, government and regulatory policies, technological developments and changes in the competitive environment in which the Company operates. Persons reading this Prospectus are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements, including those discussed in "Risk Factors." THE TRANSACTIONS THE ITCO MERGER AND THE RECLASSIFICATION On the Closing Date, a wholly owned subsidiary of the Issuer merged with ITCO Logistics pursuant to an Agreement and Plan of Merger (the "ITCO Merger Agreement") with ITCO Logistics and the stockholders of ITCO Logistics (the "ITCO Stockholders"). The total consideration paid on the Closing Date upon completion of the ITCO Merger to the ITCO Stockholders consisted of $18.0 million in cash and 1,400,667 newly issued shares of Class B Common Stock. In addition, approximately $5.1 million of ITCO's total indebtedness remained outstanding, with the balance repaid as part of the Transactions. At the Closing Date, ITCO's long-term indebtedness was approximately $31.4 million. The ITCO Merger Agreement contains certain representations, warranties and covenants made by the Issuer on the one hand and the ITCO Stockholders on the other hand. With certain limited exceptions, such representations and warranties expire two years after the Closing Date. In general, the ITCO Merger Agreement provides for indemnification of the Issuer by the ITCO Stockholders, and for the indemnification of the ITCO Stockholders by the Issuer, for losses relating to misrepresentations or breaches of such representations, warranties and covenants. With certain limited exceptions, the ITCO Merger Agreement provides that a party has recourse with respect to claims for indemnification only against, in the case of indemnification claims against the ITCO Stockholders, their shares of Class B Common Stock and, in the case of indemnification claims against the Issuer, up to 1,400,667 newly issued shares of Class B Common Stock. 21 25 In connection with the ITCO Merger, the Issuer's authorized common stock was reclassified into shares of Class A Common Stock, $.01 par value (the "Class A Common Stock"), and shares of Class B Common Stock (the "Reclassification"). As a result of the Reclassification, all outstanding shares of the Issuer's common stock, and all options, warrants and other rights exercisable into or exchangeable for the Issuer's common stock, became shares of Class A Common Stock or became exercisable into or exchangeable for shares of Class A Common Stock, as the case may be. The Class A Common Stock and the Class B Common Stock have identical rights, powers and privileges, except that the shares of Class A Common Stock are entitled to 20 votes per share and the shares of Class B Common Stock are entitled to one vote per share, in each case, on all matters submitted to a vote of the Issuer's stockholders. In conjunction with the ITCO Merger, the Issuer entered into a number of ancillary agreements with the ITCO Stockholders providing for, among other things, (i) the granting of certain registration rights to such stockholders with respect to the shares of Class B Common Stock that were issued to such stockholders, (ii) the granting to such stockholders of the right to designate a person to the Issuer's Board of Directors, (iii) certain restrictions on the transfer of shares of Class B Common Stock that were issued to such stockholders, (iv) certain restrictions on the Issuer selling or issuing shares of Common Stock, or securities convertible into or exchangeable for shares of Common Stock, at a price per share that is less than the fair market value of such Common Stock, (v) certain limitations on transactions between the Company and any affiliate of the Company, and (vi) the granting to the ITCO Stockholders of the right to require the Issuer to redeem all of the outstanding shares of Class B Common Stock that were issued to such stockholders according to an agreed upon formula upon the occurrence of certain events or January 4, 2005, if earlier. THE CPW ACQUISITION On the Closing Date, the Issuer acquired all of the outstanding shares of Speed Merchant pursuant to a Stock Purchase Agreement (the "CPW Acquisition Agreement") between the Issuer and the stockholders of Speed Merchant (the "CPW Stockholders"). The total consideration payable to the CPW Stockholders in connection with the CPW Acquisition is $45.0 million in cash, of which $35.0 million was paid on the Closing Date upon consummation of the CPW Acquisition in exchange for the stock of Speed Merchant, $7.4 million is payable in installments for five years after the CPW Acquisition in exchange for covenants not to compete given by the CPW Stockholders and $2.6 million is payable in the form of contingent payouts to the CPW Stockholders. At the request of the Issuer, the agent under the New Credit Facility issued a letter of credit under the New Credit Facility to be held in escrow to secure the Issuer's obligations to make such non-compete payments. In addition, at the Closing Date, approximately $1.0 million of CPW's long-term indebtedness was repaid. The CPW Acquisition Agreement contains certain representations, warranties and covenants made by the Issuer on the one hand and the CPW Stockholders on the other hand. With certain limited exceptions, such representations and warranties expire two years after the Closing Date. In general, the CPW Acquisition Agreement provides for indemnification of the Issuer by the CPW Stockholders, and for the indemnification of the CPW Stockholders by the Issuer, for losses relating to misrepresentations or breaches of such representations, warranties and covenants. The CPW Acquisition Agreement provides that the purchase price payable for the stock of Speed Merchant will be reduced dollar for dollar if Speed Merchant's net worth or working capital as at the Closing Date falls below certain specified amounts. An additional adjustment amount is payable by the Issuer to the CPW Stockholders (or by the CPW Stockholders to the Issuer) if the net earnings attributable to certain Arizona retail stores acquired by Phoenix Racing, Inc., a wholly owned subsidiary of Speed Merchant, exceed (or fall short of) specified targets for the year following the Closing Date. On the Closing Date, Arthur C. Soares, the President of the Company's Western wholesale division and a CPW Stockholder, entered into a two-year employment agreement with the Issuer which provides for an annual base salary, stay-put bonuses payable at the end of each year of the two-year term, a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in the discretion of the Board of Directors of the Issuer. On the Closing Date, Ray C. Barney, the Chief Operating Officer of the Company's Speed Merchant 22 26 subsidiary and a CPW Stockholder, entered into a three-year employment agreement, which provides for an annual base salary, stay-put bonuses payable at the end of each year of the three-year term, a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in the discretion of the Board of Directors of the Issuer. Both employment agreements contain non-compete, non-solicitation and confidentiality provisions. FINANCING TRANSACTIONS Financing necessary to complete the acquisition of the New Businesses and the repayment of Heafner's outstanding subordinated debt was obtained from the proceeds of the offering of the Old Notes on the Closing Date and amounts outstanding under the New Credit Facility. The New Credit Facility replaced the Old Credit Facility, under which $33.5 million was outstanding on the Closing Date (without giving effect to the Transactions). The ITCO Facility, under which $26.3 million was outstanding on the Closing Date, was repaid and terminated on July 15, 1998. For purposes of the financial and other information in this Prospectus, amounts outstanding under the Old Credit Facility and the ITCO Facility have been treated as repaid on the Closing Date and borrowed under the New Credit Facility on the Closing Date. The aggregate amount of commitments under the New Credit Facility is currently $100.0 million. Also on the Closing Date, the Issuer applied a portion of the proceeds of the offering of the Old Notes to repay $16.0 million of subordinated debt and $10.3 million outstanding under a term loan of the Issuer outstanding at the Closing Date. SOURCES AND USES OF FUNDS The following table sets forth the approximate sources and uses of funds on the Closing Date (amounts in thousands): SOURCES OF FUNDS New Credit Facility......................................... $ 48,054 Notes....................................................... 100,000 Assumption of indebtedness(a)............................... 11,106 Deferred payments(b)........................................ 11,390 Class B Common Stock........................................ 14,959 -------- Total Sources..................................... $185,509 ======== USES OF FUNDS ITCO Merger(c).............................................. $ 34,349 CPW Acquisition(d).......................................... 45,000 Repayment/refinancing of existing indebtedness(e)........... 87,054 Assumption of indebtedness(a)............................... 11,106 Estimated transaction fees and expenses(f).................. 8,000 -------- Total Uses........................................ $185,509 ========
- --------------- (a) Represents assumption of (i) ITCO building mortgages of $2.5 million and (ii) vendor loans and other amounts at ITCO and CPW. (b) Includes (i) $7.4 million payable in installments over five years after the Closing Date in exchange for certain non-compete covenants of the stockholders of Speed Merchant, (ii) $2.6 million in other contingent payouts to the stockholders of Speed Merchant and (iii) $1.4 million for the exercise of stock appreciation rights by certain employees of ITCO. (c) Includes 1,400,667 shares of Class B Common Stock appraised at approximately $15.0 million and $1.4 million payable to holders of ITCO stock appreciation rights. (d) Includes the amounts described in clauses (i) and (ii) of footnote (b). 23 27 (e) Represents repayment or refinancing of (i) $59.8 million of long-term indebtedness of Heafner (including $16.0 million of subordinated debt), (ii) $26.3 million of long-term indebtedness of ITCO and (iii) $1.0 million of long-term indebtedness of CPW. (f) Fees and expenses include the Initial Purchasers' (as defined) discount and other fees and expenses of the Offering and other fees and direct expenses incurred in connection with the Transactions, including lenders' fees (including prepayment fees), legal fees, accounting fees and other out-of-pocket expenses. USE OF PROCEEDS There will be no proceeds to the Company from any exchange pursuant to the Exchange Offer. 24 28 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Old Notes were sold by the Issuer on the Closing Date to Credit Suisse First Boston Corporation and BancBoston Securities Inc. (together, the "Initial Purchasers") who resold the Old Notes to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance upon Rule 144A under the Securities Act. In connection therewith, the Issuer, the Subsidiary Guarantors and the Initial Purchasers entered into the Registration Rights Agreement. The Issuer has agreed pursuant to the Registration Rights Agreement, for the benefit of the holders of the Old Notes, that the Issuer will, at its cost, (i) within 90 days after the date of original issue of the Old Notes, file a registration statement (the "Exchange Offer Registration Statement") with the SEC with respect to a registered offer to exchange the Old Notes for New Notes and (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act within 150 days after the date of original issue of the Old Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Issuer will offer the New Notes in exchange for surrender of the Old Notes. The Issuer will keep the Exchange Offer open for not less than 20 Business Days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed or otherwise transmitted to the holders of the Old Notes. For each Old Note surrendered to the Issuer pursuant to the Exchange Offer, the holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. Interest on each New Note will accrue from the last interest payment date on which interest was paid on the Old Note surrendered in exchange therefor or, if no interest has been paid on such Old Note, from the date of its original issue. A Holder of Old Notes (other than certain specified holders) who wishes to exchange such Old Notes for New Notes in the Exchange Offer will be required to represent that any New Notes to be received by it will be acquired in the ordinary course of its business and that at the time of the commencement of the Exchange Offer it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes and that it is not an "affiliate" of the Issuer, as defined in Rule 405 of the Securities Act, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable (a holder of Notes unable to make the foregoing representation is referred to as a "Restricted Holder"). A Restricted Holder will not be able to participate in the Exchange Offer and may only sell its Old Notes pursuant to a registration statement containing the selling security holder information required by Item 507 of Regulation S-K under the Securities Act, or pursuant to an exemption from the registration requirement of the Securities Act. Based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any holder of such New Notes (other than Restricted Holders or Participating Broker-Dealers) without compliance with the registration and prospectus delivery provisions of the Securities Act. Any holder of Notes who tenders Old Notes in the Exchange Offer for the purpose of participating in a distribution of the New Notes cannot rely on the staff position enunciated in the no-action letters issued to third parties referred to above and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each Participating Broker-Dealer must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of New Notes received pursuant to the Exchange Offer. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based upon interpretations by the staff of the Commission, the Company believes that New Notes issued pursuant to the Exchange Offer to Participating Broker-Dealers may be offered for resale, resold and otherwise transferred by a Participating Broker-Dealer upon compliance with the prospectus delivery requirements, but without compliance with the registration requirements, of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market- 25 29 making activities or other trading activities. The Company has agreed that, for a period of 180 days after the date the Exchange Offer Registration Statement is declared effective by the Commission, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. By acceptance of this Exchange Offer, each broker-dealer that receives New Notes pursuant to the Exchange Offer agrees to notify the Company prior to using this Prospectus in connection with the sale or transfer of New Notes. See "Plan of Distribution." As a result of the filing and the effectiveness of the Exchange Offer Registration Statement and the consummation of the Exchange Offer, the Company's obligation to make certain semi-annual payments with respect to the Old Notes will be terminated. The Old Notes were issued to a limited number of institutional investors on the Closing Date and there is no public market for them at present. To the extent Old Notes are tendered and accepted in the exchange, the principal amount of outstanding Old Notes will decrease with a resulting decrease in the liquidity in the market therefor. Following the consummation of the Exchange Offer, holders of Old Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the Old Notes could be adversely affected. In the event that applicable interpretations of the staff of the Commission do not permit the Issuer to effect such an Exchange Offer, or if for any other reason the Exchange Offer is not consummated within 180 days of the Issue Date, or if the Initial Purchasers so request with respect to Old Notes not eligible to be exchanged for New Notes in the Exchange Offer, or if any holder of Old Notes is not eligible to participate in the Exchange Offer or does not receive freely tradeable New Notes in the Exchange Offer (provided that a Participating Broker-Dealer which has a prospectus delivery requirement with respect to New Notes received in the Exchange Offer will not be deemed, for purposes of this sentence, to have failed to receive freely tradeable New Notes), the Issuer will, at its cost, (a) as promptly as practicable, file a shelf registration statement (a "Shelf Registration Statement") covering resales of the Notes or the New Notes, as the case may be, (b) use its best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act and (c) keep the Shelf Registration Statement effective until the time when the Notes covered by the Shelf Registration Statement can be sold by non-affiliates of the Issuer pursuant to Rule 144 without any limitations under clauses (c), (e), (f) and (h) of Rule 144. The Issuer will, in the event a Shelf Registration Statement is filed, among other things, provide to each holder for whom such Shelf Registration Statement was filed copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the Notes or the New Notes, as the case may be. A holder selling such Notes or New Notes pursuant to the Shelf Registration Statement generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such holder (including certain indemnification obligations). If (i) by August 18, 1998, neither the Exchange Offer Registration Statement nor a Shelf Registration Statement has been filed with the SEC; (ii) by November 16, 1998, the Exchange Offer is not consummated and, if applicable, the Shelf Registration Statement is not declared effective; or (iii) after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Notes or New Notes in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iii) a "Registration Default"), additional interest will accrue on the applicable Old Notes and the New Notes at the rate of 0.50% per annum from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Such interest is payable in addition to any other interest payable from time to time with respect to the Old Notes and the New Notes; provided that such interest shall be the sole remedy for a Registration Default. Pursuant to the Registration Rights Agreement, the Issuer is entitled to close the Exchange Offer 20 Business Days after the commencement thereof provided that it has accepted all Notes theretofore validly tendered in accordance with the terms of the Exchange Offer. 26 30 The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which is available upon request to the Issuer. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. As of the date of this Prospectus, an aggregate of $100.0 million principal amount of the Old Notes is outstanding. The Company will issue $1,000 principal amount at maturity of New Notes in exchange for each $1,000 principal amount at maturity of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in integral multiples of $1,000. The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that the New Notes will have been registered under the Securities Act and therefore will not bear legends restricting the transfer thereof. The New Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture under which the Old Notes were, and the New Notes will be, issued. Holders of the Old Notes do not have any appraisal or dissenters' rights under law or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral (promptly confirmed in writing) or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offer. See "-- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" means 5:00 p.m., New York City time, on , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral (promptly confirmed in writing) or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date unless otherwise required by applicable law or regulation. The Company reserves the right, in its reasonable discretion, (i) to delay accepting any Old Notes, to extend the Exchange Offer or, if any of the conditions set forth below under "Conditions" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a public announcement thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus 27 31 supplement that will be distributed to the registered holders, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, termination or amendment of the Exchange Offer, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. PROCEDURES FOR TENDERING Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. To tender in the Exchange Offer, a holder of Old Notes must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Old Notes (or a confirmation of an appropriate book-entry transfer into the Exchange Agent's account at DTC as described below) and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. To be tendered effectively, the Old Notes (or a timely confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC as described below), Letter of Transmittal and other required documents must be received by the Exchange Agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. The tender by a holder will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. The Exchange Agent has established an account with respect to the Old Notes at DTC, and any financial institution which is a participant in DTC may make book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account in accordance with DTC's procedure for such transfer. Although delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal, with any required signature guarantees and any other required documents, must in any case be transmitted to and received by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date at one of its addresses set forth below under "Exchange Agent", or the guaranteed delivery procedure described below must be complied with. Delivery of documents to DTC in accordance with its procedures does not constitute delivery to the Exchange Agent. All references in this Prospectus to deposit or delivery of Old Notes shall be deemed to include DTC's book-entry delivery method. The method of delivery of Old Notes and the Letter of Transmittal and all other required documents to the Exchange Agent, including delivery through DTC, is at the election and risk of the Holder. Instead of delivery by mail, it is recommended that Holders use an overnight or hand delivery service. If Old Notes are sent by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure delivery to the Exchange Agent before the Expiration Date. No Letter of Transmittal or Old Notes should be sent to the Company. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such holders. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. 28 32 Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"). If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders (or, in the case of Old Notes delivered by book-entry transfer within DTC, will be credited to the account maintained within DTC by the participant in DTC which delivered such Old Notes), unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion to purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or, as set forth below under "Conditions," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each holder of Old Notes will represent to the Company that, among other things, such holder is not a Restricted Holder. In addition, each Participating Broker-Dealer must acknowledge that it will deliver a prospectus in connection with any resale of New Notes. See "Plan of Distribution." BOOK-ENTRY TRANSFER The Exchange Agent will establish a new account or utilize an existing account with respect to the Old Notes at the Depository promptly after the date of this Prospectus, and any financial institution that is a participant in the Depository and whose name appears on a security position listing as the owner of Old Notes may make a book-entry tender of Old Notes by causing the Depository to transfer such Old Notes into the Exchange Agent's account in accordance with the Depository's procedures for such transfer. However, although tender of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at the Depository, the Letter of Transmittal (or a manually-signed facsimile thereof), properly completed and validly executed, with any required signature guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any other required documents, must, in any case, be received by the Exchange Agent at its 29 33 address set forth below under the caption "Exchange Agent" on or prior to the Expiration Date, or the guaranteed delivery procedures described below must be complied with. The confirmation of book-entry transfer of Old Notes into the Exchange Agent's account at the Depository as described above is referred to herein as a "Book-Entry Confirmation." Delivery of documents to the Depository in accordance with the Depository's procedures does not constitute delivery to the Exchange Agent. The term "Agent's Message" means a message transmitted by the Depository to, and received by, the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that the Depository has received an express acknowledgment from the participant in the Depository tendering Old Notes stating (i) the aggregate principal amount of Old Notes which have been tendered by such participant, (ii) that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and (iii) that the Company may enforce such agreement against the participant. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes (or a confirmation of book-entry transfer of Old Notes into the Exchange Agent's account at DTC), the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date or (iii) who cannot complete the procedure for book-entry transfer on a timely basis, may effect a tender if: (a) the tender is made by or through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three (3) New York Stock Exchange, Inc. trading days after the Expiration Date, a duly executed Letter of Transmittal (or facsimile thereof) together with the Old Notes (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC), and any other documents required by the Letter of Transmittal and the instructions thereto, will be deposited by such Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), and all tendered Old Notes in proper form for transfer (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three (3) New York Stock Exchange, Inc. trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m.. New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes), (iii) be signed by the holder of such Old Notes in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. If the Old Notes have 30 34 been delivered pursuant to the book-entry procedure set forth above under "-- Procedures for Tendering," any notice of withdrawal must specify the name and number of the participant's account at DTC to be credited with the withdrawn Old Notes. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company in its sole discretion, which determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. Any Old Notes which are tendered but which are not accepted due to withdrawal, rejection of tender or termination of the Exchange Offer will be returned as soon as practicable to the holder thereof without cost to such holder (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Notes). CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as provided herein before the acceptance of such Old Notes, if: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company, or any material adverse development has occurred in any existing action or proceeding with respect to the Company or any of its subsidiaries; or (b) any change, or any development involving a prospective change, in the business or financial affairs of the Company or any of its subsidiaries has occurred which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (c) any law, statute, rule or regulation is proposed, adopted or enacted, which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (d) there shall have occurred (i) any general suspension of trading in, or general limitation on prices for, securities on the New York Stock Exchange, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or any limitation by any governmental agency or authority that adversely affects the extension of credit to the Company or (iii) a commencement of war, armed hostilities or other similar international calamity directly or indirectly involving the United States; or, in the event that any of the foregoing exists at the time of commencement of the Exchange Offer, a material acceleration or worsening thereof; or (e) any governmental approval has not been obtained, which approval the Company shall in its reasonable judgment deem necessary, for the consummation of the Exchange Offer as contemplated hereby. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its reasonable discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. If the Company determines in its reasonable judgment that any of the conditions are not satisfied, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to the tendering holders thereof (or, in the case of Old Notes delivered by book-entry transfer within DTC, credit such Old Notes to the account maintained within DTC by the participant in DTC which delivered such Notes), (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, 31 35 however, to the rights of holders thereof to withdraw such tenders of Old Notes (see "Withdrawal of Tenders" above) or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders of Notes, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders of Notes, if the Exchange Offer would otherwise expire during such five to ten business day period. EXCHANGE AGENT The Chase Manhattan Bank has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: The Chase Manhattan Bank, Exchange Agent By Mail, Hand or Overnight Courier: Facsimile Transmission Number 55 Water Street (Eligible Institutions only): Room 234, North Building (212) 638-7375 or New York, New York 10041 (212) 344-9367 Attention: Carlos Esteves To Confirm Facsimile (If by Mail, Registered or or for Information Call Certified Mail Recommended) (212) 638-0828
FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by facsimile, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith and will pay the reasonable fees and expenses of one firm acting as counsel for the holders of Old Notes should such holders deem it advisable to appoint such counsel. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be registered, or are to be issued in the name of, or delivered to, any person other than the registered holder, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Company. The expenses of the Exchange Offer and the unamortized expenses relating to the issuance of the Old Notes will be amortized over the term of the New Notes. 32 36 CAPITALIZATION The following table sets forth, as of December 31, 1997, and June 30, 1998, the consolidated capitalization of Heafner and the Company, respectively. This table should be read in conjunction with the consolidated financial statements of Heafner and the New Businesses and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
DECEMBER 31, 1997 JUNE 30, 1998 ----------------- ------------- HEAFNER COMPANY ----------------- ------------- (DOLLARS IN THOUSANDS) Cash........................................................ $ 2,502 $ 3,879 Long-term debt, including current maturities: Old Credit Facility....................................... $31,949 $ -- New Credit Facility....................................... -- 54,305 10% Senior Notes Due 2008................................. -- 100,000 Vendor loans.............................................. 5,654 11,038 Other debt................................................ 27,055 5,522 ------- -------- Total debt........................................ 64,658 170,865 ------- -------- Stockholders' equity: Preferred Stock Series A -- 4% cumulative, $.01 par value, 7,000 shares authorized, 7,000 shares issued........... 7,000 7,000 Preferred Stock Series B -- variable rate cumulative, $.01 par value, 4,500 shares authorized, 4,500 shares issued................................................. 4,500 4,500 Class A Common Stock, $.01 par value, 10,000,000 shares authorized; 3,691,000 shares issued at December 31, 1997 and June 30, 1998(a).............................. 37 37 Class B Common Stock, $.01 par value, 1,400,667 shares authorized; no shares issued at December 31, 1997; 1,400,667 shares issued at June 30, 1998............... -- 14 Warrants.................................................. 1,137 1,137 Additional paid-in capital................................ 7,256 22,200 Notes receivable from stock sales......................... (248) (177) Retained earnings (deficit)............................... 614 (3,000) ------- -------- Total stockholders' equity........................ 20,296 31,711 ------- -------- Total capitalization.............................. $84,954 $206,455 ======= ========
- --------------- (a) Gives effect to the Reclassification as if it had occurred as of December 31, 1997, and excludes 1,034,000 shares issuable upon exercise of warrants and 256,000 shares issuable upon exercise of options. 33 37 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following unaudited pro forma condensed combined statement of operations ("Pro Forma Statement of Operations") for the year ended December 31, 1997 has been derived by the application of pro forma adjustments to the historical statements of operations of Heafner, Winston, ITCO and CPW which are included elsewhere in this Prospectus. The historical accounts of ITCO for the year ended September 30, 1997, and the historical accounts of CPW for the year ended October 31, 1997, have been derived from the audited financial statements included elsewhere in this Prospectus. The unaudited Pro Forma Statement of Operations for the six months ended June 30, 1998, includes the unaudited condensed consolidated statement of operations for the six months ended June 30, 1998 for the Company, and the unaudited condensed statements of operations for the five months ended May 20, 1998 and May 31, 1998, for ITCO and CPW, respectively. The unaudited Pro Forma Statements of Operations for the year ended December 31, 1997, and for the six months ended June 30, 1998, give effect to the Winston acquisition and the Transactions as if they had all occurred on January 1, 1997. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that the Company believes are reasonable, including assumptions relating to the preliminary allocation of the consideration paid in connection with the ITCO Merger and CPW Acquisition to the assets and liabilities of the New Businesses based on estimates of their respective fair values. The actual purchase price allocation may differ from that reflected in the Pro Forma Statements of Operations. The unaudited Pro Forma Statements of Operations do not purport to represent what the Company's results would have been if the Winston acquisition and the Transactions had occurred on the date or for the periods indicated, or to project what the Company's results of operations for any future period or date will be. The unaudited Pro Forma Statements of Operations should be read in conjunction with "Selected and Historical and Unaudited Financial Data of Heafner," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of Heafner, Winston, ITCO and CPW, and notes thereto included elsewhere in this Prospectus. 34 38 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
HISTORICAL PRO FORMA (NOTE 3) ----------------------------------- --------------------------------------- ITCO CPW ACQUISITION FINANCING HEAFNER (5/20/98) (5/31/98) ADJUSTMENTS ADJUSTMENTS PRO FORMA 6/30/98 (5 MONTHS) (5 MONTHS) (NOTE 1) (NOTE 2) COMBINED -------- ---------- ---------- ----------- ----------- --------- STATEMENT OF OPERATIONS DATA: Net sales................ $243,179 $149,123 $60,964 $453,266 Cost of goods sold....... 182,131 126,920 44,411 $ 1,235(a) 354,697 -------- -------- ------- --------- -------- Gross profit........ 61,048 22,203 16,553 (1,235) 98,569 General, selling and administrative expenses............... 55,462 17,531 13,484 (1,900)(b) 84,577 Amortization expense..... 1,800 375 -- 3,397(c) 5,572 -------- -------- ------- --------- -------- Income from operations... 3,786 4,297 3,069 (2,732) 8,420 OTHER EXPENSE: Interest expense, net................. 4,286 1,526 212 247(d) $ 2,031(d) 8,302 Other expense, net..... 204 -- 50 254 -------- -------- ------- --------- ------- -------- Total nonoperating expense........... 4,490 1,526 262 247 2,031 8,556 -------- -------- ------- --------- ------- -------- Income (loss) before income taxes........... (704) 2,771 2,807 (2,979) (2,031) (136) Provision (benefit) for income taxes........... (277) 1,179 1,125 (368)(e) (808)(e) 851 -------- -------- ------- --------- ------- -------- Net income (loss) before extraordinary item................ $ (427)(h) $ 1,592 $ 1,682 $ (2,611) $(1,223) $ (987) ======== ======== ======= ========= ======= ======== OTHER DATA: Depreciation and amortization........ 4,029 1,065 246 3,397 8,737 EBITDA(f).............. 7,291 5,362 3,265 665 16,583 Capital expenditures... 1,908 292 338 2,538 Ratio of earnings to fixed charges(g).... -- 2.2x 5.2x --
35 39 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
HISTORICAL ACQUISITIONS PRO FORMA (NOTE 4) ---------- ------------------------------------- --------------------------------------- ACQUISITION FINANCING HEAFNER WINSTON ITCO CPW ADJUSTMENTS ADJUSTMENTS PRO FORMA 12/31/97 (4 MONTHS) (9/30/97) (10/31/97) (NOTE 1) (NOTE 2) COMBINED ---------- ---------- --------- ---------- ----------- ----------- --------- STATEMENT OF OPERATIONS DATA: Net sales.................... $311,839 $44,504 $351,996 $122,410 $830,749 Cost of goods sold........... 233,941 27,475 301,970 98,289 $(2,340)(a) 659,335 -------- ------- -------- -------- ------- -------- Gross profit............... 77,898 17,029 50,026 24,121 2,340 171,414 General, selling and administrative expenses.... 72,893 16,788 46,995 20,087 (6,233)(b) 150,530 Amortization expense......... 1,548 -- 872 -- 7,666(c) 10,086 -------- ------- -------- -------- ------- -------- Income from operations....... 3,457 241 2,159 4,034 907 10,798 OTHER (INCOME) EXPENSE: Interest expense (income), net...................... 4,842 (165) 3,710 156 286(d) $ 5,958(d) 14,787 Other expense (income), net...................... (1,132) 424 340 67 (301) -------- ------- -------- -------- ------- ------- -------- Total nonoperating expense................ 3,710 259 4,050 223 286 5,958 14,486 -------- ------- -------- -------- ------- ------- -------- Income (loss) before income taxes...................... (253) (18) (1,891) 3,811 621 (5,958) (3,688) Provision (benefit) for income taxes............... (239) (7) (452) 1,531 2,223(e) (2,375)(e) 681 -------- ------- -------- -------- ------- ------- -------- Net income (loss).......... $ (14) $ (11) $ (1,439) $ 2,280 $(1,602) $(3,583) $ (4,369) ======== ======= ======== ======== ======= ======= ======== OTHER DATA: Depreciation and amortization............. $ 5,399 $ 632 $ 2,493 $ 484 $ 7,953 $ 16,961 EBITDA(f).................. 9,988 449 4,312 4,451 8,860 28,060 Capital expenditures....... 4,908 373 1,188 3,489 9,958 Ratio of earnings to fixed charges(g)............... -- -- -- 3.9x --
36 40 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) NOTE 1: ACQUISITIONS Following is a description of the ITCO Merger, the CPW Acquisition and the Winston Acquisition which are reflected in the accompanying unaudited Pro Forma Statements of Operations: ITCO Merger The ITCO Merger occurred on May 20, 1998. The ITCO Merger has been accounted for as a purchase, with the excess of the purchase price over the fair value of the net assets acquired allocated to goodwill, which is being amortized over 15 years. A summary of the purchase price and related preliminary purchase allocation follows: AGGREGATE PURCHASE PRICE Cash paid to holders of ITCO common and preferred stock..... $18,000 Appraised value of Class B Common Stock issued in connection with the ITCO Merger (1,400,667 shares at $10.68 per share).................................................... 14,959 Severance, facility closing expenses and other exit costs incurred in connection with the ITCO Merger............... 4,380(a) Amount payable upon settlement of ITCO stock appreciation rights.................................................... 1,390 Financial advisors, accounting, legal and other direct acquisition costs......................................... 929 ------- Aggregate purchase price.................................. $39,658 =======
PRELIMINARY ALLOCATION OF PURCHASE PRICE Aggregate purchase price.................................... $39,658 Less net book value of assets acquired.................... (7,152) ------- Excess of cost over net book value of assets acquired....... 32,506 Adjustments to record assets and liabilities at fair market value: Property and equipment.................................... (153) Deferred tax asset........................................ (1,944)(b) Goodwill (historical)..................................... 13,963 Accrued expenses.......................................... 644 ------- Total adjustments...................................... 12,510 ------- Goodwill.................................................. $45,016(c)(d) =======
- --------------- (a) Reflects exit costs incurred in connection with the ITCO Merger in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." (b) Represents a deferred tax asset related to the temporary difference between the financial statement carrying amount and the tax basis of certain liabilities recorded in the opening balance sheet at an assumed income tax rate of 40%. (c) Upon completion of its determination of fair values, Heafner may identify other intangible assets to which a portion of the purchase price will be allocated. The Company believes that the amortization period for such identifiable intangible assets will be up to 15 years. 37 41 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) (d) For purposes of the accompanying Pro Forma Statements of Operations, goodwill resulting from the ITCO Merger will not be deductible for income tax reporting purposes. CPW Acquisition On May 20, 1998, Heafner acquired the common stock of CPW. The CPW Acquisition has been accounted for as a purchase, with the excess of the purchase price over the fair value of the net assets acquired allocated to goodwill, which is being amortized over 15 years. A summary of the purchase price and related preliminary purchase allocation follows: AGGREGATE PURCHASE PRICE Cash paid to CPW Stockholders............................... $35,000 Amount payable for non-compete agreement and other deferred payments.................................................. 10,000 Repayment of long-term indebtedness......................... 976 Severance, facility closing expenses and other costs incurred in connection with the CPW Acquisition........... 862(a) Financial, accounting, legal and other direct acquisition costs..................................................... 633 ------- Aggregate purchase price.................................. $47,471 =======
PRELIMINARY ALLOCATION OF PURCHASE PRICE Aggregate purchase price.................................... $47,471 Less net book value of assets acquired.................... (9,472) ------- Excess of cost over net book value of assets acquired....... 37,999 Less adjustments to record assets and liabilities at fair market value: Inventory................................................. 1,018 Other current assets...................................... (22) Non-compete agreement and other deferred payments......... (10,000) Other assets.............................................. 267(b) Deferred tax asset........................................ (1,353) Accounts payable.......................................... 276 Accrued expenses.......................................... 971 ------- Total adjustments...................................... (8,843) ------- Goodwill.................................................. $29,156(d) =======
- --------------- (a) Reflects exit costs incurred in connection with the CPW Acquisition in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." (b) Upon completion of its determination of fair values, the Company may identify other intangible assets to which a portion of the purchase price will be allocated. The Company believes that the amortization period for such identifiable intangible assets will be up to 15 years. (c) Represents a deferred tax asset related to the temporary difference between the financial statement carrying amount and the tax basis of certain liabilities recorded in the opening balance sheet at an assumed income tax rate of 40%. (d) For purposes of the accompanying Pro Forma Statements of Operations, goodwill resulting from the CPW Acquisition will not be deductible for income tax purposes. 38 42 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) Winston Acquisition On May 7, 1997, the Company acquired all of the outstanding common stock of Winston for approximately $43,133. The acquisition was accounted for as a purchase and accordingly, the operating results of Winston have been included in the Company's consolidated statement of operations since May 7, 1997. Accordingly, management adjusted, on a pro forma basis, the historical accounts for Winston based upon its actual results of operations for the year ended December 31, 1997. NOTE 2: FINANCING TRANSACTIONS These represent adjustments for the Offering of the Notes and the New Credit Facility. NOTE 3: PRO FORMA ADJUSTMENTS -- CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 The following pro forma adjustments have been applied to the unaudited statement of operations for the six months ended June 30, 1998, for Heafner and for the five months ended May 20, 1998 and May 31, 1998, for ITCO and CPW, respectively, to reflect the ITCO Merger, the CPW Acquisition and the Financing Transactions (Note 2) as if they had all occurred on January 1, 1997. (a) To reflect CPW vendor rebate programs. (b) To reflect the reduction in selling, general and administrative expenses of ITCO corporate offices and other administrative expenses to be eliminated upon the ITCO Merger. (c) Amortization Expense -- To reflect adjustments to record the following:
ACQUISITIONS ------------ Amortization of ITCO goodwill............................... $1,250(1) To eliminate ITCO historical goodwill....................... (285) To eliminate ITCO other intangibles amortization............ (78) Amortization of CPW goodwill................................ 810(1) Amortization of CPW non-compete covenants and other deferred payments.................................................. 1,700(2) ------ Total..................................................... $3,397 ======
- --------------- (1) ITCO and CPW goodwill is being amortized over 15 years and is assumed to be non-deductible for tax reporting purposes. (2) The noncompete covenants and other deferred payments are being amortized over the terms of the related agreements with the related amortization expense assumed to be deductible for tax reporting purposes. 39 43 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) (d) Interest Expense -- To reflect adjustments to record the following:
ACQUISITIONS FINANCING ------------ --------- To record interest expense on notes payable to CPW stockholders for noncompete agreements............... $247 Increase interest expense related to Notes issued in Offering at an assumed interest rate of 10.0% per annum................................................ $4,167 Increase in interest expense related to New Credit Facility at an assumed interest rate of 7.5% per annum................................................ 1,802 Increase in amortization of deferred financing costs incurred related to the Offering of $4,710........... 196 Increase in amortization of deferred financing costs incurred related to the New Credit Facility of $1,727............................................... 144 To eliminate historical interest expense for long-term debt to be repaid from the Offering proceeds......... (4,030) To eliminate Heafner historical amortization expense on discount on long term debt to be repaid from the Offering proceeds.................................... (66) To eliminate historical amortization of deferred financing costs on Heafner's existing credit facility to be repaid......................................... (182) ---- ------ Total................................................ $247 $2,031 ==== ======
(e) Income Taxes -- To reflect adjustments to record the following:
ACQUISITIONS FINANCING ------------ --------- Income tax benefit attributable to ITCO Merger and CPW Acquisition adjustments.............................. $(368) Income tax benefit attributable to Financing adjustments.......................................... $(808) ----- ----- Total................................................ $(368) $(808) ===== =====
The income tax benefit has been adjusted to reflect the income tax effects of pro forma adjustments based upon an assumed 40% tax rate. Net deferred tax assets and liabilities related to the temporary differences between the financial statement carrying amount and the tax basis of the acquired assets and liabilities has been recorded at an assumed income tax rate of 40% for the years in which those differences are expected to be recovered or settled. (f) EBITDA -- Represents net income plus income taxes, depreciation, amortization and interest expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (g) Ratio of Earnings to Fixed Charges -- In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs) whether expensed or capitalized and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the periods shown for Heafner and combined pro forma earnings were insufficient to cover fixed charges by $704 and $136, respectively. (h) Net income (loss) before extraordinary item excludes a $1,409 nonrecurring restructuring charge and the related tax benefit of $559. 40 44 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) NOTE 4: PRO FORMA ADJUSTMENTS -- CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 The following pro forma adjustments have been applied to the accompanying historical statements of operations for Heafner, Winston, ITCO and CPW to reflect the ITCO Merger, the CPW Acquisition and the acquisition of Winston (Note 1) and the Financing Transactions (Note 2) as if they had all occurred on January 1, 1997: (a) To reflect CPW vendor rebate programs. (b) Selling, general, and administrative expenses -- To reflect adjustments to record the following:
ACQUISITIONS ------------ Additional depreciation expense in connection with the write-up of Winston property and equipment to fair value..................................................... $ 287 Elimination of duplicate corporate selling, general and administrative expenses of ITCO corporate offices and other administrative expenses to be eliminated upon the ITCO Merger............................................... (3,800) Full year effect of a reduction of selling, general and administrative expenses related to the elimination of ITCO field staff personnel made during fiscal 1997............. (2,720) ------- Total............................................. $(6,233) =======
(c) Amortization Expense -- To reflect adjustments to record the following:
ACQUISITIONS ------------ Amortization of Winston goodwill prior to May 7, 1997....... $ 812 Amortization of ITCO goodwill............................... 3,001(1) To eliminate ITCO historical goodwill amortization.......... (684) To eliminate amortization of other intangibles -- ITCO...... (187) Amortization of CPW goodwill................................ 1,944(1) Amortization of CPW non-compete covenants and other deferred payments.................................................. 2,780(2) ------ Total..................................................... $7,666 ======
- --------------- (1) ITCO and CPW goodwill is being amortized over 15 years and is assumed to be non-deductible for tax reporting purposes. (2) The noncompete covenants and other deferred payments are being amortized over the terms of the related agreements with the related amortization expense assumed to be deductible for tax reporting purposes. 41 45 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) (d) Interest Expense -- To reflect adjustments to record the following:
ACQUISITIONS FINANCING ------------ --------- To record interest expense on notes payable to CPW stockholders for noncompete agreements............... $ 592 To eliminate historical interest expense related to Winston prior to May 7, 1997......................... (306) Increase interest expense related to Notes issued in Offering at an assumed interest rate of 10.0% per annum................................................ $10,000 Increase in interest expense related to New Credit Facility at an assumed interest rate of 7.5% per annum................................................ 3,604 Increase in amortization of deferred financing costs incurred related to the Offering of $4,710........... 471 Increase in amortization of deferred financing costs incurred related to the New Credit Facility of $1,727............................................... 345 To eliminate historical interest expense for long-term debt to be repaid from the Offering proceeds......... (8,065) To eliminate Heafner historical amortization expense on discount on long term debt to be repaid from the Offering proceeds.................................... (106) To eliminate historical amortization of deferred financing costs on Heafner's existing credit facility to be repaid......................................... (291) ------ ------- Total................................................ $ 286 $ 5,958 ====== =======
(e) Income Taxes -- To reflect adjustments to record the following:
ACQUISITIONS FINANCING ------------ --------- Income tax provision attributable to ITCO Merger and CPW Acquisition adjustments.......................... $2,227 Income taxes of Winston prior to May 7, 1997........... (4) Income tax benefit attributable to Financing adjustments.......................................... $(2,375) ------ ------- Total................................................ $2,223 $(2,375) ====== =======
The income tax provision (benefit) has been adjusted to reflect the income tax effects of pro forma adjustments based upon an assumed 40% tax rate. Net deferred tax assets and liabilities related to the temporary differences between the financial statement carrying amount and the tax basis of the acquired assets and liabilities has been recorded at an assumed income tax rate of 40% for the years in which those differences are expected to be recovered or settled. (f) EBITDA -- Represents net income plus income taxes, depreciation, amortization and interest expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (g) Ratio of Earnings to Fixed Charges -- In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs) whether expensed or capitalized and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the periods shown for Heafner, Winston, ITCO and combined pro forma earnings were insufficient to cover fixed charges by $253, $18, $1,891 and $3,688 respectively. 42 46 SELECTED HISTORICAL FINANCIAL DATA HEAFNER The following table sets forth selected historical consolidated financial data of Heafner for the periods indicated. The selected historical financial data as of and for the years ended December 31, 1993 through 1997 are derived from the historical consolidated financial statements of Heafner as of and for the years ended December 31, 1993 through 1997 which have been audited by Arthur Andersen LLP, independent certified public accountants. The consolidated financial statements of Heafner for each of the years in the three-year period ended December 31, 1997 are included elsewhere in this Prospectus. The selected historical financial data for the six months ended June 30, 1997 and 1998 have been derived from financial statements that are included elsewhere herein which are unaudited but which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments except as otherwise described therein, necessary for fair presentation of the financial position and results of operations for such period. 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" and the consolidated financial statements of Heafner and the related notes included elsewhere herein.
SIX MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1993 1994 1995 1996 1997(A) 1997(A) 1998(B) -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales.................. $157,603 $161,786 $169,031 $190,535 $311,839 $127,377 $243,179 Costs of goods sold........ 131,837 134,625 140,811 158,880 233,941 99,677 182,131 -------- -------- -------- -------- -------- -------- -------- Gross profit............... 25,766 27,161 28,220 31,655 77,898 27,700 61,048 Selling, general and administrative expenses................. 24,384 25,420 26,584 29,660 74,441 26,128 57,262 -------- -------- -------- -------- -------- -------- -------- Income from operations..... 1,382 1,741 1,636 1,995 3,457 1,572 3,786 Interest and other expense, net...................... 227 520 946 944 3,710 1,687 5,899 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations before benefit for income taxes and extraordinary charge..... 1,155 1,221 690 1,051 (253) (115) (2,113) Benefit for income taxes... -- -- -- -- (239) (49) (837) -------- -------- -------- -------- -------- -------- -------- Net income (loss) from operations before extraordinary charge..... 1,155 1,221 690 1,051 (14) (66) (1,276) Extraordinary charge....... -- -- -- -- -- -- 2,198 -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ 1,155 $ 1,221 $ 690 $ 1,051 $ (14) $ (66) $ (3,474) ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Depreciation and amortization............. $ 1,380 $ 1,232 $ 1,062 $ 1,331 $ 5,399 $ 1,551 $ 4,029 EBITDA(c).................. 3,316 3,352 3,060 3,848 9,988 3,108 3,684 Capital expenditures....... 1,422 1,687 2,205 7,865 4,908 2,849 1,905 Ratio of earnings to fixed charges(d)............... 1.9x 1.9x 1.4x 1.5x -- -- -- BALANCE SHEET DATA (AT END OF PERIOD): Working capital............ $ 18,807 $ 16,957 $ 19,148 $ 16,913 $ 20,582 $ 19,905 $ 42,023 Total assets............... 49,609 44,844 55,458 59,551 146,508 149,390 411,368 Total debt................. 14,304 12,515 15,632 21,003 64,658 67,072 170,864 Stockholders' equity....... 11,306 11,640 11,719 11,574 20,296 20,424 31,711
43 47 - --------------- (a) In May 1997, Heafner acquired Winston. The transaction was accounted for using the purchase method of accounting. (b) In May 1998, the ITCO Merger and the CPW Acquisition occurred. Each transaction was accounted for using the purchase method of accounting. (c) EBITDA represents net income plus income taxes, depreciation and amortization and interest expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (d) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the year ended December 31, 1997 and the six months ended June 30, 1997 and 1998, earnings were insufficient to cover fixed charges by $253,000, $115,000 and $2.1 million. 44 48 WINSTON The following table sets forth selected historical financial data of Winston for the periods indicated. The selected historical data as of and for the years ended September 30, 1993 through 1996 are derived from the historical consolidated financial statements of Winston as of and for the years ended September 30, 1993 through 1996 which have been audited by Deloitte & Touche LLP, independent certified public accountants. The selected historical financial data for the six months ended March 31, 1996 and 1997 have been derived from financial statements that are included elsewhere herein which are unaudited but which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such period. The consolidated financial statements of Winston for each of the years in the three year period ended September 30, 1996 are included elsewhere in this Prospectus. The following selected historical financial information should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of Winston and the related notes included elsewhere herein.
SIX MONTHS ENDED FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31, ----------------------------------------- ----------------- 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales..................... $147,053 $134,921 $135,593 $143,070 $68,634 $67,846 Cost of goods sold............ 82,965 78,876 78,783 83,542 40,029 39,023 -------- -------- -------- -------- ------- ------- Gross profit.................. 64,088 56,045 56,810 59,528 28,605 28,823 Selling, general and administrative expenses.... 63,489 56,323 56,068 58,388 28,632 29,159 -------- -------- -------- -------- ------- ------- Income (loss) from operations................. 599 (278) 742 1,140 (27) (336) Interest and other expense.... 313 385 535 675 363 447 -------- -------- -------- -------- ------- ------- Income (loss) before income taxes...................... 286 (663) 207 465 (390) (783) Income taxes (benefit)........ 7 -- 3 11 -- -- Minority interest in earnings of subsidiary(a)........... 221 (16) -- -- -- -- -------- -------- -------- -------- ------- ------- Net income (loss)............. $ 58 $ (647) $ 204 $ 454 $ (390) $ (783) ======== ======== ======== ======== ======= ======= OTHER DATA: Depreciation and amortization............... $ 2,868 $ 2,753 $ 2,338 $ 2,130 $ 1,088 $ 1,144 EBITDA(b)..................... 3,467 2,475 3,080 3,270 1,061 808 Capital expenditures.......... 1,501 1,394 2,319 2,149 989 888 Ratio of earnings to fixed charges(c)................. 1.1x -- 1.1x 1.1x -- -- BALANCE SHEET DATA (AT END OF PERIOD): Working capital............... $ (1,572) $ (3,288) $ (1,021) $ (575) $ (810) $(1,404) Total assets.................. 41,802 37,714 39,587 38,844 36,359 36,886 Total debt(d)................. 2,581 3,658 7,568 8,279 7,181 10,070 Stockholders' equity.......... 6,620 4,201 4,405 4,359 4,015 3,576
- --------------- (a) Prior to June 1, 1994, Winston had a 79% ownership in a subsidiary, Winston Indemnity, Ltd., which was a captive insurance company based in Bermuda and provided workers' compensation insurance solely for Winston employees. The consolidated financial statements for the years ended September 30, 1993 and 1994 include the accounts of Winston and its 79% owned subsidiary. All significant intercompany transactions and balances have been eliminated. 45 49 (b) EBITDA represents net income plus income taxes, depreciation and amortization and interest expense, net and minority interest in earnings of subsidiary. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (c) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the year ended September 30, 1994 and the six month periods ended March 31, 1996 and 1997, earnings were insufficient to cover fixed charges by $663,000, $390,000 and $783,000, respectively. (d) Excludes all related party debt and certain amounts representing ledger balance financing arrangements with vendors that are included in accounts payable. 46 50 ITCO The following table sets forth selected historical consolidated financial data of ITCO for the periods indicated. The selected historical data are derived from the historical consolidated financial statements of ITCO as of and for the years ended October 2, 1993, October 1, 1994 and September 30, 1995 which have been audited by Deloitte & Touche LLP, independent certified public accountants. The remaining selected historical data is derived from the historical consolidated financial statements of ITCO for the period from inception (November 13, 1995) to September 30, 1996 and for the year ended September 30, 1997 which have been audited by Ernst & Young LLP, independent auditors. The consolidated financial statements of ITCO for each of the years in the three year period ended September 30, 1997 are included elsewhere in this Prospectus. The selected historical financial data for the eight months ended May 31, 1997 and the period ended May 20, 1998 have been derived from financial statements that are included elsewhere herein which are unaudited but which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments except as otherwise described therein, necessary for a fair presentation of the financial position and results of operations for such period. 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" and the consolidated financial statements of ITCO and the related notes included elsewhere herein.
EIGHT MONTHS PERIOD FISCAL YEAR ENDED ENDED ---------------------------------------------------- MAY 31, MAY 20, 1993 1994 1995 1996(A) 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Sales...................... $204,586 $252,526 $294,113 $290,982 $351,996 $225,804 $232,277 Cost of goods sold......... 178,561 221,034 257,040 253,629 301,970 194,203 198,701 -------- -------- -------- -------- -------- -------- -------- Gross profit............... 26,025 31,492 37,073 37,353 50,026 31,601 33,576 Selling, general and administration expenses................. 23,531 29,134 34,177 36,946 47,867 31,097 29,957 -------- -------- -------- -------- -------- -------- -------- Income from operations..... 2,494 2,358 2,896 407 2,159 504 3,619 Interest and other expense.................. 802 1,105 2,147 3,659 4,050 2,280 1,961 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes.................... 1,692 1,253 749 (3,252) (1,891) (1,776) 1,658 Income taxes (benefit)..... 707 545 121 (1,296) (452) (700) 811 Cumulative effect of change in accounting for income tax(b)................... -- 408 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ 985 $ 1,116 $ 628 $ (1,956) $ (1,439) $ (1,076) $ 847 ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Depreciation and amortization............. $ 1,298 $ 1,394 $ 1,313 $ 2,179 $ 2,493 $ 1,683 $ 1,616 EBITDA(c).................. 4,547 4,816 5,107 2,411 4,312 2,252 5,626 Capital expenditures....... 3,563 3,520 869 1,133 1,188 1,033 711 Ratio of earnings to fixed charges(d)............... 1.8x 1.4x 1.2x -- -- -- 1.4x BALANCE SHEET DATA (AT END OF PERIOD): Working capital............ $ 4,006 $ 5,717 $ 5,062 $ 24,869 $ 16,402 $ 12,714 $ 9,012 Total assets............... 72,897 89,433 98,287 124,218 123,320 116,557 131,274 Total debt................. 19,805 29,717 30,651 47,163 39,482 37,780 32,556 Stockholders' equity (deficit)................ 9,811 10,927 11,555 (1,751) (4,103) (3,427) (3,218)
- --------------- (a) On November 13, 1995, ITCO changed ownership. The operations data disclosed for the year ended September 30, 1996 include operational information from November 13, 1995 to September 30, 1996. 47 51 (b) Effective October 3, 1993, ITCO adopted prospectively SFAS No. 109. SFAS No. 109 requires a change from the deferred method as required under APB Opinion No. 11 to the asset and liability method of accounting for income taxes. The cumulative effect of the change in accounting for income taxes was $408,000. (c) EBITDA represents net income plus income taxes, depreciation and amortization and interest expense less the cumulative effect of change in accounting for income taxes. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, 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. (d) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the years ended September 30, 1996 and 1997, and the eight months ended May 31, 1997, earnings were insufficient to cover fixed charges by $3.3 million, $1.9 million and $1.8 million, respectively. 48 52 CPW The following table sets forth selected historical financial data of CPW for the periods indicated. The selected historical data are derived from the unaudited financial statements of CPW as of and for the years ended October 31, 1993 and 1994. The selected historical data are derived from the historical financial statements of CPW as of and for the years ended October 31, 1995 through 1997 which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The financial statements of CPW for each of the years in the three-year period ended October 31, 1997 are included elsewhere in this Prospectus. The selected historical financial data for the six months ended April 30, 1997 and 1998 have been derived from financial statements that are included elsewhere herein which are unaudited but which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such period. The following selected historical financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of CPW and the related notes included elsewhere herein.
SIX MONTHS ENDED FISCAL YEAR APRIL 30, -------------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales............................ $38,290 $61,091 $107,683 $122,930 $122,410 $56,589 $67,578 Cost of goods sold................... 29,694 49,148 88,363 101,355 98,289 45,295 49,013 ------- ------- -------- -------- -------- ------- ------- Gross profit......................... 8,596 11,943 19,320 21,575 24,121 11,294 18,565 Selling, general and administrative expenses........................... 7,470 11,119 17,786 18,660 20,087 9,580 13,963 ------- ------- -------- -------- -------- ------- ------- Income from operations............... 1,126 824 1,534 2,915 4,034 1,714 4,602 Interest and other expense........... 77 96 265 162 223 113 324 ------- ------- -------- -------- -------- ------- ------- Income before income taxes........... 1,049 728 1,269 2,753 3,811 1,601 4,278 Income taxes......................... 369 329 537 1,070 1,531 638 1,710 Minority interest(a)................. 267 144 6 3 -- -- -- ------- ------- -------- -------- -------- ------- ------- Net income........................... $ 413 $ 255 $ 726 $ 1,680 $ 2,280 $ 963 $ 2,568 ======= ======= ======== ======== ======== ======= ======= OTHER DATA: Depreciation and amortization........ $ 116 $ 216 $ 338 $ 404 $ 484 $ 203 $ 328 EBITDA(b)............................ 1,241 1,044 1,905 3,202 4,450 1,888 4,833 Capital expenditures................. 108 1,639 788 655 3,489 2,587 745 Ratio of earnings to fixed charges(c)......................... 4.2x 2.6x 1.9x 3.3x 3.9x 3.3x 5.6x BALANCE SHEET DATA (AT END OF PERIOD): Working capital...................... $ 1,716 $ 1,375 $ 4,217 $ 4,827 $ 4,883 $ 3,093 $ 6,446 Total assets......................... 12,212 28,303 38,784 45,724 46,674 41,103 55,427 Total debt(d)........................ 1,270 4,236 9,819 6,359 5,452 6,735 9,758 Stockholders' equity................. 962 1,217 2,336 4,016 6,296 4,980 8,865
- --------------- (a) CPW's consolidated financial statements include the consolidation of its majority interests in Speed Merchant of San Jose, a California partnership, and Arthur Enterprises, a California corporation. All significant intercompany transactions and balances are eliminated in consolidation. (b) EBITDA represents net income plus income taxes, depreciation and amortization and interest expense, net and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service or incur indebtedness. However, EBITDA should not be considered an 49 53 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. (c) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. (d) Excludes all related party debt. 50 54 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 the Company, Heafner, Winston, ITCO, and CPW should be read in conjunction with the financial statements and the "Unaudited Pro Forma Condensed Combined Financial Data" and the related notes thereto included elsewhere in this Prospectus. OVERVIEW Most of the Company's sales consist of passenger and light truck tires, which in 1997 would have represented approximately 78.6% of its pro forma net sales. The remainder of such sales would have been derived from automotive service (7.7%), custom wheels (6.8%), automotive service equipment (3.1%) and parts and other products (3.8%). The Company sells its products to a variety of markets, both in terms of end-use and geography. The Company's distribution channels consist of (i) Eastern wholesale, (ii) Western retail tires and automotive service and (iii) Western wholesale. In 1997, on a pro forma basis, net sales through such channels accounted for approximately 65.7%, 20.0% and 14.3%, respectively. The Company believes that the diversity of its markets helps stabilize the Company's sales and earnings. In connection with the Transactions completed on May 20, 1998, the Company has recorded a non-recurring extraordinary charge of $3.7 million for the write-off of unamortized financing expenses and discounts and to pay prepayment penalties. The Company has also recorded a non-recurring restructuring charge to operations of $1.4 million, and is establishing reserves of $5.2 million related to costs to be incurred in consolidation of distribution, retail, and corporate office facilities, severance obligations, and other related exit costs. Cash payments during the 12 months following the consummation of the Transactions from these items are estimated to be approximately $5.0 million. The Company has identified a number of areas in which it expects to realize annual cost savings as a result of the Transactions. For example, the Company anticipates cost reductions based on elimination of duplicate corporate expenses, warehouse consolidations and optimization of transportation, distribution and delivery systems. In addition, the Company expects to realize improvements as a result of lower purchase prices on tires and other products as supplier programs are coordinated and the Company's combined purchasing power is utilized. Although management believes that cost savings in these areas are achievable, there can be no assurance that any such cost reductions or savings will be achieved. RESULTS OF OPERATIONS -- COMPANY AND HEAFNER The Issuer acquired Winston on May 7, 1997 and CPW on May 20, 1998. The ITCO Merger occurred on May 20, 1998. Therefore, results for 1998 include the operations of ITCO and CPW only after May 20, 1998. Results for 1997 exclude results of ITCO and CPW, and include the operations of Winston after May 7, 1997. Results for 1996 and 1995 include solely the results of the Issuer without ITCO, CPW, or Winston. 51 55 The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR SIX MONTHS ENDED DEC. 31, ENDED JUNE 30, ----------------------- -------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................. 83.3 83.4 75.0 78.3 74.9 Gross profit....................................... 16.7 16.6 25.0 21.7 25.1 Selling, general and administrative expenses....... 15.7 15.6 23.9 20.5 23.5 Income from operations............................. 1.0 1.0 1.1 1.2 1.6 Interest and other expense......................... 0.6 0.4 1.2 1.3 2.4 Income (loss) from operations before benefit for income taxes..................................... 0.4 0.6 (0.1) (0.1) (0.8) Income taxes....................................... 0.0 0.0 (0.1) 0.0 (0.3) Net income (loss) before extraordinary charge...... 0.4 0.6 -- (0.1) (0.5) Extraordinary charge............................... -- -- -- -- 0.9 Net income (loss).................................. 0.4 0.6 -- (0.1) (1.4) EBITDA............................................. 1.8 2.0 3.2 2.4 1.6
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Net sales were $243.2 million for the six months ended June 30, 1998, an increase of $115.8 million, or 90.9%, from $127.4 million in the corresponding period in 1997. The inclusion of sales for Winston (6 months versus 2), ITCO (1 month), and CPW (1 month) accounted for $96.8 million, or 83.6%, of the increase in sales in 1998. Most of the remaining increase was due to strong wholesale distribution sales in the first six months of 1998, which grew by more than 15.0% during the period over the first six months of 1997. Strong market conditions and additional market share gains contributed to this increase. Gross profit was $61.0 million for the six months ended June 30, 1998, an increase of $33.3 million, or 120.4%, from $27.7 million in the six months ended June 30, 1997. As a percentage of net sales, gross profit was 25.1% and 21.7%, respectively, for the six months ended June 30, 1998 and 1997. The increase in gross profit dollars was also due to the inclusion of the acquired operations, which accounted for $28.6 million, or 85.8%, of the gross dollar increase. Most of the increase in gross margin percents was due to the higher percentage of retail to total sales in the 1998 period. Retail sales generally result in higher margins than distribution sales. Both the Issuer and Winston improved their gross margins by more than 1.0% during the six-month period ended June 30, 1998. Selling, general and administrative expenses were $57.3 million in the six months ended June 30, 1998, an increase of $31.1 million, or 119.2%, from $26.1 million in the corresponding 1997 period. As a percentage of net sales, these expenses were 23.5% and 20.5%, respectively, for the six months ended June 30, 1998 and 1997. The inclusion of Winston and the New Businesses accounted for $28.3 million, or 90.9%, of the increase in selling, general and administrative expenses in the six-month period ended June 30, 1998. The increase in selling, general and administrative costs as a percent of sales was primarily due to the higher percentage of retail operations in 1998, which generally have higher selling, general and administrative expense percentages than distribution operations. Interest and other expense increased from $1.7 million in the first six months of 1997 to $5.9 million in the corresponding 1998 period. Interest expense increased by $2.6 million in the 1998 period as a result of increased borrowings incurred in connection with the Winston acquisition and, to a lesser extent, the Transactions. Included in other expense in the six-month period ended June 30, 1998 was a non-recurring restructuring charge of $1.4 million related to costs to be incurred by Heafner in the consolidation of distribution and corporate office facilities and integration of management information systems. 52 56 The results of operations for the six months ended June 30, 1998 also include a non-recurring extraordinary charge of $3.7 million ($2.2 million net of taxes) for the write-off of unamortized financing expenses and discounts and the payment of prepayment penalties. EBITDA, excluding restructuring and extraordinary charges, was $7.3 million for the six months ended June 30, 1998, an increase of $4.2 million, or 134.6% from $3.1 million for the first six months in 1997 due to the factors discussed above. EBITDA, excluding restructuring and extraordinary charges, as a percentage of net sales increased to 3.0% in the 1998 period from 2.4% in the corresponding period in 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales were $311.8 million for 1997, an increase of $121.3 million, or 63.7%, from $190.5 million in 1996. The increase was primarily due to the acquisition of Winston on May 7, 1997. Winston sales included in reported 1997 results totaled $101.1 million, or 83.3% of the total sales increase for the year. Wholesale distribution sales for Heafner in 1997 totaled $210.8 million, an increase of $20.3 million, or 10.7%, from 1996 sales. This increase resulted primarily from additional market share gains in the Southeast. Gross profit was $77.9 million in 1997, an increase of $46.2 million, or 146.1%, from $31.7 million in 1996. As a percentage of net sales, gross profit was 25.0% and 16.6%, respectively. Gross profit increased primarily due to the acquisition of Winston. Excluding Winston's gross profits included in 1997 results, gross profit would have been $35.1 million, or 16.7% of net sales. Retail sales generally result in higher gross profit margins than sales from wholesale distribution. Selling, general and administrative expenses were $74.4 million in 1997, an increase of $44.8 million, or 151.0%, from $29.7 million in 1996. As a percentage of net sales, these expenses were 23.9% and 15.6%, respectively. Excluding the results of Winston subsequent to May 7, 1997, selling, general and administrative expenses in Heafner's wholesale distribution business were $32.7 million, or 15.5%, of wholesale sales. Although as a percentage of sales these costs were slightly lower in 1997 on an absolute basis, the increase of $3.0 million reflects Heafner's investment in both field and corporate capabilities as it prepared for higher levels of activity in 1998 and beyond. Interest and other expense increased from $0.9 million in 1996 to $3.7 million in 1997 due to additional debt incurred in connection with the acquisition of Winston. Income taxes were $(0.2) million in 1997 as a result of the change in the status of Heafner as of May 7, 1997 from a Subchapter S corporation to a Subchapter C corporation. EBITDA was $10.0 million in 1997, an increase of $6.1 million, or 159.6%, from $3.8 million in 1996 due to the factors discussed above. EBITDA as a percentage of net sales increased to 3.2% in 1997 from 2.0% in 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales were $190.5 million for 1996, an increase of $21.5 million, or 12.7%, from $169.0 million in 1995. The increase came as a result of Heafner adding a new distribution center, improved performance of the custom wheel and service business and additional market share gains. Gross profit was $31.7 million in 1996, an increase of $3.4 million, or 12.2%, from $28.2 million in 1995. As a percentage of net sales, gross profit was 16.6% and 16.7%, respectively. Selling, general and administrative expenses were $29.7 million in 1996, an increase of $3.1 million, or 11.6%, from $26.6 million in 1995. As a percentage of net sales, these expenses were 15.6% and 15.7%, respectively. Although slightly lower as a percentage of sales, the dollar increase reflected Heafner's decision to begin significant investments primarily in personnel designed to upgrade its ability to handle increased business in the Southeast and its overall capacity to grow its business in future years. Interest and other expense remained flat at $0.9 million in 1995 and 1996 with slightly increased interest expense being offset by higher levels of other income. 53 57 Income taxes were not applicable in both periods due to Heafner's tax status as a Subchapter S corporation. EBITDA was $3.8 million in 1996, an increase of $0.8 million, or 25.7%, from $3.1 million in 1995 due to the factors discussed above. EBITDA as a percentage of net sales increased to 2.0% in 1996 from 1.8% in 1995. RESULTS OF OPERATIONS -- WINSTON Winston was acquired by Heafner on May 7, 1997. Results subsequent to that date are included with those of the Company above. The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR ENDED SIX MONTHS SEPTEMBER 30, ENDED MARCH 31, ----------------------- ---------------- 1994 1995 1996 1996 1997 ----- ----- ----- ------ ------ Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................. 58.5 58.1 58.4 58.3 57.5 Gross profit....................................... 41.5 41.9 41.6 41.7 42.5 Selling, general and administrative expenses....... 41.7 41.4 40.8 41.7 43.0 Income (loss) from operations...................... (0.2) 0.5 0.8 0.0 (0.5) Interest and other expense......................... 0.3 0.3 0.5 0.6 0.7 Net income (loss).................................. (0.5) 0.2 0.3 (0.6) (1.2) EBITDA............................................. 1.8 2.3 2.3 1.5 1.2
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996 Net sales were $67.8 million for the six months ended March 31, 1997, a decrease of $0.8 million, or 1.1%, from $68.6 million in the corresponding period in 1996. The decrease in net sales was due principally to the reduction in tire sales by 3.6% in 1997 from 1996 levels, which Winston believes was due in part to softness in the California marketplace. Mechanical service revenue for the six months increased by 2.2%, offsetting a portion of the overall decrease. Tire sales revenue represented 57% and 58% of the total revenues in the 1997 and 1996 periods, respectively. Gross profit was $28.8 million for the six months ended March 31, 1997, an increase of $0.2 million, or 0.8%, from $28.6 million in the six months ended March 31, 1996. As a percentage of net sales, gross profit was 42.5% and 41.7%, respectively. The increase in gross profit amounts and percentages in the 1997 period was due to the shift in Winston's business from tires to mechanical service revenue, which generate higher gross profit margins. Selling, general and administrative expenses were $29.2 million in the six months ended March 31, 1997, an increase of $0.5 million, or 1.8%, from $28.6 million in the corresponding 1996 period. As a percentage of net sales, these expenses were 43.0% and 41.7%, respectively. Selling, general and administrative expenses were basically unchanged during the two periods, reflecting salary and other cost controls instituted by Winston. Interest and other expense was relatively flat at $0.4 million in the six months ended March 31, 1997 and 1996. Income taxes were not applicable for either period due to Winston's status as a Subchapter S corporation. EBITDA was $0.8 million for the six months ended March 31, 1997, a decrease of $0.3 million, or 23.8%, from $1.1 million for the first six months in fiscal 1996 due to the factors discussed above. EBITDA as a percentage of net sales decreased to 1.2% in the 1997 period from 1.5% in the corresponding period in 1996. 54 58 YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 Net sales were $143.1 million for fiscal 1996, an increase of $7.5 million, or 5.5%, from $135.6 million in fiscal 1995. The increase primarily reflected increased selling efforts on the part of Winston and an increase in mechanical service revenue. Tire sale revenue represented 59.7% and 59.5% of the total revenues in the 1996 and 1995 periods, respectively. Gross profit was $59.5 million in fiscal 1996, an increase of $2.7 million, or 4.8% from $56.8 million in fiscal 1995. As a percentage of net sales, gross profit was 41.6% and 41.9%, respectively. Gross profit margins decreased slightly as Winston priced products and services more competitively in connection with Winston's increased selling efforts. Selling, general and administrative expenses were $58.4 million in fiscal 1996, an increase of $2.3 million, or 4.1% from $56.1 million in fiscal 1995. As a percentage of net sales, these expenses were 40.8% and 41.4%, respectively. Selling, general and administrative expenses increased in dollar amounts due to normal increases in salaries and other costs. However, these cost increases were more than offset by increased revenues and therefore selling, general and administrative expenses as a percentage of net sales decreased. Interest and other expense increased from $0.5 million in fiscal 1995 to $0.7 million in fiscal 1996 due to slightly higher levels of average inventory during the year. Income taxes were not applicable for both periods due to Winston's tax status as a Subchapter S corporation. EBITDA was $3.3 million in fiscal 1996, an increase of $0.2 million, or 6.5%, from $3.1 million in fiscal 1995 due to the factors discussed above. EBITDA as a percentage of net sales remained constant at 2.3% of net sales in both years. YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994 Net sales were $135.6 million for fiscal 1995, an increase of $0.7 million, or 0.5%, from $134.9 million fiscal 1994. This nominal increase in net sales reflected the continuing effects of the slowdown in sales which began in 1993 as the result of the investigation of Winston for alleged unfair selling practices by the California Bureau of Automotive Repair. Tire sale revenue represented 59.5% and 59.9% of the total net sales in the 1995 and 1994 periods, respectively. Gross profit was $56.8 million in fiscal 1995, an increase of $0.8 million, or 1.4%, from $56.0 million in fiscal 1994. As a percentage of net sales, gross profit was 41.9% and 41.5%, respectively. Selling, general and administrative expenses were $56.1 million in fiscal 1995, a decrease of $0.3 million, or 0.5%, from $56.3 million in fiscal 1994. As a percentage of net sales, these expenses were 41.4% and 41.7%, respectively. The reduction in selling, general and administrative expenses reflected salary and other cost controls instituted by Winston. Interest and other expense increased from $0.4 million in fiscal 1994 to $0.5 million in fiscal 1995 due to an increase in inventory stocking levels at the end of fiscal 1995 in preparation for higher sales levels leading into the next fiscal year. Income taxes were not applicable for either period due to Winston's tax status a Subchapter S corporation. EBITDA was $3.1 million in fiscal 1995, an increase of $0.6 million, or 24.4%, from $2.5 million in fiscal 1994 due to the factors discussed above. EBITDA as a percentage of net sales increased to 2.3% in fiscal 1995 from 1.8% in fiscal 1994. RESULTS OF OPERATIONS -- ITCO The ITCO Merger took place on May 20, 1998. Results subsequent to that date are included with those of the Company above. ITCO acquired the assets of ITCO Holdings in a transaction accounted for as a 55 59 purchase at the close of business on November 30, 1995. Therefore, the reported results for fiscal 1996 only include the 10-month period from December 1, 1995 to September 30, 1996. The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR ENDED EIGHT SEPTEMBER 30, MONTHS ----------------------- ENDED PERIOD ENDED 1995 1996 1997 MAY 31, 1997 MAY 20, 1998 ----- ----- ----- ------------ ------------ Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold....................... 87.4 87.2 85.8 86.0 85.5 Gross profit............................. 12.6 12.8 14.2 14.0 14.5 Selling, general and administrative expenses............................... 11.6 12.7 13.6 13.8 12.9 Income from operations................... 1.0 0.1 0.6 0.2 1.6 Interest and other expense............... 0.7 1.2 1.1 1.0 0.9 Income (loss) before income taxes........ 0.3 (1.1) (0.5) (0.8) 0.7 Income taxes............................. 0.1 (0.4) (0.1) (0.3) 0.3 Net income (loss)........................ 0.2 (0.7) (0.4) (0.5) 0.4 EBITDA................................... 1.7 0.8 1.2 1.0 2.4
PERIOD ENDED MAY 20, 1998 COMPARED TO EIGHT MONTHS ENDED MAY 31, 1997 Net sales were $232.3 million for the period ended May 20, 1998, an increase of $6.5 million, or 2.9%, from $225.8 million for the eight months ended May 31, 1997. The increase was due to strong sales in the March-May 1998 period as a result of aggressive marketing by ITCO of its products, offset partially by strong economic activity and related sales in the prior year's November-December 1996 period combined with a decision by ITCO in the October-December 1997 period to concentrate on higher margin business. Gross profit was $33.6 million for the period ended May 20, 1998, an increase of $2.0 million, or 6.2%, over the eight months ended May 31, 1997. As a percentage of net sales, gross profit was 14.5% and 14.0%, respectively, for the periods ended May 20, 1998 and May 31, 1997. Gross profit margins improved in the current period as a result of the concentration by ITCO on higher margin products. Selling, general and administrative expenses were $30.0 million in the period ended May 20, 1998, a decrease of $1.1 million, or 3.7%, from $31.1 million for the eight months ended May 31, 1997. As a percentage of net sales, these expenses were 12.9% and 13.8%, respectively, for the periods ended May 20, 1998 and May 31, 1997. Selling, general and administrative expenses decreased by almost 1.0% for the 1998 period as a percentage of sales due to certain headcount reductions instituted during the latter half of the prior fiscal year, offset slightly by increased spending on sales and operations management personnel in the current period. In fiscal 1997, ITCO reduced field headcounts by approximately 125 persons. Interest and other expense decreased to $2.0 million in the period ended May 20, 1998 from $2.3 million in the comparable period in 1997. Income taxes increased to an expense of $0.8 million for the period ended May 20, 1998 from a credit of $0.7 million in the comparable 1997 period as a result of improved pre-tax earnings and provisions for permanent timing differences on the expected fiscal 1998 earnings. EBITDA was $5.6 million for the period ended May 20, 1998, an increase of $3.4 million, or 149.8%, from $2.2 million for the first eight months in fiscal 1997 due to the combination of higher sales, better margins, and lower expenses as discussed above. EBITDA as a percentage of net sales increased to 2.4% in the 1998 period from 1.0% in the comparable period in 1997. YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO PERIOD ENDED SEPTEMBER 30, 1996 Sales were $352.0 million for fiscal 1997, an increase of $61.0 million, or 21.0%, from $291.0 million fiscal 1996. However, fiscal 1996 included only 10 months of operating results. If 1996 results were restated for a full 56 60 12 months of operations, sales in fiscal 1997 increased by $10.5 million, or 3.1%. This increase, as adjusted, was due to the full-year sales effect from companies acquired during fiscal 1996 of $17.5 million, partially offset by a decline in the sale of custom wheels, and a change in the recording of truck tire sales to national fleets. The change in truck tire sales accounting reduced sales by $4.0 million, with no effect on earnings. Gross profit was $50.0 million in fiscal 1997, an increase of $12.7 million, or 33.9%, from $37.4 million in fiscal 1996. Giving effect to a full 12 months in fiscal 1996, gross profit rose in fiscal 1997 by $6.8 million, or 15.7%. As a percentage of sales, gross profit rose from 12.7% in the adjusted fiscal 1996 period to 14.2% in fiscal 1997. Gross profit increased largely due to improved field pricing programs implemented during the years. Selling, general and administrative expenses were $47.9 million in fiscal 1997, or 13.6% of net sales, an increase of $10.9 million, or 29.6%, from $36.9 million in fiscal 1996. On a full-year basis, fiscal 1996 selling, general and administrative expenses would have been $40.8 million, or 12.0%, of restated sales. Increases in these expenses were primarily caused by the full-year effect in fiscal 1997 of the 1996 acquisition of companies with higher operating expense ratios and by increased bad debt expense during fiscal 1997 from a company acquired in late fiscal 1996. Interest and other expense increased from $4.0 million in fiscal 1996 on a 12 month basis to $4.1 million in fiscal 1997. Income taxes decreased from a credit of $1.3 million in fiscal 1996 to a credit of $0.5 million in fiscal 1997 as a result of the reduced pre-tax loss amount. EBITDA was $4.3 million in fiscal 1997, an increase of $1.9 million, or 78.8%, from both reported and restated fiscal 1996 results, due to the factors discussed above. EBITDA as a percentage of sales increased to 1.2% in fiscal 1997 from 0.8% in fiscal 1996. PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 Sales were $291.0 million for fiscal 1996, a decrease of $3.1 million, or 1.1%, from $294.1 million fiscal 1995. Restating fiscal 1996 on a 12 month basis, sales would have reflected an increase of $47.3 million, or 16.1%. This increase was primarily due both to the partial-year inclusion of sales from companies acquired during fiscal 1996 along with continued growth in existing locations Gross profit was $37.4 million in fiscal 1996, an increase of $0.3 million, or 0.8%, from $37.1 million in fiscal 1995. Full-year gross profit in fiscal 1996 would have been $43.3 million, or 12.7%, of sales in restated fiscal 1996 versus 12.6% in fiscal 1995. Gross profit increased in full-year fiscal 1996, coinciding with the overall increase in sales levels. Selling, general and administrative expenses were $36.9 million in fiscal 1996, an increase of $2.8 million, or 8.1%, from $34.2 million in fiscal 1995. As a percentage of sales, these expenses were 12.7% and 11.6%, respectively. On a full-year basis, fiscal 1996 selling, general and administrative expenses would have been $40.8 million, or 12.0% of net sales. The increase of $6.6 million in full-year fiscal 1996 expense was due both to expenses of companies acquired during fiscal 1996, and to increased investment in sales personnel, drivers, and warehouse facilities during 1996. Interest and other expense increased from $2.1 million in fiscal 1995 to $3.7 million fiscal 1996 and $4.0 million for fiscal 1996 on a full-year basis. The primary cause for the increase was increased debt incurred as a part of the acquisition of ITCO Holdings by ITCO coupled with higher borrowings caused by higher levels of inventory. Income taxes decreased from $0.1 million in fiscal 1995 to a credit of $1.3 million in fiscal 1996 as a result of the pre-tax loss incurred in fiscal 1996. EBITDA was $2.4 million in fiscal 1996, both on a 10 month and full-year basis, a decrease of $2.7 million, or 52.8%, from $5.1 million in fiscal 1995 due to the factors discussed above, particularly the increase 57 61 in selling, general and administrative expenses. EBITDA as a percentage of sales decreased to 0.8% in fiscal 1996 from 1.7% in fiscal 1995. RESULTS OF OPERATIONS -- CPW CPW was acquired by Heafner on May 20, 1998. Results subsequent to that date are included with those of the Company above. The following table sets forth each category of statements of operations data as a percentage of net sales:
SIX MONTHS FISCAL YEAR ENDED ENDED OCTOBER 31, APRIL 30, ----------------------- -------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................. 82.1 82.4 80.3 80.0 72.5 Gross profit....................................... 17.9 17.6 19.7 20.0 27.5 Selling, general and administrative expenses....... 16.5 15.2 16.4 17.0 20.7 Income from operations............................. 1.4 2.4 3.3 3.0 6.8 Interest and other expense......................... 0.2 0.1 0.2 0.2 0.5 Income before income taxes......................... 1.2 2.3 3.1 2.8 6.3 Income taxes....................................... 0.5 0.9 1.2 1.1 2.5 Net income......................................... 0.7 1.4 1.9 1.7 3.8 EBITDA............................................. 1.8 2.6 3.6 3.3 7.2
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997 Net sales were $67.6 million for the six months ended April 30, 1998, an increase of $11.0 million, or 19.4%, from $56.6 million in the corresponding period in 1997. The increase was due to aggressive sales efforts by CPW during the 1998 period, combined with sales contributions of two small retail acquisitions completed in February and April 1998. Gross profit was $18.6 million for the six months ended April 30, 1998, an increase of $7.3 million, or 64.4%, from $11.3 million in the six months ended April 30, 1997. As a percentage of net sales, gross profit was 27.5% and 20.0%, respectively, for the six months ended April 30, 1998 and 1997. Gross profit margins increased significantly during the period ended April 30, 1998 primarily due to improved vendor program receipts. Increased retail sales, with their corresponding higher margins, also contributed somewhat to the overall margin improvements. Selling, general and administrative expenses were $14.0 million in the six months ended April 30, 1998, an increase of $4.4 million, or 45.8%, from $9.6 million in the corresponding 1997 period. As a percentage of net sales, these expenses were 20.7% and 17.0%, respectively, for the six months ended April 30, 1998 and 1997. Selling, general and administrative expenses increased as a result of the two retail acquisitions in February 1998, installation of a new telemarketing group in the 1998 period, and higher bonus expenses associated with the increased earnings levels. Net interest expense increased to $0.3 million for the six months ended April 30, 1998 from $0.1 million in the comparable period in 1997. Income taxes increased to $1.7 million for the six months ended April 30, 1998 from $0.6 million in the comparable 1997 period as a result of the increased earnings levels. EBITDA was $4.8 million for the six months ended April 30, 1998, an increase of $2.9 million, or 156.0%, from $1.9 million for the six months ended April 30, 1997 due to the strong sales increases and margin improvements discussed above. EBITDA as a percentage of net sales increased to 7.2% in the 1998 period from 3.3% in the corresponding period in 1997. 58 62 YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996 Net sales were $122.4 million for fiscal 1997, a decrease of $0.5 million, or 0.4%, from $122.9 million fiscal 1996. The decrease was due to efforts on the part of CPW to focus during fiscal 1997 on more profitable product lines, particularly high performance and light truck tires, and the effect of very high levels of sales during late fiscal 1996. Gross profit was $24.1 million in fiscal 1997, an increase of $2.5 million, or 11.8%, from $21.6 million in fiscal 1996. As a percentage of sales, gross profit was 19.7% and 17.6%, respectively. Gross profit increased primarily due to favorable pricing programs provided by CPW's vendors during the year, along with the product mix change in fiscal 1997 towards higher margin product lines. Selling, general and administrative expenses were $20.1 million in fiscal 1997, an increase of $1.4 million, or 7.6%, from $18.7 million in fiscal 1996. As a percentage of sales, these expenses were 16.4% and 15.2%, respectively. Selling, general and administrative expenses increased due to a decision to expand CPW's "just-in-time" delivery service in many of its major markets. Interest and other expense remained flat at $0.2 million in fiscal 1996 and 1997. Income taxes increased from $1.1 million in fiscal 1996 to $1.5 million fiscal 1997 as a result of the higher levels of pre-tax earnings. EBITDA was $4.5 million in fiscal 1997, an increase of $1.2 million, or 39.0%, from $3.2 million in fiscal 1996 due to the factors discussed above. EBITDA as a percentage of sales increased to 3.6% in fiscal 1997 from 2.6% in fiscal 1996. YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 Net sales were $122.9 million for fiscal 1996, an increase of $15.2 million, or 14.2%, from $107.7 million fiscal 1995. The increase was due to an acquisition early in fiscal 1996, and very high sales late in fiscal 1996 in connection with CPW's twenty-fifth anniversary sale. Gross profit was $21.6 million in fiscal 1996, an increase of $2.3 million, or 11.7%, from $19.3 million in fiscal 1995. As a percentage of sales, gross profit was 17.6% and 17.9%, respectively. Gross profit margins decreased primarily due to lower margin product lines from a company acquired in late fiscal 1995 compared with CPW's normal profitability on its product mix. Selling, general and administrative expenses were $18.7 million in fiscal 1996, an increase of $0.9 million, or 4.9%, from $17.8 million in fiscal 1995. As a percentage of sales, these expenses were 15.2% and 16.5%, respectively. Selling, general and administrative expenses decreased as a percent of sales due to CPW's ability to incorporate the sales and operations of an acquisition in late fiscal 1995 without any significant increase in selling, general and administrative expenses. Interest and other expense decreased from $0.3 million in fiscal 1995 to $0.2 million in fiscal 1996 due to the repayment of sums borrowed in connection with the acquisition in late fiscal 1995. Income taxes increased from $0.5 million in fiscal 1995 to $1.1 million in fiscal 1996 as a result of the increase in pre-tax earnings. EBITDA was $3.2 million in fiscal 1996, an increase of $1.3 million, or 68.1%, from $1.9 million in fiscal 1995 due to the factors discussed above. EBITDA as a percentage of sales increased to 2.6% in fiscal 1996 from 1.8% in fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES The Company required approximately $148.1 million of financing in connection with the Transactions for (i) the consummation of the ITCO Merger, (ii) the completion of the CPW Acquisition, (iii) the repayment of existing credit facilities (treating amounts outstanding under the Old Credit Facility and under the ITCO Facility as repaid and borrowed under the New Credit Facility on the Closing Date) and subordinated 59 63 debt, and (iv) the payment of related fees and expenses. The Company obtained the necessary funds from, among other sources, (i) the issuance and sale of the Notes in the Offering and (ii) outstanding borrowings under the New Credit Facility. See "Transactions," "Use of Proceeds," and "Capitalization." The Transactions had a significant impact on the capitalization of the Company. At June 30, 1998, the combined indebtedness of the Company was $170.9 million compared to $64.7 million for Heafner on a stand-alone basis at December 31, 1997. Financing committed by the lenders under the New Credit Facility is $100.0 million under a revolving line of credit, approximately $55.5 million of which is drawn as of August 14, 1998. See "Unaudited Pro Forma Condensed Combined Financial Data" and "Capitalization." Heafner's principal sources of cash during the six months ended June 30, 1998, and the years ended 1997, 1996 and 1995 were from operations, borrowings under credit facilities and the issuance of long-term subordinated debt and preferred stock in connection with the acquisition of Winston. Cash generated (used) from operating activities totaled $(4.9) million, $6.7 million, $4.0 million and $(.4) million, respectively, during each of those periods. Capital expenditures during the six months ended June 30, 1998 and the years ended 1997, 1996, and 1995 amounted to $1.9 million, $4.9 million, $7.9 million and $2.2 million, respectively. Capital spending during the six months ended June 30, 1998 was primarily for new equipment in retail operations. Expenditures during 1997 and 1996 were primarily for the construction and purchase of warehouse distribution locations, including Heafner's primary "mixing" warehouse in Lincolnton, North Carolina. Historically, the majority of capital spending by Heafner has been for the construction or purchase of additional distribution facilities, or for maintenance of existing fixed assets. The Company intends to make capital expenditures in excess of $30.0 million over the next five years, principally for the renovation and addition of retail facilities and for general corporate expenditures. It is estimated that approximately $9.0 million of such capital expenditures will be made in 1998. On an ongoing basis, the Company estimates its maintenance level of annual capital expenditures to be approximately $4.0 million. In addition, the Company anticipates making further acquisitions of retail and wholesale operations that may become available and that meet the Company's overall strategic guidelines. Such acquisition spending may be incremental to the capital expenditures forecast above. See "Business -- Business Strategy." The New Credit Facility will mature on May 20, 2003. Interest on loans under the New Credit Facility bear interest at a floating rate based upon federal funds or Eurodollar rates plus an applicable margin. Loans under the New Credit Facility are guaranteed by all material subsidiaries of the Issuer and secured by inventory and accounts receivable of the Company. See "Risk Factors -- Substantial Leverage; Restrictive Covenants," and "Description of New Credit Facility." The Company has entered into interest rate swap agreements from time to time to manage exposure to fluctuations in interest rates. As of June 30, 1998, interest rate swap agreements were in place covering notional amounts of approximately $25.0 million of indebtedness expiring at various dates through October 2000, at an average interest rate of 8.53%. The Company does not anticipate entering into additional swap agreements or hedging arrangements at this time. The Company plans to evaluate the arrangements under which it uses certain distribution facilities it owns, and expects to enter into sale-and-leaseback arrangements with respect to certain of the sites, and to sell and vacate others. The Company anticipates that its principal use of cash going forward will be to meet working capital and debt service requirements and to make capital expenditures. In addition, the Company expects to pay $5.0 million relating to consolidation of warehouse and office facilities, severance obligations and other exit costs over the next 12 months. In connection with the CPW Acquisition, the Company also expects to pay an aggregate of $10.0 million to the CPW Stockholders for certain non-compete covenants and other contingent payments over the next five years. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the New Credit Facility, will be adequate to meet its anticipated requirements. There can be no assurance, however, that the Company's business will continue to generate sufficient cash flow from operations in the future to be applied to 60 64 meet these requirements or to service its debt, and the Company 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 the Company. Certain minority stockholders of the Company have been granted redemption rights commencing in 2004, subject to certain conditions, which if exercised would obligate the Company to redeem the shares of capital stock held by such stockholders at agreed valuations (based upon a multiple of EBITDA formula). See "Transactions" and "Certain Relationships and Related Party Transactions -- Warrants" and "-- Preferred Stock." There can be no assurance that sufficient funds will be available to redeem the shares of capital stock held by such stockholders if the Company is required to do so or whether the terms of the Company's outstanding indebtedness at such time (including the Indenture) will permit such redemption. 61 65 BUSINESS The market share information, descriptions of markets and industry statistics contained in the "Prospectus Summary" and "Business" sections and elsewhere in this Prospectus are based on the good faith estimates of the Company's management. Such estimates are based on, among other things, the following factors: (i) industry publications including Modern Tire Dealer and Tire Business and industry statistics published by organizations such as the Rubber Manufacturers Association (RMA); (ii) management's knowledge of the market based on its historical business and industry experience; (iii) management's discussions with customers and competitors in the markets in which the Company competes; and (iv) the Company's product sales compared to management's good faith estimates of the total product sales in the relevant market. The Company has not independently verified any of this information and makes no representation as to its accuracy. This Prospectus contains trademarks, tradenames or registered marks of the Company and other entities, including Regul(R) tires, Winston(R) tires, Pacer(R) custom wheels, Monarch(R) tires and Magnum(R) automotive lifts. HISTORY Heafner. Founded in 1935, Heafner is one of the largest tire distributors and retailers in the country, based on tires distributed and number of outlets at December 1997, and believes that it is a significant distributor of mechanical service equipment to the automotive service and repair industry in the United States. With over 30 distribution facilities, Heafner distributes private-label, house and flag brands of passenger, light truck, truck and specialty tires, wheels, mechanical service equipment and related products to the automotive replacement market in over 18 states. Excluding sales by Winston, Heafner generated net sales of $210.8 million and sold more than 3.3 million tires in 1997. Heafner's products include flag brands manufactured by Michelin (including the B.F. Goodrich and Uniroyal brands), private-label products such as Regul tires, Winston tires and Pacer custom wheels, and house brand products such as Monarch tires (manufactured by Kelly-Springfield, a division of 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. Tire sales represented approximately 76.0% of Heafner's fiscal 1997 net sales. Winston. On May 7, 1997, Heafner entered the retail tire business with its acquisition of Winston. Founded in 1962, Winston has grown to become the fourth largest independent tire dealer in the country in 1997, based on the number of company-owned retail stores. Winston sold more than 1.1 million tires as well as other automotive products in 1997 through its chain of 176 retail stores in California and Arizona for net sales in excess of $145.0 million. Each Winston store offers customers multiple choices of flag brands, including Michelin (including the B.F. Goodrich and Uniroyal brands), Pirelli and, beginning in June 1998, Goodyear, as well as the Winston tire private-label brand and related automotive products and services, including Quaker State oil products and Monroe and Raybestos ride control products. Tire sales represented approximately 57.9% of Winston's fiscal 1997 net sales. ITCO. Heafner acquired ITCO on May 20, 1998. Founded in 1962, ITCO is one of the largest wholesale distributors of tires, custom wheels, equipment and tire dealer supplies in the United States, with net sales for fiscal 1997 of approximately $352.0 million. ITCO shipped more than 4.8 million passenger and light truck tires and 175,000 medium truck tires in fiscal 1997. ITCO's products include flag brand tires such as Michelin (including the B.F. Goodrich and Uniroyal brands), Bridgestone, Firestone and Dunlop and private-label brand tires manufactured by Michelin, Bridgestone/Firestone, Kelly-Springfield and Dunlop, custom wheels manufactured by Ultra and private-branded under the ICW name and supplies and equipment manufactured by Ingersoll-Rand and Hennessey. Tire sales represented approximately 85.5% of ITCO's net sales in fiscal 1997. CPW. Heafner acquired CPW on May 20, 1998. Started in 1971 as a performance automotive shop, CPW is now primarily a wholesale distributor specializing in replacement market sales of tires, parts, wheels and equipment. CPW also operates a network of 40 retail stores in California and Arizona. Of CPW's retail stores, 35 sell flag brand high performance as well as regular grade tires, wheels and related automotive 62 66 products, while the remaining five retail stores sell only automotive parts. CPW's net sales for fiscal 1997 were approximately $122.0 million. CPW shipped more than 1.5 million passenger and light truck tires in fiscal 1997. CPW's flag brand tire offerings include Michelin, Dunlop, B.F. Goodrich, Uniroyal and Pirelli. Its private-label brand tire offerings include Lee, Centennial, Mickey Thompson, Starfire, Cooper and Nankang. CPW believes that it is the largest distributor of high performance tires in California. CPW also sells parts, wheels, and equipment built by nationally recognized manufacturers. Tire sales represented approximately 72% of CPW's total sales for fiscal 1997. Sales of high performance tires represented approximately 40% of CPW's total net sales for the same period. GENERAL Following the acquisition of the New Businesses, the Company is one of the largest independent suppliers of tires to the replacement tire market in the United States. The Company's wholesale distribution operations accounted for approximately 82.5% of the Company's total net sales, on a pro forma basis, in 1997. With over 65 distribution centers servicing 20 states, the Company believes that it is the largest independent distributor of new replacement tires in the Southeast and in California. Through this distribution network, the Company's wholesale divisions supplied 9.7 million tires in 1997 and currently serve an average of 20,000 customers each month. Through its retail division, the Company also operates over 215 retail tire and automotive service outlets in California and Arizona which sold over 1.2 million tires in 1997. The Company's Winston subsidiary, which operates 176 of the Company's retail tire and automotive service outlets, was the fourth largest independent tire dealer in the United States in 1997 based on number of locations. The Company generally stocks over 18,000 SKUs of tires in its distribution centers. The Company supplies premium, economy and private-label brands of tires manufactured by the major tire manufacturers, including Michelin (which manufactures the B.F. Goodrich and Uniroyal brands), Kelly-Springfield (a division of Goodyear), Dunlop, Bridgestone/Firestone and Pirelli. The Company's private-label tires are sold under the Winston and Regul trademarks. In addition to its tire sales, the Company believes that it is a significant independent distributor and retailer of aftermarket wheels, automotive replacement parts and accessories and automotive service equipment. The Company believes that the combination of Heafner and the New Businesses represents a distinct opportunity to broaden product offerings, strengthen manufacturer relationships, develop new competencies in its organization and strengthen the Company's presence in the Southeast and the West. The Company believes that the ITCO Merger will enable the Company's Eastern wholesale division to provide more cost-effective service and will increase its distribution capacity, positioning the Company for expansion into new geographic areas. The Company believes that the acquisition of CPW and its distribution facilities will establish a broader supply network with more frequent delivery capabilities for the Company's Winston retail stores, improving the Company's ability to restock inventory and obtain customer-requested products on a more timely basis. In addition, the Company expects to realize significant cost savings and operating efficiencies and improvements that will contribute to its goal of increasing future profitability. On a pro forma basis, the Company generated net sales and EBITDA of $830.7 million and $28.1 million, respectively, in fiscal 1997. In 1997, on a pro forma basis, sales of tires accounted for approximately 78.6% of the Company's total net sales, sales of automotive service, 7.7%, sales of custom wheels, 6.8%, sales of automotive service equipment, 3.1%, and sales of parts and other products, 3.8%. INDUSTRY OVERVIEW Purchasers in the United States spent approximately $18.1 billion on new replacement tires in 1997. Of that amount, passenger tires accounted for approximately 58% of sales, light truck tires accounted for approximately 15%, truck tires accounted for approximately 21% and farm, specialty and other types of tires accounted for approximately 6%. 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 208.1 million tires in 1997, a compound annual growth rate of approximately 2.2%. The Company believes that the factors that have contributed to this growth include increases in both the number and average age of cars as well as passenger miles driven in the United States. 63 67 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 the Company, are the largest point of sale suppliers of new replacement tires to the United States market. Independent tire dealers accounted for approximately 59.5% of retail sales of domestic replacement passenger tires in 1997. Independent tire dealers obtain their inventory of new replacement tires through three principal sources: tire manufacturers, independent wholesale distributors (such as the Company) and dealer-owned warehouses. Other sources include discount or price clubs and tire outlet chains. Industry estimates indicate that independent wholesale distributors provided approximately one-third of the passenger and light truck new replacement tires supplied to independent tire dealers, and approximately 25% of all passenger and light truck new replacement tires reaching the consumer market, in 1997. The Company believes that, in recent years, certain tire manufacturers have reduced their supply to small independent tire dealers due to the inefficiencies of supplying a small amount of product to a large number of locations. At the same time, manufacturers have increased their supplies to independent wholesale distributors, such as the Company, who are able to deliver tires to a large number of independent tire dealers with greater efficiency. The replacement tire market for passenger cars and light trucks consists of three primary types of tires: "flag" brands, which are premium tires made by the major tire manufacturers; associate or "house" brands, which are primarily economy brand tires made by the major tire manufacturers; and private-label brands, which are brands made by tire manufacturers generally for independent tire wholesale distributors and retailers. In 1997, flag brands constituted approximately 50.0% of the United States passenger and light truck replacement tire markets in 1997, private-label brands constituted approximately 29.9% of those markets and house brands made up approximately 20.1% of those markets. COMPETITIVE STRENGTHS AND BUSINESS STRATEGY The Company's strategy is to increase net sales and EBITDA while becoming the leading national distributor of tires and automotive equipment and services through wholesale distribution centers and retail tire outlets. To achieve this objective, the Company intends to continue to build upon the following strengths: Leading Market Positions. The Company believes that it is one of the nation's largest buyers of new replacement passenger and light truck tires, purchasing in excess of 10.9 million tires in 1997, representing approximately 5.2% of the total U.S. replacement tire market. Through its Eastern and Western wholesale divisions, the Company also believes that it is the leading wholesale distributor of tires to the replacement tire market in the Southeast and in California, with over 65 distribution centers servicing 20 states. In addition, through its retail division, the Company currently operates over 215 retail tire and automotive service outlets in California and Arizona, including 176 tire and automotive service outlets operated by Winston. Winston was the fourth largest independent tire dealer in the United States in 1997 based on number of locations. The Company intends to strengthen and expand its existing network of distribution centers and retail outlets by pursuing a strategy of selective expansion and acquisition focusing on geographic areas it does not currently serve. Strong Relationships with Major Tire Manufacturers. The Company has established strong relationships with the major tire manufacturers, including Michelin (which manufactures the B.F. Goodrich and Uniroyal brands), Kelly-Springfield (a division of Goodyear), Dunlop, Bridgestone/Firestone and Pirelli. The Company has conducted business with its major tire suppliers for a combined average of 26 years. In terms of replacement tires purchased, the Company believes that it is the largest U.S. customer of Dunlop, one of the largest U.S. customers of Michelin (including the B.F. Goodrich and Uniroyal brands) and one of the largest U.S. customers of Bridgestone/Firestone. The Company recently negotiated an arrangement with Goodyear for the placement of Goodyear flag-branded products in the Company's Winston retail stores. The Company's network of retail points of sale offers tire manufacturers a desirable platform for their branded products and allows the Company to relay important feedback from tire consumers to the manufacturers. The Company 64 68 believes that this combination of factors improves tire manufacturers' access to the replacement tire market and, in turn, enhances the Company's relationship with its suppliers. Private-Label Brands. The Company offers two private-label brands of tires, Regul (manufactured by Michelin and Kelly-Springfield) and Winston (manufactured by Kelly-Springfield), which are supplied exclusively by the Company. In general, private-label brands allow the independent wholesale distributor and its retail dealer customer to realize higher gross profit margins than are obtainable through sales of flag or house brands. Sales of private-label tires account for a significant portion of the Company's total net sales ($101.0 million on a pro forma basis in 1997). The Company also sells other private-label products, including ICW and Pacer custom wheels and Magnum automotive lifts. The Company intends to continue to build the brand identity of its private-label products through advertising, promotions and continued emphasis on the quality of those products, and plans to introduce its private-label brand tires as leading value-priced products in the new markets it serves. Supply Practices and Customer Service. The Company distributes tires and other products to dealers and other customers generally on a same-day basis and, in certain markets, makes multiple deliveries in a single day. By offering reliable, timely and frequent deliveries and using sophisticated inventory management systems, the Company's wholesale divisions assist customers in reducing investment in inventories while still enabling them to provide a full range of products. In addition, the integration of the New Businesses will allow the Company to implement the best inventory management practices of its existing businesses and those of the New Businesses on a company-wide basis as it continues to emphasize value-added customer service and supply practices in all aspects of its business. The Company believes that its strong inventory management systems and retail expertise will allow it to successfully integrate the New Businesses, expand its customer base and provide a strong platform for future expansion. OPERATIONS Wholesale Divisions. The Company's Eastern and Western wholesale divisions accounted for approximately 82.5% of the Company's net sales, on a pro forma basis, in 1997. With over 65 distribution centers servicing 20 states, the Company believes that it is the largest independent distributor of replacement tires in the Southeast and in California. Through this distribution network, in 1997 the Company supplied 9.7 million tires and provided service to an average of 20,000 active customers in each month. The Company's distribution network provides daily delivery to its tire dealer customers in most areas and, in major markets, provides delivery two to four times a day. The Company has been able to offer reliable, timely and frequent deliveries to its customers by utilizing its inventory management systems that link its distribution facilities to its major customers and electronic data links directly with Michelin and Kelly-Springfield, its two largest suppliers. This level of just-in-time service is intended to allow the Company's customers to reduce investment in inventories while still enabling them to provide a full range of products to consumers. The Company believes that software and on-line programs, such as the Company's "HeafNet" electronic interlink service, will play an increasingly important role for its distribution customers. See "-- Information Systems and Technology." The Company's fleet of approximately 650 trucks also facilitates frequent deliveries to its distribution customers. In order to improve efficiency in its Southeastern operations, the Company utilizes a large "mixing" warehouse located in Lincolnton, North Carolina where products are sorted for shipments to customers located outside the territories typically served by the distribution network. The mixing warehouse also enables the Company to make volume purchases from suppliers when advantageous and ship the resulting inventory to distribution centers within its network. The Company believes that this mixing and accessibility of inventory enables the Company's customers to expand sales opportunities without the burden and expense of large investments in inventory. As an additional service to its customers, the Company may pass through to its distribution customers all or a portion of credits from tire manufactures for advertising or special promotions on tires or other products. These credits assist the Company's customers in budgeting for their advertising and similar operating expenses. The Company also participates in and sponsors dealer conferences among its customers in order to 65 69 keep them informed of industry trends and new product offerings. In addition, as the Company's retail expertise grows, the Company intends to continue to make this expertise available to its independent tire retailer customers in order to enhance customer relations. Retail Division. The Company's retail division operates over 215 retail tire and service outlets in California and Arizona, including 176 tire and automotive service outlets operated by Winston. Winston was the fourth largest independent tire dealer in the United States in 1997 based on number of locations. The Company believes that the strength of the Winston retail franchise in California may make it suitable for expansion in the West. The Company's CPW subsidiary, which began as a performance automotive shop in 1971, currently operates 40 of the Company's retail stores in California and Arizona. Of these retail stores, 35 sell flag brand high performance as well as regular grade tires, wheels and related automotive products, while the remaining five sell only automotive parts. The following chart shows the geographical distribution of the Company's retail locations:
REGION WINSTON CPW TOTAL - ------ ------- --- ----- Southern California................................. 124 9 132 Sacramento/California Central Valley................ 29 5 34 Northern California................................. 20 15 35 Arizona............................................. 3 11 14 --- -- --- Totals.................................... 176 40 216
Through Winston's retail locations, the average size of which is approximately 4,400 square feet, the Company also provides automotive repair and service, such as wheel alignment, oil changes and brake repair. These services accounted for approximately 42.1% of Winston's total net sales in 1997. Winston provides its customers with a guarantee on all products and services and believes that its emphasis on customer service distinguishes it from many of its competitors. Winston also conducts an eight-week training course for its store managers and mechanics and routinely monitors the performance of its customer service representatives. Through its strong consumer protection program, which includes sending "mystery shoppers" to store locations, Winston seeks to ensure that services and sales tactics comply with California consumer protection regulations covering the automotive services industry. Winston's programs have been highlighted by the California Bureau of Automotive Repair in its publications as examples of how compliance with such regulations can and should be achieved. PRODUCTS The Company sells a broad selection of tires, custom wheels, automotive service equipment and related products manufactured by the leading manufacturers. The Company's products include flag brand tires manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, private-label products such as Regul tires, Winston tires and Pacer custom wheels, and house brand products such as Monarch tires, manufactured by Kelly-Springfield (a division of Goodyear). The Company generally stocks over 18,000 SKUs of tires in its distribution centers. The Company 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. The Company 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 over 200,000 SKUs of automotive parts and accessories. Through Winston's retail tire and automotive service outlets, the Company offers other automotive products such as Quaker State oil products and Monroe and Raybestos ride control products. The Company believes that products sold by the New Businesses will complement Heafner's existing product line and, in the case of CPW, increase the Company's sales of high-performance tires and automotive parts and accessories. Although the Company anticipates some consolidation of product lines following completion of the Transactions, it intends to continue to provide its customers with a broad choice of flag and private-label products. In 1997, on a pro forma basis sales of tires accounted 66 70 for approximately 78.6% of the Company's total net sales, sales of automotive service, 7.7%, sales of custom wheels, 6.8%, sales of automotive service equipment, 3.1%, and sales of parts and other products, 3.8%. SUPPLIERS The Company purchases its products in finished form from all major tire manufacturers and other suppliers. In 1997, the Company purchased in excess of 10.9 million tires, representing approximately 5.2% of the total U.S. replacement tire market. Approximately 90% of the Company's total tire purchases (in units) in 1997 were supplied by Michelin, Kelly-Springfield, Dunlop and Bridgestone/Firestone. Michelin and Kelly-Springfield, a division of Goodyear, are the Company's two largest tire suppliers, supplying 35% and 34%, respectively, of all tires sold by the Company in 1997. In addition, the Company has recently negotiated an arrangement with Goodyear for the placement of Goodyear flag-branded products in the Company's Winston retail stores. Of the total 1997 U.S. new replacement passenger tire market, Michelin (which manufactures the B.F. Goodrich and Uniroyal brands) accounted for 15.5%, Bridgestone/Firestone accounted for 13.0% and the leader, Goodyear, accounted for 16.0%. Of the total 1997 U.S. replacement light truck tire market, Michelin accounted for 18.5%, Bridgestone/Firestone accounted for 12.5% and Goodyear accounted for 13.0%. Of the Company's principal private-label brands, Winston tires are manufactured exclusively by Kelly-Springfield and Regul tires are manufactured by both Michelin and Kelly-Springfield. There are a number of worldwide manufacturers of wheels and other automotive products and equipment. Most of the wheels purchased by the Company are private-label custom brands, such as Pacer and ICW, and are produced by a variety of manufacturers. The Company 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 (the "Kelly-Springfield Supply Agreement") with Kelly-Springfield, a division of Goodyear, the Company's supply arrangements with its major suppliers generally are pursuant to 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 a combined average of 26 years and believes that it has strong relationships with all of its major suppliers. See "Risk Factors -- Reliance on Vendors." The Company purchases certain private-label and house brand tires, including the Winston and Monarch products, from Kelly-Springfield, a division of Goodyear. Purchases are made pursuant to the Kelly-Springfield Supply Agreement at prices specified from time to time in the manufacturer's pricing schedule. Pursuant to the agreement, the Company must purchase all of its requirements of Winston brand tires from Kelly-Springfield during the term of the agreement, but may purchase such tires from other manufacturers if Kelly-Springfield is unable or unwilling to meet its supply obligations under the agreement. The initial term of the Kelly-Springfield Supply Agreement expires on May 7, 2007 and the agreement is automatically renewable for successive three-year terms thereafter. The supply agreement may be terminated by either party upon twelve months' advance notice. Kelly-Springfield is the sole holder of the Issuer's Preferred Stock (as defined). See "Certain Relationships and Related Transactions -- Preferred Stock." CUSTOMERS Wholesale. Through its Eastern and Western wholesale divisions, the Company distributes tires and related automotive products principally to independent tire dealers. The Company's other customers include national retail chains, service stations, general automotive repair facilities, auto parts stores, automobile dealers and specialty automotive repair facilities. The Company generally requires payment from its customers within 30 days, although it may tailor programs for its larger customers. In 1997, the Company's wholesale divisions served an average of more than 20,000 customers in each month. The Company's largest customer accounted for less than 0.5% of the Company's pro forma net sales for 1997 and the Company's top 25 customers accounted for less than 5% of the Company's pro forma net sales for 1997. 67 71 Retail. The Company's retail operations attract a variety of individual consumers in the areas they serve. Through the Winston retail chain, the Company also offers accounts to its corporate retail customers. Winston's corporate accounts represent approximately 9.2% of its tire business. COMPETITION The industry in which the Company competes is highly competitive, and many of the Company's competitors have resources significantly greater than the Company's. Tire manufacturers distribute tires to the retail market by direct shipments to independent tire dealers, national retail chains such as Sears and Wal-Mart and manufacturer-owned retail stores as well as through shipments to independent wholesale distributors. A number of independent wholesale tire distributors also compete in the regions in which the Company does business. In its retail business, the Company also faces competition from national chains and department stores, other independent tire stores, tire manufacturer-owned stores, discount and warehouse clubs and other automotive product retailers. The Company believes that the principal competitive factors in its business are reputation, breadth of product offering, delivery frequency, price and service. The Company 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. SEASONALITY AND INVENTORY The Company's wholesale distribution and retail service operations typically experience their highest levels of sales from March through October of each fiscal year, with the period from November through February generally experiencing the lowest levels of sales. The Company's inventories generally fluctuate with anticipated seasonal sales volumes. The Company believes it maintains levels of inventory that are adequate to meet its customers' needs on short notice. The average of beginning- and end-of-year inventories of the Company in 1997 was $108.5 million. INFORMATION SYSTEMS AND TECHNOLOGY The Company believes that software and on-line programs will play an increasingly important role in linking the Company to its distribution and retail customers and improving the Company's management of inventories of tires, wheels and related products. The Company is able to offer reliable, timely and frequent deliveries to its customers by utilizing its inventory-management systems that link directly to its major customers and among its distribution facilities and electronic data interlinks directly with Michelin and Kelly-Springfield, its two largest suppliers. Heafner supplies a number of customers with its proprietary "HeafNet" system, which allows customers to electronically access Heafner's warehouses to locate, price and order inventory. Heafner believes this system allows its customers to respond more quickly and efficiently to retail customers' requests for products. The Company intends to implement a company-wide inventory management system based on the strongest attributes of Heafner's, CPW's and ITCO's existing systems in order to improve the operation of its overall distribution network. The Company also intends to make available certain interactive software programs focused on the retail customer that are currently offered by CPW to independent tire dealers in the West to the Company's retail stores in the West and independent tire dealer customer base in the Southeast. For example, CPW currently is a distributor of a software product called Wheel Wizard that allows customers to view a wide assortment of wheels in combination with the make and color of their automobiles. The Company believes that interactive software programs such as these enhance its ability to market wheels by providing retail dealers devices that take up little floor space, are relatively easy to use and are customer oriented. 68 72 YEAR 2000 The Company has implemented a program designed to ensure that all of its accounting and operational systems and software will manage and manipulate data involving the transition from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. The Company does not expect that the costs associated with any required conversions of systems to ensure year 2000 compliance will be significant. The Company does not currently have any information concerning year 2000 compliance problems on the part of its suppliers and customers. EMPLOYEES The Company employs approximately 3,230 people as of June 30, 1998, of whom approximately 1,600 were employed in its wholesale divisions and approximately 1,630 were employed in its retail division. None of the Company's employees is represented by unions. The Company believes its employee relations are satisfactory. LEGAL PROCEEDINGS The Company's Winston subsidiary was named as a defendant in a class action lawsuit filed on June 10, 1998 in Los Angeles County Superior Court on behalf of certain Winston employees alleging violations of 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 in coordination with its liability insurers. The Company believes that these insurers will be responsible for defending some of the claims involved in the lawsuit, and that a portion of any potential losses may be covered under applicable insurance policies. The Company has also been named as a defendant in various other claims and lawsuits arising in the normal course of business. The Company believes that the facts do not support the plaintiffs' claims and intends to vigorously contest each of them. To the Company's knowledge, except as described in the previous paragraph, it is not currently a party to any litigation that would have a material adverse effect on the Company. PROPERTIES The principal properties of the Company are geographically situated to meet sales and operating requirements. All of the properties of the Company are considered to be both suitable and adequate to meet current operating requirements. The Company is reviewing its properties to determine whether certain facilities could be consolidated into other locations following completion of the Transactions. At present, the Company plans to close 11 to 13 distribution warehouses in the Southeast and is considering closing two distribution warehouses in California in order to eliminate redundancies within its Eastern and Western wholesale divisions. Although there can be no assurance that it will be successful in doing so, the Company believes that, in particular with respect to its distribution centers, it may obtain cost savings and synergies by closing or consolidating certain facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 69 73 Distribution Centers. The following table sets forth certain information regarding the Company's warehouse and distribution facilities as of June 30, 1998:
OWNED/ LOCATION COMPANY LEASED - -------- ------- ------ Alabama: Birmingham............................................. Heafner Leased Cullman................................................ ITCO Leased Mobile................................................. Heafner Leased Montgomery............................................. ITCO Leased Arizona: Mesa................................................... CPW Leased Arkansas: Little Rock............................................ Heafner Leased Texarkana.............................................. Heafner Owned California: Fresno................................................. CPW Owned Hayward................................................ Winston Leased Moorpark............................................... CPW Leased Rancho Cucamonga....................................... Winston Leased Sacramento............................................. CPW Leased San Jose(a)............................................ CPW Leased Santa Fe Springs....................................... CPW Leased Florida: Fort Myers............................................. ITCO Leased Jacksonville........................................... ITCO Leased Medley................................................. ITCO Leased Orlando................................................ Heafner Leased Orlando................................................ ITCO Leased Pensacola.............................................. Heafner Owned Tallahassee............................................ Heafner Owned Tampa.................................................. ITCO Leased West Palm Beach........................................ ITCO Leased Georgia: Atlanta................................................ Heafner Leased Augusta................................................ Heafner Leased Rome................................................... ITCO Leased Savannah............................................... ITCO Leased Tucker................................................. ITCO Leased Warner Robins.......................................... ITCO Leased Kentucky: Lexington.............................................. Heafner Leased Louisville............................................. Heafner Leased Maryland: Baltimore.............................................. ITCO Leased Landover............................................... ITCO Leased Salisbury.............................................. ITCO Owned Mississippi: Jackson................................................ Heafner Leased
70 74
OWNED/ LOCATION COMPANY LEASED - -------- ------- ------ Missouri: Springfield............................................ Heafner Leased North Carolina: Asheville.............................................. Heafner Owned Burlington............................................. ITCO Leased Charlotte.............................................. Heafner Owned Charlotte.............................................. ITCO Owned Fayetteville........................................... ITCO Leased Greensboro............................................. Heafner Leased Lincolnton............................................. Heafner Owned Lumberton.............................................. Heafner Owned Raleigh................................................ Heafner Owned Wilmington............................................. ITCO Leased Wilson(a).............................................. ITCO Leased Winston-Salem.......................................... Heafner Leased Oklahoma: Oklahoma City.......................................... CPW Leased South Carolina: Charleston............................................. ITCO Leased Columbia............................................... Heafner Leased Columbia............................................... ITCO Leased Florence............................................... Heafner Leased Mauldin................................................ Heafner Owned Mauldin................................................ ITCO Owned Tennessee: Chattanooga............................................ Heafner Leased Johnson City........................................... ITCO Leased Knoxville.............................................. Heafner Owned Knoxville.............................................. ITCO Leased Memphis (two properties)............................... Heafner Leased Nashville.............................................. Heafner Leased Nashville.............................................. ITCO Leased Virginia: Harrisonburg........................................... ITCO Leased Norfolk................................................ Heafner Owned Norfolk................................................ ITCO Leased Richmond............................................... Heafner Owned Richmond............................................... ITCO Leased Roanoke................................................ Heafner Owned Wytheville............................................. ITCO Leased
- --------------- (a) Includes corporate office space. 71 75 Retail Stores. As of June 30, 1998, the Company operated over 215 retail tire and service outlets in California and Arizona, including 176 tire and automotive service outlets operated by Winston. The Company intends to consolidate the management of all retail stores under its retail division. Corporate and Executive Offices. The Company currently has corporate offices in four locations. In connection with the ITCO Merger, ITCO's corporate offices are expected to be consolidated into Heafner's corporate offices in Lincolnton, North Carolina.
LOCATION COMPANY USE - -------- ------- ----------------- Charlotte, North Carolina....................... Heafner Executive offices Lincolnton, North Carolina...................... Heafner Corporate offices Burbank, California............................. Winston Corporate offices San Jose, California............................ CPW Corporate offices Wilson, North Carolina.......................... ITCO Corporate offices
72 76 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the directors and executive officers of the Issuer as of June 30, 1998. 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 - ---- --- -------- Ann H. Gaither............................. 66 Chairperson William H. Gaither......................... 42 President, Chief Executive Officer and Director Donald C. Roof............................. 46 Senior Vice President, Chief Financial Officer and Treasurer J. Michael Gaither......................... 46 Senior Vice President/Strategic Planning, General Counsel and Secretary Daniel K. Brown............................ 45 Senior Vice President/Sales and Marketing Thomas J. Bonburg.......................... 49 President, Retail Division Arthur C. Soares........................... 49 President, Western Wholesale Division Richard P. Johnson......................... 50 President, Eastern Wholesale Division Joseph P. Donlan........................... 52 Director V. Edward Easterling, Jr................... 38 Director Victoria B. Jackson........................ 43 Director William M. Wilcox.......................... 71 Director
Ann H. Gaither -- Chairperson. Ms. Gaither joined the Issuer in 1972 and succeeded her father as Chief Executive Officer in 1984. She served as President of the Issuer from 1986 until 1989 and has served as Chairperson since 1988. Ms. Gaither currently serves on the Board of Directors of C200, a national women's business owners organization, and is a Commissioner on the North Carolina Department of Transportation Board. Ms. Gaither is the mother of William H. Gaither, the President, Chief Executive Officer and a Director of the Issuer. William H. Gaither -- President, Chief Executive Officer and Director. Mr. Gaither joined the Issuer 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 has served as President of the Issuer since 1989. Mr. Gaither also has served as the Chief Executive Officer of the Issuer since 1996 and has been a Director of the Issuer since 1986. He holds a B.A. from Davidson College. Mr. Gaither is the son of Ann H. Gaither, the Chairperson of the Issuer. Donald C. Roof -- Senior Vice President, Chief Financial Officer and Treasurer. Mr. Roof has served as the Issuer's Senior Vice President, Chief Financial Officer and Treasurer since April 1997. Prior to that time, from 1987 to November 1996, he served in a variety of positions with Yale International/Spreckels Industries, a global industrial manufacturing and food processing company. From 1990 to 1994, Mr. Roof was Treasurer and Chief Financial Officer of Yale International/Spreckels Industries, and from 1994 to 1996, Senior Vice President and Chief Financial Officer. He received his B.B.A. from Eastern Michigan University. J. Michael Gaither -- Senior Vice President/Strategic Planning, General Counsel and Secretary. Mr. Gaither has served in his present capacity since joining the Issuer in 1991. Prior to that time, he was a lawyer in private practice for several years. He holds a B.A. from Duke University and received his J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves on the Board of Directors of Ridgeview, Inc. Daniel K. Brown -- Senior Vice President/Sales and Marketing. Mr. Brown joined the Issuer in 1975 and held various field sales assignments before becoming Marketing Manager in 1979. He advanced to 73 77 Director of Marketing and to Vice President of Marketing during the 1980's and was named Vice President of Sales and Marketing in 1991. 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 the Company. Mr. Brown holds a B.A. from Western Carolina University. Thomas J. Bonburg -- President, Retail Division. Mr. Bonburg joined Winston in 1990 as President, Chief Executive Officer and Vice Chairman. He served in those positions until Winston was acquired by the Issuer in May 1997. Mr. Bonburg served as President of Winston from May 1997 until October 1997, and as Senior Vice President of the Issuer from October 1997 until the consummation of the Transactions. Prior to joining Winston, he held senior management positions with Autoworks/Crown Auto, Northern Automotive and Pep Boys. Mr. Bonburg holds a B.S. from Ohio State University and an M.B.A. from the University of Southern California. Arthur C. Soares -- President, Western Wholesale Division. Mr. Soares is the founder and principal owner of CPW, and currently serves as its Chairman, President and Chief Executive Officer. Mr. Soares started CPW in 1971 with a single retail outlet, which grew over the years to its current level of operations. He holds a B.A. from Santa Clara University. Richard P. Johnson -- President, Eastern Wholesale Division. Mr. Johnson joined ITCO as President and Chief Operating Officer in February 1997. He served with Albert Fisher Distribution as Senior Vice President from 1991 to 1994, and as President and Chief Operating Officer from 1994 to 1996. Prior to that time, Mr. Johnson held a variety of management positions with Leprino Foods, Sargento Cheese and Kraft Foods. He holds an A.A. from Palm Beach College. Joseph P. Donlan -- Director. Mr. Donlan has been a director since May 1997. He is currently a Senior Manager of Brown Brothers Harriman & Co., where he has served in a variety of capacities beginning in 1970 when he joined Brown Brothers' commodities lending group. He was promoted to run this group in 1976, and in 1981 was named Senior Credit Officer and a member of Brown Brothers' Credit Committee, on which he continues to serve. In 1996 he co-founded the 1818 Mezzanine Fund. He is a 1968 graduate of Georgetown University and received an M.B.A. from Rutgers University in 1970. Mr. Donlan also serves on the Board of Directors of National Auto Finance, Incorporated. V. Edward Easterling, Jr. -- Director. Mr. Easterling has been a director since June 1998. He is currently a principal of Wingate Partners, a private equity investment firm based in Dallas, Texas. Prior to joining Wingate in 1994, he was part of the investment and executive management group that acquired 12 troubled thrifts in Texas and created American Federal Bank in 1988. Previously, Mr. Easterling was Vice President and Treasurer of Swift Independent Packing Company and Treasurer of Valley View Capital Corporation. He received a B.B.A., a B.A. in Psychology, and an M.B.A. from Southern Methodist University. Mr. Easterling also serves as Chairman of the Board of Directors for NSG Corporation. Victoria B. Jackson -- Director. Ms. Jackson has been a director since June 1997. She has been with DSS/Pro Diesel, a diesel parts manufacturer, remanufacturer and distribution company based in Nashville, Tennessee since 1977 and currently serves as its President and Chief Executive Officer. She received an M.B.A. from the Owen Graduate School of Management at Vanderbilt University and a B.A. in Business Administration and A.A. from Belmont University. Ms. Jackson also serves on the Boards of Directors of AmSouth Bancorporation, Hussman Econometrics Advisors, Inc. and Whitman Corporation. William M. Wilcox -- Director. Mr. Wilcox has been a director since March 1998. Mr. Wilcox served for over 41 years with both B.F. Goodrich and Uniroyal Goodrich. At B.F. Goodrich, he served in various capacities, including Executive Vice President/Sales. He retired from Uniroyal Goodrich after serving as President, Company Brands and President, Sales Worldwide. 74 78 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation for services in all capacities to the Issuer for the years ended December 31, 1997, 1996 and 1995 of those persons who (i) served during the fiscal year ended December 31, 1997 as the Chief Executive Officer of the Issuer and (ii) were, at December 31, 1997, the other four most highly compensated executive officers of the Issuer who earned more than $100,000 in salary and bonus in fiscal 1997 (collectively, the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ -------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(A) (#)(B) ($) - --------------------------- -------- ------- ------ ------------ ------------ ------------ William H. Gaither.......... 12/31/97 318,000 49,000 25,000 62,500 41,741(c) President, Chief Executive 12/31/96 303,387 -- -- -- 25,604(d,e) Officer and Officer 12/31/95 273,586 -- -- -- -- Donald C. Roof.............. 12/31/97 161,253(f) 60,000 25,000 25,000 -- Senior Vice President, Chief Financial Officer and Treasurer J. Michael Gaither.......... 12/31/97 191,883 60,000 15,000 25,000 -- Senior Vice President, 12/31/96 155,652 26,000 15,000 -- 23,761(e) General Counsel and 12/31/95 148,896 26,000 -- -- 6,169(e) Secretary Daniel K. Brown............. 12/31/97 164,499 51,000 15,000 25,000 24,935(e) Senior Vice President/ 12/31/96 112,335 39,599 15,000 -- 28,073(e) Sales and Marketing 12/31/95 106,480 50,199 -- -- 16,378(e) Thomas J. Bonburg(g)........ 12/31/97 96,952(g) 75,000 -- 37,500 -- President, Retail Division
- --------------- (a) This column includes nothing for perquisites and other personal benefits because in no case did the aggregate amount of such perquisites and other personal benefits exceed the reporting threshold (the lesser of $50,000 or 10% of total annual salary and bonus), but includes amounts for the annual contribution for deferred compensation for such Named Executive Officer for the year. (b) This column includes stock options granted pursuant to the Option Plan (as defined). Ten percent of the options have vested and are exercisable within 60 days. The remaining options vest as described in "-- Stock Option Plan," below. (c) Consists of certain Board-designated discretionary compensation paid in 1997. (d) Consists of directors' fees paid during 1996 of $10,000. (e) Consists of taxable amounts reported in connection with vendor-sponsored trips. (f) Mr. Roof joined the Issuer in April 1997. Salary represents payments to Mr. Roof during the period of his employment in fiscal 1997. On an annualized basis, Mr. Roof's salary for fiscal 1997 would have been $215,000. (g) Mr. Bonburg was the Chief Executive Officer of Winston, which was acquired by the Issuer on May 7, 1997. 75 79 OPTION/SAR GRANTS IN 1997 No stock appreciation rights were granted during the twelve months ended December 31, 1997. The following table sets forth information concerning the grant of stock options to each of the Named Executive Officers during the twelve months ended December 31, 1997.
INDIVIDUAL GRANTS --------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED ANNUAL NUMBER OF OPTIONS EXERCISE RATES OF STOCK SECURITIES GRANTED TO OR PRICE APPRECIATION UNDERLYING EMPLOYEES BASE FOR OPTION TERM(B) OPTIONS IN FISCAL PRICE EXPIRATION ------------------------ NAME GRANTED(A) YEAR ($/SH) DATE 5%($) 10%($) - ------- ----------- ---------- -------- ---------- --------- ---------- William H. Gaither........ 62,500 24.4% $1.10 5/28/07 $43,237 $109,570 Donald C. Roof............ 25,000 9.8 1.10 5/28/07 17,295 43,828 J. Michael Gaither........ 25,000 9.8 1.10 5/28/07 17,295 43,828 Daniel K. Brown........... 25,000 9.8 1.10 5/28/07 17,295 43,828 Thomas J. Bonburg......... 37,500 14.6 1.10 5/28/07 25,942 65,742
- --------------- (a) The securities underlying the options, which were granted pursuant to the Option Plan, are shares of the Issuer's Class A Common Stock. Pursuant to the Option Plan, 10% of the options granted to each of the Named Executive Officers have vested and are exercisable within 60 days. The remaining options will vest as set forth 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 $1.10 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 $1.10 was assumed based on the per-share amount paid to certain selling shareholders in May 1997. Actual gains on the exercise of the options are dependent on the future performance of the Class A Common Stock. There can be no assurance that the potential values reflected in this table will be the actual values realized. All amounts have been rounded to the nearest whole dollar. No options to purchase common stock were exercised by the Named Executive Officers during the 12 months ended December 31, 1997. STOCK OPTION PLAN In 1997, the Issuer adopted The J.H. Heafner Company 1997 Stock Option Plan (the "Option Plan"), which is designed to motivate designated employees, officers, directors and independent contractors of the Company by encouraging them to acquire a proprietary interest in the Company. The Board of Directors of the Issuer, acting through a committee of at least two members of the Board (the "Plan Committee"), administers the Option Plan, selects eligible participants, determines the number of shares subject to each option granted under the Option Plan and sets other terms and conditions applicable to participants in the Option Plan. Giving effect to the Reclassification, an aggregate of 275,000 shares of Class A Common Stock are reserved for issuance under the Option Plan. The Option Plan provides for the grant of options to purchase shares of Class A Common Stock to designated employees, officers, directors and independent contractors of the Company. 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 to be subject to options granted. The purchase price for shares of Class A Common Stock to be subject to options granted is fixed by the Committee, but cannot be less than their fair market value (as determined in good faith by the Board of Directors) if the corresponding option is intended to qualify as an incentive stock option under the Internal Revenue Code. All options granted under the Option Plan are subject to the terms and conditions of a Stock Option Agreement ("Option Agreement") entered into by each option recipient. 76 80 The Option Agreement entered into by each option recipient generally requires the recipient to be bound by the terms of a stockholder agreement between certain management stockholders and the Issuer in the event he or she elects to exercise options. Options generally vest in installments of 10%, 20%, 30% and 40% of the total number of underlying shares on the first, second, third and fourth anniversaries of the date of grant, respectively. Options are not transferable by the recipient other than by will or by the laws of descent and distribution and are exercisable during the recipient's lifetime only by the recipient. Under the terms of the Option Plan, options terminate no later than the tenth anniversary of the date of grant. Options are also subject to adjustment to avoid dilution in the event of a change in the capital structure of the Issuer. If an option recipient dies or his or her employment with the Company is terminated for permanent disability or for any other reason (other than for cause, as defined in the Option Agreement), the recipient or his or her personal representative may exercise the option within 180 days after the date of termination to the extent the option has vested on the date of termination or otherwise would have vested in the 12 months thereafter, beyond which time the options lapse. If an option recipient's employment with the Company is terminated for cause, the recipient may exercise the option within 30 days after the date of termination to the extent the option has vested on the date of termination, beyond which time the options lapse. In the event that (i) any person or entity not controlled by the Issuer's stockholders acquires more than 50% of the shares of the common stock of the Issuer, (ii) all or substantially all of the assets of the Issuer are sold, (iii) the majority of the Board of Directors no longer comprises persons currently serving on the Board (or persons designated by the current Board majority), (iv) Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones collectively own less than 50% of the combined voting power of the then outstanding shares of common stock of the Issuer or (v) the Issuer issues common stock in a public offering (each such event a "change in control"), then all options outstanding under the Option Plan will become fully vested and immediately exercisable immediately prior to such event. To the extent not exercised, all options outstanding under the Option Plan expire upon a change in control. As of December 31, 1997, options to purchase an aggregate of 256,000 shares of common stock of the Issuer (which, upon the Reclassification, became exercisable for an equal number of shares of Class A Common Stock) at $1.10 per share were outstanding under the Option Plan. RESTRICTED STOCK PLAN In 1997, the Issuer adopted The J.H. Heafner Company 1997 Restricted Stock Plan (the "Restricted Stock Plan"), which is designed to motivate designated employees, officers, directors and independent contractors of the Company by encouraging them to acquire a proprietary interest in the Company. The Board of Directors of the Issuer, acting through the Plan Committee, administers the Restricted Stock Plan, selects eligible participants, determines the number of shares to be awarded to each participant and sets other terms and conditions applicable to participants in the Restricted Stock Plan. As of December 31, 1997, an aggregate of 225,000 shares of Class A Common Stock (giving effect to the Reclassification) had been issued to participants in the Restricted Stock Plan for a purchase price of $1.10 per share. The shares issued pursuant to the Restricted Stock Plan were issued in exchange for promissory notes given by the participants. The principal of the notes is forgiven over time by the Issuer depending upon the attainment of certain earnings targets. The Restricted Stock Plan enables designated employees, officers, directors and independent contractors of the Company to purchase shares of Class A Common Stock. The Plan Committee has sole authority to select those individuals to whom the opportunity to participate in the Restricted Stock Plan may be offered and to determine the number of shares of Class A Common Stock to be issued. The purchase price for shares of Class A Common Stock issued pursuant to the Restricted Stock Plan is fixed by the Plan Committee, which has the authority to impose additional terms and conditions in connection with issuances to participants. All shares that have been issued under the Restricted Stock Plan are subject to the terms and conditions of a Securities Purchase and Stockholders' Agreement ("Restricted Stock Agreement") entered into by each option recipient. The Restricted Stock Agreement prohibits the transfer of stock issued pursuant to the Restricted Stock Plan except for transfers (i) to the Issuer upon the termination of employment of a participating stockholder, 77 81 (ii) to other management employees of the Company who have executed and delivered agreements substantially similar to the Restricted Stock Agreement, (iii) by will or by the laws of descent or distribution or (iv) if and to the extent repurchase rights in favor of the Issuer on termination of employment have not been exercised, to third parties (subject to rights of first refusal in favor of the Issuer and the other holders of restricted stock). The Issuer has the right to repurchase all of a participating stockholder's shares upon the termination of such stockholder's employment with the Company due to cause (as defined in the Restricted Stock Agreement) or death. A participating stockholder may require the Issuer to repurchase all of such stockholder's shares if that stockholder terminates his employment for good reason (as defined in the Restricted Stock Agreement). In all cases, the repurchase price for shares of stock subject to the Restricted Stock Agreement is the higher of the original purchase price and a price derived from the Net Equity Value of the Issuer (as defined in the Restricted Stock Agreement) at the time of repurchase. COMPENSATION OF DIRECTORS During the year ended December 31, 1997, directors who were not members of the Gaither family or nominees of The 1818 Mezzanine Fund, L. P. or Wingate Partners II, L.P. were paid a fee of $2,500 for each Board meeting attended. The Issuer intends to continue this compensation policy for directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1997, William H. Gaither, Donald C. Roof, J. Michael Gaither and Daniel K. Brown served on an executive committee of the Issuer 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 Board of Directors of the Issuer. In June 1998, the Board of Directors of the Issuer designated a Compensation Committee consisting of Ann H. Gaither, William M. Wilcox and Victoria B. Jackson to review, modify and recommend executive compensation arrangements for the Named Executive Officers and certain other key executives of the Company. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Articles of Incorporation of the Issuer provide for the release of any person serving as a director of the Issuer from liability to the Issuer or its stockholders for damages for breach of fiduciary duty and for the indemnification by the Issuer 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, the Issuer has purchased a directors' and officers' insurance policy covering the Issuer, its officers and directors 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 such. EMPLOYMENT AGREEMENTS; SEVERANCE The Issuer has entered into employment agreements with each of Messrs. William H. and J. Michael Gaither, Roof, Brown and Bonburg, providing for annual base salaries of approximately $354,444, $222,459.96, $241,335.96, $191,004 and $250,000, respectively, for the current year. Mr. Bonburg's employment agreement provides for an annual base salary of $250,000 for calendar year 1999. The employment agreements with Messrs. William H. and J. Michael Gaither, Roof and Brown provide for fixed bonus payments ranging from 15% to 30% of annual base salary, with additional incentive bonus payments to be made in the discretion of the Board of Directors of the Issuer. Fixed bonus payments made to William H. Gaither are reduced by the amount received by him under the Issuer's Board-designated discretionary compensation plan. The employment agreement with Mr. Bonburg provides for additional base salary payments of $50,000 on June 30, 1998 and $150,000 on December 31, 1998 and for additional incentive bonus payments based on the attainment of specified performance targets. The June 30, 1998 payment of $50,000 has been made to Mr. Bonburg. Payment of the additional base salary and incentive bonus is contingent on Mr. Bonburg's continued employment with the Company. The employment agreements may be terminated at any time by the Issuer. Upon termination of employment with the Issuer on account of death or disability, for cause, or without good reason (as defined in 78 82 each employment agreement), the employee is entitled to receive his base salary and target bonus payable for 12 months after the date of termination (base salary, additional base salary and incentive bonus, in the case of Mr. Bonburg). Upon termination of employment by the Issuer without cause or by the employee with good reason, the employee is entitled to receive an additional payment equal to base salary and target bonus for one year (base salary and additional base salary through December 31, 1999, in the case of Mr. Bonburg). In the event of a termination by the Issuer as a result of or in anticipation of a change in control (as defined in the employment agreements) or a constructive termination, each of the employment agreements provides that the employee is entitled to receive his base salary and target bonus for a period of 24 months from the date of termination or constructive termination, as the case may be. The employment agreements with Messrs. William H. and J. Michael Gaither, Roof and Brown expire on May 6, 1999, subject to automatic one-year extensions unless either party gives 120 days' notice not to renew. The employment agreement with Mr. Bonburg expires on December 31, 1999. All of the employment agreements contain non-compete, non-solicitation and confidentiality provisions. In conjunction with the CPW Acquisition, the Company entered into employment agreements with each of Arthur C. Soares, the current President and Chief Executive Officer, and Ray C. Barney, the current Executive Vice President and Chief Operating Officer, of Speed Merchant. Mr. Soares' employment agreement provides for a two year term and an annual base salary of $250,000, a stay-put bonus of $2,000,000 ($1,250,000 payable at the end of the first year and $750,000 at the end of the second year after the Closing Date), a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by the Board of Directors of the Issuer. Mr. Barney's employment agreement provides for a three-year term and an annual base salary of $140,000, a stay-put bonus of $600,000 ($200,000 at the end of each of the first three years after the Closing Date), a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by the Board of Directors of the Issuer. Both employment agreements contain non-compete, non-solicitation and confidentiality provisions. The employment agreements with Messrs. Soares and Barney are terminable at any time by the Company. Upon termination of employment for any reason (including death or permanent disability) the employee (or his heirs, as the case may be) is entitled to receive the employee's base salary and incentive bonus earned through the date of termination and the synergy bonus for the first year of the employment term. Upon termination of employment by the Company without cause or by the employee with good reason (as defined in the employment agreements), the employee is entitled to receive an additional payment equal to the employee's base salary through the end of the term of employment and the incentive bonus payable for the first year. Payment of the stay-put bonus is contingent upon the employee's continued employment with the Company except in the case of death, permanent disability or termination by the employer without cause or by the employee for good reason. In connection with the consummation of the Transactions, the Company entered into an employment agreement with Richard P. Johnson, who serves as President, Eastern Wholesale Division of the Company. Mr. Johnson is paid an annual base salary of $250,000, a fixed bonus and an annual incentive bonus to be determined in the discretion of the Board of Directors of the Issuer. Upon termination of Mr. Johnson's employment by the Company without cause, or by Mr. Johnson for good reason, or upon a change of control (as defined in the employment agreement), Mr. Johnson is entitled to a severance payment ranging from 12 to 24 months' salary and bonus (depending on the date of termination) from and after the date of termination. The employment agreement contains non-compete, non-solicitation and confidentiality provisions. EXECUTIVE BONUS PLAN The Company awards annual cash bonuses to up to 20 of its top executives. Bonuses are payable only if the Company attains specified annual performance targets, and can range from up to 5% of salary for executives in the lowest bonus bracket to up to 60% of salary for those in the highest. The executive bonus plan may be altered in the discretion of the Board of Directors of the Issuer. 79 83 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Issuer's Common Stock as of June 30, 1998 (giving effect to the Reclassification and the other Transactions) of (i) each person known by the Issuer to own beneficially more than 5% of the Class A Common Stock, (ii) each person known by the Issuer to own beneficially more than 5% of the Class B Common Stock, (iii) each director of the Issuer, (iv) the Named Executive Officers and (v) all directors and executive officers of the Issuer as a group.
NUMBER OF SHARES PERCENT OF PERCENT OF NAME AND ADDRESS OF BENEFICIALLY CLASS A COMMON CLASS B COMMON BENEFICIAL OWNER(A) OWNED STOCK(B) STOCK(B) - ------------------- ---------------- -------------- -------------- Ann H. Gaither............................... 1,992,293(c) 53.9% 1,066,538(c, William H. Gaither........................... d) 28.8 Susan Jones.................................. 475,919 12.9 The 1818 Mezzanine Fund, L.P................. 1,034,000(e) 21.9 Wingate Partners II, L.P..................... 1,301,264(f) 92.9% Donald C. Roof............................... 27,500(g) 1.4 J. Michael Gaither........................... 27,500(h) 1.4 Daniel K. Brown.............................. 27,500(i) 1.4 Thomas J. Bonburg............................ 41,250(j) 2.0 Joseph P. Donlan............................. 1,034,000(e) 21.9 V. Edward Easterling, Jr..................... --(k) Victoria B. Jackson.......................... 5,000(l) * Richard P. Johnson........................... 27,110(f) 1.9 Arthur C. Soares............................. -- William M. Wilcox............................ 5,000(l) * All directors and executive officers of Issuer as a group (11 persons)............. 4,253,691(m) 98.7 1.9
- --------------- * Indicates less than 1% of the outstanding Class A Common Stock or Class B Common Stock, as the case may be. (a) Unless otherwise indicated, the address for each person listed in the table is in care of The J.H. Heafner Company, 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 outstanding or Class B Common Stock outstanding, as the case may be. For purposes of computing the percentage of outstanding shares held by each person or group of persons named in this table, any securities which such person or group of persons has the right to acquire within 60 days of the date hereof 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. Shares of Class A Common Stock possess 20 votes per share and shares of Class B Common Stock possess one vote per share. (c) Excludes 475,919 shares of Class A Common Stock that Ann H. Gaither and William H. Gaither have the power to vote pursuant to a voting trust agreement among certain members of the Gaither family. (d) Includes 6,250 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (e) Represents shares issuable upon the exercise of Warrants (as defined). 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." 80 84 (f) Represents shares of Class B Common Stock issued in exchange for shares of ITCO Logistics as part of the consideration for the ITCO Merger. Share numbers for Wingate Partners II, L.P. include shares of Class B Common Stock held by its affiliate, Wingate Affiliates II, L.P. See "Transactions." (g) Includes 2,500 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (h) Includes 2,500 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (i) Includes 2,500 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (j) Includes 3,750 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (k) Does not include an aggregate of 1,301,264 shares of Class B Common Stock owned by Wingate Partners II, L.P. and its affiliate, Wingate Affiliates II, L.P. Mr. Easterling is a general partner of Wingate Affiliates II, L.P., and an indirect general partner of Wingate Partners II, L.P., and, accordingly, may be deemed to be the beneficial owner of such shares. (l) Consists of 5,000 shares of Class A Common Stock issuable upon the exercise of options which are exercisable within 60 days. (m) Includes (i) 27,110 shares of Class B Common Stock and (ii) 4,221,581 shares of Class A Common Stock, of which 1,034,000 are shares issuable upon the exercise of Warrants to The 1818 Mezzanine Fund, L.P., of which Mr. Donlan is co-manager and will, in that capacity, have voting and investment power over the shares. 81 85 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WARRANTS In connection with the incurrence of subordinated debt to finance the acquisition of its Winston subsidiary on May 7, 1997, the Issuer issued warrants (the "Warrants") to purchase shares of its common stock to The 1818 Mezzanine Fund, L. P. (the "Fund"). Joseph P. Donlan, a member of the Issuer's Board of Directors, is a Senior Manager of Brown Brothers Harriman & Co., the Fund's general partner. Mr. Donlan and Robert R. Gould, a Partner of Brown Brothers Harriman & Co., are co-managers of the Fund and in that capacity exercise voting and investment power over the Fund's shares. The Warrants were initially exercisable for a total of 977,590 shares of common stock of the Issuer. Giving effect to a subsequent issuance of shares of restricted stock and grant of stock options to certain key management employees and the Reclassification, the Warrants are exercisable for 1,034,000 shares of Class A Common Stock. The Warrants may be exercised at any time, in whole or in part, but in no event after the earlier of (i) May 7, 2007, (ii) the date of an initial public offering of Class A Common Stock yielding gross proceeds of at least $25 million or representing at least 20% of the Class A Common Stock on a fully-diluted basis or (iii) the merger or consolidation with or into another entity by the Issuer or the sale of all or substantially all of the assets of the Company. 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 the Issuer issues Class A Common Stock at a price per share that is less than its current fair market value (as 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 the Board of Directors of the Issuer 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). The Warrants provide that the holders of a majority in interest of the Warrants issued on May 7, 1997 have the right, exercisable (i) upon a Change of Control (as defined in the Warrants) or (ii) at any time after May 7, 2004, to require the Issuer to redeem the Warrants, provided, that no such right may be exercised after the consummation of an initial public offering of the Class A Common Stock yielding gross proceeds of at least $25 million or representing at least 20% of the Class A Common Stock on a fully-diluted basis. If the requested redemption right is exercised, the Issuer must redeem all of the outstanding Warrants at an agreed redemption price (calculated based on an EBITDA multiple of the Issuer at the time of redemption) unless otherwise prevented by law. The Issuer has no right to call for the redemption of the Warrants. The Issuer and the Fund are also parties to a Note and Warrant Purchase Agreement and 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 the Issuer) 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 the Issuer 7,000 newly issued shares of the Issuer's Series A Cumulative Redeemable Preferred Stock, par value $.01 (the "Series A Preferred Stock") and 4,500 newly issued shares of the Issuer's Series B Cumulative Redeemable Preferred Stock, par value $.01 (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Preferred Stock"), for an aggregate purchase price of $11.5 million. Kelly-Springfield is the sole holder of the Preferred Stock. The Preferred Stock has a stated value and liquidation preference equal to $1,000 per share, except the liquidation preference of the Series B Preferred Stock is reduced from time to time based upon purchases of certain types of tires by the Company 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 annum, which may be increased if annual tire purchases fall below certain levels. The Issuer is not required to pay dividends on the Series B Preferred Stock unless annual tire purchases by the Company from Kelly-Springfield fall below certain levels. 82 86 Subject to the limitations summarized below, beginning in December 2002 and ending in June 2007, the Issuer is required to redeem 700 shares of Series A Preferred Stock per 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 Issuer 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, the Issuer also is required to redeem the Preferred Stock if the Kelly-Springfield Supply Agreement is terminated or, at the request of Kelly-Springfield, if a change of control of the Issuer occurs. The Preferred Stock also is redeemable at any time at the Issuer's option. So long as any amounts are outstanding under the Issuer's existing credit facility or subordinated notes, or any amending or replacing agreement for such debt, or any commitments to lend exist under such debt, the Issuer is prohibited from making any payment in respect of any mandatory or optional redemption of the Preferred Stock, or declaring, making or paying any dividend or distribution in respect of the Preferred Stock if any event of default or 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 therefrom and has not been cured or waived in accordance with such debt. SHARE REPURCHASES In February 1997, the Issuer offered to repurchase shares of common stock from members of the Gaither family not actively involved in the operation of the Issuer at a price equal to $.8058 per share ($2,644 per share without giving effect to a 3,281-for-1 stock split that occurred on May 7, 1997). Pursuant to the offer, the Issuer repurchased (and subsequently canceled and retired) 3,359,744 shares of common stock from such family members (1,024 shares without giving effect to the stock split) for an aggregate purchase price of $2.7 million. In 1986, the Issuer repurchased from Carolyn H. Williams (and subsequently canceled and retired) all of her shares of common stock in the Issuer in exchange for a promissory note in the original principal amount of $1.4 million. Carolyn H. Williams is the sister of Ann H. Gaither, the Chairperson of the Issuer. The note is payable in annual installments of $124,600 (including interest at a rate per annum of 7.5%) through January 2006. The outstanding principal amount of the note at June 30, 1998 was approximately $730,000. RELATED PARTY LEASES; LOAN GUARANTEE The Issuer leases corporate office space in Lincolnton, North Carolina from Ann H. Gaither, the Chairperson of the Issuer, and her sister, Carolyn H. Williams, for an annual rent equal to approximately $87,000. The Issuer leases its Winston-Salem, North Carolina distribution center from Ann H. Gaither, the Chairperson of the Issuer, for an annual rent equal to approximately $55,200. The Issuer leases the data processing and human resources buildings adjacent to its corporate headquarters in Lincolnton, North Carolina from Evangeline Heafner, Ann H. Gaither's mother, for an annual rent equal to approximately $37,000. The expiration dates of these leases are September 30, 2002, August 1, 1998 and December 30, 2002, respectively. The Company believes that these leases are on terms no less favorable to the Company than could have been obtained from an independent third party. Pursuant to a guaranty dated March 31, 1997, the Issuer has agreed to guarantee all obligations of William H. Gaither, President and Chief Executive Officer of the Issuer, under a mortgage loan in an aggregate principal amount not to exceed $890,000. 83 87 DESCRIPTION OF NEW CREDIT FACILITY The following is a summary description of the principal terms of the New Credit Facility. The description set forth below does not purport to be complete and is qualified in its entirety by reference to the agreements setting forth the principal terms and conditions of the New Credit Facility. Copies of such agreements (other than schedules and exhibits) are available from the Company upon request. The Issuer and certain of its subsidiaries (the "Borrowers") entered into the New Credit Facility on the Closing Date. At August 14, 1998, approximately $55.5 million was outstanding and an additional $34.1 million was available for additional borrowings under the New Credit Facility. It is expected that the New Credit Facility will be syndicated among the several lenders parties thereto (collectively, the "Lenders"), with BankBoston, N.A., as Agent, and Fleet Capital Corporation and First Union National Bank, as Co-Agents (together, the "Agents"). The New Credit Facility provides for a senior secured revolving credit facility, which may be borrowed in the aggregate principal amount of up to $100 million (of which up to $10 million may be utilized in the form of commercial and standby letters of credit). Guaranties and Security. All obligations of the Borrowers under the New Credit Facility are guaranteed (the "Credit Facility Guaranties") by certain subsidiaries of the Company which are not direct obligors thereunder (the "Credit Facility Guarantors"). The Borrowers' obligations under the New Credit Facility, and the Credit Facility Guarantors' obligations under their respective Credit Facility Guaranties, are secured by all of the inventory and accounts receivable (and proceeds thereof) of the Borrowers and the Credit Facility Guarantors (collectively, the "Collateral"). Future subsidiaries of the Company may be required to become Credit Facility Guarantors or Borrowers under the New Credit Facility. Availability and Maturity. Provided that no event of default exists, loans made pursuant to the New Credit Facility may be drawn, repaid and reborrowed from time to time until May 2003, subject to the satisfaction of certain conditions on the date of any such borrowing. The New Credit Facility will be permanently reduced by an amount equal to any Net Available Cash (as defined in the Indenture), and the Company will be required to prepay the New Credit Facility to the extent necessary at the time of any such permanent reduction. The New Credit Facility will mature and become due and payable in May 2003, except that the Borrowers and the Agent may agree to extend the New Credit Facility for up to an additional five years. Interest. Indebtedness under the New Credit Facility bears interest, at the Company's option, (i) at the "Base Rate" (a floating rate per annum equal to the greater of the federal funds rate plus 0.5% or the rate announced by the Agent from time to time as its base or prime lending rate) plus the Applicable Margin or (ii) at the "Eurodollar Rate" (a fixed rate per annum based on LIBOR) for one, two, three, six or (subject to the Lenders' agreement) twelve months plus the Applicable Margin. The "Applicable Margin" for Base Rate Loans will be 0.25% and the Applicable Margin for Eurodollar Rate Loans will be 1.75%, subject in each case to performance based step-downs based on the Company's ratio of Funded Debt to EBITDA (as defined). Overdue sums under the New Credit Facility will bear interest at a default rate equal to the applicable interest rate plus 2% per annum. Certain Fees. The Company is required to pay to the Lenders a commitment fee equal to 0.375% per annum on the committed undrawn amount of the New Credit Facility, subject to performance based step-downs based upon the Company's ratio of Funded Debt to EBITDA, letter of credit fees equal to the Applicable Margin applicable to Eurodollar Rate Loans on a per annum basis and a fronting fee of 0.125% per annum to be paid to the issuer of letters of credit. The Company has also agreed to pay certain other fees and expenses of the Lenders and the Agent. Covenants. The New Credit Facility requires the Company to meet certain financial tests, including minimum Net Worth and minimum Loan Availability (as defined therein). The New Credit Facility also contains covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guaranties; make loans and investments (provided that the Company will be permitted to make investments in respect of new acquisitions up to $25 million in any fiscal year and $40 million during the term of the agreement); make capital expenditures in excess of $12 million in any fiscal 84 88 year; declare dividends; engage in mergers, consolidations and asset sales; enter into transactions with affiliates; create or suffer to exist liens and encumbrances; enter into sale/leaseback transactions; modify material agreements or constitutive documents; and change the business it conducts. The covenants also require the Company to provide periodic financial reports to the Lenders; observe certain practices and procedures with respect to the Collateral; comply with applicable laws; maintain and preserve the properties and corporate existence of the Company and its subsidiaries; and maintain insurance. Events of Default. The New Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-default and cross-acceleration, bankruptcy, asserted invalidity of any loan documents, failure of security interests, material judgments, ERISA liabilities, the failure of the Issuer directly or indirectly to own 100% of any Borrower or Credit Facility Guarantor under the New Credit Facility (except to the extent such Borrower is merged into the Issuer or one of its wholly owned subsidiaries) or the occurrence of a Change of Control (as defined in the New Credit Facility). Although no definitive plan or arrangement for repayment of borrowings under the New Credit Facility has been made, the Company anticipates such borrowings will be repaid with internally generated funds (including those of the New Businesses) and from other sources which may include the proceeds of future bank refinancings, asset sales or the public or private sale of debt or equity securities. No decision has been made concerning the method the Company will use to repay the borrowings under the New Credit Facility. Such decision will be made based on the Company's review from time to time of the advisability of particular actions, as well as prevailing interest rates, financial and other economic conditions and such other factors as the Company may deem appropriate. 85 89 DESCRIPTION OF THE NEW NOTES GENERAL The New Notes will be issued pursuant to the Indenture, dated as of May 15, 1998 (the "Indenture"), between the Issuer and First Union National Bank, as Trustee (the "Trustee"), which has been filed as an exhibit to the Exchange Offer Registration Statement of which this Prospectus constitutes a part. The following is a summary of certain provisions of the Indenture and the Notes. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. On May 20, 1998, the Issuer issued $100.0 million aggregate principal amount of Old Notes under the Indenture. The terms of the New Notes are identical in all material respects to the Old Notes, except for certain transfer restrictions and registration and other rights relating to the exchange of the Old Notes for New Notes. The Trustee will authenticate and deliver New Notes for original issue only in exchange for a like principal amount of Old Notes. Any Old Notes that remain outstanding after the consummation of the Exchange Offer, together with the New Notes, will be treated as a single class of securities under the Indenture. The New Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. No service charge shall be made for any registration of transfer or exchange of New Notes, but the Issuer may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. TERMS OF THE NEW NOTES The Notes will be unsecured senior obligations of the Issuer, limited to $100.0 million aggregate principal amount, and will mature on May 15, 2008. The New Notes will bear interest at the rate per annum shown on the cover page hereof from May 20, 1998, or from the most recent date to which interest has been paid or provided for, payable semiannually to Holders of record at the close of business on the May 1 or November 1 immediately preceding the interest payment date on May 15 and November 15 of each year, commencing November 15, 1998. The Issuer will pay interest on overdue principal at 1% per annum in excess of such rate, and it will pay interest on overdue installments of interest at such higher rate to the extent lawful. OPTIONAL REDEMPTION Except as set forth in the following paragraph, the Notes will not be redeemable at the option of the Issuer prior to May 15, 2003. Thereafter, the Notes will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 15 of the years set forth below:
REDEMPTION PERIOD PRICE - ------ ---------- 2003...................................................... 105.000 2004...................................................... 103.333 2005...................................................... 101.667 2006 and thereafter....................................... 100.000%
In addition, at any time and from time to time prior to May 15, 2001, the Issuer may redeem in the aggregate up to 35% of the original principal amount of the Notes with the proceeds of one or more Public Equity Offerings following which there is a Public Market, at a redemption price (expressed as a percentage of principal amount) of 110.0% plus accrued interest to the redemption date (subject to the right of Holders of 86 90 record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least $65.0 million aggregate principal amount of the Notes must remain outstanding and be held, directly or indirectly, by Persons other than the Issuer and its Affiliates, after each such redemption. In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Note of $1,000 in original principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. SUBSIDIARY GUARANTIES The obligations of the Issuer pursuant to the Notes, including the repurchase obligation resulting from a Change of Control, are unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by each of the Subsidiary Guarantors. Each Subsidiary Guaranty will be limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. If a Subsidiary Guaranty were to be rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such indebtedness, a Subsidiary Guarantor's liability on its Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- Fraudulent Conveyance Statutes". Upon the sale or other disposition of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of a Subsidiary Guarantor (in each case other than to the Issuer or an Affiliate of the Issuer) permitted by the Indenture, such Subsidiary Guarantor will be released and relieved from all its obligations under its Subsidiary Guaranty. RANKING The indebtedness evidenced by the Notes constitutes a senior unsecured obligation of the Issuer, ranks pari passu in right of payment with all existing and future senior indebtedness of the Issuer and is senior in right of payment to all future subordinated indebtedness of the Issuer. The Subsidiary Guaranties rank pari passu in right of payment with all existing and future senior indebtedness of the Subsidiary Guarantors and are senior in right of payment to all future subordinated indebtedness of the Subsidiary Guarantors. The Notes are effectively subordinated to all existing and future secured indebtedness of the Issuer and the Subsidiary Guarantors, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such indebtedness. As of June 30, 1998, the Issuer and the Subsidiary Guarantors had outstanding, either directly or through guarantees, approximately $170.9 million of indebtedness, all of which was senior indebtedness and approximately $66.1 million of which was secured. In addition, at August 14, 1998, the Company could have borrowed an additional $34.1 million under the New Credit Facility, all of which would have been secured. A portion of the operations of the Issuer are conducted through its subsidiaries. Claims of creditors of such subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Issuer, including holders of the Notes. The Notes, therefore, are effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of subsidiaries of the Issuer (other than the Subsidiary Guarantors). At June 30, 1998, the total liabilities of the Issuer's subsidiaries (all of whom are Subsidiary Guarantors, with immaterial exceptions) was approximately $205.6 million, including trade payables. Although the Indenture limits the incurrence of Indebtedness and preferred stock of certain of the Issuer's subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Indenture does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not 87 91 considered Indebtedness or Preferred Stock under the Indenture. See "-- Certain Covenants -- Limitation on Indebtedness." BOOK-ENTRY, DELIVERY AND FORM The Old Notes were initially issued in the form of a Global Note (the "Old Global Note"). The New Notes will initially be issued in the form of a Global Note (the "New Global Note"). The Old Global Note was deposited on the date of the closing of the sale of the Old Notes, and the New Global Note will be deposited with, or on behalf of, the Depository and registered in the name of the Depository or its nominee on the date of closing of the Exchange Offer. Except as set forth below, the New Global Note may be transferred, in whole and not in part, only to the Depository or another nominee of the Depository. Investors may hold their beneficial interests in the New Global Note directly through the Depository if they have an account with the Depository or indirectly through organizations which have accounts with the Depository. Notes that are issued as described under "-- Certificated Notes" will be issued in definitive form. Upon the transfer of a Note in definitive form, such Note will, unless the New Global Note has previously been exchanged for Notes in definitive form, be exchanged for an interest in the New Global Note representing the principal amount of Notes being transferred. The Depository has advised the Issuer as follows: The Depository is a limited-purpose trust company and organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and "a clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depository was created to hold securities of institutions that have accounts with the Depository ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers (which may include the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to the Depository's book-entry system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, whether directly or indirectly. Upon the issuance of the New Global Note, the Depository will credit, on its book-entry registration and transfer system, the principal amount of the New Notes represented by such New Global Note to the accounts of participants. The accounts to be credited shall be designated by the Trustee. Ownership of beneficial interests in the New Global Note will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the New Global Note will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the Depository (with respect to participants' interest) and such participants (with respect to the owners of beneficial interests in the New Global Note other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to transfer or pledge beneficial interests in the New Global Note. So long as the Depository, or its nominee, is the registered holder and owner of the New Global Note, the Depository or such nominee, as the case may be, will be considered the sole legal owner and holder of the related Notes for all purposes of such Notes and the Indenture. Except as set forth below, owners of beneficial interests in the New Global Note will not be entitled to have the Notes represented by the New Global Note registered in their names, will not receive or be entitled to receive physical delivery of certificated Notes in definitive form and will not be considered to be the owners or holders of any Notes under the New Global Note. The Issuer understands that under existing industry practice, in the event an owner of a beneficial interest in the New Global Note desires to take any action that the Depository, as the holder of the New Global Note, is entitled to take, the Depository would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. Payment of principal of and interest on Notes represented by the New Global Note registered in the name of and held by the Depository or its nominee will be made to the Depository or its nominee, as the case may be, as the registered owner and holder of the New Global Note. 88 92 The Issuer expects that the Depository or its nominee, upon receipt of any payment of principal of or interest on the New Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Note as shown on the records of the Depository or its nominee. The Issuer also expects that payments by participants to owners of beneficial interests in the New Global Note held through such participants will be governed by standing instructions and customary practices and will be the responsibility of such participants. The Issuer will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the New Global Note for any Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between the Depository and its participants or the relationship between such participants and the owners of beneficial interests in the New Global Note owning through such participants. Unless and until it is exchanged in whole or in part for certificated Notes in definitive form, the New Global Note may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository. Although the Depository has agreed to the foregoing procedures in order to facilitate transfers of interests in the New Global Note among participants of the Depository, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Trustee nor the Issuer will have any responsibility for the performance by the Depository or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED NOTES The Notes represented by the New Global Note are exchangeable for certificated Notes in definitive form of like tenor as such Notes in denominations of U.S. $1,000 and integral multiples thereof if (i) the Depository notifies the Issuer that it is unwilling or unable to continue as Depository for the New Global Note or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act and a successor Depository is not appointed by the Issuer within 90 days, (ii) the Issuer in its discretion at any time determines not to have all of the Notes represented by the New Global Note or (iii) an Event of Default has occurred and is continuing. Any Note that is exchangeable pursuant to the preceding sentence is exchangeable for certificated Notes issuable in authorized denominations and registered in such names as the Depository shall direct, subject to certain ownership certification requirements imposed by Regulation S under the Securities Act. Subject to the foregoing, the New Global Note is not exchangeable, except for a New Global Note of the same aggregate denomination to be registered in the name of the Depository or its nominee. SAME-DAY PAYMENT The Indenture requires that payments in respect of Notes (including principal, premium and interest) be made by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. REGISTRATION RIGHTS Holders of New Notes are not entitled to any registration rights with respect to the New Notes. The Company has agreed for a period of 180 days from the consummation of the Exchange Offer to make available a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any resale of any New Notes. The Registration Statement of which this Prospectus is a part constitutes the Exchange Offer Registration Statement which is the subject of the Registration Rights Agreement. Upon the closing of the Exchange Offer, subject to certain limited exceptions, Holders of untendered Old Notes will not retain any rights under the Registration Rights Agreement. CHANGE OF CONTROL Upon the occurrence of any of the following events (each a "Change of Control"), each Holder shall have the right to require that the Issuer repurchase, pursuant to the offer procedure described below, such 89 93 Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date): (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (i) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Issuer; (for the purposes of this clause (i), such other person shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation, if such other person is the beneficial owner (as defined in this clause (i)), directly or indirectly, of more than 50% of the voting power of the Voting Stock of such parent corporation); (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Issuer was approved by (x) a vote of 66 2/3% of the directors of the Issuer then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (y) Permitted Holders holding a majority of the aggregate voting power of the Voting Stock of the Company held by all Permitted Holders) cease for any reason to constitute a majority of the Board of Directors then in office; (iii) the adoption of a plan relating to the liquidation or dissolution of the Issuer; or (iv) the merger or consolidation of the Issuer with or into another Person or the merger of another Person with or into the Issuer, or the sale of all or substantially all the assets of the Issuer to another Person (other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Issuer that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Issuer are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation. Within 30 days following any Change of Control, the Issuer shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Issuer to purchase such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Issuer, consistent with the covenant described hereunder, that a Holder must follow in order to have its Notes purchased. The Issuer will not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The Issuer shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Issuer shall comply with the 90 94 applicable securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Issuer and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Issuer would decide to do so in the future. Subject to the limitations discussed below, the Issuer could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Issuer's capital structure or credit ratings. Restrictions on the ability of the Issuer to incur additional Indebtedness are contained in the covenants described under "-- Certain Covenants -- Limitation on Indebtedness", "-- Limitation on Liens" and "-- Limitation on Sale/Leaseback Transactions." Such restrictions can only be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. Except for the limitations contained in such covenants, however, the Indenture will not contain any covenants or provisions that may afford holders of the Notes protection in the event of a highly leveraged transaction. The New Credit Facility contains and future indebtedness of the Issuer may contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of their right to require the Issuer to repurchase the Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Issuer. There can be no assurance that in the event of a Change of Control the Issuer will be able to obtain the consents from such lenders needed to consummate a Change of Control Offer without causing such a default. Finally, the Issuer's ability to pay cash to the holders of Notes following the occurrence of a Change of Control may be limited by the Issuer's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The provisions under the Indenture relative to the Issuer's obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in principal amount of the Notes. CERTAIN COVENANTS The Indenture contains covenants including, among others, the following: Limitation on Indebtedness. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Issuer may Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto, the Consolidated Coverage Ratio exceeds 2 to 1 if such Indebtedness is Incurred prior to May 15, 2000 or 2.25 to 1 if such Indebtedness is Incurred thereafter. (b) Notwithstanding the foregoing paragraph (a), the Issuer and the Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the New Credit Facility; provided, however, that, after giving effect to any such Incurrence, the aggregate principal amount of such Indebtedness then outstanding does not exceed the greater of (i) $100 million less the sum of all principal payments with respect to such Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock" and (ii) the sum of (x) 65% of the book value of the inventory of the Issuer and its Restricted Subsidiaries and (y) 85% of the book value of the accounts receivables of the Issuer and its Restricted Subsidiaries; (2) Indebtedness owed to and held by the Issuer or a Restricted Subsidiary; provided, however, that (i) any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Issuer or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the obligor thereon and (ii) if the Issuer is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes; 91 95 (3) the Notes and the New Notes; (4) Vendor Financing, and Refinancing Indebtedness in respect thereof, in an aggregate amount which does not exceed, when taken together with all other Indebtedness Incurred pursuant to this clause (4) and then outstanding, including Vendor Financing outstanding on the Issue Date, $20 million; (5) Attributable Debt in respect of Sale/Leaseback Transactions, and Refinancing Indebtedness in respect thereof, in an amount which does not exceed, when taken together with all other Indebtedness Incurred pursuant to this clause (5) and then outstanding, $15 million; provided that such Sale/ Leaseback Transactions comply with the covenant described under "-- Limitation on Sale/Leaseback Transactions"; (6) Indebtedness outstanding (or Incurred pursuant to commitments outstanding) on the Issue Date (other than Indebtedness described in clause (1), (2), (3), (4) or (5) of this covenant); (7) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Issuer (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Issuer); provided, however, that on the date of such acquisition and after giving effect thereto, the Issuer would have been able to Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a) of this covenant; (8) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3), (6), (7) or this clause (8); provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary Incurred pursuant to clause (7), such Refinancing Indebtedness shall be Incurred only by such Subsidiary; provided further, however, that Indebtedness outstanding on the Issue Date pursuant to the ITCO Facility shall not be Refinanced pursuant to this clause (8) but shall only be Refinanced pursuant to the Incurrence of Indebtedness under clause (b)(1) above; (9) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Issuer pursuant to the Indenture; (10) the Subsidiary Guaranties of the Subsidiary Guarantors; and (11) Indebtedness of the Issuer in an aggregate principal amount which, together with all other Indebtedness of the Issuer outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (10) above or paragraph (a)) does not exceed $15 million. (c) Notwithstanding the foregoing, the Issuer shall not Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Notes to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Issuer, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. Limitation on Restricted Payments. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Issuer or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Issuer is not able to Incur an additional $1.00 of Indebtedness pursuant to 92 96 paragraph (a) of the covenant described under "-- Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments since the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter during which the Notes are originally issued to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Issuer from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Issuer and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees); (C) the aggregate Net Cash Proceeds received by the Issuer from the issuance or sale of its Capital Stock (other than Disqualified Stock) to an employee stock ownership plan (including a 401(k) plan that holds Capital Stock of the Company) subsequent to the Issue Date; provided, however, that if such employee stock ownership plan incurs any Indebtedness, such aggregate amount shall be limited to an amount equal to any increase in the Consolidated Net Worth of the Issuer resulting from principal repayments made by such employee stock ownership plan with respect to Indebtedness incurred by it to finance the purchase of such Capital Stock; (D) the amount by which Indebtedness of the Issuer is reduced on the Issuer's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Issuer) subsequent to the Issue Date of any Indebtedness of the Issuer convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Issuer (less the amount of any cash, or the fair value of any other property, distributed by the Issuer upon such conversion or exchange); (E) an amount equal to the sum of (i) the net reduction in Investments in a Person resulting from dividends, repayments of loans or advances or other transfers of assets, in each case to the Issuer or any Restricted Subsidiary from such Person and (ii) the portion (proportionate to the Issuer's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made on or after the Issue Date (and included in the calculation of Restricted Payments) by the Issuer or any Restricted Subsidiary in such Person; and (F) $5 million. (b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any acquisition of any Capital Stock of the Issuer made out of the proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Issuer (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Issuer or an employee stock ownership plan or to a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such acquisition of Capital Stock shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3)(B) of paragraph (a) above; (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Issuer which is permitted to be Incurred pursuant to the covenant described under "-- Limitation on Indebtedness"; provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; provided, however, that at the time of payment of 93 97 such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (iv) the repurchase or other acquisition of shares of, or options to purchase shares of, common stock of the Issuer or any of its Subsidiaries from employees, former employees, directors or former directors of the Issuer or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), (x) upon death, retirement, severance or termination of employment or service or (y) pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such common stock; provided, however, that the aggregate amount of such repurchases and other acquisitions shall not exceed $1.0 million in any calendar year; provided further, however, that such repurchases and other acquisitions shall be excluded in the calculation of the amount of Restricted Payments; (v) the payment to The Kelly Springfield Tire Company or its successors or assigns of dividends on the 7,000 shares of Series A Cumulative Redeemable Preferred Stock or the 4,500 shares of Series B Cumulative Redeemable Preferred Stock held by The Kelly Springfield Tire Company to the extent required to be paid by the Issuer pursuant to the terms of such stock as in existence on the Issue Date; provided, however, that such payment shall be excluded in the calculation of the amount of Restricted Payments; or (vi) payments to employees of ITCO in respect of certain stock appreciation rights granted by ITCO and required to be made upon consummation of the Transactions not to exceed $1.5 million in the aggregate; provided, however, that such payments shall be excluded from the calculation of the amount of Restricted Payments. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Issuer shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Issuer or a Restricted Subsidiary or pay any Indebtedness owed to the Issuer, (b) make any loans or advances to the Issuer or (c) transfer any of its property or assets to the Issuer, except: (i) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date or the New Credit Facility as in effect on the Issue Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Issuer (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Issuer) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or (ii) of this covenant or this clause (iii) or contained in any amendment to an agreement referred to in clause (i) or (ii) of this covenant or this clause (iii); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are not, taken as a whole, materially less favorable to the Noteholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; (iv) any such encumbrance or restriction consisting of customary provisions restricting (x) assignments, subletting or other transfers contained in leases, licenses and similar agreements to the extent such provisions restrict the transfer of the property subject thereto, or (y) the assignment or other transfer of any lease or other contract; 94 98 (v) in the case of clause (c) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary or Permitted Liens to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages or Permitted Liens; and (vi) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition. Limitation on Sales of Assets and Subsidiary Stock. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Issuer or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition and at least 75% of the consideration thereof received by the Issuer or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Issuer (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Issuer elects (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Issuer or an Affiliate of the Issuer) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Issuer elects, to acquire Additional Assets within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an offer to the holders of the Notes (and to holders of other Senior Indebtedness designated by the Issuer) to purchase Notes (and such other Senior Indebtedness) pursuant to and subject to the conditions contained in the Indenture; and (D) fourth, to the extent of any balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), in any manner that does not violate the Indenture; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or (C) above, the Issuer or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this paragraph, the Issuer and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this paragraph except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this paragraph exceeds $5 million. Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this covenant, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Issuer or any Restricted Subsidiary and the release of the Issuer or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition and (y) securities received by the Issuer or any Restricted Subsidiary from the transferee that are promptly converted by the Issuer or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of the Notes (and other Senior Indebtedness) pursuant to clause (a)(ii)(C) above, the Issuer will be required to purchase Notes tendered pursuant to an offer by the Issuer for the Notes (and other Senior Indebtedness) at a purchase price of 100% of their principal amount (without premium) plus accrued but unpaid interest (or, in respect of such other Senior Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of Notes (and any other Senior Indebtedness) tendered pursuant to such offer is less than the Net Available Cash allotted to the purchase thereof, the Issuer shall apply the remaining Net Available Cash in accordance with clause (a)(ii)(D) above. The Issuer shall not be required to make such an offer to purchase Notes (and other Senior Indebtedness) pursuant to this covenant if the Net Available Cash available therefor is less than $5 million (which lesser amount shall be carried 95 99 forward for purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (c) The Issuer shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue thereof. Limitation on Affiliate Transactions. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, enter into any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Issuer (an "Affiliate Transaction") unless the terms thereof (1) are no less favorable to the Issuer or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of $1 million, (i) are set forth in writing and (ii) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (3) if such Affiliate Transaction involves an amount in excess of $7.5 million, have been determined by a nationally recognized investment banking firm to be fair, from a financial standpoint, to the Issuer and its Restricted Subsidiaries. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any transaction permitted pursuant to the covenant described under "-- Limitation on Restricted Payments", or explicitly excluded from the definition of "Restricted Payment", (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to employees and directors of the Issuer pursuant to plans approved by the Board of Directors, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Issuer or its Restricted Subsidiaries, but in any event not to exceed $1 million in the aggregate outstanding at any one time, (v) the payment of reasonable fees to directors of the Issuer and its Restricted Subsidiaries who are not employees of the Issuer or its Restricted Subsidiaries, (vi) any Affiliate Transaction between the Issuer and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no Affiliate of the Issuer (other than another Restricted Subsidiary) owns the Capital Stock of any such Restricted Subsidiary, (vii) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Issuer or (viii) the amendment or extension or renewal of any transaction in effect on the Issue Date on terms no less favorable to the Issuer and its Restricted Subsidiaries than the terms in effect on the Issue Date. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries. The Issuer shall not sell or otherwise dispose of any Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock except (i) to the Issuer or a Wholly Owned Subsidiary, (ii) directors' qualifying shares, (iii) if, immediately after giving effect to such issuance, sale or other disposition, neither the Issuer nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary or (iv) if, immediately after giving effect to such issuance, sale or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under the covenant described under "-- Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition. Limitation on Liens. The Issuer shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any nature whatsoever on any of its properties (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, other than Permitted Liens, without effectively providing that the Notes shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured. Limitation on Sale/Leaseback Transactions. The Issuer shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless (i) the Issuer or such Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the Attributable Debt 96 100 with respect to such Sale/Leaseback Transaction pursuant to the covenant described under "-- Limitation on Indebtedness" and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the Notes pursuant to the covenant described under "-- Limitation on Liens", (ii) the net proceeds received by the Issuer or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property and (iii) the Issuer applies the proceeds of such transaction in compliance with the covenant described under "-- Limitation on Sale of Assets and Subsidiary Stock". Merger and Consolidation. The Issuer shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Issuer") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Issuer (if not the Issuer) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Issuer under the Notes and the Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Issuer or any Subsidiary as a result of such transaction as having been Incurred by such Successor Issuer or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Successor Issuer would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "-- Limitation on Indebtedness"; (iv) immediately after giving effect to such transaction, the Successor Issuer shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Issuer immediately prior to such transaction; (v) the Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel addressed to the Trustee with respect to the foregoing matters; provided, however, that the requirements set forth in clauses (iii) and (iv) above shall not apply to a merger between the Issuer and any Wholly Owned Subsidiary; and (vi) the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Issuer will not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all of its assets to any Person (other than in a transaction or transactions resulting in a release of such Subsidiary Guarantor as described under "-- Subsidiary Guaranties" above provided that the Issuer certifies to the Trustee that the Issuer will comply with the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock") unless: (i) the resulting, surviving or transferee Person (if not such Subsidiary) (the "Successor Guarantor") shall be a Person organized and existing under the laws of the United States of America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by a Guaranty Agreement, in a form satisfactory to the Trustee, all the obligations of such Subsidiary, if any, under its Subsidiary Guaranty; (ii) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been issued by such Person at the time of such transaction), no Default shall have occurred and be continuing; and (iii) the Issuer delivers to the Trustee an Officers' Certificate and an Opinion of Counsel addressed to the Trustee with respect to the foregoing matters. The Successor Issuer shall be the successor to the Issuer and shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under the Indenture, but the predecessor Issuer in the case of a conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Notes. The Successor Guarantor shall be the successor to such Subsidiary Guarantor and shall succeed to, and be substituted for, and may exercise every right and power of, such Subsidiary Guarantor under the Indenture, but such predecessor Subsidiary Guarantor in the case of a conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Notes. Future Guarantors. The Issuer shall cause each domestic Restricted Subsidiary (other than an Immaterial Subsidiary that is neither a borrower nor a guarantor under the New Credit Facility) to execute 97 101 and deliver to the Trustee a Guaranty Agreement pursuant to which such Restricted Subsidiary will Guarantee payment of the Notes on the same terms and conditions as those set forth in the Indenture. SEC Reports. Notwithstanding that the Issuer may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Issuer shall file with the SEC (to the extent such filings are accepted by the SEC) and provide the Trustee and Noteholders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections. DEFAULTS An Event of Default is defined in the Indenture as (i) a default in the payment of interest on the Notes when due, continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, (iii) the failure by the Issuer to comply with its obligations under "-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by the Issuer to comply for 30 days after notice with any of its obligations in the covenants described above under "Change of Control" (other than a failure to purchase Notes) or under "-- Certain Covenants" under "-- Limitation on Indebtedness", "-- Limitation on Restricted Payments", "-- Limitation on Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes), "-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries", "-- Limitation on Liens", "-- Limitation on Sale/Leaseback Transactions", "-- Future Guarantors" or "-- SEC Reports", (v) the failure by the Issuer to comply for 60 days after notice with its other agreements contained in the Indenture, (vi) Indebtedness of the Issuer, any Subsidiary Guarantor or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million (the "cross acceleration provision"), (vii) certain events of bankruptcy, insolvency or reorganization of the Issuer or a Significant Subsidiary (the "bankruptcy provisions"), (viii) any final, non-appealable judgment or decree for the payment of money in excess of $10 million is entered against the Issuer or a Significant Subsidiary, remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed within 10 days after notice (the "judgment default provision") or (ix) a Subsidiary Guaranty ceases to be in full force and effect (other than in accordance with the terms of such Subsidiary Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guaranty. However, a default under clauses (iv), (v) and (viii) will not constitute an Event of Default until the Trustee or the holders of 25% in principal amount of the outstanding Notes notify the Issuer of the default and the Issuer does not cure such default within the time specified after receipt of such notice. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Issuer occurs and is continuing, the principal of and interest on all the Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of the Notes unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of a Note may pursue any remedy with respect to the Indenture or the Notes unless (i) such holder has previously given the Trustee notice that an Event of Default is continuing, (ii) holders of at least 25% in principal amount of the outstanding Notes 98 102 have requested the Trustee to pursue the remedy, (iii) such holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or indemnity and (v) the holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would involve the Trustee in personal liability. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each holder of the Notes notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Note, the Trustee may withhold notice if and so long as a committee of its trust officers determines that withholding notice is not opposed to the interest of the holders of the Notes. In addition, the Issuer is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Issuer also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Issuer is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for the Notes) and any past default or compliance with any provisions may also be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, no amendment may, among other things, (i) reduce the amount of Notes whose holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Note, (iii) reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce the amount payable upon the redemption of any Note or change the time at which any Note may be redeemed as described under "-- Optional Redemption", (v) make any Note payable in money other than that stated in the Note, (vi) impair the right of any holder of the Notes to receive payment of principal of and interest on such holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Notes, (vii) make any change in the amendment provisions which require each holder's consent or in the waiver provisions or (viii) make any change in any Subsidiary Guaranty that would adversely affect the Noteholders. Without the consent of any holder of the Notes, the Issuer, the Subsidiary Guarantors and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Issuer or the Subsidiary Guarantors under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add guarantees with respect to the Notes, to secure the Notes, to add to the covenants of the Issuer or the Subsidiary Guarantors for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Issuer, to make any change that does not adversely affect the rights of any holder of the Notes or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act. The consent of the holders of the Notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. 99 103 After an amendment under the Indenture becomes effective, the Issuer is required to mail to holders of the Notes a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER The Notes will be issued in registered form and will be transferable only upon the surrender of the Notes being transferred for registration of transfer. The Issuer may require payment of a sum sufficient to cover any tax, assessment or other governmental charge payable in connection with certain transfers and exchanges (other than those contemplated by the Exchange Offer). DEFEASANCE The Issuer at any time may terminate all its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. The Issuer at any time may terminate its obligations under "Change of Control" and under the covenants described under "-- Certain Covenants" (other than the covenant described under "-- Merger and Consolidation"), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and the judgment default provision described under "-- Defaults" above and the limitations contained in clauses (iii) and (iv) under "-- Certain Covenants -- Merger and Consolidation" above ("covenant defeasance"). The Issuer may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Issuer exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Issuer exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (iv), (vi), (vii) (with respect only to Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the failure of the Issuer to comply with clause (iii) or (iv) under "-- Certain Covenants -- Merger and Consolidation" above. If the Issuer exercises its legal defeasance option or its covenant defeasance option, each Subsidiary Guarantor will be released from all of its obligations with respect to its Subsidiary Guaranty. In order to exercise either defeasance option, the Issuer must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or change in applicable Federal income tax law). CONCERNING THE TRUSTEE First Union National Bank is the Trustee under the Indenture and has been appointed by the Issuer as Registrar and Paying Agent with regard to the Notes. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, however, if it acquires any conflicting interest it must either eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. The Holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that if an Event of Default occurs (and is not cured), the 100 104 Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture without charge by contacting the Company at 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217 or by telephone at (704) 423-8989. CERTAIN DEFINITIONS "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Issuer or another Restricted Subsidiary or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the provisions described under "-- Certain Covenants -- Limitation on Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Issuer or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Issuer or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Issuer or a Restricted Subsidiary), (ii) all or substantially all the assets of any division or line of business of the Issuer or any Restricted Subsidiary or (iii) any other assets of the Issuer or any Restricted Subsidiary outside of the ordinary course of business of the Issuer or such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (A) a disposition by a Restricted Subsidiary to the Issuer or by the Issuer or a Restricted Subsidiary to a Restricted Subsidiary, (B) for purposes of the covenant described under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a transaction either permitted by the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments" or excluded from the definition of "Restricted Payment", (C) any transfer of properties or assets (including Capital Stock) that is governed by, and made in accordance with, the provisions described under "-- Certain Covenants -- Merger and Consolidation" and (D) any disposition of assets with a fair market value of less than $250,000). 101 105 "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/ Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. "Banks" means the Lenders as defined in the New Credit Facility. "Bank Indebtedness" means all Obligations pursuant to the New Credit Facility. "Board of Directors" means the Board of Directors of the Issuer or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Code" means the Internal Revenue Code of 1986, as amended. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination to (ii) Consolidated Interest Expense for such four fiscal quarters (provided that with respect to Indebtedness Incurred under a revolving credit facility, instead of such historical interest, there shall be included pro forma interest on the one year projected average balance of such Indebtedness as determined in good faith by senior management of the Company); provided, however, that (1) if the Issuer or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, other than in either such case Indebtedness Incurred under a revolving credit facility, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period, and to the application of the proceeds of such Indebtedness, including without limitation the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged, or the acquisition of assets with the proceeds of such new Indebtedness, as if such application had occurred on the first day of such period, (2) if the Issuer or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Issuer or such Restricted Subsidiary had not earned the interest income actually earned during such period in respect of 102 106 cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if since the beginning of such period the Issuer or any Restricted Subsidiary shall have made any Asset Disposition or disposition of a Permitted Investment ("Disposition"), the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Disposition for such period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness (other than Indebtedness Incurred under a revolving credit facility) of the Issuer or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Issuer and its continuing Restricted Subsidiaries in connection with such Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness (other than Indebtedness Incurred under a revolving credit facility) of such Restricted Subsidiary to the extent the Issuer and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (4) if since the beginning of such period the Issuer or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or a Permitted Investment or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all of an operating unit, segment or location of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness other than under a revolving credit facility) as if such Investment or acquisition occurred on the first day of such period and (5) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Issuer or any Restricted Subsidiary since the beginning of such period) shall have made any Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Issuer or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Disposition, Investment or acquisition occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Issuer. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Issuer and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by the Issuer or its Restricted Subsidiaries, without duplication, (i) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale/ Leaseback Transaction (provided that interest expense attributable to leases constituting part of Sale/ Leaseback Transactions in respect of currently owned warehouses with a value not in excess of $10 million shall be excluded from this calculation), (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs associated with Hedging Obligations (including amortization of fees), (vii) Preferred Stock dividends in respect of all Preferred Stock held by Persons other than the Issuer or a Wholly Owned Subsidiary (other than non-cash dividends in respect of Preferred Stock that is not Disqualified Stock of the Issuer), (viii) interest incurred in 103 107 connection with Investments in discontinued operations, (ix) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Issuer or any Restricted Subsidiary and (x) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Issuer) in connection with Indebtedness Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income of the Issuer and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person (other than the Issuer) if such Person is not a Restricted Subsidiary, except that (A) subject to the exclusion contained in clause (iv) below, the Issuer's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Issuer or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitation contained in clause (iii) below) and (B) the Issuer's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income (or loss) of any Person acquired by the Issuer or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary to the extent such Restricted Subsidiary is subject to prohibitions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Issuer, except that the Issuer's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (iv) any gain or loss realized upon the sale or other disposition of any assets of the Issuer, its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purposes of the covenant described under "Certain Covenants -- Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Issuer or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D). "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Issuer and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Issuer ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Issuer plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund 104 108 obligation or otherwise, (ii) is convertible or exchangeable at the holder's option for Indebtedness or Disqualified Stock or (iii) is redeemable or must be purchased, upon the occurrence of certain events or otherwise, by such Person at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Notes; provided, however that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Notes shall not constitute Disqualified Stock if (x) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the terms applicable to the Notes and described under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "-- Certain Covenants -- Change of Control" and (y) any such requirement only becomes operative after compliance with such terms applicable to the Notes, including the purchase of any Notes tendered pursuant thereto; provided further, however, that any class of Capital Stock of such Person that, by its terms, authorizes such Person to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of Capital Stock that is not Disqualified Stock shall not be deemed to be Disqualified Stock. "EBITDA" for any period means the sum of Consolidated Net Income, plus Consolidated Interest Expense plus the following to the extent deducted in calculating such Consolidated Net Income: (a) all income tax expense of the Issuer and its consolidated Restricted Subsidiaries, (b) depreciation expense of the Issuer and its consolidated Restricted Subsidiaries, (c) amortization expense of the Issuer and its consolidated Restricted Subsidiaries and (d) all other non-cash charges of the Issuer and its consolidated Restricted Subsidiaries (excluding any such other non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period), in each case for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements and pronouncements of the Financial Accounting Standards Board, (iii) such other statements by such other entity as approved by a significant segment of the accounting profession and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Guaranty Agreement" means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the Issuer's obligations with respect to the Notes on the terms provided for in the Indenture. 105 109 "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Registrar's books. "Immaterial Subsidiary" means any Subsidiary with total assets not greater than $50,000. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, including, in each case, any premium on such indebtedness to the extent such premium has become due and payable; (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/ Leaseback Transactions entered into by such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, the liquidation preference with respect to, any Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and (viii) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (other than leases of equipment to customers in the ordinary course of business) 106 110 (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments", (i) "Investment" shall include the portion (proportionate to the Issuer's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Issuer at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Issuer shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (x) the Issuer's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Issuer's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date on which the Notes are originally issued. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of such Asset Disposition and (iv) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Issuer or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means the Amended and Restated Loan and Security Agreement to be entered into by and among the Issuer, certain of its Subsidiaries, the lenders referred to therein, BankBoston, N.A., as Agent, and Fleet Capital Corporation and First Union National Bank, as Co-Agents, together with the related documents thereto (including the notes, guarantees and security documents thereunder), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement (and related document) governing Indebtedness incurred to Refinance, in whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding thereunder or under a successor credit agreement, whether by the same or any other lender or group of lenders. "Permitted Holders" means Ann H. Gaither and William H. Gaither and members of their immediate families and any spouse, parent or descendant of the foregoing, any trust the beneficiaries of which include only any of the foregoing, and any corporation, partnership or other entity all of the Capital Stock of which (other than directors' qualifying shares) is owned by any of the foregoing. 107 111 "Permitted Investment" means an Investment by the Issuer or any Restricted Subsidiary in (i) the Issuer, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Issuer or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to the Issuer or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Issuer or any such Restricted Subsidiary deems reasonable under the circumstances; (v) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Issuer or such Restricted Subsidiary; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Issuer or any Restricted Subsidiary or in satisfaction of judgments; (viii) promissory notes issued by members of management of the Issuer and its Subsidiaries as payments for restricted shares of Capital Stock of the Issuer not to exceed $500,000 per year; and (ix) any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to the covenant described under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock". "Permitted Liens" means, with respect to any Person, (a) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review; (c) Liens for property taxes not yet subject to penalties for non-payment or which are being contested in good faith and by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute Indebtedness; (e) survey exceptions, encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred to secure Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens securing Indebtedness, including Indebtedness Incurred pursuant to clause (b)(4) under "-- Certain Covenants -- Limitation on Indebtedness," Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of such Person; provided, however, that the Lien may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness (other than any interest thereon) secured by the Lien may not be Incurred more than 180 days after the later of the acquisition, 108 112 completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (g) Liens to secure Indebtedness permitted under the provisions described in clauses (b)(1) and (5) under "-- Certain Covenants -- Limitation on Indebtedness"; (h) Liens existing (or Incurred in connection with Indebtedness committed on) on the Issue Date; (i) Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that such Liens are not created, Incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Lien may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries; (j) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that such Liens are not created, Incurred or assumed in connection with, or in contemplation of, such acquisition; provided further, however, that the Liens may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Restricted Subsidiary of such Person; (l) Liens securing Hedging Obligations so long as such Hedging Obligations relate to Indebtedness that is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such Hedging Obligations; (m) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease; (n) any attachment of a judgment Lien that does not give rise to an Event of Default; (o) Liens on inventory deemed to arise by reason of the consignment of inventory in the ordinary course of business of the Issuer and its Restricted Subsidiaries; and (p) Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (f), (h), (i) and (j); provided, however, that (x) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property) and (y) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (f), (h), (i) or (j) at the time the original Lien became a Permitted Lien and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (f), (i) or (j) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash pursuant to the covenant described under "-- Certain Covenants -- Limitation on Sale of Assets and Subsidiary Stock". For purposes of this definition, the term "Indebtedness" shall be deemed to include interest on such Indebtedness. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. 109 113 "principal" of a Note means the principal of the Note plus the premium, if any, payable on the Note which is due or overdue or is to become due at the relevant time. "Public Equity Offering" means an underwritten primary public offering of common stock of the Issuer pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after (x) a Public Equity Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of the Issuer has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Issuer or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the Issuer or (y) Indebtedness of the Issuer or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of the Issuer and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" with respect to any Person means (i) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person) or similar payment to the direct or indirect holders of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions to the extent payable to the Issuer or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to the extent made to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (ii) the purchase, redemption or other acquisition or retirement for value on or subsequent to the Issue Date of any Capital Stock of the Issuer held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Issuer (other than the Issuer or a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Issuer that is not Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition) or (iv) the making of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Issuer that is a Subsidiary on the Issue Date and any other Subsidiary that is not an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Issuer or a Restricted Subsidiary transfers such property to a Person and the Issuer or a Restricted Subsidiary leases it from such Person. 110 114 "SEC" means the Securities and Exchange Commission. "Senior Indebtedness" of a Person means (i) Indebtedness of such Person, whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Person to the extent post-filing interest is allowed in such proceeding) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable unless, in the case of (i) and (ii), in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are subordinate in right of payment to the Notes; provided, however, that Senior Indebtedness shall not include (1) any obligation of the Issuer to any Subsidiary or of any Subsidiary Guarantor to the Issuer or any other Subsidiary, (2) any liability for Federal, state, local or other taxes owed or owing by such Person, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (4) any Indebtedness of such Person (and any accrued and unpaid interest in respect thereof) which is subordinate or junior in any respect to any other Indebtedness or other obligation of such Person or (5) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of the Indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Issuer within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Issuer (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Subsidiary of the Issuer that is a Subsidiary on the Issue Date (other than certain Immaterial Subsidiaries) and any other Subsidiary that Guarantees the Issuer's obligations with respect to the Notes. "Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the Issuer's obligations with respect to the Notes. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 360 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, 111 115 (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 360 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Issuer) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, (v) investments in split dollar life insurance policies on various officers, directors and shareholders of the Issuer and its Subsidiaries in the ordinary course of business consistent with past practices, and (vi) investments in securities with maturities of 12 months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. "Unrestricted Subsidiary" means (i) any Subsidiary of the Issuer that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (other than Subsidiary Guarantors) of the Issuer (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Issuer or any other Subsidiary of the Issuer that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments". The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Issuer could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant described under "-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "Vendor Financing" means Indebtedness Incurred to finance the cost to acquire inventory to the extent such Indebtedness is issued to and held by the supplier of such inventory. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. The "voting power" of Voting Stock means the number of votes which such Voting Stock is normally entitled (without regard to the occurrence of any contingency) to vote in such an election. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Issuer or one or more Wholly Owned Subsidiaries. 112 116 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of certain material United States federal income tax consequences generally applicable to the exchange of Old Notes for New Notes and the ownership and disposition of Notes. The federal income tax considerations set forth below are based upon currently existing provisions of the Code, applicable Treasury Regulations ("Treasury Regulations"), judicial authority, and current administrative rulings and pronouncements of the Internal Revenue Service (the "IRS"). There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS has been, or will be, sought on the issues discussed herein. Legislative, judicial, or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences discussed below. As used in this summary, "Note" means either a New Note or an Old Note, and, where the context so requires, "the Note" or "such Note" includes a Note for which a relevant Note was exchanged pursuant to the Exchange Offer. As used in this summary, the term "U.S. Holder" means the beneficial owner of a Note that is for U.S. federal income tax purposes (i) an individual citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income tax regardless of its source, (iv) a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (v) a person whose worldwide income and gain is otherwise subject to U.S. federal income tax on a net income basis . The term "Non-United States Holder" means an owner of a Note that is not a U.S. Holder. The summary is not a complete analysis or description of all potential federal tax considerations that may relevant to, or of the actual tax effect that any of the matters described herein will have on, particular U.S. Holders and Non-United States Holders (collectively, "Holders"), and does not address foreign, state, local or other tax consequences. This summary does not address the federal income tax consequences to (a) special classes of taxpayers (such as S corporations, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, real estate investment trusts, dealers in securities or currencies, broker-dealers and tax-exempt organizations) who are subject to special treatment under the federal income tax laws, (b) Holders that hold Notes as part of a position in a "straddle," or as part of a "hedging," "conversion," or other integrated investment transaction for federal income tax purposes, (c) Holders that do not hold the Notes as capital assets within the meaning of section 1221 of the Code, (d) Holders whose functional currency is not the U.S. dollar or (e) Holders that did not purchase the Old Notes for cash at original issue. Furthermore, estate and gift tax consequences are not discussed herein. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF THE NOTES IS STRONGLY URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO HIS OR HER PARTICULAR TAX SITUATION AND AS TO ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE NOTES. TAX CONSEQUENCES TO U.S. HOLDERS Interest Generally, interest paid on the Notes will be taxable to a U.S. Holder as ordinary income at the time it accrues or is received in accordance with such U.S. Holder's method of accounting for U.S. federal income tax purposes. 113 117 Tax Consequences of the Exchange Offer The exchange of Old Notes for New Notes pursuant to the Exchange Offer should not be a taxable event for U.S. federal income tax purposes. As a result, there should be no U.S. federal income tax consequences to the U.S. Holders exchanging the Old Notes for the New Notes pursuant to the Exchange Offer, and a U.S. Holder should have the same tax basis and holding period in the New Notes as the Old Notes. Disposition of the Notes Upon the sale, exchange or retirement of a Note, a U.S. Holder will recognize taxable gain or loss equal to the difference between the amount realized on the sale, exchange or retirement (except to the extent attributable to accrued interest, which will be taxable as ordinary interest income) and such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a Note will generally equal the U.S. Holder's purchase price for such Note (net of accrued interest) less any principal payments received by the U.S. Holders. Gain or loss realized on the sale, exchange or retirement of a Note generally will constitute capital gain or loss and will constitute long-term capital gain or loss if the underlying Note has been held by a U.S. Holder for more than 12 months as of the date of such disposition (the "Disposition Date"). Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deduction of capital losses is subject to certain limitations. Prospective investors should consult their tax advisors regarding the treatment of capital gains and losses. Backup Withholding Under section 3406 of the Code and applicable Treasury Regulations, a noncorporate U.S. Holder of the Notes may be subject to backup withholding at the rate of 31 percent with respect to "reportable payments," which include interest paid on or the proceeds of a sale, exchange or redemption of, the Notes. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a correct Taxpayer Identification Number ("TIN") to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a "notified payee underreporting" described in section 3406(c) of the Code or (iv) there has been a failure of the payee to certify under penalties of perjury that the payee is not subject to withholding under section 3406(a)(1)(C) of the Code. As a result, if any one of the events listed above occurs, the payor will be required to withhold an amount equal to 31 percent from any interest payment made with respect to the Notes or any payment of proceeds of a redemption of the Notes to a noncorporate U.S. Holder. Amounts paid as backup withholding do not constitute an additional tax and will be credited against the U.S. Holder's federal income tax liability, so long as the required information is provided to the IRS. The payor generally will report to the U.S. Holders of the Notes and to the IRS the amount of any "reportable payments" for each calendar year and the amount of tax withheld, if any, with respect to payment on those securities. TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS Interest paid by the issuer to a Non-United States Holder will not be subject to United States federal income or withholding tax if such interest is not effectively connected with the conduct of a trade or business within the United States (or a permanent establishment therein, if a tax treaty applies) by such Non-United States Holder and such Non-United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Issuer; (ii) is not a controlled foreign corporation that is related to the Issuer through stock ownership; (iii) is not a bank whose receipt of interest on a Note is described in Section 881(c)(3)(A) of the Code; and (iv) certifies, under penalties of perjury, that such Holder is not a United States person and provides the Issuer or its paying agent with such Holder's name and address or a securities clearing organization, bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business certifies, under penalties of perjury, that such certification and information has been received by it or a qualifying intermediary from the Non-United States Holder and furnished the Issuer with a copy thereof. 114 118 If a Non-United States Holder of a Note is engaged in a trade or business in the United States, and if interest on the Note (or gain realized on its sale, exchange or other disposition) is effectively connected with the conduct of such trade or business, the Non-United States Holder, although exempt from the withholding tax discussed in the preceding paragraph, will generally be subject to regular United States Income tax on such effectively connected income in the same manner as if it were a U.S. Holder. See "U.S. Holders" above. Such Holder will be required to provide to the withholding agent a properly executed IRS Form 4224 (or, after December 31, 1999, a Form W-8) to claim an exemption from withholding tax. In addition, if such Non-United States Holder is a foreign corporation, it may be subject to a 30% branch profits tax (unless reduced or eliminated by an applicable treaty) of its effectively connected earnings and profits from the taxable year, subject to certain adjustments. For purposes of the branch profits tax, interest on, and any gain recognized on the sale, exchange or other disposition of, a Note will be included in the effectively connected earnings and profits of such Non-United States Holder if such interest or gain, as the case may be, is effectively connected with the conduct by the Non-United States Holder of a trade or business in the United States. Gain on Disposition A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, redemption or other disposition of a Note unless (i) the gain is effectively connected with the conduct of a trade or business within the United States (or a permanent establishment therein, if a tax treaty applies) by Non-United States Holder, (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Note as a capital asset, such Holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met or (iii) the Holder is subject to tax pursuant to the provisions of the Code applicable to certain United States expatriates. Information Reporting and Backup Withholding The Issuer will, where required, report to the Non-United States Holders of Notes and the IRS the amount of any interest paid on the Notes in each calendar year and the amounts of tax withheld, if any, with respect to such payments. Copies of those information returns also may be made available, under the provisions of a specific treaty or agreement, to the taxing authorities of the country in which the Non-U.S. Holder resides or is incorporated. In the case of payments of interest to Non-United States Holders, Treasury regulations provide that the 31% backup withholding tax and certain information reporting will not apply to such payments with respect to which either the requisite certification, as described above, has been received or an exemption has otherwise been established; provided that neither the Issuer nor its payment agent has actual knowledge that the Non-United States Holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under Treasury regulations, these information reporting and backup withholding requirements will apply, however, to the gross proceeds paid to a Non-United States Holder on the disposition of the Notes by or through a United States office of a United States or foreign broker, unless such Holder certifies to the broker under penalties of perjury as to its name, address and status as a foreign person or the Holder otherwise establishes an exemption provided that the broker does not have actual knowledge that such Holder is a U.S. person or that the conditions of an exemption are not in fact satisfied. Information reporting requirements, but not backup withholding, will also apply to a payment of the proceeds of a disposition of the Notes by or through a foreign office of a United States broker or foreign brokers with certain types of relationships to the United States unless such broker has documentary evidence in its file that the Non-United States Holder of the Notes is not a United States person, and such broker has no actual knowledge to the contrary, or the Non-United States Holder establishes an exemption. Neither information reporting nor backup withholding generally will apply to a payment of the proceeds of a disposition of the Notes by or through a foreign office of a foreign broker not subject to the preceding sentence. The Treasury Department recently adopted regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify reliance standards. These regulations will become effective for payments made after December 31, 1999, subject to certain transition rules. 115 119 PLAN OF DISTRIBUTION Each Holder desiring to participate in the Exchange Offer will be required to represent, among other things, that (i) it is not an "affiliate" (as defined in Rule 405 of the Securities Act) of the Company or any Subsidiary Guarantor (ii) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the New Notes and (iii) it is acquiring the New Notes in the ordinary course of its business. A Restricted Holder will not be able to participate in the Exchange Offer and may only sell its Old Notes pursuant to a registration statement containing the selling security holder information required by Item 507 of Regulation S-K under the Securities Act, or pursuant to an exemption from the registration requirement of the Securities Act. Each Participating Broker-Dealer must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New Notes. Based upon interpretations by the staff of the Commission, the Company believes that New Notes issued pursuant to the Exchange Offer to Participating Broker-Dealers may be offered for resale, resold, and otherwise transferred by a Participating Broker-Dealer upon compliance with the prospectus delivery requirements, but without compliance with the registration requirements, of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any Participating Broker-Dealer for use in connection with any such resale. If the Company is not so notified by any Participating Broker-Dealers that they may be subject to such requirements or if it is later notified by all such Participating Broker-Dealers that they are no longer subject to such requirements, the Company will not be required to maintain the effectiveness of the Exchange Offer Registration Statement or to amend or supplement this Prospectus following the consummation of the Exchange Offer or following such date of notification, as the case may be. The Company believes that during such period of time, delivery of this Prospectus, as it may be amended or supplemented, will satisfy the prospectus delivery requirements of a Participating Broker-Dealer engaged in market-making or other trading activities. Based on interpretations by the staff of the Commission, the Company believes that New Notes issued pursuant to the Exchange Offer may be offered for resale, resold, and other transferred by a Holder thereof (other than a Restricted Holder or a Participating Broker-Dealer) without compliance with the registration and prospectus delivery requirements of the Securities Act. The Company will not receive any proceeds from any sale of New Notes by broker-dealers (including Participating Broker-Dealers). New Notes received by Participating Broker-Dealers for their own accounts pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the- counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker-Dealer and/or the purchasers of any such New Notes. Any Participating Broker-Dealer that resells New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incidental to the Exchange Offer other than commissions and concessions of any brokers or dealers and will indemnify holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act, as set forth in the Registration Rights Agreement. By acceptance of the Exchange Offer, each Participating Broker-Dealer that receives New Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior to using the Prospectus in 116 120 connection with the sale or transfer of New Notes, and acknowledges and agrees that, upon receipt of notice from the Company of the happening of any event that makes any statement in the Prospectus untrue in any material respect or which requires the making of any changes in the Prospectus in order to make the statements therein not misleading (which notice the Company agrees to deliver promptly to such Participating Broker-Dealer), such Participating Broker-Dealer will suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented prospectus to such Participating Broker-Dealer. LEGAL MATTERS The validity of the New Notes will be passed upon on behalf of the Issuer by Howard, Smith & Levin LLP, New York, New York. EXPERTS The consolidated financial statements of Heafner as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts (or, as experts in accounting and auditing) in giving said reports. The financial statements of Winston for each of the three years in the period ended September 30, 1996 included in this Prospectus have been audited by Deloitte & Touche, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of ITCO as of September 30, 1996 and 1997 and for the year ended September 30, 1997 and the period from inception (November 13, 1995) to September 30, 1996 included in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their respective report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of ITCO Holding Company, Inc. for the year ended September 30, 1995 included in this Prospectus have been audited by Deloitte & Touche, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of CPW as of October 31, 1996 and 1997 and for each of the years in the three-year period ended October 31, 1997 included in this Prospectus have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as stated in their report appearing herein. 117 121 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- THE J.H. HEAFNER COMPANY, INC. -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... F-3 Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... F-4 Consolidated Statements of Operations for the three years ended December 31, 1997................................... F-5 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1997....................... F-6 Consolidated Statements of Cash Flows for the three years ended December 31, 1997................................... F-7 Notes to Consolidated Financial Statements.................. F-8 THE J.H. HEAFNER COMPANY, INC. -- UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997..................................... F-21 Condensed Consolidated Statements of Operations for the six month periods ended June 30, 1998 and 1997................ F-22 Condensed Consolidated Statements of Stockholders' Equity for the six month period ended June 30, 1998.............. F-23 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997................ F-24 Notes to Condensed Consolidated Financial Statements........ F-25 OLIVER & WINSTON, INC. -- FINANCIAL STATEMENTS Independent Auditors' Report................................ F-30 Statements of Operations and Retained Earnings for the three-year period ended September 30, 1996................ F-31 Statements of Cash Flows for the three-year period ended September 30, 1996........................................ F-32 Notes to Financial Statements............................... F-33 OLIVER & WINSTON, INC. -- UNAUDITED CONDENSED FINANCIAL STATEMENTS Condensed Balance Sheet as of March 31, 1997................ F-38 Condensed Statements of Operations for the six-month periods ended March 31, 1997 and 1996............................. F-39 Condensed Statements of Stockholders' Equity for the six-month periods ended March 31, 1997 and 1996........... F-40 Condensed Statements of Cash Flows for the six-month periods ended March 31, 1997 and 1996............................. F-41 Notes to Condensed Financial Statements..................... F-42 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-48 Consolidated Balance Sheets as of September 30, 1997 and 1996...................................................... F-49 Consolidated Statements of Operations for the year then ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996................. F-50 Consolidated Statements of Shareholders' Deficit for the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996....... F-51 Consolidated Statements of Cash Flows for the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996................. F-52 Notes to Consolidated Financial Statements.................. F-53
F-1 122
PAGE ---- ITCO HOLDING COMPANY AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-62 Consolidated Statements of Earnings for the year ended September 30, 1995........................................ F-63 Consolidated Statement of Stockholders' Equity for the year ended September 30, 1995.................................. F-64 Consolidated Statement of Cash Flows for the year ended September 30, 1995........................................ F-65 Notes to Consolidated Financial Statements.................. F-66 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheet as of May 20, 1998..... F-69 Unaudited Consolidated Statement of Operations for the eight-month periods ended May 20, 1998 and May 31, 1997... F-70 Unaudited Consolidated Statements of Shareholders' Deficit for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-71 Unaudited Consolidated Statement of Cash Flows for the eight-month periods ended May 20, 1998 and May 31, 1997... F-72 Notes to Unaudited Interim Consolidated Financial Statements................................................ F-73 THE SPEED MERCHANT, INC. (FORMERLY THE SPEED MERCHANT, INC. AND SUBSIDIARY) -- FINANCIAL STATEMENTS Independent Auditors' Report................................ F-74 Balance Sheets as of October 31, 1996 and 1997 and April 30, 1998 (Unaudited).......................................... F-75 Statements of Income and Retained Earnings for each of the years in the three-year period ended October 31, 1997 and for the six-month periods ended April 30, 1997 and 1998 (Unaudited)............................................... F-76 Statements of Cash Flows for each of the years in the three-year period ended October 31, 1997 and for the six-month periods ended April 30, 1997 and 1998 (Unaudited)............................................... F-77 Notes to Financial Statements............................... F-78
F-2 123 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of The J. H. Heafner Company, Inc. and Subsidiary: We have audited the accompanying consolidated balance sheets of The J. H. Heafner Company, Inc. (a North Carolina Corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The J. H. Heafner Company, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Charlotte, North Carolina, March 11, 1998. F-3 124 THE J.H. HEAFNER COMPANY, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ------------ ----------- ASSETS Current assets: Cash...................................................... $ 2,502,286 $ 1,006,062 Accounts receivable, less allowance for doubtful accounts of $400,000 and $200,000 in 1997 and 1996, respectively........................................... 31,809,291 21,843,162 Inventories............................................... 41,529,430 20,399,616 Deferred tax assets....................................... 2,101,624 0 Prepaid expenses and other current assets................. 1,085,381 642,099 ------------ ----------- Total current assets................................... 79,028,012 43,890,939 ------------ ----------- Property and equipment, at cost: Land...................................................... 1,639,367 1,115,469 Buildings and leasehold improvements...................... 14,500,615 10,004,829 Machinery and equipment................................... 10,924,751 1,555,149 Furniture and fixtures.................................... 6,335,726 4,400,802 Vehicles and other........................................ 1,720,271 1,788,659 ------------ ----------- 35,120,730 18,864,908 Less -- Accumulated depreciation.......................... (9,129,642) (6,400,518) ------------ ----------- 25,991,088 12,464,390 ------------ ----------- Goodwill, net............................................... 34,978,580 0 Deferred tax assets......................................... 1,655,079 0 Other assets................................................ 4,855,519 3,196,046 ------------ ----------- $146,508,278 $59,551,375 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 43,456,901 $24,213,345 Accrued expenses.......................................... 12,409,878 2,281,253 Current maturities of long-term debt...................... 2,579,316 483,014 ------------ ----------- Total current liabilities.............................. 58,446,095 26,977,612 ------------ ----------- Revolving credit facility................................... 31,948,605 13,544,039 ------------ ----------- Long-term debt.............................................. 15,161,397 6,975,490 ------------ ----------- Other liabilities........................................... 5,687,157 480,716 ------------ ----------- Subordinated debt........................................... 14,969,000 0 ------------ ----------- Commitments and contingencies Stockholders' equity: Preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding..................... 7,000,000 0 Preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding........ 4,500,000 0 Common stock, par value $.01 and $100 per share in 1997 and 1996, respectively; authorized 10,000,000 and 5,000 shares; 3,691,000 and 2,080 shares issued and outstanding in 1997 and 1996, respectively............. 36,910 208,000 Warrants.................................................. 1,137,400 0 Additional paid in capital................................ 7,255,190 0 Notes receivable from stock sales......................... (247,500) 0 Retained earnings......................................... 614,024 11,365,518 ------------ ----------- 20,296,024 11,573,518 ------------ ----------- $146,508,278 $59,551,375 ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-4 125 THE J.H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Net sales......................................... $311,838,506 $190,535,412 $169,031,156 Cost of goods sold................................ 233,940,589 158,880,254 140,810,888 ------------ ------------ ------------ Gross profit................................. 77,897,917 31,655,158 28,220,268 General, selling and administrative expenses...... 74,441,386 29,660,119 26,584,266 ------------ ------------ ------------ Income from operations....................... 3,456,531 1,995,039 1,636,002 ------------ ------------ ------------ Other income (expense): Interest expense................................ (4,841,790) (1,465,259) (1,308,388) Interest income................................. 606,409 491,237 334,161 Other income.................................... 525,422 30,116 27,738 ------------ ------------ ------------ Income (loss) from operations before benefit for (253,428) 1,051,133 689,513 income taxes.................................... Benefit for income taxes (Notes 1 and 6)........ 239,829 0 0 ------------ ------------ ------------ Net (loss) income................................. (13,599) 1,051,133 689,513 Pro forma provision for income taxes (Notes 1 and 0 (439,000) (325,000) 6).............................................. ------------ ------------ ------------ Pro forma net income (loss).................. $ (13,599) $ 612,133 $ 364,513 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 126 THE J.H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PREFERRED STOCK NOTES ----------------------------------------- RECEIVABLE SERIES A SERIES B COMMON STOCK ADDITIONAL FROM ------------------- ------------------- -------------------- PAID-IN STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS SALES ------ ---------- ------ ---------- --------- -------- ---------- ---------- ---------- Balance, December 31, 1994, as previously reported............. 0 $ 0 0 $ 0 2,080 $208,000 $ 0 $ 0 $ 0 Retroactive effect on prior years of change in accounting principle............ 0 0 0 0 0 0 0 0 0 ----- ---------- ----- ---------- --------- -------- ---------- ---------- --------- Balance, December 31, 1994, as restated.... 0 0 0 0 2,080 208,000 0 0 0 Net income............ 0 0 0 0 0 0 0 0 0 Dividends............. 0 0 0 0 0 0 0 0 0 ----- ---------- ----- ---------- --------- -------- ---------- ---------- --------- Balance, December 31, 1995................. 0 0 0 0 2,080 208,000 0 0 0 Net income............ 0 0 0 0 0 0 0 0 0 Dividends............. 0 0 0 0 0 0 0 0 0 ----- ---------- ----- ---------- --------- -------- ---------- ---------- --------- Balance, December 31, 1996................. 0 0 0 0 2,080 208,000 0 0 0 Net (loss)............ 0 0 0 0 0 0 0 0 0 Dividends............. 0 0 0 0 0 0 0 0 0 Issuance of preferred stock series A....... 7,000 7,000,000 0 0 0 0 0 0 0 Issuance of preferred stock series B....... 0 0 4,500 4,500,000 0 0 0 0 0 Repurchase of common shares............... 0 0 0 0 (1,024) (102,400) 0 0 0 Stock split........... 0 0 0 0 3,464,944 (70,940) 70,940 0 0 Warrants issued....... 0 0 0 0 0 0 0 1,137,400 0 Shares issued for notes receivable..... 0 0 0 0 225,000 2,250 245,250 0 (247,500) Reclassification of S Corporation retained earnings to additional paid-in capital (Note 1)..... 0 0 0 0 0 0 6,939,000 0 0 ----- ---------- ----- ---------- --------- -------- ---------- ---------- --------- Balance, December 31, 1997................. 7,000 $7,000,000 4,500 $4,500,000 3,691,000 $ 36,910 $7,255,190 $1,137,400 $(247,500) ===== ========== ===== ========== ========= ======== ========== ========== ========= RETAINED EARNINGS TOTAL ----------- ----------- Balance, December 31, 1994, as previously reported............. $ 9,704,001 $ 9,912,001 Retroactive effect on prior years of change in accounting principle............ 1,727,722 1,727,722 ----------- ----------- Balance, December 31, 1994, as restated.... 11,431,723 11,639,723 Net income............ 689,513 689,513 Dividends............. (609,864) (609,864) ----------- ----------- Balance, December 31, 1995................. 11,511,372 11,719,372 Net income............ 1,051,133 1,051,133 Dividends............. (1,196,987) (1,196,987) ----------- ----------- Balance, December 31, 1996................. 11,365,518 11,573,518 Net (loss)............ (13,599) (13,599) Dividends............. (1,193,603) (1,193,603) Issuance of preferred stock series A....... 0 7,000,000 Issuance of preferred stock series B....... 0 4,500,000 Repurchase of common shares............... (2,605,292) (2,707,692) Stock split........... 0 0 Warrants issued....... 0 1,137,400 Shares issued for notes receivable..... 0 0 Reclassification of S Corporation retained earnings to additional paid-in capital (Note 1)..... (6,939,000) 0 ----------- ----------- Balance, December 31, 1997................. $ 614,024 $20,296,024 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 127 THE J.H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income....................................... $ (13,599) $ 1,051,133 $ 689,513 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities, net of Winston acquisition -- Depreciation and amortization......................... 5,399,363 1,331,460 1,062,301 Deferred taxes........................................ (527,514) 0 0 (Gain) loss on sale of property and equipment......... (114,393) (390,266) 7,626 Loss on investment.................................... 0 0 75,000 Change in assets and liabilities: Accounts receivable, net........................... (5,758,490) (1,671,892) (3,351,060) Inventories, net................................... (2,376,988) 4,955,559 (6,143,421) Prepaid expenses and other current assets.......... 199,722 (136,202) (120,410) Accounts payable and accrued expenses.............. 9,580,874 (1,145,008) 7,443,579 Other.............................................. 314,255 13,672 (25,726) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING 6,703,230 4,008,456 (362,598) ACTIVITIES....................................... ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Winston, net of cash acquired.......... (42,194,588) 0 0 Purchase of property and equipment.................... (4,908,021) (7,865,313) (2,205,426) Proceeds from sale of property and equipment.......... 363,031 1,089,970 761,268 Purchases of real estate held for sale................ 0 (541,860) (513,570) Other................................................. 281,051 (309,146) (242,565) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.............. (46,458,527) (7,626,349) (2,200,293) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.............. 28,000,000 6,447,000 1,350,000 Net proceeds from revolving credit facility and other 18,404,566 1,429,039 1,887,300 notes.............................................. Proceeds from issuance of preferred stock............. 11,500,000 0 0 Principal payments on long-term debt.................. (10,557,878) (2,505,895) (120,320) Cash paid for stock repurchase........................ (2,707,692) 0 0 Cash paid for financing costs......................... (2,377,828) 0 0 Cash dividends paid................................... (1,193,603) (1,196,987) (609,864) Collection (issuance) of notes receivable, net........ 183,956 (461,780) 122,653 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 41,251,521 3,711,377 2,629,769 NET INCREASE IN CASH.................................... 1,496,224 93,484 66,878 Cash, beginning of year................................. 1,006,062 912,578 845,700 ----------- ----------- ----------- Cash, end of year....................................... $ 2,502,286 $ 1,006,062 $ 912,578 =========== =========== =========== Supplemental disclosures of cash flow information--Cash $ 3,585,000 $ 1,428,000 $ 1,288,000 payments for--Interest................................ =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: During 1997, the Company received $2,643,000 in accounts payable credits from a vendor in exchange for a note payable. In connection with the issuance of Subordinated Debt (Note 8), the Company issued detachable warrants, which resulted in a discount on the Senior Subordinated Debt in the amount of $1,137,400.
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 128 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS The J. H. Heafner Company, Inc. (the Company), a North Carolina corporation, is engaged in the wholesale distribution of tires and tire accessories. The Company sells primarily to retail distributors throughout the southeastern United States. In May 1997, the Company acquired all outstanding shares of common stock of Oliver and Winston, Inc. (Winston), a California-based operation of 175 retail tire and automotive service centers in California and Arizona (Note 2). PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING CHANGE During 1997, the Company changed its method of determining the cost of inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Under the current economic environment of low inflation, the Company believes that the FIFO method will result in a better measurement of operating results and a better matching of costs with product sales. This change has been applied by retroactively restating the accompanying financial statements for prior years. The balances of retained earnings for the years ended December 31, 1996 and 1995, have been adjusted for the effect of applying retroactively the new method of valuing inventories. The following summarizes the effect on net income of changing the accounting method for valuing inventories.
1996 1995 ---------- ---------- Net income, as previously reported.......................... $1,919,306 $ 384,536 Effect of change in accounting method for inventories....... (868,173) 304,977 ---------- ---------- Net income, as restated..................................... $1,051,133 $ 689,513 ========== ==========
For income tax reporting purposes, the income from the change in accounting method will be recognized on a straight-line basis over a six-year period. CASH AND CASH EQUIVALENTS The Company includes cash, demand deposits and highly liquid investments with maturities of less than three months in cash and cash equivalents in its consolidated financial statements. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK For its wholesale operations, the Company recognizes revenue upon shipment from its distribution centers/warehouse to the customer. For its retail operations, the Company recognizes revenue at the point of sale. In the normal course of business, the Company extends credit, on open accounts, to its customers after performing a credit analysis based on a number of financial and other criteria. The Company performs ongoing credit evaluations of its customers financial conditions and does not normally require collateral, however, letters of credit and other security are occasionally required for certain new and existing customers. F-8 129 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 Allowances are maintained for potential credit losses and such losses have been within management's expectations. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable, other current assets, accounts payable and accrued liabilities are reflected in the financial statements at fair value because of the short-term maturity of those instruments. A reasonable estimate of the fair values of the Company's notes receivable, for which there are no quoted market prices, could not be made without incurring excessive costs. The fair values of the Company's cash value of life insurance and debt are disclosed in Notes 3 and 7, respectively. The fair value of the Company's interest rate swaps is disclosed in Note 7. 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. 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: Building and leasehold improvements........................ 10-39 years Service equipment.......................................... 5-10 years Furniture and equipment.................................... 5-7 years Vehicles................................................... 4-5 years
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 6, 7 and 8), are capitalized and amortized using the effective interest method and charged to interest expense in the accompanying consolidated statements of operations. Total costs deferred and included in other assets in the accompanying consolidated balance sheet were $2,378,000 at December 31, 1997. LONG-LIVED ASSETS During 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events occur which indicate that the carrying amount of the asset might not be recoverable. The review should assess fair value based on estimated future cash flows expected from the use and disposition of the asset. The asset should be reported at the lower of carrying amount or fair value less cost to sell. The adoption of SFAS No. 121 did not have a material effect on the Company's results of operations. F-9 130 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 GOODWILL Goodwill, which represents the excess of the purchase price over the fair value of the net assets of Winston is being amortized on a straight-line basis over a period of 15 years. Amortization of goodwill applicable to continuing operations for 1997 was $1,548,000. The carrying value of goodwill will be reviewed periodically based on the nondiscounted cash flows and pretax income of the acquired entity over the remaining amortization period. Should this review indicate that the goodwill balance will not be recoverable, the Company's carrying value of the goodwill will be reduced. At December 31, 1997, the Company believes goodwill of $34,979,000 is fully recoverable. INCOME TAXES In connection with the Winston acquisition in May 1997, the Company terminated its S Corporation status for federal and state income tax purposes. Accordingly, the Company has adopted the provisions of SFAS 109 "Accounting for Income Taxes." This statement requires the use of 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. In connection with the Company's S Corporation termination, the Company reclassified its undistributed S Corporation earnings of $6,939,000 as of May 7, 1997, to additional paid-in capital. The pro forma provision for income taxes in the accompanying statements of operations for the years ended December 31, 1996 and 1995, reflect the pro forma effect of income taxes as if the Company had been taxed as a C Corporation for those periods. The pro forma effect of income taxes for the period from January 1, 1997 to May 7, 1997 was not significant. STOCK OPTION PLAN The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense is being recognized on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant, but also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income disclosures for employee stock option grants made in 1997 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provision of APB Opinion No. 25 and provide the pro forma disclosure provision of SFAS No. 123. DEFERRED COMPENSATION The Company has unfunded deferred compensation agreements with certain officers and other key employees. The agreements provide for monthly payments beginning at age 58 and continuing for 10 years. The Company also has unfunded deferred compensation agreements with two former employees. Vested benefits under these agreements are payable in installments over a 15-year period, upon death or retirement. The present value of the liability for these benefits ($3,047,000) has been accrued over the term of the active service of the employees. F-10 131 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 SELF-INSURANCE COVERAGE Prior to June 1, 1994, Winston (see Note 2) maintained self-insurance for its worker's compensation program which was terminated on June 1, 1994. Winston's self insurance reserve which amounted to $2,020,000 at December 31, 1997, has been determined based on a certified estimate from an independent actuary for claims incurred on or before June 1, 1994. These estimates are reviewed periodically and are subject to the impact of future changes in such factors as claim severity and frequency. While management believes that the amounts are fairly stated, the ultimate liability may be in excess of or less than the amounts provided, and any adjustments will be reflected in the periods in which they become known. DEFERRED SERVICE AND WARRANTY REVENUE The Company defers a portion of revenue from the sale of service and warranty contracts. Deferred service revenue is recognized over the estimated lives of such contracts. Warranty revenue is recognized in proportion to costs incurred in satisfaction of the terms of such contracts. Deferred service and warranty revenue is included in other long-term liabilities in the accompanying consolidated balance sheet to the extent that the deferred revenue is estimated to be recognized in income beyond the next fiscal year. Deferred revenue estimated to be recognized in income during the next fiscal year is included in accrued expenses in the accompanying consolidated balance sheet. INTEREST RATE SWAPS The Company periodically enters into interest rate swap agreements to manage exposure to fluctuations in interest rates. The swap agreements represent contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on interest rate agreements is recognized as an adjustment to interest expense. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. 2. ACQUISITION: On May 7, 1997, the Company acquired all outstanding shares of common stock of Oliver and Winston, Inc. (Winston), a California-based operator of retail tire and automotive service centers, for approximately $43,133,000, consisting of $42,447,000 in cash and $686,000 in direct acquisition costs. The acquisition was funded primarily through proceeds from a revolving credit facility with a bank ($3,633,000), proceeds from a term loan with a bank ($12,000,000), issuance of 12% Senior Subordinated Notes ($16,000,000) and issuance of Series A and Series B preferred stock ($11,500,000). F-11 132 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 The acquisition has been accounted for as a purchase and, accordingly, the operating results of Winston have been included in the Company's consolidated financial statements since May 7, 1997. A summary of the purchase price and preliminary purchase price allocation follows: Purchase price-- Cash..................................................... $42,447,000 Direct acquisition costs................................. 686,000 ---------- Total purchase price.................................. $43,133,000 ========== Preliminary purchase price allocation-- Current assets........................................... $26,426,000 Current liabilities...................................... (26,466,000) ---------- (40,000) Property, plant and equipment............................ 12,291,000 Goodwill................................................. 36,527,000 Other assets............................................. 1,786,000 Other noncurrent liabilities............................. (7,431,000) ---------- Cash paid for common stock............................... $43,133,000 ==========
In connection with the acquisition, the Company recorded a reserve of approximately $1.4 million for estimated costs related to employee severance and other exit activities in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." As of December 31, 1997, the Company had charged approximately $400,000 to this reserve. Prior to the acquisition, Winston had a fiscal year-end of September 30. Winston results have been restated to conform with the Company's year-end. The following unaudited pro forma summary information, which is not covered by the report of independent accountants, presents information for the years ended December 31, 1997 and 1996, as if the Winston acquisition occurred as of January 1, 1996 (in thousands):
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Net sales................................................... $357,282 $333,605 Net loss.................................................... $ (1,373) $ (2,919)
The unaudited pro forma information is provided for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition taken place on January 1, 1996, nor is it indicative of future results of the combined companies. 3. CASH SURRENDER VALUE OF LIFE INSURANCE: The Company maintains life insurance policies with a face amount of $14,402,000 for certain key employees and stockholders as well as certain former employees and stockholders. The carrying amount of the cash value of life insurance of $1,645,000, net of policy loans of $645,000, approximates its fair value at December 31, 1997. Net cash surrender value is included in other assets in the accompanying consolidated balance sheets. F-12 133 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 4. ACCRUED EXPENSES: Accrued expenses at December 31, 1997 and 1996, consist of:
1997 1996 ----------- ----------- Payroll and employee benefits............................... $ 4,006,000 $ 1,936,000 Deferred service and warranty income........................ 2,813,000 0 Other....................................................... 5,591,000 345,000 ----------- ----------- $12,410,000 $ 2,281,000 =========== ===========
5. INCOME TAXES: Through May 7, 1997, the Company was an S Corporation for federal and state income tax purposes. Accordingly, all income and losses of the Company through May 7, 1997, were recognized by the Company's stockholders in their individual income tax returns. The Company terminated its S Corporation status upon completion of the Winston acquisition. In accordance with Statement of Financial Accounting Standards No. 109, the effect of the Company's change in tax status has been recorded in the income tax provision for the year ended December 31, 1997. The accompanying financial statements reflect the provision for income taxes for the year ended December 31, 1997, and a pro forma income tax provision for the years ended December 31, 1996 and 1995, as if the Company had been subject to federal and state income taxes for those years. The following historical and pro forma income tax information summarizes the components of the Company's income tax provision (benefit) for the year ended December 31, 1997, and the Company's pro forma income tax provision (benefit) for each of the years ended December 31, 1996 and 1995, as if the Company had been subject to federal and state income taxes for those years:
YEAR ENDED DECEMBER 31, ----------------------------------- PRO FORMA ---------------------- 1997 1996 1995 --------- --------- --------- Federal-- Current provision................................... $ 252,000 $ 304,000 $ 401,000 Deferred (benefit) provision........................ (473,000) 69,000 (125,000) --------- --------- --------- (221,000) 373,000 276,000 State-- Current provision................................... 65,000 54,000 71,000 Deferred (benefit) provision........................ (84,000) 12,000 (22,000) --------- --------- --------- (19,000) 66,000 49,000 --------- --------- --------- Total (benefit) provision................... $(240,000) $ 439,000 $ 325,000 ========= ========= =========
F-13 134 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 Actual and pro forma income tax expense differed from the amounts computed by applying the statutory federal income tax rate of 34% as a result of the following:
YEAR ENDED DECEMBER 31, ----------------------------------- PRO FORMA ---------------------- 1997 1996 1995 --------- --------- --------- Income tax (benefit) provision computed at the $ (85,000) $ 357,000 $ 234,000 federal statutory rate.............................. Adoption of SFAS No.109 upon termination of S (383,000) 0 0 Corporation status.................................. Amortization of nondeductible goodwill................ 109,000 0 0 State income taxes, net of federal income tax 65,000 54,000 71,000 benefit............................................. Other................................................. 54,000 28,000 20,000 --------- --------- --------- Income tax (benefit) provision........................ $(240,000) $ 439,000 $ 325,000 ========= ========= =========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes and (b) operating loss and tax credit carryforwards. The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 31, 1997, are as follows: Deferred tax assets-- Accrued expenses and reserves not currently deductible... $1,796,000 Accrued Warranty costs................................... 1,191,000 Self Insurance reserves.................................. 651,000 Other.................................................... 428,000 ---------- Gross deferred tax assets............................. 4,066,000 ---------- Deferred tax liabilities-- Accounting method change from LIFO to FIFO (Note 1)...... $ (288,000) Other.................................................... (21,000) ---------- Gross deferred tax liabilities........................ (309,000) ---------- Net deferred tax asset................................ $3,757,000 ==========
6. REVOLVING CREDIT FACILITY: In May 1997, the Company entered into a $65,000,000 loan and security agreement with a bank (Security Agreement) which is comprised of a $53,000,000 revolving credit (the Revolver) and a $12 million term loan (Term Loan) (see Note 7). The Revolver provides for up to the lesser of $53,000,000 or the Borrowing Base, as defined in the agreement based on 85% of eligible accounts receivable and 65% of eligible tire inventory and 50% of all other eligible inventory. The Security Agreement is collateralized by substantially all of the Company's assets. At December 31, 1997, the maximum loan amount available was $36,771,000 of which $31,949,000 was outstanding which was comprised of $28,000,000 of Eurodollar rate revolving credit loans (the Eurodollar Revolving Loans) and $3,949,000 of base rate revolving credit loans (the Base Rate Revolving Loans). In addition, the Company had trade letters of credit outstanding at December 31, 1997, of $1,858,000, which reduces the availability under the Revolver at December 31, 1997. The Revolver provides for payment in full on May 7, 2002, and therefore is classified as noncurrent as of December 31, 1997. F-14 135 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 The Eurodollar Revolving Loans bear interest based on the quotient of LIBOR and one less the percentage in effect under Regulation D of the Board of Governors of the Federal Reserve System plus the applicable margin (Applicable Margin) of 2.25% (8.05% at December 31, 1997). The Base Rate Revolving Loans bear interest at the greater of the bank's base rate in effect at the time of the loan or the Federal Funds effective rate plus 1/2% plus the Applicable Margin of 0.25% (8.75% at December 31, 1997). 7. DEBT: Long-term debt consists of the following:
1997 1996 ----------- ---------- $12 million term loan with a bank, payable in monthly principal installments of $142,857 beginning on June 1, 1997, with the final installment for the remaining balance due on May 7, 2002........................................ $11,000,000 $ 0 Unsecured note payable to a supplier, due in 24 monthly principal installments commencing January 15, 2000. Interest accrues at prime and is payable annually commencing January 15, 1999. Interest payable can be adjusted downward or eliminated, based on achievement of annual purchase requirements.............................. 4,000,000 0 Unsecured note payable to a supplier, due in monthly installments of $4,000 plus interest at 4% through December 1999, at which time the agreement provides for monthly installments of $67,000 plus interest through December 2002............................................. 904,000 0 Unsecured note payable to a former stockholder, due in annual installments of $124,600 including interest at 7.5% through January 2006...................................... 794,000 856,000 Special credit terms extended from a supplier. Agreement requires that the Company at all times carry a stock of the supplier's tires of value not less than the total amount outstanding on credit extension. The Company must also maintain certain purchase levels, as defined in the agreement................................................. 750,000 0 Note payable to a bank in monthly installments of $63,900 including interest at 8.613% through October 31, 2001, with a balloon payment of $5,156,151 plus accrued interest due December 1, 2001. The note is collateralized by first mortgages on six pieces of land and six buildings......... 0 6,403,000 Other....................................................... 292,000 200,000 ----------- ---------- 17,740,000 7,459,000 Less--Current maturities.................................... (2,579,000) (483,000) ----------- ---------- $15,161,000 $6,976,000 =========== ==========
At December 31, 1997, there was $11,000,000 outstanding under the $12,000,000 Term Loan which was comprised of $10,000,000 in Eurodollar loans (Eurodollar Term Loans) and $1,000,000 in base rate loans (Base Rate Term Loans). The Eurodollar Term Loans bear interest based on the quotient of LIBOR and one less the percentage in effect under Regulation D of the Board of Governors of the Federal Reserve System plus the Applicable Margin of 2.75% (8.55% at December 31, 1997). The Base Rate Term Loans bear interest at the greater of the bank's base rate in effect at the time of the loan or the federal funds effective rate plus 1/2% plus the Applicable Margin of 0.75% (9.25% at December 31, 1997). The Applicable Margin is subject to quarterly adjustments beginning with quarter ending June 30, 1998, in accordance with the Security Agreements. F-15 136 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 Aggregate maturities required on long-term debt including subordinated debt (Note 8), at December 31, 1997, are as follows: 1998...................................................... $ 2,579,000 1999...................................................... 1,845,000 2000...................................................... 2,539,000 2001...................................................... 5,875,000 2002...................................................... 1,816,000 Thereafter................................................ 19,086,000 ----------- $33,740,000 ===========
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, in the aggregate, at December 31, 1997, approximates fair value. DEBT COVENANTS The Security Agreement and the Subordinated Notes Agreement, contain certain restrictive covenants which, among other things, require the Company to maintain minimum levels of net worth and EBITDA. The agreements also contain certain restrictions on dividends, mergers, capital expenditures, indebtedness and investments. INTEREST RATE SWAP AGREEMENTS The Company uses interest rate swaps (Swaps) to manage interest rate risk related to its borrowings. At December 31, 1997, the Company had five Swaps in place, each with a notional amount of $5,000,000, which effectively fix the variable portion of the interest rates on $25,000,000 of the Company's debt. The fixed rates paid by the Company range from 5.75% to 6.22% and expire from May 1998 through October 2000. The fair value of the Swaps is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates. The estimated fair value of the Swaps at December 31, 1997, results in a payable position of approximately $145,000 which does not necessarily reflect the potential expense that would be realized on an actual settlement of the liability. 8. SUBORDINATED DEBT: In May 1997, the Company issued $16 million of 12% Senior Subordinated Debt (Subordinated Debt) due on May 7, 2004, with interest payable quarterly. The Subordinated Debt has a mandatory redemption clause, which states that upon a change in control or public offering (other than an initial public offering), the holder has the right to require the Company to redeem all outstanding Subordinated Debt at a price equal to a percentage, as specified, of the outstanding principal plus accrued interest. The Company also has the right to redeem the Subordinated Debt in whole, with 30 days notice, at a price equal to a percentage, as specified, of the outstanding principal plus accrued interest. In connection with the issuance of Subordinated Debt, the Company issued detachable warrants which permit the holder to acquire up to 20.68% 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 in no event later than the date of an initial public offering or a sale transaction. The Company has recorded the warrants at fair value ($1,137,400), which resulted in a discount on the Subordinated Debt in the same amount, which is being amortized over the life of the Subordinated Debt. The unamortized discount at December 31, 1997, is $1,031,000. F-16 137 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 As discussed in Note 13, the Company is in the process of conducting a $100,000,000 private debt placement, the proceeds of which will be used in part to retire the Subordinated Debt. 9. EMPLOYEE BENEFITS: PROFIT SHARING PLAN The Company and Winston have qualified profit-sharing and 401(k) plans for all eligible employees. All accounts are funded based on employee contributions to the plans, with the limits of such contributions determined by the Board of Directors. The Company matches 50% of the participant's contributions, up to 6% of their compensation. Winston matches 100% of the first 1% of participant contributions and 5% of the next 5% of participant contributions. The Company plan also provides for contributions in such amounts as the Board of Directors may annually determine for the profit-sharing portion of the plan. The amount charged to expense during the years ended December 31, 1997, 1996 and 1995, was $413,000, $346,000 and $274,000, respectively. POSTRETIREMENT BENEFITS The Company provides certain life insurance benefits for several key officers of the Company. On January 1, 1996, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS No. 106, the cost of the life insurance benefits is accrued over relevant employee service periods. Previously, these costs were charged to expense when paid. The Company elected to amortize the expense for years prior to December 31, 1995, over future periods. The effect of the adoption of SFAS No. 106 and related liability was not significant. STOCK OPTION PLAN In 1997, the Company adopted a Stock Option Plan (the Plan) for certain key employees. The Plan was designed to attract and retain key employees of the Company. The Plan authorizes the issuance of up to 265,000 shares of voting common stock to be issued to officers and key employees under terms and conditions to be set by the Company's Board of Directors. During 1997, 256,000 options were granted to various members of management at a fair value price of $1.10 per share, as determined by an independent appraisal. The options vest as specified by the stock option agreements over a period of approximately four years and are generally exercisable beginning in May 1998. All options expire 10 years from the date of grant. No options have vested and accordingly no options have been exercised as of December 31, 1997. The Company has elected to account 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. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", which 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. F-17 138 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 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:
1997 -------- Net loss.................................................... $(14,000) Pro forma................................................... $(42,000) ========
For the above information, the fair value of options granted in 1997 were determined using a Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 6.42%, no dividend yield, expected life of 10 years which equals the lives of the grants, and no expected volatility. 10. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings, equipment and vehicles under various operating leases which expire between 1998 and 2012, including two properties which are leased from individual stockholders. The Company also has obligations totaling $1,125,000 related to properties which have been subleased. Future minimum lease commitments at December 31, 1997 (excluding subleased properties) are as follows: 1998...................................................... $11,379,000 1999...................................................... 9,594,000 2000...................................................... 8,262,000 2001...................................................... 5,911,000 2002...................................................... 4,413,000 Thereafter................................................ 16,755,000 ----------- $56,314,000 ===========
Rent expense under these operating leases was $8,954,000 in 1997, $2,385,000 in 1996 and $1,984,000 in 1995. Related-party rent expense was $222,000 for 1997, $369,000 for 1996 and $386,000 in 1995. Obligations under capital leases are not significant. PURCHASE COMMITMENTS In May 1997, the Company entered into a purchase agreement with a supplier (the Tire Supply Agreement--see Note 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 The Company is involved in various lawsuits arising out of the ordinary conduct of its business. While the ultimate results of these lawsuits cannot be predicted with certainty, management does not expect that these matters will have a material adverse effect on the financial position of the Company. F-18 139 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 ENVIRONMENTAL The Company is also subject to a claim pursuant to environmental laws and regulations that may require the Company to take action to correct the effects on the environment. While it is not possible at this time to predict the outcome of the claim, in the opinion of management, the disposition of the claim will not have a material effect on the financial position of the Company. 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 termination of the Tire Supply Agreement (see Note 10), 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 or below redemption requirements, so long as amounts are outstanding under the Loan and Security Agreement, the Senior Notes and other agreements entered into in connection therewith, including any replacement agreement which results in a greater principal amount outstanding. SERIES A PREFERRED STOCK The stated value of Series A Preferred Stock is $1,000 per share. Holders of Series A Preferred Stock are entitled to receive, when and if declared by the Board of Directors, cumulative cash dividends at an annual rate of 4%, subject to adjustment based on the volume of purchases from the Supplier. Additional dividends will accrue, when and if declared by the Board of Directors, and are payable on the last business day of January, beginning in 1999. In June 1997, the Company declared a dividend based on a 4% rate. 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, to be adjusted based on Tire Purchase Credits as determined by the number of units purchased under the Tire Supply Agreement (see Note 10). 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. 12. COMMON STOCK: STOCK REPURCHASE AND STOCK SPLIT At December 31, 1996, the Company had 5,000 shares of $100 par value common stock authorized with 2,080 shares issued and outstanding. On May 2, 1997, the Company amended its Articles of Incorporation to authorize 10,000,000 shares of common stock, and reduce the par value of common stock from $100 to $.01 per share. F-19 140 THE J.H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 On May 7, 1997, the Board of Directors approved the repurchase and subsequent cancellation and retirement of 1,024 outstanding shares of common stock at a price equal to $2,644 per share on a pre-stock split basis. On the same date, the Board of Directors authorized a 3,281-for-1 stock split on all outstanding shares of common stock at the close of business on that date. STOCK ISSUANCE On May 28, 1997, the Company issued 225,000 shares of common stock to certain members of management pursuant to The J. H. Heafner Company 1997 Restricted Stock Plan. The shares were issued at a price of $1.10 per share, as determined by an independent appraisal, in exchange for notes receivable for the amounts owed. The notes bear interest at the federal funds effective rate and are forgivable as to principal in equal amounts over four years upon the Company achieving certain annual financial targets. These notes have been included as a component of stockholders' equity in the accompanying consolidated balance sheet. 13. SUBSEQUENT EVENTS: MERGER AGREEMENT On March 10, 1998, the Company entered into an Agreement and Plan of Merger with ITCO Logistics Corporation and Subsidiaries, a wholesaler of tires and related accessories in the eastern part of the United States. The total consideration expected to be paid upon completion of the merger will consist of $18 million in cash and 1,400,667 newly issued shares of the Company's Class B Common Stock with an appraised value of approximately $14.9 million. ACQUISITION AGREEMENT On March 11, 1998, Company entered into a Stock Purchase Agreement with the stockholders of The Speed Merchant Inc., a wholesaler and retailer of tires, parts and accessories located in California and Arizona. The total consideration to be paid to the stockholders is $45 million in cash, of which $35 million is payable upon consummation of the acquisition, $7.4 million is payable in installments over five years in consideration for noncompete agreements, and $2.6 million is payable in the form of contingent payments to the stockholders. PRIVATE PLACEMENT DEBT OFFERING The Company is proceeding with a plan to offer $100,000,000 of Senior Notes (Senior Notes) through a private placement debt offering to be completed May 1998. The net proceeds of the offering will be used to repay the Revolver, Term Loan and the Subordinated Debt (see Notes 6, 7 and 8). The Senior Notes are unsecured senior obligations of the Company and will include certain restrictions on incurring additional indebtedness and payment of dividends. In addition, the Senior Notes will impose certain operational and financial restrictions on the Company. F-20 141 THE J.H. HEAFNER COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 3,879,161 $ 2,502,286 Accounts receivable, less allowance for doubtful accounts of $2,704,000 and $400,000............................. 104,235,158 31,809,291 Inventories, net.......................................... 122,646,790 41,529,430 Deferred tax assets....................................... 9,947,921 2,101,624 Prepaid expenses and other current assets................. 2,611,224 1,085,381 ------------ ------------ Total current assets................................... 243,320,254 79,028,012 ------------ ------------ PROPERTY AND EQUIPMENT, NET................................. 39,572,640 25,991,088 GOODWILL, NET............................................... 107,997,959 34,978,580 OTHER INTANGIBLE ASSETS..................................... 9,768,334 0 OTHER ASSETS................................................ 9,529,336 4,855,519 DEFERRED TAX ASSETS......................................... 1,179,482 1,655,079 ------------ ------------ $411,368,005 $146,508,278 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $159,966,307 $ 43,456,901 Accrued expenses.......................................... 35,660,250 12,409,878 Current maturities of long-term debt...................... 5,670,384 2,579,316 ------------ ------------ Total current liabilities.............................. 201,296,941 58,446,095 ------------ ------------ LONG-TERM DEBT.............................................. 110,889,079 15,161,397 ------------ ------------ REVOLVING CREDIT FACILITY................................... 54,305,114 31,948,605 ------------ ------------ OTHER LIABILITIES........................................... 13,166,004 5,687,157 ------------ ------------ SUBORDINATED DEBT........................................... 0 14,969,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding..................... 7,000,000 7,000,000 Preferred stock series B -- Variable rate cumulative, 4,500 shares authorized, issued and outstanding........ 4,500,000 4,500,000 Class A Common Stock -- Par value of $.01 per share; authorized 10,000,000 shares; 3,691,000 shares issued and outstanding........................................ 36,910 36,910 Class B Common Stock -- Par value of $.01 per share; authorized 20,000,000 and 0; 1,400,667 and 0 shares issued and outstanding................................. 14,007 0 Warrants.................................................. 1,137,400 1,137,400 Additional paid-in capital................................ 22,200,307 7,255,190 Notes receivable from stock sales......................... (177,374) (247,500) Retained earnings (deficit)............................... (3,000,383) 614,024 ------------ ------------ 31,710,867 20,296,024 ------------ ------------ $411,368,005 $146,508,278 ============ ============
See notes to unaudited condensed consolidated financial statements. F-21 142 THE J. H. HEAFNER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1998 1997 ------------ ------------ (UNAUDITED) (UNAUDITED) NET SALES................................................... $243,178,526 $127,377,225 COST OF GOODS SOLD.......................................... 182,130,539 99,677,295 ------------ ------------ Gross profit.............................................. 61,047,987 27,699,930 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES................ 57,262,067 26,128,057 ------------ ------------ Income from operations.................................... 3,785,920 1,571,873 ------------ ------------ OTHER INCOME (EXPENSE): Interest expense.......................................... (4,286,471) (1,672,421) Special charges (Note 6).................................. (1,409,000) 0 Interest income........................................... 330,467 298,574 Other expense............................................. (533,569) (313,234) ------------ ------------ LOSS FROM OPERATIONS BEFORE BENEFIT FOR INCOME TAXES AND EXTRAORDINARY CHARGE...................................... (2,112,653) (115,208) Benefit for income taxes.................................. 836,518 48,673 ------------ ------------ LOSS FROM OPERATIONS BEFORE EXTRAORDINARY CHARGE............ (1,276,135) (66,535) Extraordinary charge from early extinguishment of debt, net of income tax benefits of $1,466,000 (Note 7)............. (2,198,272) 0 ------------ ------------ NET LOSS.................................................... $ (3,474,407) $ (66,535) ============ ============
See notes to unaudited condensed consolidated financial statements. F-22 143 THE J. H. HEAFNER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
PREFERRED STOCK COMMON STOCK ----------------------------------------- ----------------------------------------- SERIES A SERIES B CLASS A CLASS B ADDITIONAL ------------------- ------------------- ------------------- ------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ------ ---------- ------ ---------- --------- ------- --------- ------- ----------- Balance, December 31, 1997................... 7,000 $7,000,000 4,500 $4,500,000 3,691,000 $36,910 0 $ 0 $ 7,255,190 Issuance of shares in connection with ITCO Merger................. 0 0 0 0 0 0 1,400,667 14,007 14,945,117 Dividends paid on preferred stock........ 0 0 0 0 0 0 0 0 0 Forgiveness of management notes receivables related to common stock........... 0 0 0 0 0 0 0 0 0 Net (loss).............. 0 0 0 0 0 0 0 0 0 ----- ---------- ----- ---------- --------- ------- --------- ------- ----------- Balance, June 30, 1998................... 7,000 $7,000,000 4,500 $4,500,000 3,691,000 $36,910 1,400,667 $14,007 $22,200,307 ===== ========== ===== ========== ========= ======= ========= ======= =========== NOTES RECEIVABLE FROM STOCK RETAINED WARRANTS SALES EARNINGS TOTAL ---------- ---------- ----------- ----------- Balance, December 31, 1997................... $1,137,400 $(247,500) $ 614,024 $20,296,024 Issuance of shares in connection with ITCO Merger................. 0 0 0 14,959,124 Dividends paid on preferred stock........ 0 0 (140,000) (140,000) Forgiveness of management notes receivables related to common stock........... 0 70,126 0 70,126 Net (loss).............. 0 0 (3,474,407) (3,474,407) ---------- --------- ----------- ----------- Balance, June 30, 1998................... $1,137,400 $(177,374) $(3,000,383) $31,710,867 ========== ========= =========== ===========
See notes to unaudited condensed consolidated financial statements. F-23 144 THE J. H. HEAFNER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1998 1997 ------------ ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $ (3,474,407) $ (66,535) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities, net of the ITCO merger, CPW acquisition and the Winston acquisition -- Depreciation and amortization........................... 4,029,059 1,550,778 Extraordinary charge.................................... 2,198,272 0 Special charge.......................................... 1,409,000 0 Deferred taxes.......................................... (151,648) (335,796) Loss on sale of property and equipment.................. 281,945 18,263 Change in assets and liabilities: Accounts receivable, net.............................. (8,307,040) (3,846,843) Accounts payable and accrued expenses................. (2,229,599) 6,402,230 Inventories, net...................................... (194,744) (5,137,612) Prepaid expenses and other current assets............. 301,210 (309,658) Other................................................. 1,263,738 1,445,495 ------------ ------------ Net cash used in operating activities............... (4,874,214) (279,678) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of CPW, net of cash acquired.................. (36,086,212) 0 Acquisition of ITCO, net of cash acquired................. (16,138,271) 0 Acquisition of Winston, net of cash acquired.............. 0 (42,194,588) Purchase of property and equipment........................ (1,905,167) (2,849,433) Proceeds from sale of property and equipment.............. 883,789 60,804 ------------ ------------ Net cash used in investing activities................... (53,245,861) (44,983,217) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................. 100,000,000 28,000,000 Principal payments on long-term debt...................... (28,287,198) (9,221,390) Cash paid for financing costs............................. (6,384,883) (2,377,828) Net proceeds (payments) from revolving credit facility and other notes............................................. (5,690,969) 22,205,630 Proceeds from issuance of preferred stock................. 0 11,500,000 Cash dividends paid....................................... (140,000) (1,012,381) Cash paid for stock repurchase............................ 0 (2,707,692) ------------ ------------ Net cash provided by financing activities............... $ 59,496,950 $ 46,386,339 ------------ ------------ Net increase in cash........................................ $ 1,376,875 $ 1,123,444 Cash, beginning of year..................................... 2,502,286 1,006,062 ------------ ------------ Cash, end of year........................................... $ 3,879,161 $ 2,129,506 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest................................ $ 3,516,602 $ 1,130,561 ============ ============ Cash payments for income taxes............................ $ 612,528 $ 0 ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: In connection with the issuance of subordinated debt in 1997, the Company issued detachable warrants, which resulted in a discount on the senior subordinated debt in the amount of $1,137,400. In May 1998, the Company issued 1,400,667 shares of Class B Common Stock with an appraised value of $14,959,000. In connection with the CPW acquisition, the Company entered into noncompete agreements in the amount of $7,400,000 and other deferred payments in the amount of $2,600,000.
See notes to unaudited condensed consolidated financial statements. F-24 145 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 1. ORGANIZATION: The J. H. Heafner Company, Inc. (the Company), a North Carolina corporation, is engaged in the wholesale distribution of tires and tire accessories and the operation of retail tire and auto service stores. In May 1997, the Company acquired all outstanding shares of common stock of Oliver and Winston, Inc. (Winston), a California-based operation of 176 retail tire and automotive service centers in California and Arizona. In May 1998, the Company, through a newly formed wholly owned subsidiary, merged with ITCO Logistics Corporation and Subsidiaries (ITCO), a wholesaler of tires and related accessories in the eastern part of the United States. Concurrent with the ITCO merger, the Company acquired all outstanding shares of common stock of The Speed Merchant, Inc. (CPW), a wholesaler and retailer of tires, parts and accessories located in California and Arizona. 2. BASIS OF PRESENTATION: The unaudited condensed consolidated balance sheet as of June 30, 1998, and the condensed consolidated statements of operations, stockholders' equity and cash flows for the six months ended June 30, 1998 and 1997, have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's consolidated financial statements for the fiscal year ended December 31, 1997. The results of the operations for the six months ended are not necessarily indicative of the operating results for the full fiscal year. 3. COMMON STOCK: On May 12, 1998, the Company's Board of Directors amended the Articles of Incorporation of the Company to create two classes of common stock. At June 30, 1998, the Company has authorized for issuance 10,000,000 shares that have been designated Class A Common Stock (the Class A Common Stock) and 20,000,000 shares that have been designated Class B Common Stock (the Class B Common Stock). Class A Common Stock and Class B Common Stock have equal rights related to dividends and distributions and liquidation, dissolution or winding up. However, Class A Common Stock is entitled to 20 votes per share and Class B Common Stock is entitled to one vote per share. Class B Common Stock shall automatically convert into one share of Class A Common Stock without the requirement of any further action on the part of the Corporation or it stockholders upon the earliest of (i) an initial public offering of the Class A Common Stock in connection with the registration of the Class A Common Stock under the Securities Act of 1933, as amended (ii) the occurrence of any condition or event which results in the acceleration of the maturity of the indebtedness evidenced by the Debt Documents, or (iii) an order for relief under Title 11 of the United States Code is entered against the Company. 4. ACQUISITIONS: During the six months ended June 30, 1998, the Company completed the following business combinations, both of which were accounted for by the purchase method. Accordingly, results of operations for the acquired businesses have been included in the condensed consolidated statement of operations from the May 20, 1998, acquisition date. A preliminary allocation of the purchase price has been recorded in the F-25 146 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accompanying condensed consolidated financial statements as of June 30, 1998, based on management's best estimate of assets acquired and liabilities assumed. ITCO Merger On May 20, 1998, a wholly owned subsidiary of the Company merged with ITCO. The purchase price included $18,000,000 in cash and 1,400,667 newly issued shares of the Company's Class B Common Stock with an appraised value of approximately $14,959,000. The excess of the purchase price over the net tangible assets acquired (goodwill) was $45,016,000, which is being amortized over 15 years. A summary of the purchase price and related preliminary purchase allocation for the ITCO Merger follows (in 000's): AGGREGATE PURCHASE PRICE Cash paid to holders of ITCO common and preferred stock..... $18,000 Appraised value of Class B Common Stock issued in connection with the ITCO Merger (1,400,667 shares at $10.68 per share).................................................... 14,959 Severance, facility closing expenses and other exit costs incurred in connection with the ITCO Merger............... 4,380 Amount payable upon settlement of ITCO stock appreciation rights.................................................... 1,390 Financial advisors, accounting, legal and other direct acquisition costs......................................... 929 ------- Aggregate purchase price.................................. $39,658 =======
PRELIMINARY ALLOCATION OF PURCHASE PRICE Aggregate purchase price.................................... $39,658 Less net book value of assets acquired.................... (7,152) ------- Excess of cost over net book value of assets acquired....... 32,506 Adjustments to record assets and liabilities at fair market value: Deferred tax asset........................................ (1,944) Goodwill (historical)..................................... 13,963 Other..................................................... 491 ------- Total adjustments...................................... 12,510 ------- Goodwill.................................................. $45,016 =======
In connection with the ITCO merger, the Company recorded a $4,380,000 liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." No charges were made against the reserve at June 30, 1998. CPW Acquisition On May 20, 1998, the Company acquired all of the outstanding common stock of CPW for $45,000,000 in cash, of which $35,000,000 was paid on May 20, 1998, with $7,400,000 payable in installments over five years in consideration for noncompete agreements and $2,600,000 payable in the form of contingent payments to CPW stockholders. The excess purchase price over the net tangible assets acquired was allocated to F-26 147 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) goodwill ($29,156,000) which is being amortized over a 15 year period, and $10,000,000 to other intangible assets which are being amortized over a two to five year period. A summary of the purchase price and related preliminary purchase allocation for the CPW acquisition follows (in 000's): AGGREGATE PURCHASE PRICE Cash paid to CPW Stockholders............................... $35,000 Amount payable for non-compete agreement and other deferred payments.................................................. 10,000 Repayment of long-term indebtedness......................... 976 Severance, facility closing expenses and other costs incurred in connection with the CPW acquisition........... 862 Financial, accounting, legal and other direct acquisition costs..................................................... 633 ------- Aggregate purchase price.................................. $47,471 =======
PRELIMINARY ALLOCATION OF PURCHASE PRICE Aggregate purchase price.................................... $ 47,471 Less -- Net book value of assets acquired................. (9,472) -------- Excess of cost over net book value of assets acquired....... 37,999 Less adjustments to record assets and liabilities at fair market value: Inventory................................................. 1,018 Other current assets...................................... (22) Noncompete agreement and other deferred payments.......... (10,000) Other assets.............................................. 267 Deferred tax assets....................................... (1,353) Accounts payable.......................................... 276 Accrued expenses.......................................... 971 -------- Total adjustments................................. (8,843) -------- Goodwill.................................................. $ 29,156 ========
In connection with the CPW acquisition, the Company recorded an $862,000 liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination." No charges were made against the reserve at June 30, 1998. The following unaudited pro forma results of operations give effect to the acquisitions of Winston, ITCO and CPW as if they had occurred on January 1, 1997. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisitions occurred on January 1, 1997, or which may result in the future.
SIX MONTHS ENDED ---------------------------- JUNE 30, JUNE 30, 1998 1997 ------------ ------------ Net sales................................................... $453,266,000 $408,678,000 Loss from continuing operations before extraordinary charge.................................................... (2,235,000) (4,684,000) Net loss.................................................... $ (4,433,000) $ (4,684,000)
F-27 148 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT: Long-term debt consists of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ Senior Notes, interest due semiannually at 10.0%, commencing on November 15, 1998, due May 2008........................ $100,000,000 $ -- $12,000,000 term loan with a bank, payable in monthly principal installments of $142,857 beginning June 1, 1997, with the final installment for the remaining balance due on May 7, 2002............................................ -- 11,000,000 Unsecured note payable to a supplier, due in monthly installments of $4,000 plus interest at 4% through December 1999 at which time the agreement provides for monthly installments of $167,000 plus interest through December 2002............................................. 4,000,000 4,000,000 Installment notes payable to suppliers, due through 1999, bearing no interest; collateralized by inventories purchased from these suppliers............................ 2,333,000 -- Other....................................................... 10,226,000 2,740,000 ------------ ----------- 116,559,000 17,740,000 Less - Current Maturities................................... 5,670,000 2,579,000 ------------ ----------- $110,899,000 $15,161,000 ============ ===========
Revolving Credit Facility: On May 20, 1998, the Company replaced its existing loan and security agreement with a new credit facility that provides for a senior secured revolving credit facility (the Revolver), which may be borrowed in the aggregate principal amount of up to $100,000,000 (of which up to $10,000,000 may be utilized in the form of letters of credit). At the closing date of the ITCO merger and CPW acquisition, $48,054,000 was borrowed under the Revolver. The Revolver has a five-year term expiring in May 2003, extendable by the Company and the banks for an additional five years. Indebtedness under the new credit facility bears interest, at the Company's option, (i) at the Base Rate, as defined, plus the applicable margin or (ii) at the Eurodollar Rate, as defined, plus the applicable margin. The applicable margin for base rate loans will be 0.25% and the applicable margin for Eurodollar Rate Loans will be 1.75%, subject in each case to performance based step-downs. The Company is required to pay commitment fees on the committed undrawn amount of the Revolver, and a fronting fee to the issuer of letters of credit. The Company has also agreed to pay certain other fees and expenses of the Lenders and the Agent. The Revolver requires the Company to meet certain financial tests, including minimum net worth and minimum loan availability and contains certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guaranties; 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 of the inventory and accounts receivable of the Company. F-28 149 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Senior Notes Offering: On May 15, 1998, the Company sold $100,000,000 of Senior Notes due May 15, 2008, resulting in net proceeds of approximately $97,000,000. The 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 may redeem up to 35% of the original principal amount of the Notes at 110% of par with one or more public equity offerings. Interest on the Senior Notes is payable semiannually on May 15 and November 15 of each year beginning on November 15, 1998. The Indenture contains certain covenants that, among other things, limit the ability of the Company to incur indebtedness, make restricted payments, make certain distributions, sell assets and subsidiary stock, enter into certain affiliate transactions, sell or issue of capital stock of restricted subsidiaries, incur liens, enter into sale/leaseback transactions, and engage in mergers and consolidations. Proceeds from the Revolver and the Senior Notes were used to finance the $18,000,000 cash portion of the ITCO merger and the $35,000,000 cash portion of the CPW acquisition. Proceeds were also used to repay $86,792,000 of existing long-term indebtedness of Heafner and ITCO and to pay approximately $8,000,000 of transaction fees and expenses. 6. SPECIAL CHARGES: In the second quarter of 1998, the Company recorded a special charge of $1,409,000, related to the restructuring of its southeast wholesale business, which includes the closing of 13 distribution centers commencing in the third quarter. The second quarter charges include lease commitments for certain distribution centers, asset writedowns, severance and employee related costs and costs to shut down certain facilities. 7. EXTRAORDINARY CHARGE: The Company recorded an extraordinary charge in May 1998 related to the early extinguishment of debt resulting in a noncash write-off of deferred financing fees and unamortized discounts of subordinated debt of $1,691,000, net of applicable income tax benefits of $1,128,000. The Company also had pre-payment penalties associated with the extinguishment of debt that resulted in a cash charge of $507,000, net of applicable income tax benefits of $338,000. F-29 150 INDEPENDENT AUDITORS' REPORT To Oliver & Winston, Inc.: We have audited the accompanying statements of operations and retained earnings and of cash flows of Oliver and Winston, Inc. (the Company) for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the Company's operations and its cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. /s/ DELOITTE AND TOUCHE LLP Los Angeles, California January 15, 1997 F-30 151 OLIVER & WINSTON, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Net sales......................................... $143,070,000 $135,593,000 $134,921,000 Cost of sales..................................... 83,542,000 78,783,000 78,876,000 ------------ ------------ ------------ Gross profit................................. 59,528,000 56,810,000 56,045,000 Selling, general, and administrative expenses..... 58,388,000 56,068,000 56,323,000 ------------ ------------ ------------ Income (loss) from operations................ 1,140,000 742,000 (278,000) Interest expense, net (Notes 2, 3 and 4).......... 675,000 535,000 385,000 ------------ ------------ ------------ Income (loss) before provision for income taxes and minority interest in net loss of subsidiary...................................... 465,000 207,000 (663,000) Provision for income taxes...................... 11,000 3,000 ------------ ------------ ------------ Net income (loss) before minority interest in net loss of subsidiary.............................. 454,000 204,000 (663,000) Minority interest in net loss of subsidiary (Note 1).............................................. 16,000 ------------ ------------ ------------ Net income (loss)................................. 454,000 204,000 (647,000) Retained earnings, beginning of year.............. 3,207,000 3,003,000 6,450,000 Dividends......................................... (500,000) 0 (2,800,000) ------------ ------------ ------------ Retained earnings, end of year.................... $ 3,161,000 $ 3,207,000 $ 3,003,000 ============ ============ ============
See accompanying notes to financial statements. F-31 152 OLIVER & WINSTON, INC. STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 454,000 $ 204,000 $ (647,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................. 2,130,000 2,338,000 2,753,000 Provision for losses on accounts receivable............... 293,000 181,000 247,000 Minority interest in net loss of subsidiary............... 0 0 (16,000) Interest income from note receivable from related party... (140,000) 0 0 Gain on sale of property and equipment.................... (94,000) 0 Change in operating assets and liabilities: Accounts receivable..................................... (471,000) (114,000) (656,000) Other receivables....................................... 313,000 (106,000) (1,708,000) Inventories............................................. 83,000 (3,560,000) (731,000) Prepaid expenses........................................ 132,000 (12,000) (127,000) Accounts payable........................................ (1,105,000) 1,722,000 1,075,000 Accrued expenses........................................ 152,000 1,291,000 1,169,000 Self-insurance loss reserves............................ (89,000) (1,533,000) (2,849,000) Deferred compensation................................... (287,000) 14,000 (58,000) Warranty and adjustment liability....................... (316,000) (498,000) 814,000 Other liabilities....................................... 103,000 (143,000) (316,000) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..... 1,158,000 (216,000) (1,050,000) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.......................... (2,149,000) (2,319,000) (1,394,000) Other assets................................................ (9,000) (289,000) 120,000 Proceeds from sale of property and equipment................ 555,000 73,000 0 Certificates of deposit--restricted......................... 0 2,021,000 0 ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES................... (1,603,000) (514,000) (1,274,000) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable.................................. 1,000,000 0 0 Repayments of long-term debt................................ (1,006,000) (810,000) (1,364,000) Net borrowings on line of credit............................ 902,000 1,663,000 2,441,000 Receivables from affiliates................................. 87,000 84,000 (4,000) Net payments to related parties............................. (115,000) (37,000) (487,000) (Advances to) repayments from related parties............... 0 (21,000) 2,078,000 Payment of dividends........................................ 0 0 (2,800,000) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 868,000 879,000 (136,000) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH............................. $ 423,000 $ 149,000 $(2,460,000) Cash, beginning of year..................................... 437,000 288,000 2,748,000 ---------- ---------- ---------- Cash, end of year........................................... $ 860,000 $ 437,000 $ 288,000 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year: Interest.................................................. $ 530,000 $ 451,000 $ 408,000 Income taxes................................................ $ 0 $ 24,000 $ 0 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Effective September 30, 1994, 10,782 shares of Oliver & Winston, Inc. common stock were issued in exchange for the $1,028,000 minority interest in Winston Indemnity, Ltd. (see Note 1) During 1995, a trade payable was renegotiated into notes totaling $3,057,000 (see Note 3) During 1996, the Company declared a $500,000 dividend in exchange for $436,000 of notes receivable from related parties and $64,000 of notes payable to related parties. As a result of discounting the $1,000,000 unsecured note payable to a vendor during 1996, the Company reclassified $185,000 from long-term debt to accrued expenses (see Note 3)
See accompanying notes to financial statements. F-32 153 OLIVER & WINSTON, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL Oliver & Winston, Inc., (the "Company") operates retail tire and automotive service centers (d/b/a Winston Tire) in California. In addition, in 1994, its 79% owned subsidiary, Winston Indemnity, Ltd., operated as a captive insurance company based in Bermuda that provided workers' compensation insurance solely for the Company. The 1994 financial statements include the accounts of the Company and its 79% owned subsidiary, Winston Indemnity, Ltd. All significant intercompany transactions and balances have been eliminated. In October 1994, the Company and the minority stockholders of Winston Indemnity, Ltd. reached an agreement, effective September 30, 1994 (the Effective Date), whereby, pursuant to a plan of reorganization, the Company acquired all of the assets and assumed all of the liabilities of Winston Indemnity, Ltd. in exchange for 51,348 shares of Oliver & Winston, Inc. common stock. Simultaneously, under the plan of reorganization, these shares of Oliver & Winston, Inc. stock were distributed to the stockholders of Winston Indemnity, Ltd. in proportion to their respective ownership percentages, and Winston Indemnity, Ltd. was dissolved. The Company received 40,566 of such shares, representing its 79% interest in Winston Indemnity, Ltd., which were immediately retired. The minority stockholders of Winston Indemnity, Ltd., consisting of the same stockholders and with the same proportionate ownership percentages as the minority ownership of Oliver & Winston, Inc., received 10,782 shares of Oliver & Winston, Inc. common stock in exchange for their $1,028,000 minority interest. The accompanying 1994 financial statements give effect to this transaction as if it had occurred on September 30, 1994. INCOME TAXES The Company has elected S Corporation status for federal income tax purposes. Accordingly, earnings are taxed at the individual shareholder level, and the Company incurs no federal income tax liability. The Company is, however, subject to California S Corporation franchise taxes of 1.5% of taxable income. INVENTORIES Inventories, consisting of tires and automotive parts, are valued at the lower of cost or market, in aggregate, cost being determined using the last-in, first-out (LIFO) method. Net income for the years ended September 30, 1996, 1995 and 1994, would have been $871,000, $638,000 and $(1,040,000), respectively, using FIFO costs for inventories, compared to $454,000, $204,000 and $(647,000), respectively, using LIFO cost. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Generally, estimated useful lives range from 4 to 20 years for automobiles, machinery, equipment and buildings. Leasehold improvements are amortized on the straight-line basis over the shorter of ten years or the remaining lease terms. DEFERRED COMPENSATION The Company has unfunded deferred compensation agreements with certain officers and other key employees. The agreements provide for monthly payments beginning at age 58 and continuing for 10 years. The present value of the estimated cost of these payments, discounted at 7.5%, is accrued over the period of F-33 154 OLIVER & WINSTON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 active employment of the covered individuals. Operating expense has been charged with $206,000 in 1996, $208,000 in 1995 and $210,000 in 1994 to provide for the benefits accrued. In addition, certain executives have agreements which provide for severance payments. SELF-INSURANCE RESERVES Prior to June 1, 1994, the Company was self-insured for workers' compensation insurance and employee medical insurance. Prior to September 1, 1992, the Company was also self-insured with respect to general liability insurance. The self-insurance loss reserves and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on the Company's available loss history and industry data, for losses incurred but not reported. These estimates are reviewed and are necessarily subject to the impact of future changes in such factors as claim severity and frequency. While management believes that the amounts are fairly stated, the ultimate liability may be in excess of or less than the amounts provided, and any adjustments will be reflected in the periods in which they become known. REVENUE RECOGNITION The Company recognizes revenue at the point of sale as it relates to tires and mechanical services. DEFERRED SERVICE AND WARRANTY REVENUE The Company defers a portion of revenue from the sale of service and warranty contracts. Deferred service revenue is recognized over the estimated effective lives of such contracts. Warranty revenue is recognized proportionally to historical costs incurred in satisfaction of the terms of such contracts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In connection with the death of the Company's principal stockholder in 1995, the Company has incurred certain costs related to the settlement of various related estate and corporate matters. Such costs approximated $220,000 in 1996 and are included in selling, general and administrative expense in the accompanying statement of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROSPECTIVE ACCOUNTING CHANGES The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective for fiscal years beginning after December 15, 1995; however, earlier application is permitted. Among other provisions, the statement standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The Company has decided not to elect early adoption of the statement; however, the Company anticipates that adoption of the change will not have a material impact on its financial statements. F-34 155 OLIVER & WINSTON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 2. RELATED-PARTY TRANSACTIONS: NOTES RECEIVABLE FROM RELATED PARTY The notes receivable from related party are unsecured and bear interest at 5.19%. The notes require minimum annual payments of $450,000 with the remaining balance due on September 30, 1998. NOTES RECEIVABLE FROM AFFILIATES Notes receivable from affiliates are due on demand and accrue interest at prime plus 1.5% per annum. The notes represent advances for the purchase of real estate to partnerships whose general partner is the estate of the Company's principal stockholder. The receivables are collateralized by trust deeds on the real estate. NOTES PAYABLE TO RELATED PARTY Notes payable to related parties are due on demand and bear interest at various rates ranging from 9.5% to 10% per annum. Interest expense related to these notes totaled $248,000, $244,000 and $267,000 in 1996, 1995, and 1994, respectively. MINORITY INTEREST IN SUBSIDIARY In 1994, stockholders of the Company owned a 21% interest in the Company's subsidiary (See Note 1). 3. BORROWING ARRANGEMENTS: The Company has a credit agreement with a bank which provides for maximum borrowings of $12,000,000 through April 14, 1998, under a revolving line of credit, a term loan facility and letters of credit. The revolving line of credit provides for borrowings limited to a borrowing base formula, as defined. Borrowings under the revolving line bear interest at the bank's prime rate plus 1.5% (9.75% at September 30, 1996). Borrowings under the above credit agreement are collateralized by substantially all of the Company's assets. The terms of the credit agreement contain certain restrictive covenants, including maintenance of minimum working capital, tangible net worth, current ratio, and debt coverage ratio and provides for immediate repayment on changes in control under certain circumstances. The agreement also restricts dividend payments and capital expenditures. At September 30, 1996, the Company was in violation of certain of these covenants, for which the bank has waived compliance as of September 30, 1996. The Company has two notes payable to a tire vendor for $1,700,000 and $1,357,000. The $1,700,000 note is payable in monthly principal installments of $56,667 plus interest at 6% through June 1997. At September 30, 1996 and 1995, $510,000 and $1,190,000, respectively, were outstanding under this note. The $1,357,000 note accrues interest at prime plus 1% (9.25% at September 30, 1996), with monthly interest-only payments due through June 1997, at which time the agreement provides for 36 equal monthly principal payments. The notes are secured by the related inventories. In December 1995, the Company signed a $1,000,000 unsecured note payable to another vendor. The note is payable in monthly principal installments of $4,167 plus interest at 4% through December 1999, at which time the agreement provides for monthly payments of $66,667 plus interest through December 2000. This note was discounted at an imputed interest rate of 10.75%, resulting in an unamortized discount of approximately $185,000 at September 30, 1996. The note is subject to accelerated repayment if minimum levels of purchases from the vendor are not maintained. F-35 156 OLIVER & WINSTON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 Future principal payments on long-term debt at September 30, 1996 are as follows: 1997........................................................ $627,000 1998........................................................ $454,000 1999........................................................ $453,000 2000........................................................ $913,000 2001........................................................ $201,000
4. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings and equipment under various operating and capital leases. Future minimum obligations under capital leases are as follows: 1997........................................................ $280,000 1998........................................................ 213,000 1999........................................................ 147,000 2000........................................................ 55,000 2001........................................................ 21,000 Thereafter.................................................. 6,000 -------- Total minimum lease payments................................ 722,000 Less -- Amount representing interest........................ 97,000 -------- Net present value of future minimum lease payments.......... $625,000 ========
As of September 30, 1996, future minimum lease payments and sublease rentals under the noncancellable operating leases are summarized as follows:
RELATED NONRELATED SUBLEASE OPERATING LEASES PARTIES PARTIES RENTALS TOTAL ---------------- ---------- ----------- ----------- ----------- 1997..................................... $ 458,000 $ 9,426,000 $ 299,000 $ 9,585,000 1998..................................... 460,000 8,932,000 214,000 9,178,000 1999..................................... 460,000 7,669,000 187,000 7,942,000 2000..................................... 460,000 6,566,000 164,000 6,862,000 2001..................................... 460,000 4,762,000 63,000 5,159,000 Thereafter............................... 1,383,000 17,031,000 63,000 18,351,000 ---------- ----------- ----------- ----------- Total minimum lease payment......... $3,681,000 $54,386,000 $ 990,000 $57,077,000 ========== =========== =========== ===========
Rent expense, net of sublease income of $392,000, $393,000 and $365,000 under operating leases was $9,281,000, $9,030,000 and $8,406,000 for the years ended September 30, 1996, 1995 and 1994, respectively. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising out of the ordinary conduct of its business. While the ultimate results of these lawsuits cannot be predicted with certainty, management does not expect that these matters will have a material adverse effect on the financial position of the Company. The Company is also subject to a claim pursuant to environmental laws and regulations that may require the Company to take action to correct the effects on the environment. While it is not possible at this time to F-36 157 OLIVER & WINSTON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 predict the outcome of the claim, in the opinion of management, the disposition of the claim will not have a material effect on the financial position of the Company. On October 26, 1993, the California Bureau of Automotive Repair reached an agreement with the Company in connection with alleged violations related to the performance of unnecessary repairs and replacement of unneeded parts. Under the terms of the agreement, the Company was obligated to pay an aggregate of $1,400,000 for restitution, civil penalty and investigation costs to the State of California, the counties of Sacramento and Ventura, and former customers over a two-year period. During May 1994, the Company terminated a tire supply agreement with a vendor. Under the terms of the termination agreement, the Company received $1,500,000 from the vendor to provide all warranty and adjustment privileges to purchasers of these tires. The Company believes that this amount approximates the ultimate cost of providing the related warranty and adjustment privileges. 5. PROFIT SHARING PLAN AND 401(K) PLAN: The Company has a profit sharing plan that covers substantially all employees of the Company. Contributions are made to the plan annually at the discretion of the Board of Directors. No contribution to the plan was made for the years ended September 30, 1996, 1995 and 1994. The Company also has a 401(k) defined contribution plan that covers full-time employees of the Company who have completed six months of service. All accounts are funded based on employee contributions. Employer contributions are determined by the Board of Directors. No employer contributions were granted in 1996, 1995 or 1994. F-37 158 OLIVER & WINSTON, INC. CONDENSED BALANCE SHEET
MARCH 31, 1997 -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 315,000 Accounts receivable, net of allowance for doubtful accounts of $317,000 at March 31, 1997................. 2,758,000 Other receivables......................................... 1,611,000 Inventories............................................... 20,222,000 Prepaid expenses.......................................... 542,000 Notes receivable from related party and affiliates........ 558,000 ----------- Total current assets.............................. 26,006,000 ----------- Property and equipment Land...................................................... 315,000 Building.................................................. 121,000 Leased facilities under capital leases.................... 3,357,000 Leasehold improvements.................................... 8,659,000 Machinery and equipment................................... 21,069,000 ----------- Total............................................. 33,521,000 ----------- Less -- Accumulated depreciation and amortization......... (25,517,000) ----------- Net property and equipment................................ 8,004,000 ----------- Notes receivable from related party......................... 1,988,000 Other assets................................................ 888,000 ----------- $36,886,000 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit............................................ $ 6,986,000 Accounts payable.......................................... 8,200,000 Accrued expenses.......................................... 8,663,000 Notes payable to related parties.......................... 2,326,000 Current portion of long-term debt......................... 735,000 Other current liabilities................................. 500,000 ----------- Total current liabilities......................... 27,410,000 ----------- Commitments and contingencies (Notes 4 and 5) Long-term debt.............................................. 2,349,000 Deferred compensation....................................... 1,789,000 Other liabilities........................................... 1,762,000 Stockholders' equity Common stock, $.10 par value, 1,000,000 shares authorized; 181,942 shares issued and outstanding in 1996 and 1995................................................... 18,000 Additional paid-in capital................................ 1,180,000 Retained earnings......................................... 2,378,000 ----------- Total stockholders' equity........................ 3,576,000 ----------- $36,886,000 ===========
The accompanying notes to consolidated financial statements are an integral part of this balance sheet. F-38 159 OLIVER & WINSTON, INC. CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS SIX MONTHS ENDED ENDED MARCH 31, 1997 MARCH 31, 1996 -------------- -------------- (UNAUDITED) (UNAUDITED) NET SALES................................................... $67,846,000 $68,634,000 COST OF SALES............................................... 39,023,000 40,029,000 ----------- ----------- Gross profit........................................... 28,823,000 28,605,000 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES................ 29,159,000 28,632,000 ----------- ----------- Loss from operations................................... (336,000) (27,000) INTEREST EXPENSE, NET....................................... (447,000) (363,000) ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES...................... (783,000) (390,000) Provision for income taxes (Note 1)....................... 0 0 ----------- ----------- NET LOSS.................................................... $ (783,000) $ (390,000) =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-39 160 OLIVER & WINSTON, INC. CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES DOLLARS CAPITAL EARNINGS TOTAL ------- ------- ---------- ---------- ---------- Balance, September 30, 1995....... 181,942 $18,000 $1,180,000 $3,207,000 $4,405,000 Net loss........................ 0 0 0 (390,000) (390,000) ------- ------- ---------- ---------- ---------- Balance, March 31, 1996........... 181,942 $18,000 $1,180,000 $2,817,000 $4,015,000 ======= ======= ========== ========== ========== Balance, September 30, 1996....... 181,942 $18,000 $1,180,000 $3,161,000 $4,359,000 Net loss........................ 0 0 0 (783,000) (783,000) ------- ------- ---------- ---------- ---------- Balance, March 31, 1997........... 181,942 $18,000 $1,180,000 $2,378,000 $3,576,000 ======= ======= ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-40 161 OLIVER & WINSTON, INC. CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (783,000) $ (390,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 1,144,000 1,088,000 Provision for losses on accounts receivable............ 117,000 146,000 Interest income from note receivable from related party................................................. (43,000) (82,000) Gain on sale of property and equipment................. 0 (94,000) Change in operating assets and liabilities: Accounts receivable.................................. 120,000 191,000 Other receivables.................................... 378,000 363,000 Inventories.......................................... 396,000 1,344,000 Prepaid expenses..................................... (109,000) 9,000 Accounts payable..................................... (2,567,000) (2,362,000) Accrued expenses..................................... (222,000) 486,000 Other current liabilities............................ (216,000) (446,000) Deferred compensation................................ (16,000) (262,000) Other liabilities.................................... 86,000 (253,000) ---------- ---------- Net cash used in operating activities............. (1,715,000) (262,000) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (888,000) (989,000) Other assets.............................................. 264,000 381,000 Proceeds from sale of property and equipment.............. 0 450,000 ---------- ---------- Net cash used in investing activities............. (624,000) (158,000) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayment) on line of credit.............. 1,980,000 (893,000) Net borrowings to related parties and affiliates.......... 3,000 459,000 Proceeds from note payable................................ 300,000 1,000,000 Repayments of long-term debt.............................. (489,000) (495,000) ---------- ---------- Net cash provided by financing activities......... 1,794,000 71,000 ---------- ---------- NET DECREASE IN CASH........................................ $ (545,000) $ (349,000) CASH, BEGINNING OF PERIOD................................... 860,000 437,000 ---------- ---------- CASH, END OF PERIOD......................................... $ 315,000 $ 88,000 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year: Interest............................................... $ 515,000 $ 445,000 Income taxes........................................... $ 0 $ 0 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: As a result of discounting the $1,000,000 unsecured note payable to a vendor during 1996, the Company reclassified $185,000 from long-term debt to accrued expenses (see Note 3)
The accompanying notes to consolidated financial statements are an integral part of these statements. F-41 162 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS SIX MONTHS ENDED MARCH 31, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL Oliver & Winston, Inc., (the Company) operates retail tire and automotive service centers (d/b/a Winston Tire) in California. Basis of Presentation The unaudited condensed balance sheet as of March 31, 1997, and the condensed statements of operations, stockholders' equity and cash flows for the six months ended March 31, 1997 and 1996, have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's consolidated financial statements for the fiscal year ended September 30, 1996. The results of the operations for the six months ended are not necessarily indicative of the operating results for the full fiscal year. INCOME TAXES The Company has elected to be treated as an S Corporation status for federal income tax purposes. Accordingly, earnings are taxed at the individual shareholder level, and the Company incurs no federal income tax liability. The Company is, however, subject to California S Corporation franchise taxes of 1.5% of taxable income. INVENTORIES Inventories, consisting of tires and automotive parts, are valued at the lower of cost or market, in aggregate, cost being determined using the last-in, first-out (LIFO) method. LIFO inventory cost was approximately $1,000 less than first-in, first-out (FIFO) cost at March 31, 1997. Net loss for the six months ended March 31, 1997 and 1996, would have been $548,000 and $602,000, respectively, using FIFO costs for inventories, compared to $783,000 and $390,000, respectively, using LIFO cost. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Generally, estimated useful lives range from 4 to 20 years for automobiles, machinery, equipment and buildings. Leasehold improvements are amortized on the straight-line basis over the shorter of ten years or the remaining lease terms. DEFERRED COMPENSATION The Company has unfunded deferred compensation agreements with certain officers and other key employees. The agreements provide for monthly payments beginning at age 58 and continuing for 10 years. The present value of the estimated cost of these payments, discounted at 7.5%, is accrued over the period of F-42 163 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) active employment of the covered individuals. Operating expense has been charged with $98,000 and $107,000 for the six-month period ended March 31, 1997 and 1996, respectively, to provide for the benefits accrued. In addition, certain executives have agreements which provide for severance payments. SELF-INSURANCE RESERVES Prior to June 1, 1994, the Company was self-insured for workers' compensation insurance and employee medical insurance. Prior to September 1, 1992, the Company was also self-insured with respect to general liability insurance. The self-insurance loss reserves and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on the Company's available loss history and industry data, for losses incurred but not reported. These estimates are reviewed and are necessarily subject to the impact of future changes in such factors as claim severity and frequency. While management believes that the amounts are fairly stated, the ultimate liability may be in excess of or less than the amounts provided, and any adjustments will be reflected in the periods in which they become known. DEFERRED SERVICE AND WARRANTY REVENUE The Company defers a portion of revenue from the sale of service and warranty contracts. Deferred service revenue is recognized over the estimated effective lives of such contracts. Warranty revenue is recognized proportionally to historical costs incurred in satisfaction of the terms of such contracts. The Company deferred revenue of $3,646,000 under these programs at March 31, 1997. Deferred service and warranty revenue is reflected in the balance sheet of the Company to the extent that the deferred revenue is estimated to be recognized in income after the next fiscal year. Deferred revenue estimated to be recognized in income during the next fiscal year is included with accrued expenses in the accompanying balance sheet. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In connection with the death of the Company's principal stockholder in 1995, the Company has incurred certain costs related to the settlement of various related estate and corporate matters. Such costs approximated $110,000 as of March 31, 1996, and are included in selling, general and administrative expense in the accompanying statement of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of accounts receivable, other receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments. The carrying values of the line of credit and various loan balances included in long-term debt approximate their fair value either due to their variable rate nature or due to the short maturity of these items. The fair value of the notes receivable from related parties and affiliates and the notes payable to related parties cannot be determined due to the related party nature of the transactions. F-43 164 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) PROSPECTIVE ACCOUNTING CHANGES The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events occur which indicate that the carrying amount of the asset might not be recoverable. The review should assess fair value based on estimated future cash flows expected from the use and disposition of the asset. The asset should be reported at the lower of the carrying amount or fair value less cost to sell. The adoption of SFAS No. 121 did not have a material effect on the Company's results of operations. 2. RELATED-PARTY TRANSACTIONS: NOTES RECEIVABLE FROM RELATED PARTY The note receivable from related party is unsecured and bears interest at 5.19%. The note requires minimum annual payments of $450,000 with the remaining balance due on September 30, 1998. The note was repaid in full in connection with the acquisition by Heafner (see Note 6). NOTES RECEIVABLE FROM AFFILIATES Notes receivable from affiliates are due on demand and accrue interest at prime plus 1.5% per annum. The notes represent advances for the purchase of real estate to partnerships whose general partner is the estate of the Company's principal stockholder. The receivables are collateralized by trust deeds on the real estate. NOTES PAYABLE TO RELATED PARTY Notes payable to related parties are due on demand and bear interest at various rates ranging from 9.5% to 10% per annum. Interest expense related to these notes totaled $114,000 and $127,000 as of March 31, 1997, and 1996, respectively. 3. BORROWING ARRANGEMENTS: The Company has a revolving line of credit agreement with a bank which provides for maximum borrowings of $12,000,000 through April 14, 1998, certain vendor notes, a term loan and letters of credit. REVOLVING LINE OF CREDIT The revolving line of credit provides for borrowings limited to a borrowing base formula, as defined. Borrowings under the revolving line bear interest at the bank's prime rate plus 1.5% (10% at March 31, 1997). Outstanding borrowings under the line of credit were $6,986,000 at March 31, 1997. No amounts were outstanding under the term loan facility. The revolving line of credit agreement also provides for the issuance of letters of credit to a maximum of $7,000,000 which reduce availability under the revolving line of credit. The Company pays a fee equal to 2% per annum of the face amount of each letter of credit. At March 31, 1997, letters of credit totaling $1,525,000 were outstanding under this agreement (see Note 4). Borrowings under the revolving line of credit agreement are collateralized by substantially all of the Company's assets. The terms of the credit agreement contain certain restrictive covenants, including maintenance of minimum working capital, tangible net worth, current ratio, and debt coverage ratio and provides for immediate repayment on changes in control under certain circumstances. The agreement also restricts dividend payments and capital expenditures. At March 31, 1997, the Company was in violation of F-44 165 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) certain of these covenants, however the revolving line of credit was paid in full in connection with the acquisition by Heafner (see Note 6). VENDOR NOTES The Company has two notes payable to a tire vendor for $1,700,000 and $1,357,000. The $1,700,000 note is payable in monthly principal installments of $57,000 plus interest at 6% through June 1997. At March 31, 1997, $170,000 was outstanding under this note. The $1,357,000 note accrues interest at prime plus 1% (9.5% at March 31, 1997), with monthly interest-only payments due through June 1997, at which time the agreement provides for 36 equal monthly principal payments. The notes are secured by the related inventories. In December 1995, the Company signed a $1,000,000 unsecured note payable to another vendor. The note is payable in monthly principal installments of $4,167 plus interest at 4% through December 1999, at which time the agreement provides for monthly payments of $66,667 plus interest through December 2000. This note was discounted at an imputed interest rate of 10.75%, resulting in an unamortized discount of approximately $185,000 at March 31, 1997. At March 31, 1997, $756,000 was outstanding under this note. The note is subject to accelerated repayment if minimum levels of purchases from the vendor are not maintained. TERM LOAN In December 1996, the Company signed a note payable in the amount of $300,000 plus interest, secured by a building and land. The note bears interest at a variable rate equal to two points above the bank's prime rate prevailing 30 days prior to the effective date of rate change. The effective date of rate change is every three months beginning April 1, 1997. Principal and interest are payable in 180 monthly installments commencing February 1, 1997, with the remaining balance due in full on January 1, 2012. Payment amounts are subject to change based on interest rate in effect at the time. At March 31, 1997, $298,000 was outstanding under this note. Future principal payments on long-term debt at March 31, 1997, are as follows: 1998..................................................... $ 735,000 1999..................................................... 652,000 2000..................................................... 760,000 2001..................................................... 667,000 2002..................................................... 17,000 Thereafter............................................... 253,000 ---------- $3,084,000 ==========
F-45 166 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) 4. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings and equipment under various operating and capital leases. Future minimum obligations under capital leases are as follows: 1998........................................................ $263,000 1999........................................................ 169,000 2000........................................................ 103,000 2001........................................................ 34,000 2002........................................................ 4,000 -------- Total minimum lease payments...................... 573,000 Less -- Amount representing interest........................ 70,000 -------- Net present value of future minimum lease payments.......... $503,000 ========
The current portion of the obligation under capital leases at March 31, 1997, is $222,000. The net book value of leased facilities under capital leases was $246,000 at March 31, 1997. As of March 31, 1997, future minimum lease payments and sublease rentals under the noncancellable operating leases are summarized as follows:
RELATED NONRELATED SUBLEASE OPERATING LEASES PARTIES PARTIES RENTALS TOTAL - ---------------- ---------- ----------- --------- ----------- 1998.................................... $ 481,000 $ 8,981,000 ($214,000) $ 9,248,000 1999.................................... 481,000 8,600,000 (187,000) 8,894,000 2000.................................... 481,000 7,518,000 (168,000) 7,831,000 2001.................................... 481,000 6,393,000 (79,000) 6,795,000 2002.................................... 464,000 4,551,000 (63,000) 4,952,000 Thereafter.............................. 1,196,000 16,641,000 (68,000) 17,769,000 ---------- ----------- --------- ----------- Total minimum lease payments.................... $3,584,000 $52,684,000 ($779,000) $55,489,000 ========== =========== ========= ===========
Rent expense, net of sublease income of $182,000 and $197,000 under operating leases was $4,797,000 and $4,606,000 six-month period ended March 31, 1997 and 1996. LETTERS OF CREDIT At March 31, 1997, a bank issued letters of credit totaling $1,525,000 to support reinsurance requirements, workers' compensation and personal injury exposure. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising out of the ordinary conduct of its business. While the ultimate results of these lawsuits cannot be predicted with certainty, management does not expect that these matters will have a material adverse effect on the financial position of the Company. On October 26, 1993, the California Bureau of Automotive Repair reached an agreement with the Company in connection with alleged violations related to the performance of unnecessary repairs and replacement of unneeded parts. Under the terms of the agreement, the Company was obligated to pay an aggregate of $1,400,000 for restitution, civil penalty and investigation costs to the State of California, the counties of Sacramento and Ventura, and former customers over a two-year period. At March 31, 1997, an F-46 167 OLIVER & WINSTON, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) aggregate of $67,000 related to this matter is included in accrued expenses in the accompanying balance sheets. During May 1994, the Company terminated a tire supply agreement with a vendor. Under the terms of the termination agreement, the Company received $1,500,000 from the vendor to provide all warranty and adjustment privileges to purchasers of these tires. The Company believes that this amount approximates the ultimate cost of providing the related warranty and adjustment privileges. At March 31, 1997, an aggregate of $103,000 is included in accrued expense and the warranty and adjustment liability in the accompanying balance sheets as an estimate of such future cost. ENVIRONMENTAL The Company is also subject to a claim pursuant to environmental laws and regulations that may require the Company to take action to correct the effects on the environment. While it is not possible at this time to predict the outcome of the claim, in the opinion of management, the disposition of the claim will not have a material effect on the financial position of the Company. 5. PROFIT SHARING PLAN AND 401(k) PLAN: The Company has a profit sharing plan that covers substantially all employees of the Company. Contributions are made to the plan annually at the discretion of the Board of Directors. No contribution to the plan was made for the six-month periods ended March 31, 1997 and 1996. The Company also has a 401(k) defined contribution plan that covers full-time employees of the Company who have completed six-months of service. All accounts are funded based on employee contributions. Employer contributions are determined by the Board of Directors. No employer contributions were granted during the six-month periods ended March 31, 1997 and 1996. 6. SUBSEQUENT EVENT On May 7, 1997, the Company's common stock was purchased by The J.H. Heafner Company, Inc. (Heafner) for approximately $42,447,000. In connection with the acquisition, the note receivables from a related party were collected in full and the revolving line of credit and note payable to related parties were repaid. F-47 168 REPORT OF INDEPENDENT AUDITORS Board of Directors ITCO Logistics Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of ITCO Logistics Corporation and its subsidiaries as of September 30, 1997 and 1996 and the related consolidated statements of operations, shareholders' deficit and cash flows for the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of ITCO Logistics Corporation and its subsidiaries at September 30, 1997 and 1996 and the consolidated results of their operations and their cash flows for the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Raleigh, North Carolina October 31, 1997, except for Note 13, as to which the date is January 14, 1998 F-48 169 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 ---------------------------- 1997 1996 ------------ ------------ ASSETS Current assets: Cash...................................................... $ 1,855,590 $ 1,753,583 Receivables: Trade, net of allowance for doubtful accounts of $664,000 and $758,513................................ 42,557,956 43,545,804 Other including supplier rebates....................... 7,369,671 7,460,392 ------------ ------------ 51,783,217 52,759,779 Inventories............................................... 43,187,911 41,483,793 Deferred income tax asset................................. 1,174,247 2,127,728 Income tax recoverable.................................... -- 99,146 Prepaid expenses.......................................... 528,310 350,633 ------------ ------------ Total current assets........................................ 96,673,685 96,821,079 Property and equipment, net................................. 10,905,001 11,995,317 Intangible assets, net...................................... 14,560,994 15,250,240 Deferred income tax asset................................... 630,875 -- Other assets................................................ 549,924 151,670 ------------ ------------ TOTAL ASSETS........................................... $123,320,479 $124,218,306 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 75,146,475 $ 67,396,239 Accrued expenses.......................................... 3,086,404 2,476,382 Current maturities of long-term debt...................... 2,038,463 1,999,754 Current obligations under capital leases.................. -- 79,288 ------------ ------------ TOTAL CURRENT LIABILITIES.............................. 80,271,342 71,951,663 Revolving credit agreement.................................. 32,122,667 37,572,884 Long-term debt.............................................. 5,321,135 7,589,980 Deferred income taxes....................................... -- 59,684 ------------ ------------ TOTAL LIABILITIES...................................... 117,715,144 117,174,211 Commitments and contingencies Redeemable preferred stock, Class A, $.01 par value; $1,000 stated value; 16,200 shares authorized; 8,100 shares issued and outstanding.................................... 9,708,591 8,795,504 Shareholders' deficit: Common stock, $.01 par value; 250,000 shares authorized; 90,000 shares issued and outstanding................... 900 900 Additional paid in capital................................ 899,100 899,100 Accumulated deficit....................................... (5,003,256) (2,651,409) ------------ ------------ Total shareholders' deficit................................. (4,103,256) (1,751,409) ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............ $123,320,479 $124,218,306 ============ ============
See accompanying notes. F-49 170 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TEN MONTH YEAR ENDED PERIOD ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1996 ------------ ------------ Sales....................................................... $351,996,122 $290,982,083 Cost of sales............................................... 301,969,811 253,629,352 ------------ ------------ Gross profit................................................ 50,026,311 37,352,731 Selling, general and administrative expenses................ 47,867,120 36,945,539 ------------ ------------ Income from operations...................................... 2,159,191 407,192 Other income (expense): Interest expense.......................................... (3,709,869) (3,484,178) Rental income............................................. 331,559 314,175 Other, net................................................ (671,641) (489,394) ------------ ------------ Total other expense......................................... (4,049,951) (3,659,397) ------------ ------------ Loss before income taxes.................................... (1,890,760) (3,252,205) Income tax benefit.......................................... 452,000 1,296,300 ------------ ------------ Net loss.................................................... $ (1,438,760) $ (1,955,905) ============ ============
See accompanying notes. F-50 171 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----------- Balance at inception (November 13, 1995)...... $ -- $ -- $ -- $ -- Issuance of Common stock.................... 900 899,100 -- 900,000 Net loss.................................... -- -- (1,955,905) (1,955,905) Accrued dividends on Preferred Stock, Class -- -- (695,504) (695,504) A........................................ ---- -------- ----------- ----------- Balance at September 30, 1996................. 900 899,100 (2,651,409) (1,751,409) Net loss.................................... -- -- (1,438,760) (1,438,760) Accrued dividends on Preferred Stock, Class -- -- (913,087) (913,087) A........................................ ---- -------- ----------- ----------- Balance at September 30, 1997................. $900 $899,100 $(5,003,256) $(4,103,256) ==== ======== =========== ===========
See accompanying notes. F-51 172 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION YEAR ENDED (NOVEMBER 13, 1995) SEPTEMBER 30 TO SEPTEMBER 30 1997 1996 ------------ --------------------- OPERATING ACTIVITIES Net loss................................................... $(1,438,760) $(1,955,905) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization on property and 1,621,564 1,511,167 equipment............................................. Amortization on intangible assets........................ 871,627 668,103 Net loss on disposal of property and equipment........... 28,171 34,409 Deferred income tax...................................... 262,922 (1,230,000) Changes in assets and liabilities, net of effects from purchases of business: Receivables, net...................................... 1,078,569 (11,627,826) Inventories........................................... (1,704,118) 12,678,926 Prepaid expenses...................................... (177,677) 176,190 Accounts payable...................................... 7,750,236 6,477,969 Accrued expenses...................................... 610,022 237,438 Other liabilities/assets.............................. (398,254) (43,962) Income tax payable/receivable......................... 99,146 (456,825) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES............. 8,603,448 6,469,684 INVESTING ACTIVITIES Payments for purchase of property and equipment............ (1,187,836) (1,133,380) Proceeds from sale of equipment............................ 446,036 335,177 Acquisitions of businesses, net of cash acquired........... -- (15,351,554) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES................. (741,800) (16,149,757) FINANCING ACTIVITIES Proceeds from issuance of Common Stock..................... -- 900,000 Proceeds from issuance of Preferred Stock, Class A......... -- 8,100,000 Net payments on revolving credit agreement................. (5,450,217) (481,468) Proceeds from issuance of long-term debt................... -- 4,250,000 Repayment of long-term debt................................ (2,230,136) (1,277,338) Principal paid on capital lease obligations................ (79,288) (57,538) ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (7,759,641) 11,433,656 ----------- ----------- NET INCREASE IN CASH....................................... 102,007 1,753,583 Cash at beginning of period................................ 1,753,583 -- ----------- ----------- Cash at end of period...................................... $ 1,855,590 $ 1,753,583 =========== =========== Interest paid............................................ $ 3,692,913 $ 3,399,150 =========== =========== Income taxes paid........................................ $ -- $ 434,200 =========== ===========
See accompanying notes. F-52 173 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION ITCO Logistics Corporation (formerly known as ITCO Acquisition Company, Inc.) a Delaware corporation was formed on November 13, 1995. At the close of business on November 30, 1995, ITCO Logistics Corporation through its wholly-owned subsidiary ITCO Acquisition Company, Inc. of North Carolina, purchased all the outstanding capital stock of ITCO Holding Company, Inc. ITCO Acquisition Company, Inc. of North Carolina subsequently merged with and changed its name to ITCO Holding Company, Inc. The total cost of acquisition was approximately $21,000,000. The acquisition costs were allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed which totaled approximately $13,500,000. Therefore resulting goodwill of approximately $7,500,000 was recorded. The acquisition was accounted for as a purchase and, accordingly, the results of operations of ITCO Holding Company, Inc. are included in the consolidated operations of the ITCO Logistics Corporation from the date of acquisition. ITCO Logistics Corporation and subsidiaries (collectively referred to as the "Company" throughout) are principally engaged in the business of wholesale distribution of car and truck tires and related accessories generally in the eastern part of the United States. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the ITCO Logistics Corporation and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. ACCOUNTING PERIODS The Company uses a four, four, five week accounting period for each quarter with a 52 week year ending closest to September 30 of each year. Fiscal year 1997 ended September 26, 1997. Fiscal year 1996 was a stub period from inception (November 13, 1995) to year end which ended September 28, 1996. For purposes of financial statement presentation, each fiscal year is described as having ended on September 30. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain 1996 financial statements amounts have been reclassified to conform with 1997 classifications. These reclassifications had no affect on net loss or shareholders' equity as previously reported. ACCOUNTS RECEIVABLE Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of entities comprising the Company's customer base. The Company's trade receivables are with companies in the retail and commercial car and truck tire and accessories lines of business. The Company provides credit in the normal course of business and performs ongoing credit evaluations on its customers' financial condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance F-53 174 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The allowance for doubtful accounts was $664,000 and $758,513 at September 30, 1997 and 1996, respectively, which management believes is adequate to provide for credit loss in the normal course of business. INVENTORIES Inventories consist primarily of tires, custom wheels and accessories and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is stated on the basis of cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is provided over the useful life of the asset or the remaining lease term, whichever is shorter. The estimated useful lives of property and equipment are: Buildings................................................ 20 to 40 years Furniture and equipment.................................. 3 to 5 years Transportation equipment................................. 5 years
INTANGIBLE AND LONG-LIVED ASSETS Intangible assets relate primarily to the acquisition of wholesale tire distribution businesses and costs involved in arranging and obtaining long-term financing. Amortization is provided on a straight-line basis over the estimated useful lives ranging from three to forty years. The carrying values of intangible and long-lived assets are reviewed if facts and circumstances indicate potential impairment of their carrying amount. Any impairment in the carrying value of such assets is recorded when identified. REVENUE RECOGNITION Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete. ADVERTISING COSTS The cost of advertising is expensed as incurred. The Company incurred $627,456 and $291,843 in advertising costs during the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996, respectively. INCOME TAXES ITCO Logistics Corporation and its wholly-owned subsidiaries file a consolidated federal income tax return and separate state income tax returns. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Deferred income taxes (benefits) are provided on temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. F-54 175 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 SUPPLIERS The Company currently buys the majority of its tires from four suppliers. Although there are a limited number of suppliers of particular brands of tires, management believes that other suppliers could adapt to provide similar tires on comparable terms. 2. INVENTORIES Under security agreements with several suppliers, the Company has pledged all inventories purchased from these suppliers as collateral for amounts owed to them. At September 30, 1997 and 1996, the Company owed approximately $68,721,860 and $66,047,000 to these suppliers, respectively, which was collateralized by approximately $33,217,632 and $30,638,000 in inventories for the respective periods. 3. PROPERTY AND EQUIPMENT Property and equipment at September 30 consists of the following:
1997 1996 ----------- ----------- Land........................................................ $ 2,385,891 $ 2,385,891 Buildings................................................... 6,179,593 5,993,596 Furniture and equipment..................................... 2,789,757 2,134,720 Transportation equipment.................................... 1,021,395 2,057,941 Leasehold improvements...................................... 801,594 682,904 Land and buildings under capital leases..................... -- 180,000 ----------- ----------- 13,178,230 13,435,052 Less accumulated depreciation and amortization.............. 2,273,229 1,439,735 ----------- ----------- Property and equipment, net................................. $10,905,001 $11,995,317 =========== ===========
4. INTANGIBLE ASSETS AND ACQUISITIONS Intangible assets consist of the following at September 30:
1997 1996 ----------- ----------- Goodwill.................................................... $15,491,089 $15,308,708 Noncompete agreements....................................... 554,500 554,500 Other....................................................... 55,135 55,135 ----------- ----------- 16,100,724 15,918,343 Accumulated amortization.................................... (1,539,730) (668,103) ----------- ----------- Intangible assets, net...................................... $14,560,994 $15,250,240 =========== ===========
Amortization expense related to these intangible assets totaled $871,627 and $668,103 during the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996, respectively. On January 15, 1996, February 12, 1996, and April 29, 1996, the Company acquired three businesses (Acme, McGriff, and Palmer, respectively), in business combinations accounted for as purchases for an aggregate purchase price of approximately $15,300,000. These businesses are principally engaged in the F-55 176 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 wholesale distribution of car and truck tires located in Florida (Acme), Alabama, Tennessee (McGriff), and Georgia (Palmer). The results of operations of the three acquired businesses are included in the consolidated operations of the Company from the respective dates of acquisition. Goodwill of approximately $5,100,000 associated with the transactions is being amortized using the straight-line method over fifteen years. Assuming the acquisitions had been combined as the beginning of the period, the unaudited consolidated proforma sales and net loss for the ten month period ended September 30, 1996 would have been $307,682,083 and $(2,495,905), respectively. 5. REVOLVING CREDIT AGREEMENT A subsidiary of the Company has a revolving credit agreement which expires December 1, 1998 and permits borrowings up to $50,000,000, of which $32,122,667 and $37,572,884 were outstanding at September 30, 1997 and 1996, respectively. Borrowings under the agreement cannot exceed the sum of 85% of the subsidiary's total outstanding eligible receivable balances, as defined, and 60% of eligible inventories as defined. Interest is payable at the lesser of prime (8.5% at September 30, 1997) plus 1.25% or LIBOR (6% at September 30, 1997) plus 3.25%. All trade accounts receivable and certain eligible inventories as referenced above are pledged as collateral for the loan. The terms of the agreement require the subsidiary to maintain specific levels of minimum book net worth, minimum current ratio, minimum quarterly earnings and applies restrictions on capital expenditures, cash dividends and other capital distributions as defined. (See Note 13) F-56 177 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 6. LONG-TERM DEBT Long-term debt at September 30 consists of the following (ITCO Logistics Corporation is not an obligor on any of the debt):
1997 1996 ----------- ----------- Installment notes payable to suppliers, due through 1998 with interest at 8.25% to 9.5%; collateralized by inventories purchased from these suppliers................ $ 520,758 $ 1,778,282 Installment notes payable to suppliers, due through 1999, bearing no interest; collateralized by inventories purchased from these suppliers (see below)................ 2,750,000 3,081,141 Notes payable to a bank, payable in monthly installments of $4,712, which includes interest at the lesser of prime plus .75% or the adjusted certificate of deposit base rate plus 2.80% but not in excess of 9.85%..................... -- 322,293 Notes payable to a bank, payable in monthly principal and interest installments of $14,878 through November 2002 with a balloon payment due December 2002 for the remaining principal and interest; interest payable at prime (8.5% at September 30, 1997) plus .5%; subject to an interest rate cap of 10.5% and an interest rate floor of 6% through November 1997; collateralized by land and a warehouse with a carrying value of $1,192,179............................ 720,506 823,785 Notes payable to a bank, payable in monthly principal and interest installments of $17,725 through December 2003 with a balloon payment due December 2003 for the remaining principal and interest; interest payable at prime (8.5% at September 30, 1997) plus .75%; subject to an adjustable interest rate cap ranging from 8.5% to 9.75% and an interest rate floor of 5% through December 2000; collateralized by land and a warehouse with a carrying value of $1,864,796....................................... 1,252,087 1,353,423 Notes payable to a bank, payable in monthly principal and interest installments of $8,040 through July 2004 with a balloon payment due July 2004 for the remaining principal and interest; interest payable at prime (8.5% at September 30, 1997) plus .75%; subject to an adjustable interest rate cap ranging from 9.5% to 10.25% through July 1999; collateralized by land and a warehouse with a carrying value of $865,209......................................... 671,367 701,197 Notes payable to a bank, payable in monthly installments of $11,905 through May 1999 with a balloon payment due May 1999 for the remaining principal and interest; interest payable at 8.5%; collateralized by land and a warehouse with a carrying value of $1,189,796....................... 1,049,286 1,099,317 Notes payable to a finance corporation, payable in monthly principal installments of $6,301 plus interest payable at prime (8.5% at September 30, 1997) plus 1.25% through June 2005; secured by an airplane with a carrying value of $582,773.................................................. 395,594 430,296 ----------- ----------- Total....................................................... 7,359,598 9,589,734 Less current maturities..................................... 2,038,463 1,999,754 ----------- ----------- Long-term debt.............................................. $ 5,321,135 $ 7,589,980 =========== ===========
F-57 178 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 As part of the Company's normal operating activities, a subsidiary of the Company obtained a supplier loan which had an aggregate outstanding balance of $2,750,000 at September 30, 1997. As part of the loan agreements, the subsidiary is required to purchase an annual minimum amount of inventory from the supplier in exchange for an interest-free loan. If the subsidiary does not purchase the minimum level of inventory from the supplier, interest will accrue at prime plus 1%. The Company estimates that the fair value of notes payable approximates the carrying value based upon its effective current borrowing rate for debt with similar terms and remaining maturities. Disclosure about fair value of financial instruments is based upon information available to management as of September 30, 1997. Although management is not aware of any factors that would significantly affect the fair value of amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 1997. Principal maturities of long-term debt for years subsequent to September 30, 1997 are as follows: 1998....................................................... $2,038,463 1999....................................................... 2,933,922 2000....................................................... 367,064 2001....................................................... 401,316 2002....................................................... 438,770 Thereafter................................................. 1,180,063 ---------- Total...................................................... $7,359,598 ==========
7. EMPLOYEE BENEFIT PLANS A subsidiary of the Company sponsors the ITCO Holding Company 401(k) Plan (the "401(k) Plan") for substantially all employees. The subsidiary matches 50% of eligible employees' contributions to the 401(k) Plan up to 4% of that individual's salary. The subsidiary also pays certain other expenses of the 401(k) Plan as determined by the Board of Directors. Total subsidiary contributions to the 401(k) Plan amounted to $234,531 and $194,443 for the year ended September 30, 1997 and for the period from inception (November 13 1995) to September 30, 1996, respectively. 8. INCOME TAXES Income tax benefit is comprised of the following at September 30:
1997 1996 --------- ----------- Current benefit: Federal................................................... $(638,400) $ (949,800) State..................................................... (91,600) (152,400) --------- ----------- Total current benefit....................................... (730,000) (1,102,200) Deferred benefit: Federal................................................... 242,300 (166,600) State..................................................... 35,700 (27,500) --------- ----------- Total deferred expense (benefit)............................ 278,000 (194,100) --------- ----------- Total income tax benefit.................................... $(452,000) $(1,296,300) ========= ===========
F-58 179 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 A reconciliation of the federal statutory rate to the pretax loss for the year ended September 30 are as follows:
1997 1996 --------- ---------- Statutory rate.............................................. $ 642,900 $1,105,800 Non-deductible goodwill and other certain expenses.......... (116,400) (91,400) State income tax benefit.................................... 69,000 134,000 Other....................................................... (143,500) 147,900 --------- ---------- Income tax benefit.......................................... $ 452,000 $1,296,300 ========= ==========
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The balances of deferred income tax accounts at September 30, are as follows:
1997 1996 ---------- ---------- Net current deferred income tax assets relate to: Allowance for doubtful accounts........................... $ 271,000 $ 256,800 Inventory capitalization.................................. 675,100 713,700 Accrued expenses.......................................... (27,000) -- Covenant amortization..................................... (23,000) -- Inventory obsolescence.................................... 111,500 -- Self-insurance reserves................................... (106,400) 40,000 Rebate allowance.......................................... 73,000 77,000 Section 481 adjustment.................................... -- (5,000) ---------- ---------- Subtotal.................................................... 974,200 1,082,500 Net operating loss carrybacks/forwards.................... 200,000 1,045,200 ---------- ---------- Total....................................................... $1,174,200 $2,127,700 ========== ========== Net non-current deferred income tax assets (liabilities) relate to: Depreciation.............................................. $ (68,300) $ (186,400) Section 481 adjustment.................................... 87,900 87,900 Deferred gain............................................. (1,900) 19,000 Capital leases............................................ -- 19,500 ---------- ---------- Subtotal.................................................... 17,700 (60,000) Net operating loss carrybacks/forwards.................... 613,200 -- ---------- ---------- Total....................................................... $ 630,900 $ (60,000) ========== ==========
At September 30, 1997, the Company had net operating loss carryforwards of approximately $2 million for income tax purposes. If not used, these carryforwards begin to expire in 2011. 9. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company has various operating lease agreements for warehouse facilities, office equipment, transportation equipment and other facilities. F-59 180 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more, consist of the following at September 30, 1997:
OPERATING LEASES ----------- 1998...................................................... $ 4,703,300 1999...................................................... 4,189,224 2000...................................................... 2,875,090 2001...................................................... 1,846,174 2002...................................................... 1,775,712 Thereafter................................................ 5,146,550 ----------- $20,536,050 ===========
Total rent expense was approximately $5,858,923 and $4,777,600 for the year ended September 30, 1997 and for the period from inception (November 13, 1995) to September 30, 1996, respectively. In March 1997, a subsidiary of the Company entered into a master lease agreement with a major trucking company. The terms of the lease include the leasing of 213 vehicles for lease terms ranging from 24-78 months. Monthly lease payments are based on a fixed charge plus a charge for mileage. The lease is cancelable by either party with a 120 day notice. Rental expense incurred during 1997 from this master lease agreement totaled $842,254. LITIGATION The Company is involved in litigation primarily arising in the normal course of its business. In the opinion of management, the Company's liability, if any, or the Company's recovery, if any, under any pending litigation would not materially affect its financial position or results of operations. 10. PREFERRED STOCK The Company has authorized 50,000 shares of preferred stock, $.01 par value, of which 16,200 have been designated Class A preferred stock. The Company's Class A preferred stock is convertible at the discretion of the Company for 10% Debentures to be used by the Company at the rate of $1,000 principal amount of Debentures for each $1,000 of liquidation preference of Class A preferred stock being exchanged. Cumulative dividends accrue quarterly at the rate of 10% per annum per share and are payable in cash or additional Class A preferred stock at the option of the Company. The Class A preferred stock has a liquidation preference of $1,000 per share and a par value of $0.01 per share. The Class A preferred stock shall be redeemed on or before the earlier to occur of (a) December 1, 2005, or (b) 90 days following a change in control of the Company. The Class A preferred stock may be redeemed at the option of the Company, at any time as a whole or from time to time in part, at a cash redemption price per share equal to $1,000 per share plus accrued and unpaid dividends. The holders of the Class A preferred stock are not entitled to vote on any matter submitted to a vote of stockholders. Cumulative accrued dividends on preferred stock at September 30, 1997 were $1,608,591 and is included in preferred stock. Accrued dividends for the year ended September 30, 1997 and the ten months ended September 30, 1996 were $913,087, or $113 per share and $695,504, or $86 per share, respectively. F-60 181 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 11. SHAREHOLDERS' DEFICIT STOCK APPRECIATION RIGHTS During 1995, 1996 and 1997, the Company granted 11,850 stock appreciation rights ("SARs") to officers and directors of the Company with respect to shares of the Common Stock of ITCO Logistics Corporation ("Parent Company"). The SARs entitle an optionee to surrender unexercised Parent Company SARs for cash equal to the excess of the fair market value of the Parent Company shares over the stated value of the SARs, which is $0.01 per share. The amount payable upon exercise of the SAR's will be paid by the Company. Any Parent Company SARs that are available for awards that are not utilized in a given year will be available for use in subsequent years. The SARs vest 20% per year over five years. Certain restrictions apply to these granted SARs. The vested SARs may be exercised by each individual only upon the occurrence of one of the following events: (i) the consummation of an IPO of the Parent Company Common Stock; (ii) the consummation of a merger of the Parent Company; (iii) the sale of substantially all of the Parent Company's assets; or (iv) the sale by the primary shareholder of the Parent Company of all or any portion of its investment in the Parent Company. No SARs have been exercised as of September 30, 1997. 12. RELATED PARTY TRANSACTIONS On November 30, 1995, a subsidiary the Company entered into a financial advisory agreement with the primary shareholder of the Company whereby the subsidiary agreed to pay the primary shareholder of the Company a quarterly management fee of $75,000 over five years beginning November 30, 1995 as compensation for its continuing financial advisory services. During the year ended September 30, 1997 and the period from inception (November 13, 1995) to September 30, 1996, management fees of approximately $300,000 and $250,000, respectively, (included in selling, general and administrative expenses) were incurred and paid to the primary shareholder of the Company. 13. SUBSEQUENT EVENTS On January 14, 1998, a subsidiary of the Company executed an amendment to the revolving credit agreement described in Note 5. In the amendment, the subsidiary and a financial institution agreed to amend certain financial covenants and defined terms in the revolving credit agreement and extend the term to December 1, 1999, among other items. 14. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT On March 10, 1998, the Company and J. H. Heafner Company, Inc. ("Heafner") entered into a merger agreement. On May 20, 1998, a newly formed subsidiary of Heafner was merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Heafner (the "ITCO Merger"). The total consideration paid to the stockholders of the Company in connection with the ITCO Merger was $18 million in cash plus 1,400,667 newly issued shares of Class B common stock, $.01 par value of Heafner and $1.1 million paid to the holders of the Company's stock appreciation rights. F-61 182 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders ITCO Holding Company and Subsidiaries Wilson, North Carolina We have audited the accompanying consolidated statements of earnings, stockholders' equity and cash flows of ITCO Holding Company and subsidiaries (the "Company") for the year ended September 30, 1995. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and cash flows of ITCO Holding Company and subsidiaries for the year ended September 30, 1995 in conformity with generally accepted accounting principles. /s/ Deloitte and Touche LLP Raleigh, North Carolina December 7, 1995 F-62 183 ITCO HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED SEPTEMBER 30, 1995 SALES....................................................... $294,113,425 Cost of Sales............................................... 257,039,830 ------------ Gross profit.............................................. 37,073,595 Selling and Administrative Expenses (Notes 2, 3 and 6)...... 34,177,603 ------------ Income from Operations...................................... 2,895,992 Other Income (Expenses): Interest expense (Notes 2 and 6).......................... (3,045,366) Interest income........................................... 807,594 Rental income (Note 6).................................... 434,440 Other, net................................................ (343,785) ------------ TOTAL OTHER EXPENSES................................... (2,147,117) ------------ Income Before Taxes......................................... 748,875 Income Taxes (Note 4)....................................... (121,000) ------------ NET INCOME............................................. $ 627,875 ============
See notes to consolidated financial statements. F-63 184 ITCO HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED SEPTEMBER 30, 1995
COMMON RETAINED TOTAL STOCK EARNINGS STOCKHOLDERS' EQUITY ------- ----------- -------------------- Balance, October 1, 1994......................... $32,118 $10,894,835 $10,926,953 Net income....................................... 627,875 627,875 ------- ----------- ----------- Balance, September 30, 1995...................... $32,118 $11,522,710 $11,554,828 ======= =========== ===========
See notes to consolidated financial statements. F-64 185 ITCO HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1995 OPERATING ACTIVITIES: Cash received from customers................................ $289,193,721 Cash paid to suppliers and employees........................ (286,707,646) Interest received........................................... 807,594 Interest paid............................................... (3,001,784) Income taxes paid........................................... (163,319) Net cash paid to stockholders and affiliates................ (20,765) ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 107,801 ------------ INVESTING ACTIVITIES: Payments for purchase of property and equipment............. (868,764) Proceeds from sale of equipment............................. 200,821 ------------ NET CASH USED IN INVESTING ACTIVITIES.................. (667,943) ------------ FINANCING ACTIVITIES: Net increase in short-term borrowings....................... 1,187,061 Proceeds from issuance of long-term debt.................... 1,000,000 Repayment of long-term debt................................. (1,127,681) Principal paid on capital lease obligations................. (192,562) ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 866,818 ------------ NET INCREASE IN CASH........................................ 306,676 Cash, beginning of year..................................... 1,283,848 ------------ Cash, end of year........................................... $ 1,590,524 ============ RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES -- Net income.................................................. $ 627,875 Adjustments to reconcile net income to net cash used in operating activities: Depreciation.............................................. 1,167,109 Provision for deferred income taxes....................... (335,000) Amortization of noncompete agreements..................... 31,223 Amortization of goodwill.................................. 114,624 Net gain on disposals of property and equipment........... (40,497) Changes in assets and liabilities: Receivables, net....................................... (4,583,109) Inventories............................................ (3,561,870) Prepaid expenses....................................... 124,705 Other assets........................................... (969,588) Accounts payable and accrued expenses.................. 7,239,648 Income taxes payable................................... 292,681 ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES.............. $ 107,801 ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995, the Company reached an agreement with a third party to settle a dispute regarding unpaid amounts owed by the Company under a noncompete agreement. As part of the agreement, $125,000 of the unpaid amount was forgiven. Accordingly, the noncompete asset and related liability were decreased by $125,000 with no effect on cash. See notes to consolidated financial statements. F-65 186 ITCO HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 1995 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES BASIS OF PRESENTATION ITCO Holding Company and subsidiaries (the "Company") is principally engaged in the business of wholesale distribution of car and truck tires, custom wheels and related accessories. The accompanying consolidated financial statements include the accounts of the Company and its four wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. SIGNIFICANT ACCOUNTING POLICIES The significant policies are summarized below: a. Cash and Cash Equivalents--For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at September 30, 1995. b. Inventories--Inventories consist primarily of tires, custom wheels and accessories and are stated at the lower of cost (first-in, first-out method) or market. c. Property and Equipment--Depreciation and amortization are provided using the declining-balance and straight-line methods. Amortization of leasehold improvements and assets under capital leases is provided over the useful life of the asset or the remaining lease term, whichever is shorter. The estimated useful lives of property and equipment are: Buildings................................................... 20 to 40 years Furniture and equipment..................................... 3 to 5 years Transportation equipment.................................... 5 years Leasehold improvements...................................... 3 to 10 years Buildings under capital leases.............................. 8 to 20 years Equipment under capital leases.............................. 3 to 5 years
d. Revenue Recognition--Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete. e. Income Taxes--The Company and its wholly-owned subsidiaries file a consolidated federal and separate state income tax returns. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, in 1994. Deferred income taxes (benefits) are provided on temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. f. Fiscal Year--The Company's fiscal year ends on the Saturday closest to the end of September. The financial statements for the year ended September 30, 1995 cover a period of 53 weeks. g. Other Assets--Other assets include intangible assets related to the Company's 1992 acquisition of Luke Floyd Tire and Douglas Duggin Incorporated and the Company's 1995 acquisition of Volume Tire Company, Inc., and are being amortized using the straight line method. The estimated useful lives of these intangible assets are: Goodwill.................................................... 20 years Noncompete agreements....................................... 3 to 5 years
F-66 187 ITCO HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 1995 -- (CONTINUED) 2. RELATED PARTY TRANSACTIONS The Company has lease agreements with two companies, Viking Development Company ("Viking") and TAG Development Company ("TAG"), that are owned by a stockholder/officer of the Company. Such leases provide for the rental of the Company's headquarters, main warehouse and several other warehouses. Rents paid to Viking and TAG on operating leases totaled $982,198 during fiscal year 1995. Principal and interest paid to Viking on capital leases totaled $92,291 in fiscal year 1995. See also Note 6. 3. EMPLOYEE BENEFIT PLANS The Company sponsors the ITCO Holding Company 401(k) Plan (the "Plan") for substantially all employees. The Company matches 50% of eligible employees' contributions to the Plan up to 4% of that individual's salary. The Company also pays certain other expenses of the Plan as determined by the Board of Directors. The Company contributed $183,995 to the Plan and paid $16,946 in administrative expenses for fiscal year ended in 1995. The Company sponsors the ITCO Holding Company Employee Stock Ownership Plan (the "ESOP") a non-contributory employee stock ownership plan for substantially all employees. The Company makes annual contributions as determined by the Board of Directors to a trust for the exclusive benefit of participating employees. The Company also pays certain expenses of the ESOP as determined by the Board of Directors. The Company contributed $94,650 to the ESOP and paid $12,802 in administrative expenses for fiscal year ended in 1995. 4. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The provision for income taxes includes the following: Currently payable: Federal................................................... $ 373,000 State..................................................... 83,000 --------- Total currently payable..................................... 456,000 --------- Deferred expense (benefit): Federal................................................... (292,000) State..................................................... (43,000) --------- Total deferred expense (benefit)............................ (335,000) --------- Total taxes on income....................................... $ 121,000 =========
For the year ended September 30, 1995, reported income tax expense differs from income tax expense that would result from applying the federal statutory rate to pretax income due primarily to state income taxes net of federal benefits, certain expenses not deductible for tax purposes and other miscellaneous adjustments. F-67 188 ITCO HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 1995 -- (CONTINUED) 5. DEFERRED REVENUE Deferred revenue consists primarily of non-compete agreements related to the sale of previous operations and is being amortized over the five year life of the agreements. The Company recognized income on the amortization of the agreements of $48,777 for fiscal year 1995. 6. COMMITMENTS AND CONTINGENCIES CAPITAL AND OPERATING LEASES The Company has various capital and operating lease agreements for warehouse facilities, office equipment, transportation equipment and retail outlets, including several with related parties (Note 2). Rents charged to operations in fiscal year 1995 was $4,003,975. The Company subleases four retail locations to unrelated third parties. These subleases expire from August of 1997 to January of 2000 and provide for minimum sublease rentals of $188,060 in 1996, $182,120 in 1997, $48,950 in 1998, $45,500 in 1999 and $45,500 in 2000. Rental income recorded in fiscal 1995 under these subleases was $434,440. 7. LITIGATION The Company is involved in litigation primarily arising in the normal course of its business. In the opinion of management, the Company's liability, if any, or the Company's recovery, if any, under any pending litigation would not materially affect its financial position or results of operations. 8. SUBSEQUENT EVENTS ITCO Acquisition Company of North Carolina, Inc. ("Merger Subsidiary") was incorporated in the State of North Carolina in November 1995. The Merger Subsidiary is a wholly-owned subsidiary of ITCO Acquisition Company, Inc. ("Purchaser"), a Delaware corporation. On November 30, 1995, the Purchaser acquired all of the outstanding capital stock of the Company by means of a merger of the Merger Subsidiary with and into the Company for an aggregate purchase price of $18,114,834 (the "Acquisition"). Pursuant to the Acquisition, the Company was released as guarantor of all loans on behalf of Viking, TAG and a stockholder/officer of the Company; all of the outstanding capital stock of L&N (an affiliate) was transferred to the Company; and the Company increased its credit facility from $30,000,000 to $50,000,000. The aforementioned stockholder/officer's share of the purchase price was reduced by the fair market value of assets distributed to such stockholder/officer and the amounts receivable by the Company from such stockholder/officer. The total of the purchase price reduction was $1,066,237. Additionally, the Company and either TAG or Viking entered into new long-term real estate leases with respect to nine properties currently leased by the Company. F-68 189 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEET MAY 20, 1998 ASSETS Current assets: Cash...................................................... $ 1,204,497 Receivables: Trade, net of allowance for doubtful accounts of $1,463,486............................................ 42,822,098 Other including supplier rebates....................... 6,093,492 ------------ 50,120,087 Inventories............................................... 52,988,948 Deferred income tax asset................................. 1,558,631 Prepaid expenses.......................................... 740,590 ------------ Total current assets........................................ 105,408,256 Property and equipment, net................................. 10,310,418 Goodwill, net............................................... 13,962,907 Other assets................................................ 1,134,498 Deferred income tax asset................................... 457,991 ------------ Total assets................................................ $131,274,070 ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 86,986,319 Accrued expenses.......................................... 3,555,930 Current maturities of long-term debt...................... 4,828,972 Income tax payable........................................ 1,024,542 ------------ Total current liabilities................................... 96,395,763 Revolving credit agreement.................................. 26,254,556 Long-term debt.............................................. 1,471,858 ------------ Total liabilities........................................... 124,122,177 Commitments and contingencies Preferred stock, Class A, $0.01 par value; $1,000 stated value; 50,000 shares authorized; 8,100 shares issued and outstanding............................................... 10,370,090 Shareholders' deficit: Common stock, $0.01 par value; 250,000 shares authorized; 93,000 shares issued and outstanding................... 930 Additional paid in capital................................ 1,599,070 Accumulated deficit....................................... (4,818,197) ------------ Total shareholders' deficit................................. (3,218,197) ------------ Total liabilities and shareholders' deficit................. $131,274,070 ============
See accompanying notes. F-69 190 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD ENDED EIGHT MONTHS MAY 20, ENDED MAY 31, 1998 1997 ------------ ------------- Sales....................................................... $232,277,464 $225,804,195 Cost of sales............................................... 198,701,340 194,202,890 ------------ ------------ Gross profit................................................ 33,576,124 31,601,305 Selling, general and administrative expenses................ 29,956,972 31,097,067 ------------ ------------ Income (loss) from operations............................... 3,619,152 504,238 Other income (expense): Interest expense.......................................... (2,352,238) (2,344,975) Rental income............................................. 265,137 239,207 Other, net................................................ 125,607 (174,473) ------------ ------------ Total other expense......................................... (1,961,494) (2,280,241) ------------ ------------ Income (loss) before income taxes........................... 1,657,658 (1,776,003) Income tax (expense) benefit................................ (811,100) 700,000 ------------ ------------ Net income (loss)........................................... $ 846,558 $ (1,076,003) ============ ============
See accompanying notes. F-70 191 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----------- Balance at September 30, 1997.............. $900 $ 899,100 $(5,003,256) $(4,103,256) Net income............................... -- -- 846,558 846,558 Issuance of common stock................. 30 699,970 -- 700,000 Accrued dividends on Preferred Stock, Class A............................... -- -- (661,499) (661,499) ---- ---------- ----------- ----------- Balance at May 20, 1998.................... $930 $1,599,070 $(4,818,197) $(3,218,197) ==== ========== =========== ===========
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----------- Balance at September 30, 1996.............. $900 $ 899,100 $(2,651,409) $(1,751,409) Net loss................................. -- -- (1,076,003) (1,076,003) Accrued dividends on Preferred Stock, Class A............................... -- -- (599,286) (599,286) ---- ---------- ----------- ----------- Balance at May 31, 1997.................... $900 $ 899,100 $(4,326,698) $(3,426,698) ==== ========== =========== ===========
See accompanying notes. F-71 192 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS PERIOD ENDED MAY 20, 1998 AND THE EIGHT MONTHS ENDED MAY 31, 1997
PERIOD ENDED EIGHT MONTHS MAY 20, ENDED MAY 31, 1998 1997 ------------ ------------- OPERATING ACTIVITIES Net income (loss)........................................... $ 846,558 $ (1,076,003) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization on property and equipment... 1,017,841 1,105,496 Amortization on intangible assets......................... 598,087 577,684 Non-cash charge (Note 3).................................. 670,000 -- Net (gain) loss on disposal of property and equipment..... (182,903) 55,471 Deferred income tax....................................... (211,500) 13,743 Changes in assets and liabilities: Receivables, net....................................... 1,012,037 4,213,065 Inventories............................................ (9,801,037) 3,733,339 Prepaid expenses....................................... (212,280) (374,594) Accounts payable....................................... 11,839,844 4,812,251 Accrued expenses....................................... 469,526 427,020 Other liabilities/assets............................... (584,574) (482,335) Income tax payable/receivable.......................... 1,024,542 (539,920) ----------- ------------ Net cash provided by operating activities................... 6,486,141 12,465,217 INVESTING ACTIVITIES Expenditures for property and equipment..................... (711,103) (1,032,581) Proceeds from sale of property and equipment................ 470,748 446,036 ----------- ------------ Net cash used in investing activities....................... (240,355) (586,545) FINANCING ACTIVITIES Net payments on revolving credit agreement.................. (5,868,111) (8,374,507) Repayment of long-term debt................................. (1,058,768) (3,316,311) Proceeds from issue of common stock......................... 30,000 -- Principal paid on capital lease obligations................. -- (74,177) ----------- ------------ Net cash used in financing activities....................... (6,896,879) (11,764,995) ----------- ------------ Net increase in cash........................................ (651,093) 113,677 Cash at beginning of period................................. 1,855,590 1,753,583 ----------- ------------ Cash at end of period....................................... $ 1,204,497 $ 1,867,260 =========== ============ Interest paid............................................... $ 2,395,411 $ 2,243,826 =========== ============ Income taxes paid........................................... $ 11,558 $ -- =========== ============
See accompanying notes. F-72 193 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS MAY 20, 1998 1. SIGNIFICANT ACCOUNTING POLICIES Organization ITCO Logistics Corporation and subsidiaries (the "Company") are principally engaged in the business of wholesale distribution of car and truck tires and related accessories generally in the eastern part of the United States. Basis of Presentation The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended May 20, 1998 are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. For further information, refer to the audited consolidated financial statements and notes thereto for the year ended September 30, 1997 included elsewhere in this document. 2. MERGER On March 10, 1998, the Company and J. H. Heafner Company, Inc. ("Heafner") entered into a merger agreement. On May 20, 1998, a newly formed subsidiary of Heafner was merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Heafner (the "ITCO Merger"). The total consideration paid to the stockholders of the Company in connection with the ITCO Merger was $18 million in cash plus 1,400,667 newly issued shares of Class B common stock, $.01 par value of Heafner and $1.1 million paid to the holders of the Company's stock appreciation rights. 3. STOCK PURCHASE AGREEMENT In January 1998, the Company entered into a stock purchase agreement in which two employees acquired 3,000 shares of common stock at $10.00 per share. In accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the transaction resulted in a non-cash charge of approximately $670,000 (which is included in selling, general and administrative expenses), based upon the estimated fair value of the stock at the date of issuance. 4. INCOME TAXES The major contributing factor for the difference between the federal statutory rate and the effective rate for the period ended May 20, 1998 is non-deductible goodwill. F-73 194 INDEPENDENT AUDITORS' REPORT The Board of Directors The Speed Merchant, Inc.: We have audited the accompanying balance sheets of The Speed Merchant, Inc. as of October 31, 1996 and 1997, and the related statements of income and retained earnings and cash flows for each of the years in the three-year period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Speed Merchant, Inc. as of October 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Mountain View, California December 23, 1997, except as to Note 10, which is as of January 21, 1998 F-74 195 THE SPEED MERCHANT, INC. BALANCE SHEETS
OCTOBER 31, ------------------------- APRIL 30, 1996 1997 1998 ----------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash................................................ $ 17,139 841,623 879,380 Short-term investments.............................. 409,184 71,451 8,257 Accounts receivable, net of allowance of $118,910, $251,313, and $234,171, respectively............. 15,250,571 12,509,038 15,327,527 Current portion of related party notes receivable... 447,971 61,658 65,747 Other receivables................................... 434,377 333,221 286,217 Current portion of net investment in direct financing leases................................. 125,749 294,297 317,712 Inventories......................................... 25,242,274 25,582,340 29,891,817 Prepaid expenses.................................... 182,495 174,327 181,021 Deferred income taxes............................... 349,091 413,226 413,226 ----------- ---------- ---------- Total current assets........................ 42,458,851 40,281,181 47,370,904 Net investment in direct financing leases, less current portion..................................... 260,217 397,103 302,052 Property and equipment, net........................... 2,516,602 5,006,583 6,506,136 Related party notes receivable, less current portion............................................. 336,318 782,639 835,104 Other assets.......................................... 151,600 206,653 412,336 ----------- ---------- ---------- Total assets................................ $45,723,588 46,674,159 55,426,532 =========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit...................................... $ 1,405,826 -- 2,719,240 Current portion of trade notes payable.............. 1,034,000 603,110 1,433,566 Current portion of long-term obligations............ 48,852 111,113 209,918 Related party note payable.......................... 115,237 158,151 211,896 Accounts payable.................................... 31,548,656 31,132,210 32,980,159 Accrued liabilities................................. 3,117,556 2,909,348 2,829,131 Income taxes payable................................ 361,867 484,132 540,752 ----------- ---------- ---------- Total current liabilities................... 37,631,994 35,398,064 40,924,662 Trade notes payable, less current portion............. 3,762,000 3,038,890 2,509,990 Long-term obligations, less current portion........... 108,311 1,699,037 2,885,430 Deferred income taxes................................. 204,901 241,766 241,766 ----------- ---------- ---------- Total liabilities........................... 41,707,206 40,377,757 46,561,848 ----------- ---------- ---------- Shareholders' equity: Common stock, $1.00 par value; 1,000,000 shares authorized; 14,118 shares issued and outstanding...................................... 405,869 405,869 405,869 Retained earnings................................... 3,610,513 5,890,533 8,458,815 ----------- ---------- ---------- Total shareholders' equity.................. 4,016,382 6,296,402 8,864,684 ----------- ---------- ---------- Commitments Total liabilities and shareholders' equity.................................... $45,723,588 46,674,159 55,426,532 =========== ========== ==========
See accompanying notes to financial statements. F-75 196 THE SPEED MERCHANT, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
SIX-MONTH PERIODS ENDED YEARS ENDED OCTOBER 31, APRIL 30, ------------------------------------------ ------------------------- 1995 1996 1997 1997 1998 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) Sales........................ $107,683,262 $122,930,224 $122,410,452 $56,588,551 $67,578,573 Cost of goods sold........... 88,363,232 101,355,329 98,289,369 45,294,460 49,013,332 ------------ ------------ ------------ ----------- ----------- Gross profit............... 19,320,030 21,574,895 24,121,083 11,294,091 18,565,241 Operating expenses........... 17,785,957 18,659,917 20,087,450 9,580,158 13,963,007 ------------ ------------ ------------ ----------- ----------- Income from operations..... 1,534,073 2,914,978 4,033,633 1,713,933 4,602,234 Other income (expense): Interest expense, net...... (298,461) (44,628) (155,477) (83,812) (227,275) Other income (expense), net..................... 33,397 (117,459) (67,136) (29,384) (97,358) ------------ ------------ ------------ ----------- ----------- Income before income taxes and minority interest... 1,269,009 2,752,891 3,811,020 1,600,737 4,277,601 Income taxes................. 537,000 1,070,000 1,531,000 637,493 1,709,319 ------------ ------------ ------------ ----------- ----------- Income before minority interest................ 732,009 1,682,891 2,280,020 963,244 2,568,282 Minority interest............ 6,329 2,818 -- -- -- ------------ ------------ ------------ ----------- ----------- Net income................. 725,680 1,680,073 2,280,020 963,244 2,568,282 Retained earnings: Beginning of year/period... 1,204,760 1,930,440 3,610,513 3,610,513 5,890,533 ------------ ------------ ------------ ----------- ----------- End of year/period......... $ 1,930,440 $ 3,610,513 $ 5,890,533 $ 4,573,757 $ 8,458,815 ============ ============ ============ =========== ===========
See accompanying notes to financial statements. F-76 197 THE SPEED MERCHANT, INC. STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED YEARS ENDED OCTOBER 31, APRIL 30, --------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ---------- ---------- ---------- ---------- (UNAUDITED) Cash flows from operating activities: Net income...................................... $ 725,680 1,680,073 2,280,020 963,244 2,568,282 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization................. 337,647 403,807 483,746 203,283 327,796 Allowance for doubtful accounts............... 5,114 48,025 132,403 61,925 (17,142) Minority interest............................. 6,329 2,818 -- -- -- Loss on partnership dissolution............... -- 40,773 -- -- -- Increase in cash value of life insurance...... -- -- (64,615) -- (34,647) Deferred income taxes......................... 95,000 (11,265) (27,270) -- -- Financing revenue received under leases....... -- (24,924) (102,755) (48,165) (37,375) Changes in operating assets and liabilities: Accounts receivable......................... (4,617,842) (3,751,395) 2,609,130 3,108,839 (2,721,842) Other receivables........................... (1,048,046) 755,238 101,156 326,481 75,318 Inventories................................. (1,706,660) (3,177,815) (340,066) 3,168,693 (3,120,347) Prepaid expenses............................ (64,911) (19,178) 8,168 (3,902) 9,005 Accounts payable............................ 3,518,485 7,362,351 (416,446) (4,614,279) 1,816,658 Accrued liabilities......................... 410,791 1,267,692 (208,208) (1,309,177) (395,134) Income taxes payable........................ 114,921 68,439 122,265 (61,692) 56,620 ----------- ---------- ---------- ---------- ---------- Net cash (used in) provided by operating activities.............................. (2,223,492) 4,644,639 4,577,528 1,795,250 (1,472,808) ----------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Change in short-term investments................ -- (409,184) 337,733 384,576 63,194 Purchase of property and equipment.............. (788,369) (224,496) (2,943,468) (2,255,571) (654,048) Purchase of equipment to be leased.............. -- (430,440) (545,578) (330,718) (90,507) Purchase of property and equipment in connection with acquisition.............................. -- -- -- -- (828,104) Purchase of net current assets in connection with acquisition.............................. -- -- -- -- (519,750) Payments received under direct financing leases........................................ -- 69,398 342,899 148,976 199,518 Other assets.................................... (57,422) -- 26,629 19,703 (17,726) ----------- ---------- ---------- ---------- ---------- Net cash used in investing activities..... (845,791) (994,722) (2,781,785) (2,033,034) (1,847,423) ----------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Borrowings (payments) under line of credit...... 2,469,406 (3,013,497) (1,405,826) (368,887) 2,719,240 Borrowings under long-term obligations, net of costs......................................... -- -- 1,687,775 1,610,904 990,000 Payments on long-term obligations............... (436,566) (62,246) (82,114) (24,121) (49,999) Change in related party notes receivable and payable, net.................................. (132,886) (307,915) (17,094) (87,608) (2,809) Payments on trade notes payable................. (932,558) (384,000) (1,154,000) (842,000) (298,444) ----------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities.............................. 967,396 (3,767,658) (971,259) 288,288 3,357,988 ----------- ---------- ---------- ---------- ---------- Net (decrease) increase in cash................... (2,101,887) (117,741) 824,484 50,504 37,757 Cash, beginning of year/period.................... 2,236,767 134,880 17,139 17,139 841,623 ----------- ---------- ---------- ---------- ---------- Cash, end of year/period.......................... $ 134,880 17,139 841,623 67,643 879,380 =========== ========== ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year/period: Interest...................................... $ 304,423 200,969 248,920 112,501 208,717 =========== ========== ========== ========== ========== Income taxes.................................. $ 329,742 1,012,826 1,065,671 699,185 708,188 =========== ========== ========== ========== ========== Noncash investing and financing activities: Property and equipment acquired under capital leases...................................... $ 132,498 -- 15,326 -- 269,840 =========== ========== ========== ========== ========== Inventories received in exchange for trade notes payable............................... $ 4,350,000 -- -- -- 600,000 =========== ========== ========== ========== ========== Property and equipment acquired through assumption of long-term obligation.......... -- -- -- -- 75,357 =========== ========== ========== ========== ==========
See accompanying notes to financial statements. F-77 198 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995, 1996, AND 1997 (INFORMATION AS OF APRIL 30, 1998 AND FOR THE SIX-MONTH PERIODS ENDED APRIL 30, 1997 AND 1998, IS UNAUDITED.) (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization The Speed Merchant, Inc. (the Company), a California corporation, is a specialty wholesaler and retailer of automobile tires, parts, and accessories located in California and Arizona. The Company operates under the names of Competition Parts Warehouse, Performance Leasing, Economy Imports, Main Auto, Wheel King, and The Speed Merchant. The 1995 and 1996 financial statements include the Company's majority interest in The Speed Merchant of San Jose, a California partnership. The partnership was dissolved during 1996. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Revenue Recognition The Company recognizes revenue upon shipment of product. Short-Term Investments Short-term investments consist of money market funds, certificates of deposit, U.S. Treasury notes, and corporate equity securities. The Company classifies all instruments with original maturities in excess of three months as short-term investments. All securities held by the Company are classified as trading securities and are recorded at fair value. Unrealized holding gains and losses are included in earnings. Dividends and interest income are recognized when earned. Inventories Merchandise inventories are stated at the lower of cost (first in, first out) or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of 5 to 30 years. Leasehold improvements and equipment under capital leases are amortized over the shorter of the lease term or estimated useful life of the asset. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-78 199 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk The Company offers credit terms to customers after an evaluation of a customer's financial condition. These customers are located throughout California and Arizona and no one customer accounts for a substantial part of sales or receivables. The Company generally requires collateral for all large customers. Unaudited Balances The accompanying unaudited financial statements include all adjustments (consisting of only normal recurring adjustments) that management considers necessary for a fair presentation of the financial position and results of operations as of the date and for the periods indicated. (2) RELATED PARTY NOTES RECEIVABLE AND NOTE PAYABLE The related party notes receivable consisted of amounts that are due in monthly installments over 10 years, bear interest at 6.5%, and are secured. The related party note payable consisted of an amount that is payable on demand and bears interest at 10%. (3) NET INVESTMENT IN DIRECT FINANCING LEASES The Company leases equipment to customers under direct financing leases, which are carried at the gross investment in the leases less unearned income. Unearned income is recognized in such a manner as to produce a constant periodic rate of return on the net investment in the direct financing lease. The following lists the components of the net investment in direct financing leases:
OCTOBER 31, --------------------- APRIL 30, 1996 1997 1998 --------- -------- --------- Total minimum lease payments to be received....... $ 495,381 854,677 753,812 Less unearned income.............................. (109,415) (163,277) (134,048) --------- -------- -------- Net investment in direct financing leases......... $ 385,966 691,400 619,764 ========= ======== ========
As of October 31, 1997, minimum lease payments to be received for each of the five succeeding fiscal years are as follows: $363,797 in 1998; $280,821 in 1999; $146,434 in 2000; $54,232 in 2001; and $9,393 in 2002. F-79 200 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (4) PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
OCTOBER 31, ------------------------- APRIL 30, 1996 1997 1998 ----------- ---------- ---------- Land.......................................... $ -- 455,000 455,000 Building and improvements..................... 43,655 1,793,847 1,741,471 Equipment..................................... 1,725,767 1,870,297 3,230,186 Leasehold improvements........................ 1,118,615 1,122,483 1,261,690 Office equipment, furniture, and fixtures..... 657,991 1,015,860 1,306,257 Transportation equipment...................... 373,988 519,327 678,766 Equipment held for lease...................... -- 71,985 -- ----------- ---------- ---------- 3,920,016 6,848,799 8,673,370 Accumulated depreciation and amortization..... (1,403,414) (1,842,216) (2,167,234) ----------- ---------- ---------- $ 2,516,602 5,006,583 6,506,136 =========== ========== ==========
Included in property and equipment as of October 31, 1996 and 1997, and April 30, 1998, is $257,376, $269,443, and $539,283, respectively, of equipment under capital leases. Accumulated amortization related to this equipment was $69,497, $106,612, and $132,569 as of October 31, 1996 and 1997, and April 30, 1998, respectively. (5) LINE OF CREDIT The Company has an $8,000,000 line of credit with no borrowings as of October 31, 1997. Advances on the line of credit bear interest at the prime rate (8.50% as of October 31, 1997) plus 0.25%. Substantially all assets of the Company are pledged as collateral for the line of credit. (6) LONG-TERM OBLIGATIONS/TRADE NOTES PAYABLE Long-term obligations consisted of the following:
OCTOBER 31, --------------------- APRIL 30, 1996 1997 1998 -------- --------- --------- Note payable to bank; monthly installments of $15,756 including interest at 8.5% to March 2012; secured by property....................... $ -- 1,568,377 1,539,999 Note payable to bank; monthly installments of $1,483 including interest at 8.875% to October 2027; secured by property....................... -- 119,776 119,776 Note payable to financial institution; monthly installments of $16,667 plus variable interest at the 30-day commercial paper rate plus 2.7% to April 2003; secured by property................. -- -- 966,667 Other notes payable............................... -- -- 124,636 Capital lease obligations (see Note 7)............ 157,163 121,997 344,270 -------- --------- --------- 157,163 1,810,150 3,095,348 Less current portion.............................. 48,852 111,113 209,918 -------- --------- --------- $108,311 1,699,037 2,885,430 ======== ========= =========
F-80 201 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Trade notes payable include notes to various suppliers for inventory purchases. These notes bear interest at rates ranging from the prime rate to 120% of the prime rate. The interest is forgiven provided the Company meets certain future minimum purchase requirements. Future minimum payments pursuant to these agreements are as follows:
FISCAL YEAR ENDING OCTOBER 31, - ------------------ 1998...................................... $ 603,110 1999...................................... 1,718,890 2000...................................... 180,000 2001...................................... 180,000 2002...................................... 180,000 Thereafter................................ 780,000 ---------- Total trade notes payable................. 3,642,000 Less current portion of trade notes payable................................. 603,110 ---------- $3,038,890 ==========
(7) LEASE OBLIGATIONS The Company leases warehouses, retail facilities, and vehicles under long-term operating leases that expire at various dates through fiscal 2005. The Company also leases certain equipment under capital leases. Future minimum lease payments are as follows:
FISCAL YEAR ENDING OCTOBER 31, CAPITAL LEASES OPERATING LEASES ------------------ -------------- ---------------- 1998........................................... $ 64,390 2,193,943 1999........................................... 48,063 1,617,955 2000........................................... 22,791 1,340,938 2001........................................... 3,892 1,094,728 2002........................................... 1,297 849,518 Thereafter..................................... -- 615,156 -------- ---------- Total.......................................... 140,433 $7,712,238 ========== Less amount representing interest.............. 18,436 -------- Present value of capital lease payments........ 121,997 Less current portion of capital lease obligations................................. 53,131 -------- $ 68,866 ========
Rent expense was $3,486,000, $3,517,000, $3,491,000, and $2,121,000 for the years ended October 31, 1995, 1996, and 1997, and for the six-month period ended April 30, 1998, respectively. F-81 202 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAXES The provision for income taxes consisted of the following:
YEARS ENDED OCTOBER 31, ---------------------------------- 1995 1996 1997 -------- --------- --------- Current: Federal......................................... $350,000 817,265 1,204,170 State........................................... 92,000 264,000 354,100 Deferred: Federal......................................... 65,000 (7,265) (24,170) State........................................... 30,000 (4,000) (3,100) -------- --------- --------- Total................................... $537,000 1,070,000 1,531,000 ======== ========= =========
Income tax expense differed from the amounts computed by applying the federal income tax rate of 34% to pretax income as the result of the following:
YEARS ENDED OCTOBER 31, ---------------------------------- 1995 1996 1997 -------- --------- --------- Computed "expected" tax expense................... $431,463 935,983 1,295,747 State income taxes, net of federal income tax benefit......................................... 72,789 169,696 202,268 Other............................................. 32,748 (35,679) 32,985 -------- --------- --------- $537,000 1,070,000 1,531,000 ======== ========= =========
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities as of October 31, 1996 and 1997, are presented below:
1996 1997 --------- -------- Deferred tax assets: Reserves and accruals not currently deductible............ $ 104,231 172,401 Inventories -- costs inventoried for tax purposes......... 155,027 121,490 State income taxes........................................ 89,833 119,335 --------- -------- Total gross deferred tax assets................... 349,091 413,226 Deferred tax liabilities: Property and equipment -- depreciation differences........ (204,901) (241,766) --------- -------- Net deferred tax assets........................... $ 144,190 171,460 ========= ========
A valuation allowance against the deferred tax assets was not required as management believes it is more likely than not the Company will generate sufficient taxable income to realize the deferred tax assets. (9) EMPLOYEE BENEFIT PLAN The Company has a 401(k) tax deferred savings plan to which participants may contribute up to $9,500 per year. The Company does not make contributions to the plan. (10) SUBSEQUENT EVENT On January 21, 1998, the Company acquired certain assets and liabilities of Tire Outlet's 10 retail stores in Arizona for approximately $898,000. The acquired net assets primarily consisted of receivables, inventory, property and equipment and certain liabilities. The acquisition was accounted for using the purchase method of accounting. F-82 203 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (11) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) In April 1998, the Company acquired certain assets of Tires One retail stores in California and Arizona for approximately $750,000. The acquired assets consisted primarily of inventory and property and equipment. The acquisition was accounted for using the purchase method of accounting and the operating results subsequent to the acquisition date are included in the statement of income. On May 20, 1998, the Company sold all of its common stock for $45 million. F-83 204 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER OR THE SUBSIDIARY GUARANTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER OR THE SUBSIDIARY GUARANTORS SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 3 Summary............................... 4 Risk Factors.......................... 15 The Transactions...................... 21 Use of Proceeds....................... 24 The Exchange Offer.................... 25 Capitalization........................ 33 Unaudited Pro Forma Condensed Combined Financial Data...................... 34 Selected Historical Financial Data.... 43 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 51 Business.............................. 62 Management............................ 73 Principal Stockholders................ 80 Certain Relationships and Related Transactions........................ 82 Description of New Credit Facility.... 84 Description of the New Notes.......... 86 Certain U.S. Federal Income Tax Considerations...................... 113 Plan of Distribution.................. 116 Legal Matters......................... 117 Experts............................... 117 Index to Consolidated Financial Statements.......................... F-1
UNTIL , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES HELD FOR THEIR OWN ACCOUNT. SEE "PLAN OF DISTRIBUTION." - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ THE J.H. HEAFNER COMPANY, INC. OFFER TO EXCHANGE ITS 10% SENIOR NOTES DUE 2008 FOR ANY AND ALL OF ITS OUTSTANDING 10% SENIOR NOTES DUE 2008 ----------------- PROSPECTUS ----------------- - ------------------------------------------------------ - ------------------------------------------------------ 205 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The J.H. Heafner Company, Inc., ITCO Holding Company, Inc. and ITCO Tire Company The Issuer, ITCO Holding Company, Inc. ("ITCO Holding") and ITCO Tire Company ("ITCO Tire") are North Carolina corporations. Part 5 of the North Carolina Business Corporation Act (the "NCBCA") permits a North Carolina corporation to indemnify any individual who was or is a defendant or respondent, or is threatened to be made a defendant or respondent, to any threatened, pending, or completed civil, criminal, administrative or investigative action, suit or proceeding, whether formal or informal, by reason of the fact that such individual is or was a director, officer, employee or agent of the corporation, or is or was serving as such with respect to another corporation or entity at the request of the corporation, provided that such person acted in good faith and in a manner such person reasonably believed to be (i) in the case of conduct in such individual's official capacity with the corporation, in the best interests of the corporation and (ii) in all other cases, not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, without reasonable cause to believe the conduct was unlawful. A corporation may not indemnify such individual where the action or suit is by or in the right of the corporation and such individual is adjudged liable to the corporation or in any other action, suit or proceeding where such individual is charged with, and found liable of, receiving improper personal benefit. Each of the Issuer and ITCO Tire, in their respective Articles of Incorporation, and ITCO Holding, in its By-laws, has provided that its directors and officers will be indemnified and held harmless to the fullest extent provided by the NCBCA. Section 55-8-56 of the NCBCA also permits a North Carolina corporation to purchase insurance for the benefit of any person who is or was a director, officer, employee or agent of the corporation against any liability incurred by such person, whether or not the corporation would have the power to indemnify such person against such liability. Oliver & Winston, Inc., The Speed Merchant, Inc. and Phoenix Racing, Inc. Winston, Speed Merchant and Phoenix Racing, Inc. ("Phoenix") are California corporations. Section 317 of the California General Corporation Law ("CGCL") permits a California corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving as such with respect to the predecessor corporation or another corporation or entity at the request of the corporation, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, without reasonable cause to believe the conduct was unlawful. Where the action or suit is by or in the right of the corporation, the corporation may not indemnify such person for any claim, issue or matter as to which the person shall have been adjudged liable to the corporation, except as otherwise determined by the court in which the action or suit was brought. Each of Winston, Speed Merchant and Phoenix has provided in its By-laws that its directors and officers will be indemnified and held harmless against all expenses, liability and loss (including attorneys' fees, judgments, fines, and other amounts actually and reasonably incurred in connection with the proceeding) to the extent provided by the CGCL, except that Winston and Speed Merchant have provided in their By-laws that such directors and officers shall not be indemnified for amounts paid in settling or otherwise disposing of a pending or threatened action, whether with or without court approval. The By-laws of Phoenix allow amounts paid in settling or otherwise disposing of a pending or threatened action to be paid as provided by the CGCL. Winston's Articles of Incorporation allow Winston to provide indemnification to its directors and officers for breach of duty of such directors and officers, though by-law provisions or individual agreements with such directors and officers, in excess of the indemnification otherwise permitted by Section 317 of the CGCL, subject to the limits of Section 204 of the CGCL. II-1 206 Section 317(i) of the CGCL also permits a California corporation to purchase insurance for the benefit of any person who is or was a director, officer, employee, or agent of the corporation against any liability incurred by such person, whether or not the corporation would have the power to indemnify such person against such liability. The By-laws of each of Winston and Speed Merchant specifically permit each corporation to purchase such insurance. ITCO Logistics Corporation ITCO Logistics is a Delaware corporation. Section 145 of the Delaware General Corporation Law ("DGCL") permits a Delaware corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving as such with respect to another corporation or entity at the request of the corporation, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, without reasonable cause to believe the conduct was unlawful. Where the action or suit is by or in the right of the corporation, the corporation may not indemnify such person for any claim, issue or matter as to which the person shall have been adjudged liable to the corporation, except as otherwise determined by the Delaware Court of Chancery or the court in which the action or suit was brought. ITCO Logistics has provided in its By-laws that its directors and officers will be indemnified and held harmless against all expenses, liability and loss (including attorneys' fees, judgments, fines and amounts paid in settlement) to the fullest extent provided by the law as it exists or may hereafter be amended. Section 145 of the DGCL and the By-laws of ITCO Logistics also permit ITCO Logistics to purchase insurance for the benefit of any person who is or was a director, officer, employee, or agent of the corporation against any liability incurred by such person, whether or not the corporation would have the power to indemnify such person against such liability. ITCO Tire Company of Georgia ITCO Tire Company of Georgia ("ITCO Georgia") is a Virginia corporation. Sections 13.1-697 and 13.1-702 of the Virginia Stock Corporation Act ("VSCA") permits a Virginia corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed civil, criminal, administrative or investigative action, suit or proceeding, whether formal or informal, by reason of the fact that such person is or was a director, officer, partner, trustee, employee or agent of the corporation, or is or was serving as such with respect to another corporation or entity at the request of the corporation, provided that such person acted in good faith and in a manner such person reasonably believed to be, with respect to conduct in the course of an official capacity with the corporation, in or, in all other cases, not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, without reasonable cause to believe the conduct was unlawful. Where the action or suit is by or in the right of the corporation, the corporation may not indemnify such person for any claim, issue or matter as to which the person shall have been adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. ITCO Georgia has provided in its By-laws that its directors and officers will be indemnified and held harmless against all expenses, liability and loss (including counsel fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) to the fullest extent provided by the law as it exists or may hereafter be amended. Section 13.1-703 of the VSCA and the By-laws of ITCO Georgia also permit ITCO Georgia to purchase insurance for the benefit of any person who is or was a director, officer, employee, or agent of the corporation against any liability incurred by such person, whether or not the corporation would have the power to indemnify such person against such liability under sections 13.1-697 or 12.1-698. II-2 207 Liability Insurance; Indemnification Under Employment Agreements The Company maintains directors and officers liability insurance policies, in such amounts as it deems reasonable, against certain liabilities that may be asserted against, or incurred by, the directors and officers of each registrant in their capacities as directors or officers of such corporation, including liabilities under federal and state securities laws. Each of the Named Executive Officers is indemnified by the Company against certain liabilities that may be asserted against, or incurred by, such persons in their capacities as employees pursuant to employment agreements with the Company more fully described in the Prospectus that forms a part of this Registration Statement. II-3 208 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: 3.1 Second Amended and Restated Articles of Incorporation of The J.H. Heafner Company, Inc. (the "Company") 3.2 By-laws of the Company 3.3 Articles of Incorporation of Oliver & Winston, Inc. 3.4 By-laws of Oliver & Winston, Inc. 3.5 Certificate of Incorporation of ITCO Logistics Corporation 3.6 By-laws of ITCO Logistics Corporation 3.7 Articles of Incorporation of ITCO Holding Company, Inc. 3.8 By-laws of ITCO Holding Company, Inc. 3.9 Articles of Incorporation of ITCO Tire Company 3.10 By-laws of ITCO Tire Company 3.11 Articles of Incorporation of ITCO Tire Company of Georgia* 3.12 By-laws of ITCO Tire Company of Georgia 3.13 Articles of Incorporation of The Speed Merchant, Inc. 3.14 By-laws of The Speed Merchant, Inc. 3.15 Articles of Incorporation of Phoenix Racing, Inc. 3.16 By-laws of Phoenix Racing, Inc. 4.1 Indenture, dated as of May 15, 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. (collectively, the "Subsidiary Guarantors") 4.2 Form of Global Note (attached as Exhibit A to the Indenture filed as Exhibit 4.1 to the Registration Statement) 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes* 9.1 Voting Trust Agreement, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones, as Stockholders, and Ann Heafner Gaither and William H. Gaither, as Trustees 10.1 Amended and Restated Loan and Security Agreement, dated as of May 20, 1998, among the Company, Oliver & Winston, Inc., ITCO Holding Company, Inc. and The Speed Merchant, Inc., as Borrowers, BankBoston, N.A., as Agent (the 'Agent'), Fleet Capital Corporation and First Union National Bank as Co-Agents (the "Co-Agents") and the various financial institutions from time to time party thereto, as Lenders 10.2 Letter, dated May 20, 1998, from the Company, Oliver & Winston, Inc., ITCO Holding Company, Inc., The Speed Merchant, Inc., ITCO Tire Company, ITCO Tire Company of Georgia and Phoenix Racing, Inc. to the Agent and the Co-Agents 10.3 Guaranties, dated as of May 20, 1998, by each of ITCO Tire Company, ITCO Tire Company of Georgia, ITCO Logistics Corporation and Phoenix Racing, Inc. in favor of the Agent 10.4 Subsidiary Security Agreements, dated as of May 20, 1998, between the Agent and each of ITCO Tire Company, ITCO Tire Company of Georgia, ITCO Logistics Corporation and Phoenix Racing, Inc. 10.5 Senior Subordinated Note and Warrant Purchase Agreement, dated as of May 7, 1997, by and among The J. H. Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P. 10.6 Registration Rights Agreement, dated as of May 7, 1997, by and among The J. H. Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P. 10.7 Warrant No. 2 exercisable for 1,034,000 shares of Class A Common Stock in the name of The 1818 Mezzanine Fund, L.P.
II-4 209 10.8 Securities Purchase Agreement, dated as of May 7, 1997, between The J. H. Heafner Company, Inc. and The Kelly-Springfield Tire and Rubber Company 10.9 Agreement and Plan of Merger, dated March 10, 1998, among the Company, ITCO Merger Corporation, ITCO Logistics Corporation and Wingate Partners II, L.P., Armistead Burwell, Jr., William E. Berry, Richard P. Johnson, Leon R. Ellin, Wingate Affiliates II, L.P. and Callier Investment Company (the "ITCO Stockholders") 10.10 Class B Stockholder Agreement, dated as of May 20, 1998, among the Company and the ITCO Stockholders 10.11 Class B Registration Rights Agreement, dated as of May 20, 1998, among the Company and the ITCO Stockholders 10.12 Escrow Agreement, dated as of May 20, 1998, among the Company, the ITCO Stockholders and the Chase Manhattan Bank, as escrow agent 10.13 Stock Purchase Agreement, dated as of March 11, 1998, among the Company, Arthur C. Soares and Ray C. Barney 10.14 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 Agent") 10.15 Letter of Credit, dated as of May 20, 1998, issued to First Union National Bank, as CPW Escrow Agent. 10.16 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the shareholders of Oliver & Winston, Inc. 10.17 Guaranty, dated March 31, 1997, of the Company* 10.18 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998, by and between Michelin North America, Inc. and the Company* 10.19 The J.H. Heafner Company 1997 Stock Option Plan (the "Stock Option Plan") 10.20 Form of Stock Option Agreement (incentive stock options) 10.21 Form of Stockholder Agreement (pursuant to the Stock Option Plan) 10.22 Stockholders' Agreement, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones. 10.23 The J.H. Heafner Company 1997 Restricted Stock Plan 10.24 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders 10.25 Employment and Severance Agreements between the Company and William H. Gaither, J. Michael Gaither, Donald C. Roof, Daniel K. Brown and Thomas J. Bonburg* 10.26 Employment Agreement, dated as of May 20, 1998, between the Company and Richard P. Johnson 10.27 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C. Soares 10.28 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc. and Ray C. Barney 10.29 Lease Agreement, dated October 1, 1992, by and between Carolyn Heafner, Ann H. Gaither, Albert C. Gaither and the Company, as amended 10.30 Lease, dated August 1, 1988, by and between Ann Heafner Gaither and the Company, as amended 10.31 Lease by and between Ann H. Gaither and the Company* 11.1 Statement re: Computation of Per Share Earnings* 12.1 Statement re: Computation of Ratios 21.1 Chart of Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Deloitte & Touche LLP
II-5 210 23.3 Consent of Ernst & Young LLP 23.4 Consent of KPMG Peat Marwick LLP 23.5 Consent of Arthur Andersen LLP 23.6 Consent of Howard, Smith & Levin LLP* 24.1 Power of Attorney of Directors and Officers (set forth on signature pages of this Registration Statement) 25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes 27.1 Financial Data Schedules (Filed as Item 21(b))* 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Exchange Agent Agreement
(b) Financial Data Schedules* - --------------- * To be filed by amendment. ITEM 22. UNDERTAKINGS. Each undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933 (the "Securities Act"), each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (4) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrants pursuant to the provisions described under Item 20 or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue; (5) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request; and (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-6 211 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. THE J. H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director, President and Chief August 18, 1998 - ------------------------------------------------ Executive Officer William H. Gaither /s/ DONALD C. ROOF Senior Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ VICTORIA B. JACKSON Director August 18, 1998 - ------------------------------------------------ Victoria B. Jackson /s/ JOSEPH P. DONLAN Director August 18, 1998 - ------------------------------------------------ Joseph P. Donlan /s/ WILLIAM M. WILCOX, JR. Director August 18, 1998 - ------------------------------------------------ William M. Wilcox, Jr. /s/ V. EDWARD EASTERLING, JR. Director August 18, 1998 - ------------------------------------------------ V. Edward Easterling, Jr.
II-7 212 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. OLIVER & WINSTON, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ THOMAS J. BONBURG Director, President and Chief August 18, 1998 - ------------------------------------------------ Operating Officer Thomas J. Bonburg /s/ DONALD C. ROOF Vice President and Treasurer August 18, 1998 - ------------------------------------------------ Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither
II-8 213 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. ITCO LOGISTICS CORPORATION By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ RICHARD P. JOHNSON President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Richard P. Johnson /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-9 214 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. ITCO HOLDING COMPANY, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ RICHARD P. JOHNSON President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Richard P. Johnson /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-10 215 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. ITCO TIRE COMPANY By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ RICHARD P. JOHNSON President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Richard P. Johnson /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-11 216 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. ITCO TIRE COMPANY OF GEORGIA By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ RICHARD P. JOHNSON President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Richard P. Johnson /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-12 217 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. THE SPEED MERCHANT, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ ARTHUR C. SOARES President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Arthur C. Soares /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-13 218 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, State of North Carolina, on August 18, 1998. PHOENIX RACING, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------ Name: William H. Gaither Title: Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of William H. Gaither, Donald C. Roof and J. Michael Gaither and each of them, with full power to act alone, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ WILLIAM H. GAITHER Director and Chief Executive August 18, 1998 - ------------------------------------------------ Officer William H. Gaither /s/ ARTHUR C. SOARES President and Chief Operating August 18, 1998 - ------------------------------------------------ Officer Arthur C. Soares /s/ DONALD C. ROOF Director, Vice President, Chief August 18, 1998 - ------------------------------------------------ Financial Officer and Treasurer Donald C. Roof /s/ ANN H. GAITHER Chairperson of the Board August 18, 1998 - ------------------------------------------------ Ann H. Gaither /s/ J. MICHAEL GAITHER Director, Vice President, General August 18, 1998 - ------------------------------------------------ Counsel and Secretary J. Michael Gaither
II-14 219 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 3.1 Second Amended and Restated Articles of Incorporation of The J.H. Heafner Company, Inc. (the "Company") 3.2 By-laws of the Company 3.3 Articles of Incorporation of Oliver & Winston, Inc. 3.4 By-laws of Oliver & Winston, Inc. 3.5 Certificate of Incorporation of ITCO Logistics Corporation 3.6 By-laws of ITCO Logistics Corporation 3.7 Articles of Incorporation of ITCO Holding Company, Inc. 3.8 By-laws of ITCO Holding Company, Inc. 3.9 Articles of Incorporation of ITCO Tire Company 3.10 By-laws of ITCO Tire Company 3.11 Articles of Incorporation of ITCO Tire Company of Georgia* 3.12 By-laws of ITCO Tire Company of Georgia 3.13 Articles of Incorporation of The Speed Merchant, Inc. 3.14 By-laws of The Speed Merchant, Inc. 3.15 Articles of Incorporation of Phoenix Racing, Inc. 3.16 By-laws of Phoenix Racing, Inc. 4.1 Indenture, dated as of May 15, 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. (collectively, the "Subsidiary Guarantors") 4.2 Form of Global Note (attached as Exhibit A to the Indenture filed as Exhibit 4.1 to the Registration Statement) 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes* 9.1 Voting Trust Agreement, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones, as Stockholders, and Ann Heafner Gaither and William H. Gaither, as Trustees 10.1 Amended and Restated Loan and Security Agreement, dated as of May 20, 1998, among the Company, Oliver & Winston, Inc., ITCO Holding Company, Inc. and The Speed Merchant, Inc., as Borrowers, BankBoston, N.A., as Agent (the 'Agent'), Fleet Capital Corporation and First Union National Bank as Co-Agents (the "Co-Agents") and the various financial institutions from time to time party thereto, as Lenders 10.2 Letter, dated May 20, 1998, from the Company, Oliver & Winston, Inc., ITCO Holding Company, Inc., The Speed Merchant, Inc., ITCO Tire Company, ITCO Tire Company of Georgia and Phoenix Racing, Inc. to the Agent and the Co-Agents 10.3 Guaranties, dated as of May 20, 1998, by each of ITCO Tire Company, ITCO Tire Company of Georgia, ITCO Logistics Corporation and Phoenix Racing, Inc. in favor of the Agent 10.4 Subsidiary Security Agreements, dated as of May 20, 1998, between the Agent and each of ITCO Tire Company, ITCO Tire Company of Georgia, ITCO Logistics Corporation and Phoenix Racing, Inc.
II-15 220
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 10.5 Senior Subordinated Note and Warrant Purchase Agreement, dated as of May 7, 1997, by and among The J. H. Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P. 10.6 Registration Rights Agreement, dated as of May 7, 1997, by and among The J. H. Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P. 10.7 Warrant No. 2 exercisable for 1,034,000 shares of Class A Common Stock in the name of The 1818 Mezzanine Fund, L.P. 10.8 Securities Purchase Agreement, dated as of May 7, 1997, between The J. H. Heafner Company, Inc. and The Kelly-Springfield Tire and Rubber Company 10.9 Agreement and Plan of Merger, dated March 10, 1998, among the Company, ITCO Merger Corporation, ITCO Logistics Corporation and Wingate Partners II, L.P., Armistead Burwell, Jr., William E. Berry, Richard P. Johnson, Leon R. Ellin, Wingate Affiliates II, L.P. and Callier Investment Company (the "ITCO Stockholders") 10.10 Class B Stockholder Agreement, dated as of May 20, 1998, among the Company and the ITCO Stockholders 10.11 Class B Registration Rights Agreement, dated as of May 20, 1998, among the Company and the ITCO Stockholders 10.12 Escrow Agreement, dated as of May 20, 1998, among the Company, the ITCO Stockholders and the Chase Manhattan Bank, as escrow agent 10.13 Stock Purchase Agreement, dated as of March 11, 1998, among the Company, Arthur C. Soares and Ray C. Barney 10.14 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 Agent") 10.15 Letter of Credit, dated as of May 20, 1998, issued to First Union National Bank, as CPW Escrow Agent. 10.16 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the shareholders of Oliver & Winston, Inc. 10.17 Guaranty, dated March 31, 1997, of the Company* 10.18 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998, by and between Michelin North America, Inc. and the Company* 10.19 The J.H. Heafner Company 1997 Stock Option Plan (the "Stock Option Plan") 10.20 Form of Stock Option Agreement (incentive stock options) 10.21 Form of Stockholder Agreement (pursuant to the Stock Option Plan) 10.22 Stockholders' Agreement, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones. 10.23 The J.H. Heafner Company 1997 Restricted Stock Plan 10.24 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders 10.25 Employment and Severance Agreements between the Company and William H. Gaither, J. Michael Gaither, Donald C. Roof, Daniel K. Brown and Thomas J. Bonburg* 10.26 Employment Agreement, dated as of May 20, 1998, between the Company and Richard P. Johnson 10.27 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C. Soares
II-16 221
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 10.28 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc. and Ray C. Barney 10.29 Lease Agreement, dated October 1, 1992, by and between Carolyn Heafner, Ann H. Gaither, Albert C. Gaither and the Company, as amended 10.30 Lease, dated August 1, 1988, by and between Ann Heafner Gaither and the Company, as amended 10.31 Lease by and between Ann H. Gaither and the Company* 11.1 Statement re: Computation of Per Share Earnings* 12.1 Statement re: Computation of Ratios 21.1 Chart of Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of KPMG Peat Marwick LLP 23.5 Consent of Arthur Andersen LLP 23.6 Consent of Howard, Smith & Levin LLP* 24.1 Power of Attorney of Directors and Officers (set forth on signature pages of this Registration Statement) 25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes 27.1 Financial Data Schedules (Filed as Item 21(b))* 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Exchange Agent Agreement
(b) Financial Data Schedules* - --------------- * To be filed by amendment. II-17 EX-3.1 2 SECOND AMENDED AND RESTATED ARTICLES OF INCORP. 1 Exhibit 3.1 C-0066792 FILED 2:26 PM MAY 12 1998 EFFECTIVE_________________ ELAINE F MARSHALL SECRETARY OF STATE NORTH CAROLINA ARTICLES OF RESTATEMENT OF THE J.H. HEAFNER COMPANY, INC. Pursuant to Section 55-10-07 of the General Statutes of North Carolina, the undersigned corporation hereby submits the following for the purpose of amending and restating its Articles of Incorporation: 1. The name of the Corporation is The J.H. Heafner Company, Inc. 2. The text of the Second Amended and Restated Articles of Incorporation is attached hereto. 3. These Second Amended and Restated Articles of Incorporation contain amendments requiring approval by the holders of the Corporation's common stock, and such approval was obtained as required by Chapter 55 of the General Statutes of North Carolina. IN WITNESS WHEREOF, this statement is signed by the Corporation this 11 day of May, 1998. THE J.H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER ---------------------------------- William H. Gaither President and Chief Executive Officer 2 THE J. H. HEAFNER COMPANY, INC. SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION These Second Amended and Restated Articles of Incorporation of The J. H. Heafner Company, Inc. (the "Corporation") have been duly adopted by its board of directors (the "Board of Directors") and its stockholders in accordance with Sections 55-10-03 and 55-10-07 of the North Carolina Business Corporation Act (as the same may amended, supplemented or repealed from time to time, the "Act"). The original Articles of Incorporation of the Corporation were filed with the Secretary of State of the State of North Carolina on February 27, 1962, were last amended on May 2, 1997 and are hereby amended and restated in their entirety as follows: ARTICLE 1. CORPORATE NAME. The name of the Corporation is The J. H. Heafner Company, Inc. ARTICLE 2. REGISTERED AGENT. The address, including street, number, city, and county, of the registered office of the Corporation in the State of North Carolina is 814 East Main Street in the Town of Lincolnton, County of Lincoln, and the name of the registered agent of the Corporation in the State of North Carolina at such address is William H. Gaither. ARTICLE 3. PURPOSE. The purpose of the Corporation is to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which a corporation may be organized under the Act. ARTICLE 4. CAPITAL STOCK. Section 4.1. Shares Authorized. The total number of shares of capital stock which the Corporation shall have authority to issue is (i) 30,000,000 shares of Common Stock, par value of $.01 per share (the "Common Stock"), and (ii) 11,500 shares of Preferred Stock with a par value of $.01 per share (the "Preferred Stock"). Section 4.2. Common Stock. The Common Stock shall have such rights, powers and privileges as provided in these Articles, in any amendment to these Articles and under applicable law. Of the 30,000,000 shares of Common Stock authorized for issuance by the Corporation, 10,000,000 shall initially be designated Class A Common Stock (the "Class A Common Stock") and 20,000,000 shall initially be designated Class B Common Stock (the "Class B Common Stock"). Section 4.3. Preferred Stock. The Preferred Stock shall have such voting powers, designations, preferences, such other relative, participating, optional and other special rights, and such qualifications, limitations and restrictions as provided in these Articles and in any amendment to these Articles. Of the 11,500 shares of Preferred Stock authorized for issuance by the Corporation, 7,000 shares shall initially be designated Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and 4,500 shares shall initially be designated Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Kelly Preferred Stock"). The stated value of the Series A Preferred Stock (the "Series A Liquidation Preference") shall be $1,000.00 per share. The stated value of the Series B Preferred Stock (the "Series B Liquidation Preference") 3 shall initially be $1,000.00 per share and shall be adjusted from time to time as provided in Section 6.3. Section 4.4. Rank of Capital Stock. With respect to dividend rights and other rights upon liquidation, dissolution or winding up of the Corporation, (i) the Series A Preferred Stock and the Series B Preferred Stock shall rank on a parity with each other and senior to the Common Stock and (ii) the Class A Common Stock and the Class B Common Stock shall rank on a parity with each other. Other classes or series of capital stock may, subject to the provisions of these Articles and applicable law, be authorized by the Board of Directors that rank (as to payment of dividends or distribution of assets upon liquidation, dissolution or winding up) senior to ("Senior Stock"), on a parity with ("Parity Stock") or junior to ("Junior Stock") other classes or series of capital stock. Section 4.5. No Preemptive Rights. No holder of shares of capital stock of the Corporation shall have preemptive rights to acquire unissued shares of capital stock of the Corporation under these Articles. Section 4.6. Reclassification. Upon the effectiveness of these Articles, all shares of Common Stock outstanding immediately prior to the effectiveness of these Articles shall be automatically reclassified as Class A Common Stock. ARTICLE 5. COMMON STOCK. Section 5.1. Voting Rights. (a) Each outstanding share of Class A Common Stock shall be entitled to vote on each matter on which the stockholders of the Corporation shall be entitled to vote, and each holder of Class A Common Stock shall be entitled to twenty votes for each share of such stock held by such holder. (b) Each outstanding share of Class B Common Stock shall be entitled to vote on each matter on which the stockholders of the Corporation shall be entitled to vote, and each holder of Class B Common Stock shall be entitled to one vote for each share of such stock held by such holder. (c) Except as otherwise provided by the Act, the holders of Class A Common Stock and the holders of Class B Common Stock shall vote together as a single class on all matters on which the stockholders of the Corporation shall be entitled to vote. Section 5.2. Dividends and Distributions. The holders of shares of Class A Common Stock and the holders of Class B Common Stock shall be entitled to receive dividends or other distributions, which must be identical for each of the Class A Common Stock and the Class B Common Stock, out of the assets of the Corporation legally available therefor when, as and if declared by the Board of Directors. Section 5.3. Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, holders of Common Stock shall be entitled to share ratably in the net assets of the Corporation remaining after payment or provision for payment of the debts and liabilities of the Corporation and all amounts payable to holders of Senior Stock. Section 5.4. Automatic Conversion of Class B Stock. Each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock without the requirement of any further action on the part of the Corporation or its stockholders upon the earliest to occur of (i) an initial public offering of the Class A Common Stock in connection with -2- 4 a registration of the Class A Common Stock under the Securities Act of 1933, as amended, (ii) the occurrence of any condition or event which results in the acceleration of the maturity of the indebtedness evidenced by the Debt Documents (as defined below in Section 6.6), and (iii) an order for relief under Title 11 of the United States Code is entered against the Company. Section 5.6. Other Rights. Except as otherwise required by the Act or as otherwise provided in these Articles, each share of Class A Common Stock and each share of Class B Common Stock shall have identical powers, rights and privileges. ARTICLE 6. KELLY PREFERRED STOCK. The Kelly Preferred Stock shall have the following voting powers, preferences and other rights, qualifications, limitations and restrictions: Section 6.1. Series A Dividends and Distributions. (a) Holders of shares of Series A Preferred Stock, in preference to the holders of shares of Common Stock and any shares of other capital stock of the Corporation other than shares of Parity Stock or Senior Stock with respect to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, cumulative cash dividends (the "4% Series A Dividends") on the Series A Liquidation Preference of such shares at an annual rate of 4.0%; provided that, if as of December 31, 1997 (i) the Corporation and its subsidiaries are not ordering all of their respective requirements of "Winston" brand tires from The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company (together with its affiliates, "Kelly-Springfield"), and (ii) Kelly-Springfield is otherwise ready, willing and able to supply the Corporation and its subsidiaries with such "Winston" brand tires in accordance with the terms set forth in the Supply Agreement (as defined below in Section 6.5(c)), then, beginning immediately thereafter and continuing until such time as the earlier of (1) the Corporation and its affiliates are ordering all of such "Winston" brand tires from Kelly-Springfield and (2) the Kelly Preferred Stock has been redeemed in full, the annual rate of the 4% Series A Dividends shall be at the greater of (x) 4% and (y) 120% of the Prime Rate (as defined below in Section 6.1(b)) (the "Adjusted Series A Dividend Rate"). The 4% Series A Dividends shall be calculated on the basis of a 360-day year consisting of twelve 30-day months, and shall accrue and be payable, in immediately available funds, due on the last Business Day of each calendar month (each a "4% Dividend Monthly Payment Date"). Payment of 4% Series A Dividends on shares of Series A Preferred Stock shall commence on the first 4% Dividend Monthly Payment Date following the date of original issue of such shares (the "Series A Issue Date"). The first payment of 4% Series A Dividends on such shares shall be in an amount equal to the product of (i) the quotient obtained by dividing (1) the product of the Series A Liquidation Preference of such shares and 4.0% by (2) 12 and (ii) the quotient obtained by dividing (x) the number of days from and including the Series A Issue Date up to and excluding the initial 4% Dividend Monthly Payment Date by (y) 30. If holders of shares of Series A Preferred Stock are entitled to receive 4% Series A Dividends on a date other than a 4% Dividend Monthly Payment Date (a "4% Dividend Special Payment Date"), such payment shall be in an amount equal to the product of (i) the quotient obtained by dividing (1) the product of the Series A Liquidation Preference of such shares and 4.0% or the Adjusted Series A Dividend Rate, as applicable, by (2) 12 and (ii) the quotient obtained by dividing (x) the number of days from and including the date of such immediately preceding 4% Dividend Monthly Payment Date up to and excluding the 4% Dividend Special Payment Date by (y) 30. All other payments of 4% Series A Dividends shall accrue from and including the immediately preceding 4% Dividend Monthly Payment Date or 4% Dividend Special Payment Date, as applicable, to but excluding the following 4% Dividend Monthly Payment Date or 4% Dividend Special Payment Date, as applicable. "Business Day" means any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia are authorized to close. -3- 5 (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:
------------------------------------------------------------------ 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 ------------------------------------------------------------------
-4- 6
------------------------------------------------------------------ Additional Dividend Payment Date Units Purchased Applicable Rate ------------------------------------------------------------------ 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 ------------------------------------------------------------------ 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 ------------------------------------------------------------------
-5- 7
------------------------------------------------------------------ Additional Dividend Payment Date Units Purchased Applicable Rate ------------------------------------------------------------------ January 2008 Less than 1,505,426 Standard Rate 1,505,427-1,642,281 4.0 1,642,282-1,779,139 3.0 1,779,140-1,915,996 2.0 1,915,997-2,052,852 1.0 2,052,853 or more 0.0 ------------------------------------------------------------------
provided that, in no event shall the Applicable Rate be higher than the Standard Rate. "Standard Rate" means the excess, if any, of (x) the Prime Rate over (y) 4%. "Prime Rate" means the rate of interest publicly announced from time to time by BankBoston, N.A., at its head office at 100 Federal Street, Boston, Massachusetts as its "base" rate as in effect on the Business Day immediately preceding the applicable dividend payment date. "Units Purchased" means, for any Additional Dividend Payment Date, the net number of tires (other than "Monarch" brand tires) purchased by the Corporation and its subsidiaries from Kelly-Springfield during the calendar year immediately preceding such Additional Dividend Payment Date, which number of tires shall not include an amount equal to the sum of (x) 250,000 and (y) an amount equal to the number of premium tires purchased by the Corporation and its affiliates from Kelly-Springfield in 1996. (c) If, as of the close of business on any 4% Dividend Monthly Payment Date, there is a 4% Series A Dividend Arrearage (as hereinafter defined), an additional dividend (the "4% Series A Makewhole Dividend") shall accrue on each share of the Series A Preferred Stock for the period from and including such 4% Dividend Monthly Payment Date to the earlier of (x) the date on which such 4% Series A Dividend Arrearage is paid in full and (y) the next succeeding 4% Dividend Monthly Payment Date, in an amount equal to the product of (i) the Prime Rate (calculated for such period in accordance with Section 6.1(a)) and (ii) the amount of such 4% Series A Dividend Arrearage as of such 4% Dividend Monthly Payment Date. "4% Series A Dividend Arrearage" means, with respect to each share of Series A Preferred Stock, as of any 4% Dividend Monthly Payment Date, the excess, if any, of (i) all 4% Series A Dividends accrued to (but excluding) such 4% Dividend Monthly Payment Date on such share over (ii) all 4% Series A Dividends actually paid with respect to such share on or before the close of business on such 4% Dividend Monthly Payment Date. (d) If, as of the close of business on any Additional Dividend Payment Date, there is a Series A Additional Dividend Arrearage (as hereinafter defined), an additional dividend (the "Additional Series A Makewhole Dividend") shall accrue on each share of the Series A Preferred Stock for the period from and including such Additional Dividend Payment Date to the earlier of (x) the date on which such Additional Series A Dividend Arrearage is paid in full and (y) the next succeeding Additional Dividend Payment Date, in an amount equal to the product of (i) the Prime Rate and (ii) the amount of such Additional Series A Dividend Arrearage as of such Additional Dividend Payment Date. "Additional Series A Dividend Arrearage" means, with respect to each share of Series A Preferred Stock, as of any Additional Dividend Payment Date, the excess, if any, of (i) all Series A Additional Dividends accrued to (but excluding) such Additional Dividend Payment Date on such share over (ii) all Series A Additional Dividends actually paid with respect to such share on or before the close of business on such Additional Dividend Payment Date. -6- 8 (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 of 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"). (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. -7- 9 (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. 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 -8- 10 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 of the holders of Kelly Preferred Stock shall terminate subject to revesting in the event of each and every subsequent event of the character indicated above. "Specified Number" means a number of directors equal to the number required so that the holders of Kelly Preferred Stock will have the right to elect, voting separately as a single class, a majority of the Board of Directors at any time. (d) (i) The right of holders of shares of Kelly Preferred Stock to take any action as provided in Section 6.4(c) may be exercised at any annual meeting of stockholders or at a special meeting of holders of shares of Kelly Preferred Stock held for such purpose as hereinafter provided or at any adjournment thereof, or by the written consent, delivered to the Secretary of the Corporation, of the holders of the minimum number of shares required to take such action, which shall be a majority of the outstanding shares of Kelly Preferred Stock unless otherwise required by law. So long as such right to vote continues (and unless such right has been exercised by written consent of the minimum number of shares required to take such action), the President of the Company may call, and upon the written request of holders of record of at least 10% of the outstanding shares of Kelly Preferred Stock, addressed to the Secretary of the Company at the principal office of the Company, shall call, a special meeting of the holders of shares entitled to vote as provided herein. Such meeting shall be held within 30 days after delivery of such request to the Secretary, at the place and upon the notice provided by law and in the by-laws of the Company for the holding of meetings of stockholders. (ii) At each meeting of stockholders at which the holders of shares of Kelly Preferred Stock shall have the right, voting separately as a single class, to elect the directors of the Corporation as provided in Section 6.4(c), the presence in person or by proxy of the holders of record of a majority of the total number of shares of Kelly Preferred Stock then -9- 11 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 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 -10- 12 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). (b) Subject to the restrictions contained in Section 6.6, on the last business day of June 2007 (the "Series B Fixed Redemption Date"), the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all of the outstanding shares of Series B Preferred Stock at a price per share equal to the sum of (1) 100% of the Series B Liquidation Preference and (2) an amount per share equal to all accrued and unpaid Series B Dividends and Series B Makewhole Dividends on such shares, whether or not declared or payable, to the Series B Fixed Redemption Date, in immediately available funds. (c) Subject to the restrictions contained in Section 6.6, no later than 30 Business Days after the termination of the Supply Agreement (the "Supply Agreement") to be entered into by and between the Corporation and Kelly-Springfield in connection with Kelly-Springfield's purchase of the Kelly Preferred Stock (the "Kelly Mandatory Redemption Date"), the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all of the shares of Kelly Preferred Stock outstanding on the Kelly Mandatory Redemption Date at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends and Additional Series A Makewhole Dividends or Series B Dividends and Series B Makewhole Dividends, as applicable, whether or not declared or payable, to the Kelly Mandatory Redemption Date, in immediately available funds. (d) Subject to the restrictions contained in Section 6.6, if, at any time after the Series A Issue Date a Change of Control (as defined below) occurs, the Corporation shall, within 10 Business Days after such occurrence, send notice of such occurrence to the holders of Kelly Preferred Stock. If, within 10 Business Days of such notice, (i) the holders of all (but not less than all) of the outstanding shares of Kelly Preferred Stock send notice to the Corporation specifying that such holders thereby request that the Corporation redeem all of the outstanding shares of Kelly Preferred Stock held by each such holder and (ii) Kelly-Springfield agrees in writing to the termination of the Supply Agreement, the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all such shares within 30 Business Days of the Corporation's receipt of all such requests (the "Change of Control Redemption Date") at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends and Additional Series A Makewhole Dividends or Series B Dividends and Series B Makewhole Dividends, as applicable, whether or not declared or payable, to the Change of Control Redemption Date, in immediately available funds. "Change of Control" means such time as (i) any person or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") other than the Principal Shareholders (as defined below), Family Members (as defined below) or -11- 13 Kelly-Springfield is or becomes the beneficial owner, directly or indirectly, of outstanding shares of capital stock of the Corporation, entitling such person or persons to exercise 50% or more of the total votes entitled to be cast at a regular or special meeting, or by action by written consent, of stockholders of the Corporation (the term "beneficial owner" shall be determined in accordance with Rule 13d-3, promulgated by the Securities and Exchange Commission under the Exchange Act), (ii) a majority of the Board of Directors shall consist of persons other than Continuing Directors (the term "Continuing Director" shall mean any member of the Board of Directors on the Series A Issue Date, any member of the Board of Directors elected by Kelly-Springfield pursuant to Section 6.4(c) of these Articles and any other member of the Board of Directors who shall be recommended or elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors), (iii) the stockholders of the Corporation shall have approved a recapitalization, reorganization, merger, consolidation or similar transaction, in each case, with respect to which all or substantially all the persons who were the respective beneficial owners of the outstanding shares of capital stock of the Corporation immediately prior to such recapitalization, reorganization, merger, consolidation or similar transaction will beneficially own, directly or indirectly, less than 50% of the combined voting power of the then outstanding shares of capital stock of the Corporation resulting from such recapitalization, reorganization, merger consolidation or similar transaction; or (iv) the stockholders of the Corporation shall have approved the sale or other disposition of all or substantially all the assets of the Corporation in one transaction or in a series of related transactions to a person not owning or controlling, or any entity not owned or controlled by the holders of, directly or indirectly, 50% or more of the combined voting power of the outstanding shares of capital stock of the Corporation immediately prior to such disposition. "Family Member" means (i) a member of a Principal Shareholder's family, which shall include her or his ancestors, spouse, siblings, descendants or spouses (or surviving spouse) of descendants, or (ii) a trust, corporation, partnership or other entity, all of the beneficial interests in which shall be held by a Principal Shareholder or one or more persons described in clause (i); provided, that during the period any such trust, corporation, partnership or other entity holds any right, title or interest in any Common Stock, no Person other than such Principal Shareholder or one or more Family Members of such Principal Shareholder of the type listed in clause (i) may be or become beneficiaries, stockholders or limited or general partners or owners thereof. "Principal Shareholders" means Ann Heafner Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones. (e) Subject to the restrictions contained in Section 6.6, at any time after the Series A Issue Date, the Corporation may, in its sole discretion, redeem all (but not less than all) of the outstanding shares of Kelly Preferred Stock, out of the assets of the Corporation legally available therefor, at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends 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: -12- 14
----------------------------------------------------------------------- Period Applicable Premium ----------------------------------------------------------------------- Series A Issue Date through first anniversary 1.22 ----------------------------------------------------------------------- After first anniversary through second anniversary 1.20 ----------------------------------------------------------------------- After second anniversary through third anniversary 1.18 ----------------------------------------------------------------------- After third anniversary through fourth anniversary 1.15 ----------------------------------------------------------------------- After fourth anniversary through fifth anniversary 1.10 ----------------------------------------------------------------------- After fifth anniversary 1.00 -----------------------------------------------------------------------
(g) Notice of any redemption of shares of Kelly Preferred Stock pursuant to this Section 6.5 shall be mailed at least 10, but not more than 30, days prior to the date fixed for redemption to each holder of shares of Kelly Preferred Stock to be redeemed, at such holder's address as it appears on the transfer books of the Corporation. Such notice shall include instructions for the surrender of the Kelly Preferred Stock to be redeemed and the receipt of payment therefor. In order to facilitate the redemption of shares of Kelly Preferred Stock pursuant to this Section 6.5, the Board of Directors may fix a record date for the determination of shares of Kelly Preferred Stock to be redeemed, or may cause the transfer books of the Corporation for the Kelly Preferred Stock to be closed, not more than 30 days or less than 10 days prior to the date fixed for such redemption. (h) Notice of redemption having been given as aforesaid, upon the date fixed for redemption in respect of shares of Kelly Preferred Stock to be redeemed pursuant to this Section 6.5, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, from and after the date of redemption designated in the notice of redemption, (i) the shares of Kelly Preferred Stock represented thereby shall no longer be deemed outstanding, (ii) the rights to receive dividends thereon shall cease to accrue, and (iii) all rights of the holders of shares of Kelly Preferred Stock to be redeemed shall cease and terminate, excepting only the right to receive the applicable redemption price. Section 6.6. Limitations on Mandatory Redemption and Dividends. Notwithstanding anything to the contrary in these Articles, so long as any amounts are outstanding under any Debt Documents (as defined below) or any commitments to lend under the Debt Documents have not been terminated, the Corporation shall not make payment in respect of any redemption permitted or otherwise required by Section 6.5, or declare, make or pay any dividend or distribution in respect of any shares of Kelly Preferred Stock if any Event of Default (as defined in the Debt Documents) or default under any of the Debt Documents or any event which, upon notice or lapse of time, or both, would constitute an Event of Default has occurred and is continuing or would result therefrom and has not been cured or waived in writing by the requisite vote of the holders of the indebtedness represented by the Debt Documents. "Debt Documents" means the Loan and Security Agreement, dated as of the Series A Issue Date between the Corporation, Oliver & Winston, Inc., the financial institutions party thereto and BankBoston, N.A., as agent, and the Senior Subordinated Note and Warrant Purchase Agreement, dated the Series A Issue Date, by and among the Corporation and The 1818 Mezzanine Fund, L.P., and the notes, mortgages, security documents, guaranties and other agreements entered into in connection therewith (each as amended, modified, supplemented and/or restated from time to time in accordance with its terms, including any replacement agreement therefor and any refinancing of the debt incurred thereunder, which refinancing may result in a greater principal amount outstanding in connection therewith). -13- 15 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 North Carolina, 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. 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 -14- 16 the day on which notice is given, or if notice is waived, at the close of business on the Business Day next preceding the day on which the meeting is held. ARTICLE 7. CORPORATE EXISTENCE. The Corporation is to have perpetual existence. ARTICLE 8. CORPORATE GOVERNANCE. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation, and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: Section 8.1. Management. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-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 North Carolina 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 55-10-22 of the Act, have the power to adopt, amend, or repeal the By-laws of the Corporation. Section 8.4. Indemnification of Directors. To the fullest extent permitted by the Act, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. No amendment, modification or repeal of this Section 8.4 shall adversely affect any right or protection of a director that exists at the time of such amendment, modification or repeal. Section 8.5. Indemnification of Authorized Persons. The Corporation shall, to the fullest extent permitted by the Act, indemnify any and all persons whom it shall have power to indemnify thereunder from and against any and all of the expenses, liabilities, or other matters referred to in or covered by the Act and may advance funds to such persons in respect of such expenses, liabilities or other matters. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors, and administrators of such a person. -15- 17 IN WITNESS WHEREOF, the Corporation has caused these Second Amended and Restated Articles of Incorporation to be signed in its name by its President and Chief Executive Officer on May 11, 1998. /s/ WILLIAM H. GAITHER ----------------------------- William H. Gaither President and Chief Executive Officer -16- EX-3.2 3 BY-LAWS OF THE COMPANY 1 EXHIBIT 3.2 BY-LAWS of Heafner Tire Company, Inc. ARTICLE I. OFFICES: Section 1. Principal Office: The principal office of the Corporation shall be located at Lincolnton, North Carolina, but the corporation may have offices at such other places, either within or without the State of North Carolina, as the Board of Directors may from time to time determine, or as the affairs of the corporation may require. ARTICLE II. MEETING OF SHAREHOLDERS Section 1. Place of Meetings: All meetings of shareholders shall be held at the principal office of the corporation, or at such other place, either within or without the state of North Carolina, as shall be designated in the notice of the meeting or agreed upon by a majority of the shareholders entitled to vote thereat. Section 2. Annual Meetings: The annual meeting of shareholders shall be held at 10:00 am. on the 1st day in March of each year, if not a legal holiday, but if a legal holiday, then on the next day following not a legal holiday, for the purpose of electing directors of the corporation and for the transaction of such other business as may be properly brought before the meeting. Section 3. Substitute Annual Meeting: If the annual meeting shall not be held on the day designated by these by-laws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings: Special meetings of the shareholders may be called at any time by the President, Secretary or Board of Directors of the corporation, or by any shareholder pursuant to the written request of the holders of not less than one-tenth of all the shares entitled to vote at the meeting. Section 5. Notice of Meetings: Written or printed notice stating the time and place of the meeting shall be delivered not less than 2 By-Laws Page 2 ten or more than fifty days before the date thereof, either personally or by mail, by or at the direction of the President, the Secretary or other person calling the meeting, to each shareholder of record entitled to vote at such meeting. In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat. In the case of a special meeting the notice of meeting shall specifically state the purpose or purposes for which the meeting is called. When a meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for less than thirty days in any one adjournment, it is not necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken. Section 6. Voting Lists: At least ten days before each meeting of shareholders the Secretary of the corporation shall prepare an alphabetical list of the corporation shareholders entitled to vote at such meetings, with the address of and number of shares held by each, which list shall be kept on file at the registered office of the corporation for a period of ten days prior to such meeting, and shall be subject to inspection by any shareholder at any time during the usual business hours. Section 7. Quorum: The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of shareholders. Section 8. Informal Action by Shareholders: Any action which may be taken at a meeting of the shareholders maybe taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the persons who would be entitled to vote upon such action at a meeting, and filed with the Secretary of the corporation to be kept in the Corporate Minute Book. 3 By-laws Page 3 ARTICLE III. DIRECTORS Section 1. General Powers: The business and affairs of the Corporation shall be managed by the Board of Directors or by such Executive Committees as the Board may establish pursuant to these by-laws. Section 2. Number, Term and Qualifications: The minimum number of Directors of the corporation shall be three. Each director shall hold office until his death, resignation, retirement, removal, disqualification, or his successor is elected and qualified. Directors need not be residents of the State of North Carolina or shareholders of the corporation. Section 3. Election of Directors: Except as provided in Section 4 of this article, the directors shall be elected at the annual meeting of shareholders; and these persons who receive the highest number of votes shall be deemed to have been elected. If any shareholder so demands, election of Directors shall be by ballot. Section 4. Vacancies: A vacancy occurring in the Board of Directors may be filled by a majority of the remaining Directors; though such remainder be less than a quorum, or by the sole remaining Director; but a vacancy created by an increase in the authorized number of Directors shall be filled only by election at an annual meeting or at a special meeting of shareholders called for that purpose. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Section 5. Chairman: There may be a Chairman of the Board of Directors elected by the directors from their number at any meeting of the Board. The Chairman shall preside at all meetings of the Board of Directors and perform such other duties as may be directed by the Board. Section 6. Executive Committee: The Board of Directors may, by resolution adopted by a majority of the number of directors fixed by these by-laws, designate two or more directors to constitute an executive committee, which committee to the extent provided in such resolution shall have and may exercise all of the authority of the Board of Directors in the management of the Corporation. 4 By-laws Page 4 ARTICLE IV. MEETING OF DIRECTORS Section 1. Regular Meetings: A regular meeting of that Board of Directors shall be held immediately after, and at the same place, as the annual meeting of shareholders. In addition, the Board of Directors may provide, by resolution, the time and place, either within or without the State of North Carolina, for the holding of additional regular meetings. Section 2. Special Meetings: Special meetings of the Board of Directors may be called by or at the request of the President of the company of any two directors. Such meetings may be held either within or without the State of North Carolina. Section 3. Notice of Meetings: Regular meetings of the Board of Directors may be held without notice. The person or persons calling a special meeting of the Board of Directors shall, at least two days before the meeting, give notice thereof by any usual means of communication. Such notice need not specify the purpose for which the meeting is called. Attendance by a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called. Section 4. Quorum: A majority of the directors fixed by these bylaws shall constitute a quorum for the transaction of business at my meeting of the Board of Directors. Section 5. Manner of Action: Except as otherwise provided in this section, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The vote of a majority of the number of directors fixed by these bylaws shall be required to adopt a resolution constituting an executive committee. The vote of a majority of the directors then holding office shall be required to adopt, amend or repeal, a by-law, or to adopt a resolution dissolving the corporation without action by the shareholders. Vacancies in the Board of Directors may be filled as provided in Article III, Section 4 of these bylaws. Section 6. Informal Action by Directors: Action taken by a majority of the directors without a meeting is nevertheless Board action if written consent to the action in question is signed by all the directors and filed with the minutes of the proceedings of the Board, whether done before or after the action so taken. 5 By-laws Page 5 ARTICLE V. OFFICERS Section 1. Number: The officers of the Corporation shall consist of President, a Secretary, a Treasurer, and such Vice-Presidents, Assistant Secretaries, Assistant Treasurers and other officers as the Board of Directors may from time to time elect. Any two or more offices may be held by the same person, except the office of President and Secretary. Section 2. Election and Term: The officers of the corporation shall be elected by the Board of Directors. Such elections may be held at any regular or special meeting of the Board. Each officer shall hold office until his death, resignation, retirement, removal, disqualification, or his successor is elected and qualifies. Section 3. Removal: Any officer or agent elected or appointed by the Board of Directors may be removed by the Board with or without cause; but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. Compensation: The compensation of all officers of the corporation shall be fixed by the Board of Directors. Section 5. President: The President shall be the principal executive officer of the corporation, and, subject to the control of the Board of Directors, shall supervise and control the management of the corporation in accordance with these by-laws. He shall, when present, preside at all meetings of shareholders. He shall sign, with any other proper officer, certificates for shares of the corporation and any deeds, mortgages, bonds, contracts or other instruments which may be lawfully executed on behalf of the corporation except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be delegated by the Board of Directors to some other officer or agent; and, in general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. Section 6. Vice-Presidents: The Vice-Presidents in the order of their election, unless otherwise determined by the Board of Directors, shall in the absence of or disability of the President, perform the duties and exercise the powers of that office. In addition, they shall perform such other duties and have such other powers as the Board of Directors shall prescribe. 6 By-laws Page 6 Section 7. Secretary: The Secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and directors. He shall give all notices required by law and by these by-laws. He shall have general charge of the corporate books and records and of the corporate seal, and he shall affix the corporate seal to any lawfully executed instrument requiring it. He shall have general charge of the stock transfer books of the corporation and shall keep, at the registered or principal office of the corporation, a record of shareholders showing the name and address of each shareholder and the number of shares and class of the shares held by each. He shall sign such instruments as say require his signature, and, in general, shall perform all duties incident to the office of the Secretary and such other duties as may be assigned from time to time by the President or by the Board of Directors. Section 8. Treasurer: The Treasurer shall have custody of all funds and securities belonging to the Corporation and shall receive, deposit or disburse the same under the direction of the Board of Directors. He shall keep full and accurate accounts of the finances of the Corporation in books especially provided for that purpose; and he shall cause a true statement of its assets and liabilities as of the close of each fiscal year and of the results of its operations and of changes in surplus for such fiscal year, all in reasonable detail, including particulars as to convertible securities then outstanding, to be made and filed at the registered or principal office of the corporation within four months after the end of such fiscal year. The statement so filed shall be kept available for inspection by any shareholder for a period of ten years; and the Treasurer shall mail or otherwise deliver a copy of the latest such statement to any shareholder upon his written request therefor. The treasurer shall, in general, perform all duties incident to this office and such other duties as may be assigned to him from time to time by the President or by the Board of Directors. Section 9. Assistant Secretaries and Treasurers: The Assistant Secretaries and Assistant Treasurers shall, in the absence or disability of the Secretary or the Treasurer, respectively, perform the duties and exercise the powers of these offices, and they shall, in general, perform such other duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or by the Board of Directors. 7 By-laws Page 7 ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares: Certificates representing shares of the corporation shall be issued, in such form as the Board of Directors shall determine, to every shareholder for the fully paid shares owned by him. These certificates shall be signed by the President or any Vice-President and the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer. They shall be consecutively numbered or otherwise identified; and the name and address of the persons to whom they are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. Section 2. Transfer of Shares: Transfer of shares shall be made on the stock transfer books of the corporation only upon surrender of the certificates for the shares sought to be transferred by the record holder thereof or by his duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be cancelled before new certificates for the transferred shares shall be issued. 8 By-laws Page 8 ARTICLE VII. GENERAL PROVISIONS Section l. Dividends: The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and by its charter. Section 2. Seal: The corporate seal of the corporation shall consist of two concentric circles between which is the name of the corporation and in the center of which is inscribed SEAL; and such seal, as impressed on the margin hereof, is hereby adopted as the corporate seal of the corporation. Section 3. Waiver of Notice: Whenever any notice is required to be given to any shareholder or director under the provisions of the North Carolina Business Corporation Act or under the provisions of the Charter or By-laws of this corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 4. Amendments: Except as otherwise provided herein, these by-laws may be amended or repealed and new by-laws may be adopted by the affirmative vote of a majority of the directors then holding office at any regular or special meeting of the Board of Directors. The Board of Directors shall have no power to adopt a by-law: (1) Requiring more than a majority of the voting shares for a quorum at a meeting of shareholders or more than a majority of the votes cast to constitute action by the shareholders, except where higher percentages are required by law; (2) Providing for management of the Corporation otherwise than by the Board of Directors or its Executive Committees; (3) Increasing or decreasing the number of directors; (4) Classifying and staggering the election of directors. No by-law adopted or amended by the shareholders shall be altered or repealed by the Board of Directors. EX-3.3 4 ARTICLES OF INCORPORATION OF OLIVER & WINSTON 1 EXHIBIT 3.3 FILED In the office of the Secretary of State of the State of California AUG 4 1964 FRANK M. JORDAN, Secretary of State By /s/ JAMES E. HARRIS ------------------- Deputy ARTICLES OF INCORPORATION OF OLIVER AND WINSTON, INC. I The name of this corporation is OLIVER AND WINSTON, INC. II The primary business in which this corporation intends initially to engage is the purchase and sale of tires and other rubber products. III In addition to the foregoing, the general purposes for which said corporation is formed are: (a) To purchase, acquire, own, hold, use, lease, either as lessor or lessee, grant, sell, exchange, subdivide, mortgage, convey in trust, manage, improve, construct, operate and generally deal in any and all real estate, improved or unimproved, stores, office buildings, dwelling houses, apartment houses, hotels, manufacturing plants and other buildings, and any and all other property of every kind or description, real, personal and mixed and wheresoever situated, either in California, other states of the United States, the District of Columbia, territories and colonies of the United States, or foreign countries. (b) To acquire, by purchase or otherwise, the goodwill, business, property rights, franchises and assets of every kind, with or without undertaking, either wholly or in part, the liabilities of any person, firm, association or corporation; and to acquire any property or business as a going concern or otherwise (i) by purchase of the assets thereof wholly or in part (ii) by acquisition of the shares or any part thereof, or (iii) in any other manner, and to pay for the same in cash or shares or bonds or other evidences of indebtedness of this corporation, or otherwise; to hold, maintain and operate, or in any manner dispose of, the whole or any part of the goodwill, business, rights and property so acquired, and to conduct, in any lawful manner, the whole or any part of any business so acquired; and to exercise all the powers necessary or convenient in and about the management of such business. -1- 2 (c) To acquire by purchase, lease or otherwise, lands of any and every description and leasehold estates and other interests therein; to improve and hold lands for investment purposes; to construct improvements upon lands owned by this corporation or held under leasehold or otherwise; to deal in lands, buying and selling real property of any description; to deal in leasehold estates and other estates in land less than the fee thereof; to sublet real property of every kind and character, and to relet and underlet any and all such real property to engage in the business of subdividing lands and to hire, buy, sell and deal in any and all classes of real property and improvements thereon and interests therein. (d) To hold for investment purposes securities of any kind and every description in whatsoever manner acquired; to exchange any real or personal property of this corporation for other real or personal property, including corporate shares of other corporations or bonds or other obligations thereof; and to generally deal in any and all classes of real or personal property hereinbefore mentioned. (e) To buy, exchange, contract for, lease, and in any and all other ways acquire, take, hold and own, and to deal in, sell, mortgage, lease or otherwise dispose of lands, mining claims, mineral rights, oil wells, gas wells, oil lands, gas lands and other real property, and rights and interests in and to real property, and to manage, operate, maintain, improve, and develop the said properties, and each and all of them. (f) To contract for, purchase, acquire, take, hold, own, use and enjoy, and to sell, lease, transfer, pledge, mortgage and otherwise dispose of, mortgage or hypothecate, and generally to invest, trade, deal in and with royalties covering, affecting or representing interests in oil or gas leases, or other hydrocarbon or mineral rights. (g) To supervise and manage all classes or properties, income bearing or otherwise, for other persons, corporations and associations; to act as agent, broker or attorney in fact, on a commission basis or otherwise, for any other person, corporation or association; to negotiate sales, leases, mortgages, deeds of trust and other encumbrances or properties of other persons, -2- 3 corporations and associations, real, personal and mixed and wheresoever situated; and generally to maintain, conduct and carry on the business of real estate agent and broker. (h) To have and exercise all the powers conferred by the laws of the State of California upon corporations formed under the laws pursuant to and under which this corporation is formed, as such laws are now in effect or may at any time hereafter be amended. (i) To engage in any one or more other businesses or transactions which the board of this corporation may from time to time authorize or approve, whether related to the business described in II above or to any other business then or thereafter done by this corporation. (j) To become a partner, either general or limited or both, and to enter into agreements of partnership, with one or more other persons or corporations, for the purpose of carrying on any business whatsoever which this corporation may deem proper or convenient in connection with any of the purposes herein set forth or otherwise, or which may be calculated, directly or indirectly, to promote the interests of this corporation or to enhance the value of its property or business. IV The county in the State of California in which the principal office for the transaction of the business of this corporation is to be located is Los Angeles County. V The shares of stock of this corporation shall be of one class only: the total number of shares of stock which this corporation shall have the authority to issue is one thousand (1,000) shares of stock, having a One Hundred Dollar ($100.00) par value, with an aggregate par value of One Hundred Thousand Dollars ($100,000.00). VI The number of directors of the corporation shall be three (3). The names and addresses of the persons who are appointed to act as the first directors of this corporation are: -3- 4 Ray W. Oliver 1516 Remah Vista Drive Glendale, California Sam M. Winston 1926 1/2 North Verdugo Road Glendale, California Ann M. Oliver 1516 Remah Vista Drive Glendale, California IN WITNESS WHEREOF, for the purpose of forming this corporation under the laws of the State of California, the undersigned, constituting the incorporators of this corporation, including the persons named therein as the first directors of this corporation, have executed these Articles of Incorporation this 27 day of July, 1964. /s/ RAY W. OLIVER ------------------------------- Ray W. Oliver /s/ SAM M. WINSTON ------------------------------- Sam M. Winston /s/ ANN M. OLIVER ------------------------------- Ann M. Oliver STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On this 27 day of July, 1964, before me, the undersigned, a Notary Public in and for said County and State, residing therein, duly commissioned and sworn, personally appeared RAY W. OLIVER, SAM M. WINSTON and ANN M. OLIVER, known to me to be the persons whose names are subscribed to the foregoing Articles of Incorporation, and acknowledged to me that they executed the same. WITNESS my hand and official seal. /s/ ERIC A. ASHTON ------------------------------- Notary Public in and for said County and State [SEAL] -4- 5 NA CHGD TO: OLIVER & WINSTON, INC. FILED In the office of the Secretary of State of the State of California MARCH 26 1976 MARCH FONG EU, Secretary of State By /s/ JAMES E. HARRIS ------------------- Deputy CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION SAM M. WINSTON and WILLIAM S. JOHNSTONE, JR. certify: 1. That they are the president and the secretary, respectively, of OLIVER AND WINSTON, INC., a California corporation. 2. That at a meeting of the board of directors of said corporation, duly held at Burbank, California, on March 16, 1976, the following resolutions were adopted: "RESOLVED, that Article I of the Articles of Incorporation of this corporation be amended to read as follows: 'The name of this corporation is OLIVER & WINSTON, INC.'. RESOLVED FURTHER, that Article V of the Articles of Incorporation of this corporation be amended to read as follows 'The shares of this corporation shall be of one class only: The total number of shares which this corporation shall have authority to issue is one million shares, each having a ten cent ($.10) par value, with an aggregate par value of One Hundred Thousand Dollars ($100,000.00). Upon the amendment of this Article to read as hereinabove set forth each outstanding share of a par value of $100.00 is split up and converted into one thousand shares with a par value of ten cents ($.10) each'." 3. That the shareholders have adopted said amendments by written consent. That the wording of the amended articles, as set forth in the shareholders' written consent, is the same as that set forth in the directors' resolutions in Paragraph 2 above. 4. That the number of shares represented by written consent is 256.2. That the total number of share entitled to vote on or consent to the amendments is 256.2. /s/ SAM M. WINSTON ------------------------------- SAM M. WINSTON, President /s/ WILLIAM S. JOHNSTONE JR. ------------------------------- WILLIAM S. JOHNSTONE JR. Secretary Each of the undersigned declares under penalty of perjury 6 that the matters set forth in the foregoing certificate are true and correct. Executed at Pasadena, California, on March 18, 1976. /s/ SAM M. WINSTON ---------------------------------- SAM M. WINSTON /s/ WILLIAM S. JOHNSTONE, JR. ---------------------------------- WILLIAM S. JOHNSTONE, JR. 2. 7 FILED In the office of the Secretary of State of the State of California MAR 14 1997 /s/ BILL JONES -------------- BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION THOMAS J. BONBURG and WILLIAM S. JOHNSTONE, JR. certify that: 1. They are the President and the Secretary, respectively, of OLIVER & WINSTON, INC., a California Corporation. 2. Articles VII and VIII are added to the Articles of Incorporation of this Corporation, which new Articles are to read as follows: "VII The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. VIII The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the Corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code." 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 171,160. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of our own knowledge. DATE: 3/10/97 /s/ THOMAS J. BONBURG ----------------------------------- Thomas J. Bonburg, President /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------ William S. Johnstone, Jr., Secretary [SEAL] EX-3.4 5 BY-LAWS OF OLIVER & WINSTON, INC. 1 EXHIBIT 3.4 ACTION OF SHAREHOLDERS OF OLIVER & WINSTON, INC. a California corporation Pursuant to Section 211 and Section 603 of the General Corporations Law of the State of California the shareholders of the above corporation hereby: 1. Repeal the existing bylaws of said corporation. 2. Adopt the bylaws attached hereto, which are incorporated herein by this reference, as and for the bylaws of said corporation. The Secretary of said corporation is instructed to insert this written consent and the attached bylaws in the minute book of said corporations. Dated: March , 1977. /s/ SAM M. WINSTON -------------------------------- SAM M. WINSTON /s/ ROBERT W. EBERLE -------------------------------- ROBERT W. EBERLE /s/ WILLIAM S. JOHNSTONE, JR. -------------------------------- WILLIAM S. JOHNSTONE, JR. 2 OLIVER & WINSTON INC. TABLE OF CONTENTS BYLAWS
ARTICLE I - OFFICES Page Section 1 - Principal Offices...................... 1 Section 2 - Other Offices.......................... 1 ARTICLE II - MEETINGS OF SHAREHOLDERS Section 1 - Place of Meeting...................... 1 Section 2 - Annual Meeting........................ 1 Section 3 - Special Meeting....................... 1 Section 4 - Notice of Shareholders' Meetings...... 2 Section 5 - Manner of Giving Notice............... 3 Section 6 - Quorum................................ 3 Section 7 - Adjourned Meeting; Notice............. 4 Section 8 - Voting................................ 4 Section 9 - Waiver of Notice or Consent by Absent Shareholders............ 5 Section 10 - Shareholder Action by Written Consent Without a Meeting...... 6 Section 11 - Record Date for Shareholder Notice, Voting, & Giving Consents...... 7 Section 12 - Proxies............................... 7 Section 13 - Inspectors of Election................ 8 ARTICLE III - DIRECTORS Section 1 - Powers................................ 9 Section 2 - Number & Qualification of Directors... 9 Section 3 - Election and Term of Office of Directors................... 9 Section 4 - Vacancies............................. 9 Section 5 - Place of Meetings and Meetings by Telephone................... 10 Section 6 - Annual Meeting........................ 11 Section 7 - Other Regular Meetings................ 11 Section 8 - Special Meetings...................... 11 Section 9 - Quorum................................ 11 Section 10 - Waiver of Notice...................... 12 Section 11 - Adjournment........................... 12 Section 12 - Notice of Adjournment................. 12 Section 13 - Action without Meeting................ 12 Section 14 - Fees and Compensation of Directors.... 12
(i) 3
ARTICLE IV - COMMITTEES Page Section 1 - Committees of Directors.............. 13 Section 2 - Meetings and Action of Committees.... 13 ARTICLE V - OFFICERS Section 1 - Officers............................. 14 Section 2 - Election of Officers................. 14 Section 3 - Subordinate Officers................. 14 Section 4 - Removal and Resignation of Officers..................... 14 Section 5 - Vacancies in Offices................. 15 Section 6 - Chairman of the Board................ 15 Section 7 - President............................ 15 Section 8 - Vice Presidents...................... 15 Section 9 - Secretary............................ 16 Section 10 - Chief Financial Officer.............. 16 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS Section 1 - Agents, Proceedings and Expenses..... 17 Section 2 - Actions other than by the Corporation 17 Section 3 - Actions by the Corporation........... 18 Section 4 - Successful Defense by Agent.......... 18 Section 5 - Required Approval.................... 19 Section 6 - Advance of Expenses.................. 19 Section 7 - Other Contractual Rights............. 19 Section 8 - Limitations.......................... 19 Section 9 - Insurance............................ 20 Section 10 - Fiduciaries of Corporate Employee Benefit Plan........ 20 ARTICLE VII - RECORDS AND REPORTS Section 1 - Maintenance and Inspection of Share Register........................ 20 Section 2 - Maintenance and Inspection of Bylaws. 21 Section 3 - Maintenance and Inspection of Other Corporate Records......... 21 Section 4 - Inspection by Directors.............. 21 Section 5 - Annual Report to Shareholders........ 22 Section 6 - Financial Statements................. 22 Section 7 - Annual Statement of General Information..................... 23
(ii) 4
ARTICLE VIII - GENERAL CORPORATE MATTERS Page Section 1 - Record Date for Purposes Other Than Notice and Voting............ 23 Section 2 - Checks, Drafts, Evidences of Indebtedness................. 24 Section 3 - Corporate Contracts & Instruments...... 24 ` Section 4 - Certificates for Shares................ 24 Section 5 - Lost Certificates...................... 24 Section 6 - Representation of Shares of Other Corporations................. 25 Section 7 - Construction and Definitions........... 25 ARTICLE IX - AMENDMENTS Section 1 - Amendment by Shareholders.............. 25 Section 2 - Amendment by Directors................. 26
(iii) 5 BYLAWS OF OLIVER & WINSTON, INC. ARTICLE I OFFICES Section 1. PRINCIPAL OFFICES. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office it located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California. Section 2. OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be hold each year on a date and at a time designated by the board of directors; provided, however, that the date so designated shall be within five (5) months of the end of the fiscal year of the corporation and within fifteen (15) months after the last annual meeting. At each annual meeting directors shall be elected, and any other proper business may be transacted. Section 3. SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in 6 the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the 2. 7 corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum 3. 8 for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 11 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a 4. 9 quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the shareholder's shares) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meetings, to the transaction of any business because the meeting is not 5. 10 lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders; or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 6. 11 Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give contents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be 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. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or 7. 12 attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 8. 13 ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be three (3) until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number of directors to a number less than five (5) cannot be adopted it the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 4. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. 9. 14 A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. 10. 15 Section 6. ANNUAL MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 11 of this Article III. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) 11. 16 of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 10. WAIVER OF NOTICE. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting before or at its commencement, the lack of notice to that director. Section 11. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. 12. 17 ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of these committees. Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Sections 5 (place of meetings), 7 (regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute 13. 18 the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a vice chairman of the board, one or more vice presidents, one or more assistant secretaries, a treasurer, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or 14. 19 special meeting of the board, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 6. CHAIRMAN OF THE BOARD AND VICE CHAIRMAN. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. The vice chairman of the board, if there shall be such an officer, shall in the absence or disability of the chairman of the board, exercise and perform the powers and duties of the chairman of the board, and perform such other duties as may from time to time be assigned to him by the board of directors or prescribed by the bylaws. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in 15. 20 order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president, or the chairman of the board. Section 9. SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. 16. 21 The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS Section 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this Article, "agent" means any person who is or was a director, officer, employee, or other agent of this corporation, or is or was serving at the request of this corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitations, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(c) of this Article. Section 2. ACTIONS OTHER THAN BY THE CORPORATION. This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner that person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable 17. 22 cause to believe the conduct of that person was unlawful. The termination of any 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 and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. ACTIONS BY THE CORPORATION. This 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 by or in the right of this corporation to procure a judgment in its favor by reason of the fact that that person is or was an agent of this corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this Section 3: (a) in respect of any claim, issue or matter as to which that person shall have been adjudged to be liable to this corporation in the performance of that person's duty to this corporation, unless and only to the extent that the court in which that action was brought shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; (b) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (c) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article, or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. 18. 23 Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this Article, any indemnification under this Article shall be made by this corporation only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article; by: (a) A majority vote of a quorum consisting of directors who are not parties to the proceeding; (b) Approval by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (c) The court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this corporation. Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this corporation before the final disposition of the proceedings on receipt of an undertaking by or on behalf of the agent to repay the amount of the advance unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article. Section 7. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise. Section 8. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Section 4 or Section 5(c), in any circumstance where it appears: (a) That it would be inconsistent with a provision of the articles, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or 19. 24 (b) That is would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 9. INSURANCE. Upon and in the event of a determination by the board of directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether at not this corporation would have the power to indemnify the agent against that liability under the provisions of this section. Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law other than this Article. ARTICLE VII RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal execute office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five days prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of 20. 25 a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is receive or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect 21. 26 all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the California General Corporations Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the shareholders of the corporation as they consider appropriate. Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the 22. 27 financial statements were prepared without audit from the books and records of the corporation. Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall, during the period commencing on March 1 and ending on August 31 in each year, file with the secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the chief executive officer, secretary, and chief financial officer, the street address of its principal executive office or principal business office in this state, and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. ARTICLE VIII GENERAL CORPORATE MATTERS Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 23. 28 Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number Of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same 24. 29 time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign, or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all share held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural persons. ARTICLE IX AMENDMENTS Section l. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. 25. 30 Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 1 of this Article IX, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors, may be adopted, amended, or repealed by the board of directors. 26. 31 ACTION OF SHAREHOLDERS WITHOUT MEETING OF OLIVER & WINSTON, INC. Pursuant to Section 603 of the California Corporations Code, the undersigned being the shareholders holding all of the issued and outstanding stock of Oliver & Winston, Inc. hereby take the following action without a meeting: RESOLVED, that Article III, Section 2 of the bylaws of this corporation is amended to provide that the number of directors of this corporation shall be six (6). The Secretary of this corporation is instructed to file this action with the minutes of this corporation and to indicate the amendment to the bylaws hereinabove provided for in that portion of the minute book at which the bylaws of this corporation are kept. Dated: May l, 1986. /s/ SAM M. WINSTON ------------------------------------ SAM M. WINSTON /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------ WILLIAM S. JOHNSTONE, Jr. individually and as Trustee of various trusts EX-3.5 6 CERTIFICATE OF INCORPORATION OF ITCO LEGISTICS 1 Exhibit 3.5 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 04:30 PM 05/23/1997 971170800 - 2557884 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF ITCO ACQUISITION COMPANY, INC. Pursuant to Section 242 of the Delaware General Corporation Law (the "DGCL"), ITCO Acquisition Company, Inc., a Delaware corporation (the "Corporation"), for purposes of amending its Certificate of Incorporation, DOES HEREBY CERTIFY AS FOLLOWS: FIRST, that the Corporation's Certificate of Incorporation is amended by deleting in its entirety existing Article First and inserting the following in lieu thereof: "FIRST: The name of the Corporation is ITCO Logistics Corporation." SECOND, that this Certificate of Amendment of the Corporation's Certificate of Incorporation has been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 242 of the DGCL and has been approved by the written consent of the holders of all of the Corporation's issued and outstanding Common Stock in accordance with the provisions of Section 228 of the DGCL. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by V. Edward Easterling, Jr., its President and Secretary as of the 25th day of March, 1997. ITCO ACQUISITION COMPANY, INC. By: /s/ V. EDWARD EASTERLING, JR. -------------------------------- V. Edward Easterling, Jr. President and Treasurer 2 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 12:00 PM 11/29/1995 950276034 - 2557884 CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN ERROR IN THE CERTIFICATE OF INCORPORATION OF ITCO ACQUISITION COMPANY, INC. FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON NOVEMBER 13, 1995 ITCO Acquisition Company, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is ITCO Acquisition Company, Inc. 2. That a Certificate of Incorporation was filed by the Secretary of State of Delaware on November 13, 1995 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Certificate to be corrected is as follows: the total number of shares of stock which the Corporation shall have authority to issue is 300,000. This correction will accurately reflect the sum of 250,000 shares of common stock, $.01 par value, and 50,000 shares of preferred stock, $.01 par value, authorized by the Certificate of Incorporation filed on November 13, 1995. 4. The first paragraph of Article Fourth of the Certificate is corrected to read as follows: A. The total number of shares of stock which the Corporation shall have authority to issue is 300,000 shares of capital stock, classified as (i) 250,000 shares of common stock, $.01 par value ("Common Stock") and (ii) 50,000 shares of preferred stock, $.01 par value ("Preferred Stock"). 3 IN WITNESS WHEREOF, ITCO Acquisition Company, Inc. has caused this certificate to be executed as of the 28th day of November, 1995. ITCO ACQUISITION COMPANY, INC. By: /s/ V. Edward Easterling, Jr. V. Edward Easterling, Jr. President -2- 4 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 02:00 PM 11/13/1995 950263251 - 2557884 CERTIFICATE OF INCORPORATION OF ITCO ACQUISITION COMPANY, INC. FIRST: The name of the Corporation is ITCO Acquisition Company, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1201 North Market Street in the City of Wilmington, County of New Castle. The name and address of its registered agent is Delaware Corporation Organizers, Inc., Wilmington, Delaware 19801. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. FOURTH: A. The total number of shares of stock which the Corporation shall have authority to issue is 1,001,000 shares of capital stock, classified as (i) 250,000 shares of common stock, $.01 par value ("Common Stock") and (ii) 50,000 shares of preferred stock, $.01 par value ("Preferred Stock"). The designation and the powers, preferences, rights, qualifications, limitations, and restrictions of the Preferred Stock and the Common Stock are as follows: 1. Provisions Relating to the Preferred Stock. (a) The Preferred Stock may be issued from time to time in one or more classes or series, the shares of each class or series to have such designations and powers, preferences, and rights, and qualifications, limitations, and restrictions thereof, as are stated and expressed herein and in the resolution or resolutions providing for the issue of such class or series adopted, as hereinafter prescribed, by the entire Board of Directors of the Corporation (the "Board of Directors") or (to the extent permitted by law) by any duly designated committee thereof ("Committee"). (b) Authority is hereby expressly granted to and vested in the Board of Directors or Committee to authorize the issuance of the Preferred Stock from time to time in one or more classes or series, and with respect to each class or series of the 5 Preferred Stock, to fix and state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following: (i) whether or not the class or series is to have voting rights, full, special, or limited, or is to be without voting rights, and whether or not such class or series is to be entitled to vote as a separate class either alone or together with the holders of one or more classes or series of stock; (ii) the number of shares to constitute the class or series and the designations thereof; (iii) the preferences, and relative, participating, optional, or other special rights, if any, and the qualifications, limitations, or restrictions thereof, if any, with respect to any class or series; (iv) whether or not the shares of any class or series shall be redeemable at the option of the Corporation or the holders thereof or upon the happening of any specified event, and, if redeemable, the redemption price or prices (which may be payable in the form of cash, notes, securities, or other property), and the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption; (v) whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and, if such retirement or sinking fund or funds are to be established, the annual amount thereof, and the terms and provisions relative to the operation thereof; (vi) the dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends payable on any other class or classes or series of stock, whether or not such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate; (vii) the preferences, if any, and the amounts thereof which the holders of any class or series thereof shall be entitled to receive upon -2- 6 the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (viii) whether or not the shares of any class or series, at the option of the Corporation or the holder thereof or upon the happening of any specified event, shall be convertible into or exchangeable for, the shares of any other class or classes of stock, securities, or other property of the Corporation and the conversion price or prices or ratio or ratios or the rate or rates at which such exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and (ix) such other special rights and protective provisions with respect to any class or series as may to the Board of Directors or Committee seem advisable. (c) The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The Board of Directors or Committee may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors or Committee may decrease the number of shares of the Preferred Stock designated for any existing class or series by a resolution subtracting from such class or series authorized and unissued shares of the Preferred Stock designated for such existing class or series, and the shares so subtracted become authorized, unissued, and undesignated shares of the Preferred Stock. 2. Provisions Relating to the Common Stock. (a) Each share of Common Stock of the Corporation shall have identical rights and privileges in every respect. The holders of shares of Common Stock shall be entitled to vote upon all matters submitted to a vote of the stockholders of the Corporation and shall be entitled to one vote for each share of Common Stock. (b) Subject to the prior rights and preferences, if any, applicable to shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive such dividends (payable in cash, stock or otherwise) as may be declared thereon by the Board of Directors or Committee at any time and from time to time out of any funds of the Corporation legally available therefor. -3- 7 (c) In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution to its stockholders, ratably in proportion to the number of shares of the Common Stock held by them. A liquidation, dissolution, or winding-up of the Corporation, as such terms are used in this paragraph (c), shall not be deemed to be occasioned by or to include any consolidation or merger of the Corporation with or into any other corporation or corporations or other entity or a sale, lease, exchange, or conveyance of all or a part of the assets of the Corporation. 3. General (a) Subject to the foregoing provisions of this Certificate of Incorporation, the Corporation may issue shares of its Preferred Stock and Common Stock from time to time for such consideration (not less than the par value thereof) as may be fixed by the Board of Directors or Committee, which is expressly authorized to fix the same in its absolute and uncontrolled discretion subject to the foregoing conditions. Shares so issued for which the consideration shall have been paid or delivered to the Corporation shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. (b) The Corporation shall have authority to create and issue rights and options entitling their holders to purchase shares of the Corporation's capital stock of any class or series or other securities of the Corporation, and such rights and options shall be evidenced by instrument(s) approved by the Board of Directors or Committee. The Board of Directors or Committee shall be empowered to set the exercise price, duration, times for exercise, and other terms of such options or rights; provided, however, that the consideration to be received for any shares of capital stock subject thereto shall not be less than the par value thereof. B. The holders of capital stock of the Corporation shall not have preemptive rights to acquire additional, unissued, or treasury shares of the Corporation, or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares. C. Cumulative voting shall not be allowed in the election of directors or for any other purpose. -4- 8 FIFTH: From time to time the Corporation may issue its authorized shares for such consideration per share (with respect to shares having a par value, not less than the par value thereof), either in money or money's worth of property or services, and for such other consideration, whether greater or less, now or from time to time hereafter permitted by law, as may be fixed by the Board of Directors; and all shares so issued shall be fully paid and nonassessable. No holder of any shares of any class shall as such holder have any preemptive right to subscribe for or purchase any other shares or securities of any class, whether now or hereafter authorized, which at any time may be offered for sale or sold by the Corporation. SIXTH: The name and the mailing address of the incorporator is: Name: Mailing Address ----- --------------- David H. Oden 901 Main Street Suite 3100 Dallas, TX 75219 SEVENTH: The number of directors shall be fixed by the bylaws of the Corporation and until changed in accordance with the manner prescribed by the bylaws shall be one (1). The names and addresses of those who are to serve as directors until the first annual meeting of stockholders, or until their successors be elected and qualified, are as follows: Name: Address ----- ------- V. Edward Easterling, Jr. 750 North St. Paul Suite 1200 Dallas, TX 75201 EIGHTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (a) To make, alter or repeal the bylaws of the Corporation; (b) To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation; -5- 9 (c) To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; (d) By a majority of the whole Board of Directors, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution or in the bylaws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, the bylaws may provide that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not disqualified from voting whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member; and (e) When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called upon such notice as is required by statute, or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including securities of any other corporation or corporations, as the Board of Directors shall deem expedient and for the best interests of the Corporation; NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of -6- 10 creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. TENTH: Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. ELEVENTH: The Corporation is to have perpetual existence. TWELFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THIRTEENTH: 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, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this Section by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. -7- 11 THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 13th day of November, 1995. /s/ DAVID H. ODEN --------------------------- David H. Oden, Incorporator -8- 12 CERTIFICATE OF MERGER MERGING ITCO MERGER CORPORATION INTO ITCO LOGISTICS CORPORATION ------------------------------------------------ Pursuant to Sections 103 and 251 of the General Corporation Law of the State of Delaware ------------------------------------------------ ITCO Logistics Corporation hereby certifies that: FIRST: The name and state of incorporation of each of the constituent corporations are as follows: Name State of Incorporation ITCO Merger Corporation Delaware ITCO Logistics Corporation Delaware SECOND: An agreement and plan of merger (the "Merger Agreement") in connection with the merger (the "Merger") of ITCO Merger Corporation ("Acquisition") into ITCO Logistics Corporation (the "Corporation") has been approved, adopted, certified, executed and acknowledged by Acquisition and the Corporation in accordance with the provisions Section 251 of the General Corporation Law of Delaware (the "Act"). THIRD: The name of the surviving corporation (the "Surviving Corporation") is ITCO Logistics Corporation. FOURTH: The Certificate of Incorporation of the Surviving Corporation shall be the Certificate of Incorporation of the Surviving Corporation. FIFTH: The executed Merger Agreement is on file at an office of the Surviving Corporation located at 814 East Main Street, Lincolnton, NC 28093. SIXTH: A copy of the Merger Agreement will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of Acquisition or the Corporation. SEVENTH: The Merger shall be effective upon the filing of this Certificate of Merger with the Secretary of State of the State of Delaware. 13 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Merger to be executed by its duly authorized officer, on this 20 day of May, 1998. ITCO LOGISTICS CORPORATION By: /s/ WILLIAM H. GAITHER William H. Gaither President and Chief Executive Officer EX-3.6 7 BY-LAWS OF ITCO LOGISTICS CORPORATIN 1 Exhibit 3.6 BY-LAWS OF ITCO MERGER CORPORATION ARTICLE I Stockholders Section 1.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of stockholders may be called at any time by the Chairman of the Board, if any, the Vice Chairman of the Board, if any, the President or the Board of Directors, to be held at such date, time and place either within or without the State of Delaware as may be stated in the notice of the meeting. A special meeting of stockholders shall be called by the Secretary upon the written request, stating the purpose of the meeting, of stockholders who together own of record a majority of the outstanding shares of each class of stock entitled to vote at such meeting. Section 1.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Section 1.4. Adjournments. Any meeting of stockholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. Quorum. At each meeting of stockholders, except where otherwise provided by law or the certificate of incorporation or these by-laws, the holders of one-third of the outstanding shares of stock entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, where a separate vote by class or classes is required for any matter, the holders of one-third of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum to take action with respect to that vote on that matter. Two or more classes or series of 2 stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum of the holders of any class of stock entitled to vote on a matter, the holders of such class so present or represented may, by majority vote, adjourn the meeting of such class from time to time in the manner provided by Section 1.4 of these by-laws until a quorum of such class shall be so present or represented. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither by entitled to vote nor be counted for quorum purposes; provided, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the Board if any, or in the absence of the Chairman of the Board by the Vice Chairman of the Board, if any, or in the absence of the Vice Chairman of the Board by the President, or in the absence of the President by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Unless otherwise provided in the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. If the certificate of incorporation provides for more or less than one vote for any share on any matter, every reference in these by-laws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power, regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or represented by proxy at such meeting shall so determine. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In all other matters, unless otherwise provided by law or by the certificate of incorporation or these by-laws, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Where a separate vote by class or classes is required, the affirmative vote of the holders of a majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class, except as otherwise provided by law or by the certificate of incorporation or these by-laws. -2- 3 Section 1.8. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders 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. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. -3- 4 Section 1.10. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the certificate of incorporation or by law, any action required by law to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to (a) its registered office in the State of Delaware by hand or by certified mail or registered mail, return receipt requested, (b) its principal place of business, or (c) an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this by-law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to (a) its registered office in the State of Delaware by hand or by certified or registered mail, return receipt requested, (b) its principal place of business, or (c) an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II Board of Directors Section 2.1. Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the certificate of incorporation. The Board of Directors shall consist of one or more members, the number thereof to be determined from time to time by the Board. Directors need not be stockholders. Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any director may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of any class or series of stock are entitled to elect one or more directors by the certificate of incorporation, the provisions of the preceding sentence shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Unless otherwise provided in the certificate of incorporation or these by-laws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Whenever the holders -4- 5 of any class or classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. Section 2.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined notice thereof need not be given. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, if any, by the Vice Chairman of the Board, if any, by the President or by any two directors. Reasonable notice thereof shall be given by the person or persons calling the meeting. Section 2.5. Participation in Meetings by Conference Telephone Permitted. Unless otherwise expressly restricted by the certificate of incorporation or these by-laws, members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors one-third of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board unless the certificate of incorporation or these by-laws shall require a vote of a greater number. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall be present. Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the Vice Chairman of the Board, if any, or in the absence of the Vice Chairman of the Board by the President, or in their absence by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Action by Directors Without a Meeting. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 2.9. Compensation of Directors. Unless otherwise restricted by the certificate of incorporation or these by-laws, the Board of Directors shall have the authority to fix the compensation of directors. -5- 6 ARTICLE III Committees Section 3.1. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in these by-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, removing or indemnifying directors or amending these by-laws; and, unless the resolution, these by-laws or the certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger. Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these by-laws. ARTICLE IV Officers Section 4.1. Officers; Election. As soon as practicable after the annual meeting of stockholders in each year, the Board of Directors shall elect a President and a Secretary, and it may, if it so determines, elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board may also elect one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such other officers as the Board may deem desirable or appropriate and -6- 7 may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person unless the certificate of incorporation or these by-laws otherwise provide. Section 4.2. Term of Office; Resignation; Removal; Vacancies. Unless otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Board or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board at any regular or special meeting. Section 4.3. Powers and Duties. The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these by-laws or in a resolution of the Board of Directors which is not inconsistent with these by-laws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board. Section 4.4. Chairman of the Board. The Chairman of the Board, if any, shall preside at all meeting of the Board of Directors and of the stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board or as may be provided by law. Section 4.5. Vice Chairman of the Board. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board or as may be provided by law. Section 4.6. President. In the absence of the Chairman of the Board and Vice Chairman of the Board, the President shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. The President shall be the chief executive officer and shall have general charge and supervision of the business of the Corporation and, in general, shall perform all duties incident to the office of president of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or as may be provided by law. Section 4.7. Vice Presidents. The Vice President or Vice Presidents, at the request or in the absence of the President or during the President's inability to act, shall perform the duties of the President, and when so acting shall have the powers of the President. If there be more than one Vice President, the Board of Directors may determine which one or more of the Vice Presidents shall perform any of such duties; or if such determination is not made by the Board, the President may make such determination; otherwise any of the Vice Presidents may perform any of such duties. The Vice President or Vice Presidents shall have such other powers and shall perform such other duties as may, from time to time, be assigned to him or her or them by the Board or the President or as may be provided by law. -7- 8 Section 4.8. Secretary. The Secretary shall have the duty to record the proceedings of the meetings of the stockholders, the Board of Directors and any committees in a book to be kept for that purpose, shall see that all notices are duly given in accordance with the provisions of these by-laws or as required by law, shall be custodian of the records of the Corporation, may affix the corporate seal to any document the execution of which, on behalf of the Corporation, is duly authorized, and when so affixed may attest the same, and, in general, shall perform all duties incident to the office of secretary of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or the President or as may be provided by law. Section 4.9. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation and shall deposit or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by or under authority of the Board of Directors. If required by the Board, the Treasurer shall give a bond for the faithful discharge of his or her duties, with such surety or sureties as the Board may determine. The Treasurer shall keep or cause to be kept full and accurate records of all receipts and disbursements in books of the Corporation, shall render to the President and to the Board, whenever requested, an account of the financial condition of the Corporation, and, in general, shall perform all the duties incident to the office of treasurer of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or the President or as may be provided by law. Section 4.10. Other Officers. The other officers, if any, of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in a resolution of the Board of Directors which is not inconsistent with these by-laws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board. The Board may require any officer, agent or employee to give security for the faithful performance of his or her duties. Section 4.11. Fidelity Bonds. If required by the Board of Directors, any officer shall give the Corporation a bond in a sum and with one or more sureties satisfactory to the Board, for the faithful performance of the duties of his or her office, and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. -8- 9 ARTICLE V Stock Section 5.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares of stock in the Corporation owned by such holder. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Each certificate representing shares shall state upon the face thereof that the Corporation is formed under the laws of the State of Delaware, the name of the person or persons to whom such shares have been issued and the number and class of such shares, and the designation of the class or series, if any, which such certificate represents. If the Corporation is authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided, that, except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.3. Transfers of Stock. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney, lawfully constituted in writing, and upon surrender of the certificate therefor, together with such evidence of the payment of transfer taxes and compliance with other provisions of law as the Corporation or its transfer agent may require. Section 5.4. Registered Stockholders. The Corporation may treat the holder of record of any share or shares of stock as the holder thereof, and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. -9- 10 ARTICLE VI Miscellaneous Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6.2. Seal. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees. Whenever notice is required to be given by law or under any provision of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. Section 6.4. Indemnification of Directors, Officers and Employees. The Corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer or employee. Expenses incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation. The rights provided to any person by this by-law shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director, officer or employee as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. For purposes of this by-law, the term "Corporation" shall include any predecessor of the Corporation and any constituent corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger; the term "other enterprise" shall include any corporation, partnership, joint venture, trust or employee benefit plan; service "at the request of the Corporation" shall include service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Corporation. -10- 11 Section 6.5. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 6.6. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.7. Amendment of By-Laws. These by-laws may be amended or repealed, and new by-laws adopted, by the Board of Directors, but the stockholders entitled to vote may adopt additional by-laws and may amend or repeal any by-law whether or not adopted by them. ARTICLE VII Offices Section 7.1. Registered Office. The registered office of the Corporation in the State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of New Castle, and the registered agent in charge thereof shall be The Corporation Trust Company. Section 7.2. Other Offices. The Corporation may also have an office or offices at other places within or without the State of Delaware. -11- EX-3.7 8 ARTICLES OF INCORPORATION OF ITCO HOLDING CO., INC 1 EXHIBIT 3.7 ARTICLES OF INCORPORATION OF ITCO CORPORATION WE, THE UNDERSIGNED NATURAL PERSONS OF THE AGE OF EIGHTEEN YEARS OR MORE, DO HEREBY ASSOCIATE OURSELVES INTO A BUSINESS CORPORATION UNDER THE LAWS OF THE STATE OF NORTH CAROLINA, AS CONTAINED IN CHAPTER 55 OF THE GENERAL STATUTES OF NORTH CAROLINA, ENTITLED "BUSINESS CORPORATION ACT", AND THE SEVERAL AMENDMENTS THERETO, AND TO THAT END DO HEREBY SET FORTH: 1. THE NAME OF THE CORPORATION IS ITCO CORPORATION. 2. THE PERIOD OF DURATION OF THE CORPORATION SHALL BE PERPETUAL. 3. THE PURPOSES FOR WHICH THE CORPORATION IS ORGANIZED ARE: A. TO CONDUCT AND OPERATE A BUSINESS FOR THE DISTRIBUTION AND SALE, AT WHOLESALE OR RETAIL, OF TIRES, BATTERIES, TREAD RUBBER, ACCESSORIES AND OTHER RELATED PRODUCTS PERTAINING TO THE TIRE INDUSTRY. B. TO DO ALL SUCH THINGS AS MAY BE NECESSARY OR INCIDENTAL TO CONDUCTING AND OPERATING A BUSINESS FOR THE DISTRIBUTION AND SALE, AT WHOLESALE OR RETAIL, OF TIRES, BATTERIES, TREAD RUBBER, ACCESSORIES AND OTHER RELATED PRODUCTS PERTAINING TO THE TIRE INDUSTRY. C. TO ENGAGE IN ANY OTHER LAWFUL ACTIVITY INCLUDING, BUT NOT LIMITED TO, CONSTRUCTING, MANUFACTURING, RAISING, OR OTHERWISE CARING FOR ANY TYPE OF STRUCTURE, COMMODITY, OR LIVESTOCK WHATSOEVER; PROCESSING, SELLING, BROKERING, FACTORING OR DISTRIBUTING ANY TYPE OF PROPERTY, WHETHER REAL OR PERSONAL; EXTRACTING AND PROCESSING NATURAL RESOURCES; TRANSPORTING FREIGHT OR PASSENGERS BY LAND, SEA, OR AIR; COLLECTING AND DISSEMINATING INFORMATION OR ADVERTISEMENT THROUGH ANY MEDIUM WHATSOEVER; PERFORMING PERSONAL SERVICES OF ANY NATURE; AND ENTERING INTO OR SERVING IN ANY TYPE OF MANAGEMENT, INVESTIGATIVE, ADVISORY, PROMOTIONAL, FIDUCIARY OR REPRESENTATIVE CAPACITY OR RELATIONSHIP FOR ANY PERSONS OR CORPORATIONS WHATSOEVER. 4. THE AGGREGATE NUMBER OF SHARES WHICH THE CORPORATION SHALL HAVE AUTHORITY TO ISSUE IS NINE THOUSAND (9,000) SHARES, DIVIDED INTO THREE CLASSES. THE DESIGNATION OF EACH CLASS, NUMBER OF SHARES OF EACH CLASS, SERIES, IF ANY, WITHIN EACH CLASS, AND THE PAR VALUE, IF ANY, OF THE SHARES OF EACH CLASS, OR A STATEMENT THAT THE SHARES OF ANY CLASS ARE WITHOUT PAR VALUE, IS AS FOLLOWS: 2
CLASS NUMBER OF SHARES PAR VALUE ----- ---------------- --------- A COMMON 3,000 $100.00 B COMMON 3,000 $100.00 PREFERRED 3,000 $100.00
THE PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS WITH RESPECT TO THE SHARES OF EACH CLASS ARE AS FOLLOWS: A. THE CLASS A COMMON STOCK SHALL HAVE THE EXCLUSIVE RIGHT TO VOTE IN ALL MEETINGS OF THE SHAREHOLDERS. B. THE CLASS B COMMON STOCK SHALL HAVE NO RIGHT TO VOTE AT MEETINGS OF THE SHAREHOLDERS EXCEPT AS SPECIFICALLY PROVIDED BY STATUTE. IN ALL OTHER RESPECTS IT SHALL HAVE THE SAME RIGHTS, PREFERENCES, AND LIMITATIONS AS THE CLASS A COMMON STOCK. C. THE PREFERRED STOCK SHALL BE ENTITLED TO RECEIVE AND THE CORPORATION SHALL BE BOUND TO PAY, OUT OF THE NET EARNINGS AND ACCUMULATED PROFITS OF THE CORPORATION, DIVIDENDS PAYABLE ANNUALLY AT THE RATE OF SIX PERCENT (6%) PER ANNUM ON THE PAR VALUE THEREOF. D. DIVIDENDS ON THE PREFERRED STOCK SHALL BE CUMULATIVE AND SHALL BE PAID WITHOUT INTEREST BEFORE ANY DIVIDENDS ARE DECLARED OR PAID ON THE COMMON STOCK, BUT THE PREFERRED STOCK SHALL NOT FURTHER SHARE IN THE EARNINGS OF THE CORPORATION. E. UPON A DISSOLUTION OF THE CORPORATION, THE PREFERRED STOCK SHALL BE REPAID ITS PAR VALUE, TOGETHER WITH ALL ACCUMULATED AND UNPAID DIVIDENDS, BEFORE ANY AMOUNT IS PAID ON THE COMMON STOCK, BUT AFTER SUCH PAYMENT, THE PREFERRED STOCK SHALL NOT FURTHER SHARE IN THE ASSETS OF THE CORPORATION. F. THE PREFERRED STOCK SHALL HAVE NO VOTES IN ANY MEETINGS OF THE STOCKHOLDERS OF THE CORPORATION. G. ALL PREFERRED STOCK, WHENEVER ISSUED, SHALL WITH RELATION TO ALL OTHER PREFERRED STOCK, HAVE AN EQUAL, PROPORTIONAL, AND COORDINATE LIEN UPON THE ASSETS OF THE CORPORATION. 5. THE MINIMUM AMOUNT OF CONSIDERATION FOR ITS SHARES TO BE RECEIVED BY THE CORPORATION BEFORE IT SHALL COMMENCE BUSINESS IS THREE-HUNDRED AND No/100 DOLLARS ($300.00). 6. THE MAILING ADDRESS FOR THE INITIAL REGISTERED OFFICE OF THE CORPORATION IS P.O. BOX 641, WILSON, WILSON COUNTY, NORTH CAROLINA, AND THE STREET ADDRESS OF THE INITIAL REGISTERED OFFICE 3 OF THE CORPORATION IS CARGILL AVENUE, WILSON, WILSON COUNTY, NORTH CAROLINA, AND THE NAME OF THE INITIAL REGISTERED AGENT AT SUCH ADDRESS IS JOHN C. BOLT, JR. 7. THE NUMBER OF DIRECTORS OF THE CORPORATION MAY BE FIXED BY THE BY-LAWS, BUT SHALL NOT BE LESS THAN THREE. THE NUMBER OF DIRECTORS CONSTITUTING THE INITIAL BOARD OF DIRECTORS SHALL BE THREE, AND THE NAMES AND ADDRESSES OF THE PERSONS WHO ARE TO SERVE AS DIRECTORS UNTIL THE FIRST MEETING OF SHAREHOLDERS OR UNTIL THEIR SUCCESSORS ARE ELECTED AND QUALIFIED ARE: NAMES ADDRESSES JOHN C. BOLT, JR. 1109 LAKESIDE DRIVE, WILSON, NORTH CAROLINA LEONARD TURNAGE ROUTE 5, BOX 106, WILSON, NORTH CAROLINA CLAUDIUS TURNAGE 2514 McNAIR STREET, WILSON, NORTH CAROLINA 8. THE NAMES AND ADDRESSES OF ALL THE INCORPORATORS ARE: NAMES ADDRESSES JOHN C. BOLT, JR. 1109 LAKESIDE DRIVE, WILSON, NORTH CAROLINA LEONARD TURNAGE ROUTE 5, BOX 106, WILSON, NORTH CAROLINA CLAUDIUS TURNAGE 2514 McNAIR STREET, WILSON, NORTH CAROLINA IN TESTIMONY WHEREOF, WE HAVE HEREUNTO SET OUR HANDS THIS THE 14th DAY OF SEPTEMBER, 1972. /s/ JOHN C. BOLT, JR. ------------------------------ JOHN C. BOLT, JR. /s/ LEONARD TURNAGE ------------------------------ LEONARD TURNAGE /s/ CLAUDIUS TURNAGE ------------------------------ CLAUDIUS TURNAGE 4 STATE OF NORTH CAROLINA COUNTY OF WILSON THIS IS TO CERTIFY THAT ON THE 14th DAY OF SEPTEMBER, 1972, BEFORE ME, A NOTARY PUBLIC, PERSONALLY APPEARED JOHN C. BOLT, JR., LEONARD TURNAGE, AND CLADIUS TURNAGE, WHO I AM SATISFIED ARE THE PERSONS NAMED IN AND WHO EXECUTED THE FOREGOING ARTICLES OF INCORPORATION, AND I HAVING FIRST MADE KNOWN TO THEM THE CONTENTS THEREOF, THEY DID ACKNOWLEDGE THAT THEY SIGNED AND DELIVERED THE SAME AS THEIR VOLUNTARY ACT AND DEED FOR THE USES AND PURPOSES THEREIN EXPRESSED. IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND AND AFFIXED MY OFFICIAL SEAL, THIS THE 14th DAY OF SEPTEMBER, 1972. /s/ [illegible signature] ----------------------------------- NOTARY PUBLIC MY COMM. EXPIRES: 11/29/76 - ------------------------ 5 FILED MAY 2 1:04 PM '73 THAD EURE SECRETARY OF STATE NORTH CAROLINA ARTICLES OF MERGER OF FLEET TIRE SERVICE, INC. INTO ITCO CORPORATION Fleet Tire Service, Inc., a North Carolina Corporation, and ITCO Corporation, a North Carolina Corporation, do hereby execute these Articles of Merger for the purpose of merging Fleet Tire Service, Inc., into ITCO Corporation, and to that end do hereby set forth: 1. The plan of merger, which has been approved by the Board of Directors of each of the undersigned corporations as provided by law, is as follows: PLAN OF MERGER OF FLEET TIRE SERVICE, INC. INTO ITCO CORPORATION 1. MERGER. Fleet Tire Service, Inc., a North Carolina Corporation, proposes to merge into ITCO Corporation, a North Carolina Corporation. ITCO Corporation shall be the surviving corporation. 2. NAME. The name of the surviving corporation shall be ITCO Corporation. 3. TERMS OF MERGER. The terms and conditions of the merger are as follows: A. Fleet Tire Service, Inc., shall be merged into ITCO Corporation in accordance with the statutory procedure set forth in North Carolina General Statutes, Sections 55-106, et. seq. 6 B. ITCO Corporation shall be the surviving corporation, and the corporate identity, existence, purposes, powers, franchises, rights, and immunities of ITCO Corporation shall continue unaffected and unimpaired by the merger. C. The merger shall be effective as of the time duly executed Articles of Merger are filed with the Secretary of State of North Carolina. D. As of the effective date of the merger, the separate existence of Fleet Tire Service, Inc., shall cease, and Fleet Tire Service, Inc., and ITCO Corporation shall become a single corporation, which said single corporation shall be ITCO Corporation. E. ITCO Corporation shall, as of the effective date of the merger, possess all the rights, privileges, immunities, and franchises, as well of a public as of a private nature, of each of the merging corporations; and all property, real, personal and mixed, and all debts due on whatever account, and all other choses in action, and all and every other interest, of or belonging to or due to each of the merging corporations shall be taken and deemed to be transferred to and vested in ITCO Corporation without further act or deed; and the title to any real estate or any interest therein, vested in any of the parties of this plan of merger shall not revest or be in any way impaired by reason of such merger. F. As of the effective date of the merger, ITCO Corporation shall thenceforth be liable for all the liabilities, obligations, and penalties of each of the merging corporations, and any claim existing or action or proceeding, civil or criminal, pending by or against any of said corporations may be prosecuted as if such merger had not taken place, or ITCO Corporation may be substituted in its place. Any judgment rendered against any of the merging corporation 7 may be enforced against ITCO Corporation. Neither the rights of creditors nor any liens upon the property of any of the merging corporations shall be impaired by the merger. 4. BASIS OF EXCHANGE. The manner and basis of converting the shares of each of the merging corporations into shares or other securities or other obligations of ITCO Corporation shall be as follows: A. As of the effective date of the merger, each common share of Fleet Tire Service, Inc., held by ITCO Corporation shall cease to exist and shall be deemed cancelled, retired, and eliminated, and no shares of common stock of ITCO Corporation shall be issued in respect thereof. B. As of the effective date of the merger, each share of stock of Fleet Tire Service, Inc., outstanding in the hands of the public (being all of the shares of Fleet Tire Service, Inc., other than shares thereof held by ITCO Corporation), ipso facto, and without any action on the part of the holder thereof, shall automatically become and be converted into common stock of ITCO Corporation at the rate of One Class A common share of ITCO Corporation for each two hundred and fifty shares of common stock of Fleet Tire Service, Inc. The holders of the shares of Fleet Tire Service, Inc., as defined in this subparagraph after the effective date of the merger, shall surrender the certificates representing said shares to ITCO Corporation, and such holder shall thereupon be entitled to receive in exchange a certificate representing the number of shares of common Stock of ITCO Corporation into which the shares of stock represented by the certificate or certificates so surrendered shall have been converted. 8 5. CHANGES IN CHARTER. A statement of any changes in the charter of ITCO Corporation to be effected by said merger is as follows: None. 6. DISSENTING SHAREHOLDERS. Any shareholder not voting in person or by proxy in favor of this plan of merger is entitled, upon compliance with North Carolina General Statutes, Section 55-113, including the twenty-day notice requirement, to be paid the fair value of their shares as provided in said section. 2. As to each of the undersigned corporations, the number of shares outstanding, and the designation and number of outstanding shares of each class entitled to vote as a class on such plan, were as follows:
NUMBER OF ENTITLED TO VOTE NAME OF CORPORATION SHARES OUTSTANDING AS A CLASS ------------------- ------------------ ------------------------------------------- Designation of Class Number of Shares Fleet Tire Service, Inc. 1000 Common 1000 ITCO Corporation 1352 Class A Common 852 Class B Common 500
3. As to each of the undersigned corporations, the total number of shares voted for and against such plan, respectively, and, as to each class entitled to vote thereon as a class, the number of shares of such class voted for and against such plan, respectively, were as follows:
ENTITLED TO VOTE AS A CLASS --------------------------------------------------- NAME OF CORPORATION TOTAL VOTED FOR TOTAL VOTED AGAINST CLASS VOTED FOR VOTED AGAINST - ------------------- --------------- ------------------- --------------------------------------------------- Fleet Tire Service, Inc. 1000 0 Common 1000 0 ITCO Corporation 1352 0 Class A Common 852 0 Class B Common 500 0
9 IN WITNESS WHEREOF, The President and Secretary of each of the above named corporations have executed these Articles of Merger, this the 1st day of May, 1973. ATTEST: FLEET TIRE SERVICE, INC. /s/ LEONARD TURNAGE BY: /s/ JOHN C. BOLT, JR. - ------------------------ -------------------------------- Secretary President ATTEST: ITCO CORPORATION /s/ JAMES L. MATTHEWS BY: /s/ JOHN C. BOLT, JR. - ------------------------ -------------------------------- Secretary President NORTH CAROLINA ROWAN COUNTY Verification by Officers of a corporation John C. Bolt, Jr. AND Leonard Turnage being the President and Secretary, respectively, of Fleet Tire Service, Inc., each being duly sworn, deposes and says that the facts stated in the foregoing "Articles of Merger" are true and correct. /s/ JOHN C. BOLT, JR. ----------------------------------- President /s/ LEONARD TURNAGE ----------------------------------- Secretary Sworn to and subscribed before me this 1st day of May, A. D. 1973. /s/ ANN K. PROCTOR ----------------------------------- Notary Public My Comm. Expires: 8-29-77 - ------------------------ 10 NORTH CAROLINA ROWAN COUNTY Verification by Officers of a corporation John C. Bolt, Jr. AND James L. Matthews being the President and Secretary, respectively, of ITCO Corporation, each being duly sworn, deposes and says that the facts stated in the foregoing "Articles of Merger"" are true and correct. /s/ JOHN C. BOLT, JR. ----------------------------------- President /s/ JAMES L. MATTHEWS ----------------------------------- Secretary Sworn to and subscribed before me this 1st day of May, A. D. 1973. /s/ ANN K. PROCTOR ----------------------------------- Notary Public My Comm. Expires: 8-29-77 - ------------------------ 11 FILED OCT 28 9:14 AM '75 THAD EURE SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT TO THE CHARTER OF ITCO CORPORATION The undersigned corporation, for the purpose of amending its Articles of Incorporation and pursuant to the provisions of Section 55-103 the General Statutes of North Carolina, hereby executes the following Articles of Amendment: 1. Name of Corporation: ITCO Corporation. 2. At a regularly convened meeting of the shareholders of the corporation held on the 17th day of October, A.D. 1975, the following amendment to the charter of the corporation was adopted by vote of the shareholders: BE IT RESOLVED that Paragraph 4, in its entirety, of the Articles of Incorporation of ITCO Corporation is hereby deleted, and in lieu thereof, the following is hereby substituted: 4. The aggregate number of shares which the corporation shall have authority to issue is one million (1,000,000) shares of common stock. Said shares of the common stock shall be without par value. BE IT FURTHER RESOLVED that new stock certificates for shares of the corporation shall be issued on the basis of 442.478 shares for each one share of the $100.00 par value stock surrendered, whether the same shall be Class A Common shares, or Class B Common shares, and that the shareholder be notified and directed to surrender the share certificates which are presently issued and outstanding in exchange for new certificates to be issued. 3. The number of shares of the corporation outstanding at the time of the adoption of said amendment or amendments was 1356, and the number of shares entitled to vote thereon was 1356. The designation of each class entitled to vote as a class on the adoption of said amendment or amendments, and the number of shares of each class was as follows: 12
CLASS NUMBER OF SHARES ----- ---------------- Class A Common 856 Class B Common 500
4. The number of shares voted for amendment was 1356; and the number of shares voted against the amendment or amendments was -0-. Voting within each class entitled to vote as a class was as follows:
NUMBER OF SHARES VOTED CLASS FOR AGAINST - ----- --- ------- Class A Common 856 0 Class B Common 500 0
5. Any exchange, reclassification or cancellation of issued shares will be effected in the following manner: See paragraph 2. above. 6. Any change in the stated capital of the corporation will be effected in the following manner: None. 7. The amendment herein effected does not give rise to dissenter's right to payment: All shareholders of the corporation were present at the meeting of shareholders and voted in favor of the proposals. IN TESTIMONY WHEREOF, THIS statement is signed by the President and Secretary this 27th day of October, A.D. 1975. /s/ JOHN C. BOLT, JR. ----------------------------------- President /s/ JAMES L. MATTHEWS ----------------------------------- Secretary STATE OF NORTH CAROLINA COUNTY OF WILSON This is to certify that on this the 27th day of October, A.D. 1975, personally appeared before me JOHN C. BOLT, JR., and JAMES L. MATTHEWS, each of whom, being by me first duly sworn, deposes and says that the foregoing "Articles of Amendment" in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ ANN PROCTOR ----------------------------------- Notary Public My Comm. Expires: 5-7-78 13 FILED DEC 9 3:39 PM '80 THAD EURE SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT AND REDUCTION OF CAPITAL The undersigned corporation hereby executes these Articles of Amendment for the purpose of amending its charter and effecting a reduction of capital. 1. The name of the corporation is ITCO Corporation. 2. The following amendment to the charter of the corporation was adopted by its shareholders on the 1st day of December, 1980, in the manner prescribed by law: Paragraph 4 of the Articles of Incorporation (as previously amended) is hereby deleted, and in lieu thereof, the following is hereby substituted: 4. The aggregate number of shares which the corporation shall have authority to issue is one million (1,000,000) shares of common stock. Said shares of common stock shall have a par value of ten cents ($0.10) each. 3. The number of shares of the corporation outstanding at the time of such adoption was 600,000; and the number of shares entitled to vote thereon was 600,000. 4. The number of shares voted for such amendment was 600,000; and the number of shares voted against such amendment was - 0 -. 5. The purpose of this amendment is to assign a par value to the corporation's capital stock and to reduce the stated capital of the corporation. 6. The number of issued shares and the amount of stated capital represented thereby, before and after reduction, is as follows:
Before Reduction After Reduction Number of Stated Number of Stated Class Shares Capital Shares Capital ----- ------ ------- ------ ------- Common 600,000 $135,600.00 600,000 $ 60,000.00
14 7. The total amount by which the stated capital of the corporation is being reduced by virtue of this amendment is $75,600.00. 8. All shareholders will be notified and directed to surrender the share certificates which are presently outstanding in exchange for new certificates to be issued. New certificates shall be issued on the basis of one share of ten cent par value stock for each one share of no par value stock surrendered. 9. The amendment herein does not give rise to dissenter's rights to payment: All shareholders of the corporation were present at the meeting of shareholders and voted in favor of the proposals. IN WITNESS WHEREOF, these articles are signed by the President and Secretary of the corporation this 1st day of December, 1980. ITCO CORPORATION By: /s/ JAMES L. MATTHEWS ------------------------------- President By: /s/ JOHN C. BOLT, JR. ------------------------------ Secretary STATE OF NORTH CAROLINA COUNTY OF WILSON I, Goldie P. Shadding, a Notary Public, hereby certify that on this 1st day of December, 1980, personally appeared before me James L. Matthews and John C. Bolt, Jr. each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ GOLDIE P. SHADDING ----------------------------------- Notary Public 15 FILED JUN 30 12:41 PM '81 THAD EURE SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT TO THE CHARTER OF ITCO CORPORATION The undersigned corporation hereby executes these Articles of Amendment for the purpose of amending its charter: 1. The name of the corporation is ITCO Corporation. 2. The following amendment to the charter of the corporation was adopted by its shareholders on the 23rd day of June, 1981, in the manner prescribed by law: Resolved, that the name of the corporation be and the same is hereby changed to Interstate Tire Company. 3. The number of shares of the corporation outstanding at the time of such adoption was 600,000; and the number of shares entitled to vote thereon was 600,000 shares. 4. The designation and number of outstanding shares of each class entitled to vote on such amendment as a class were as follows: Class Common Number of Shares 600,000 5. The number of shares voted for such amendment was 600,000 and the number of shares voted against such amendment was 0. 6. The amendment herein effected does not give right to dissenter's rights to payment for the reason that the only effect of such amendment is to change the name of the corporation. IN WITNESS WHEREOF, these articles are signed by the President and Secretary of the corporation this 23rd day of June, 1981. ITCO CORPORATION BY: /s/ JAMES L. MATTHEWS -------------------------------- President BY: /s/ JOHN C. BOLT, JR. -------------------------------- Secretary 16 STATE OF NORTH CAROLINA COUNTY OF WILSON I, Goldie P. Shadding, a notary public, hereby certify that on this 23 day of June, 1981, personally appeared before me James L. Matthews and John C. Bolt, Jr., each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ GOLDIE P. SHADDING ----------------------------------- Notary Public My Comm. Expires: Aug. 13, 1981 17 ARTICLES OF MERGER OF METRO TIRE COMPANY, INC. INTO INTERSTATE TIRE COMPANY The undersigned corporations hereby executes these Articles of Merger for the purpose of merging the wholly-owned subsidiary corporation into its parent corporation: I. The following Plan of Merger as duly approved by the board of directors of each of the undersigned corporations in the manner prescribed by law: PLAN OF MERGER A. CORPORATIONS PARTICIPATING IN MERGER. The following corporations (the "Merging Corporations") propose to merge: METRO TIRE COMPANY, INC. INTERSTATE TIRE COMPANY B. NAME OF SURVIVING CORPORATION. INTERSTATE TIRE COMPANY will be the surviving corporation (the "Surviving Corporation"). After the merger, the Surviving Corporation will have the name "INTERSTATE TIRE COMPANY". C. MERGER. Pursuant to the terms and conditions of this Plan, the Merging Corporations will merge into the Surviving Corporation. Upon the merger's becoming effective, the corporate existence of the Merging Corporations will cease, and the corporate existence of the Surviving Corporation will continue. The time when the merger becomes effective is October 1, 1985 and is hereinafter referred to as the "Effective Date". D. CONVERSION AND EXCHANGE OF SHARES. On the Effective Date, the outstanding shares of the Merging Corporations will be converted and exchanged as follows: Surviving Corporation. The outstanding shares of the Surviving Corporation will not be converted or altered in any manner as a result of the merger and will remain outstanding as shares of the Surviving Corporation. 18 E. ABANDONMENT. After the approval of this Plan by the shareholders of each Merging Corporation, and at any time prior to the merger's becoming effective, the directors of the Surviving Corporation may, in their discretion, abandon the merger. II. On October 1, 1985, at the time of the approval of the foregoing Plan of Merger by the board of directors of each of the undersigned corporations the surviving corporation was the owner of all the outstanding shares of the other corporation; and the foregoing Plan of Merger does not provide for any changes in the charter of, or the issuance of any shares by, the surviving corporation. IN WITNESS WHEREOF, these articles are signed by the Vice President and Asst. Secretary of each corporation as of the 1st day of October, 1985. METRO TIRE COMPANY, INC. BY: /s/ LEONARD TURNAGE ------------------------------ Vice President BY: /s/ WILLIAM E. BERRY ------------------------------ Asst. Secretary INTERSTATE TIRE COMPANY BY: /s/ LEONARD TURNAGE ------------------------------ Vice President BY: /s/ WILLIAM E. BERRY ------------------------------ Asst. Secretary NORTH CAROLINA WILSON COUNTY I, Goldie P. Shadding, a Notary Public, hereby certified that on this 3 day of Nov., 1988, personally appeared before me Leonard Turnage and William E. Berry, each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated as an officer of Interstate Tire Company that he was authorized so to sign, and that the statements therein contained are true. /s/ GOLDIE P. SHADDING ----------------------------------- Notary Public My Commission Expires: Sept. 17, 1991 - ------------------------ 19 NORTH CAROLINA WILSON COUNTY I, Goldie P. Shadding, a Notary Public, hereby certified that on this 3 day of November, 1988, personally appeared before me Leonard Turnage and William E. Berry, each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated as an officer of Metro Tire Company, Inc. that he was authorized so to sign, and that the statements therein contained are true. /s/ GOLDIE P. SHADDING ----------------------------------- Notary Public My Commission Expires: Sept. 17, 1991 - ------------------------ 20 DOCUMENT #510048 DATE 7/23/91 TIME 00: FILED RUFUS L. EDMISTEN SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT OF INTERSTATE TIRE COMPANY The undersigned corporation hereby executes these Articles of Amendment for the purpose of amending its charter: l. The name of the corporation is Interstate Tire Company. 2. The following amendment to the charter of the corporation was adopted by its shareholders on the 13th day of June, 1991, in the manner prescribed by law: The name of said corporation is hereby changed to ITCO Tire Company. 3. The number of shares of the corporation outstanding at the time of such adoption was 600,000; and the number of shares entitled to vote thereon was 600,000. 4. The number of shares voted for such amendment was 600,000; and the number of shares voted against such amendment was zero. 5. Any exchange, reclassification or cancellation of issued shares will be effected in the following manner: None . 6. Any change in the stated capital of the corporation will be effected in the following manner: None . 7. The amendment herein effected does not give rise to dissenter's rights to payment for the reason that the only effect of such amendment is to change the name of said corporation. IN WITNESS WHEREOF, these articles are signed by the President and Secretary of the corporation this 13th day of June, 1991. INTERSTATE TIRE COMPANY BY: /s/ ARMISTEAD BURWELL ------------------------------ President, Armistead Burwell BY: /s/ WILLIAM E. BERRY ------------------------------ Secretary, William E. Berry 21 NORTH CAROLINA WILSON COUNTY I, Goldie P. Shadding, a notary public, hereby certify that on this 14th day of June, 1991, personally appeared before me Armistead Burwell and William E. Berry, each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ GOLDIE P. SHADDING ----------------------------------- Notary Public My Commission Expires: Sept. 14, 1991 - ------------------------ 22 0-0075180 FILED 9:00 AM EFFECTIVE SEP 30 1993 RUFUS L. EDMISTEN SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT OF ITCO TIRE COMPANY The undersigned corporation hereby executes these Articles of Amendment for the purpose of amending its charter: l. The name of the corporation is ITCO Tire Company. 2. The following amendment to the charter of the corporation was adopted by its shareholders on the 5th day of October, 1992, in the manner prescribed by law: The name of said corporation is hereby changed to ITCO Holding Company, Inc. 3. The number of shares of the corporation outstanding at the time of such adoption was 600,000; and the number of shares entitled to vote thereon was 600,000. 4. The number of shares voted for such amendment was 600,000; and the number of shares voted against such amendment was zero. 5. Any exchange, reclassification or cancellation of issued shares will be effected in the following manner: None. 6. Any change in the stated capital of the corporation will be effected in the following manner: None. 7. The amendment herein effected does not give rise to dissenter's rights to payment for the reason that the only effect of such amendment is to change the name of said corporation. IN WITNESS WHEREOF, these articles are signed by the President and Secretary of the corporation this 5th day of October, 1992. ITCO TIRE COMPANY BY: /s/ ARMISTEAD BURWELL ------------------------------ President BY: /s/ WILLIAM E. BERRY ------------------------------ Secretary 23 NORTH CAROLINA WILSON COUNTY I, Kathy Tant Webb, a notary public, hereby certify that on this 5th day of October, 1992, personally appeared before me Armistead Burwell and William E Berry, each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ KATHY TANT WEBB ----------------------------------- Notary Public My Commission Expires: 6-5-94 - ------------------------ 24 0-0075180 FILED 1:54 PM EFFECTIVE NOV 30 1995 RUFUS L. EDMISTEN SECRETARY OF STATE NORTH CAROLINA ARTICLES OF MERGER OF ITCO ACQUISITION COMPANY OF NORTH CAROLINA, INC., a North Carolina Corporation, INTO ITCO HOLDING COMPANY, INC., a North Carolina Corporation ITCO Holding Company, Inc., a corporation organized under the laws of the State of North Carolina (the "Surviving Corporation"), hereby submits these Articles of Merger for the purpose of merging ITCO Acquisition Company of North Carolina, Inc., a corporation organized under the laws of the State of North Carolina (the "Merging Corporation"), into the Surviving Corporation. 1. With respect to each corporation that is a party to the merger: (a) The Plan of Merger affected hereto and made a part hereof as Exhibit A was duly approved on and as of November 30, 1995 by the sole shareholder of the Merging Corporation, as required by the North Carolina Business Corporation Act. (b) The Plan of Merger attached hereto and made a part hereof as Exhibit A was duly approved on and as of November 30, 1995 by the shareholders of the Surviving Corporation, as required by the North Carolina Business Corporation Act. 2. These Articles of Merger shall become effective upon filing with the North Carolina Secretary of State. Dated: November 30, 1995. ITCO HOLDING COMPANY, INC. By: /s/ ARMISTEAD BURWELL, JR. ------------------------------ Name: ARMISTEAD BURWELL, JR. ----------------------- Title: PRESIDENT ----------------------- 25 PLAN OF MERGER of ITCO ACQUISITION COMPANY OF NORTH CAROLINA, INC. A North Carolina corporation into ITCO HOLDING COMPANY, INC. A North Carolina corporation ARTICLE I ITCO Acquisition Company of North Carolina, Inc., a North Carolina corporation, which is sometimes referred to herein as the "Merging Corporation," shall be merged into ITCO Holding Company, Inc., a North Carolina corporation, which shall be the surviving corporation and which is sometimes referred to herein as the "Surviving Corporation." Merging Corporation, ITCO Holding Company, Inc. and the shareholders of ITCO Holding Company, Inc. are parties to that certain Agreement and Plan of Merger dated as of November 16, 1995, as amended November 30, 1995 (the "Merger Agreement"), pursuant to which such parties have agreed to cause the merger (the "Merger") of the Merging Corporation into ITCO Holding Company, Inc., subject to certain terms and conditions set forth herein. ARTICLE II After the merger, the Surviving Corporation will have the name ITCO Holding Company, Inc. ARTICLE III The terms and conditions of the Merger are set forth in the Merger Agreement, and include, among other things, the following: (a) The Articles of Incorporation of ITCO Acquisition Company of North Carolina, Inc. as of the effective time of the Merger shall be the Articles of Incorporation of the Surviving Corporation until changed as provided by law. (b) The Bylaws of ITCO Acquisition Company of North Carolina, Inc. as of the effective time of the Merger shall be the Bylaws of the Surviving Corporation until altered, amended or repealed as provided therein. (c) The Directors of ITCO Acquisition Company of North Carolina, Inc. as of the effective time of the Merger shall be the Directors of the Surviving Corporation until their successors are elected or appointed according to the Bylaws of the Surviving Corporation. (d) The Officers of the ITCO Acquisition Company of North Carolina, Inc. as of the effective time of the Merger shall be the Officers of the Surviving Corporation until their successors are elected or appointed according to the Bylaws of the Surviving Corporation. 26 (e) Except insofar as the same may be continued by law or in order to carry out the purposes of this Plan of Merger, and except as continued in and merged into the Surviving Corporation, the separate existence of the Merging Corporation shall cease as of the effective time of the Merger and the Surviving Corporation shall have and possess all the rights, privileges, powers, amenities and franchises and all property of the Merging Corporation, and shall be responsible and liable for all debts, duties, contracts, liabilities and obligations of the Merging Corporation. ARTICLE IV Subject to the terms and conditions of the Merger Agreement, the manner and basis of converting the shares of the corporations participating in the Merger shall be as follows: (a) The 321,185 shares of common stock, par value $.10, of ITCO Holding Company, Inc. outstanding as of the effective time of the Merger shall be cancelled and retired and converted into and become rights to receive cash consideration in the amount of $56.40 per share. (b) The shares of common stock, par value $.01, of ITCO Acquisition Company of North Carolina, Inc. outstanding as of the effective time of the Merger shall be automatically converted into an aggregate of 1,000 shares of common stock, $.01 par value, of the Surviving Corporation on a pro rata basis. ARTICLE V The Merger shall be effective upon the filing of Articles of Merger with the Secretary of State of the State of North Carolina. ARTICLE VI As set forth in the Merger Agreement, the Plan of Merger may be terminated and the Merger contemplated herein may be abandoned at any time, but only prior to the effective time of the Merger, by mutual written consent of the Boards of Directors of the Merging Corporation and the Surviving Corporation. 2 EX-3.8 9 BY-LAWS OF ITCO HOLDING COMPANY, INC. 1 EXHIBIT 3.8 BYLAWS OF ITCO ACQUISITION COMPANY OF NORTH CAROLINA, INC. ARTICLE I OFFICES Section 1. Principal Office. The principal office of the corporation shall be located in Wilson, North Carolina, or at such other place as the Board of Directors shall determine. Section 2. Registered Office. The registered office of the corporation required by law to be maintained in the State of North Carolina may be, but need not be, identical to the principal office. The address of the registered office may be changed from time to time by the Board of Directors. Section 3. Other Offices. The corporation may, from time to time, have offices at such places, either within or without the State of North Carolina, as the Board of Directors may designate or as the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of the shareholders shall be held on the first Friday in the month of June in each year, beginning with the year 1996, at the hour of 10:00 a.m. or such other time on such day designated in the notice of meeting, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the State of North Carolina, such meeting shall be held on the next succeeding business day. Section 2. Substitute Annual Meeting. If the annual meeting shall not be held on the day designated by these bylaws for the annual meeting of shareholders, or at any adjournment thereof, then a substitute annual meeting may be called in accordance with Section 3 of this Article and the meeting so called may be designated and treated for all purposes as the annual meeting. Section 3. Special Meetings. Special meetings of the shareholders may be called by the President or by the Board of Directors or shall be called by the Secretary within thirty (30) days after the delivery to the Secretary of the written request Page 1 of 16 2 of the holder or holders of not less than one-tenth of all shares entitled to vote at the meeting. Such request must be signed, dated and delivered to the Secretary and must describe the purpose or purposes for which the meeting is to be held. Section 4. Place of Meeting. The Board of Directors may designate any place, either within or without the State of North Carolina, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of North Carolina, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation. Section 5. Notice of Meeting. Written or printed notice stating the time and place of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60), or in case of a special meeting called at the request of the shareholders, not more than thirty (30), days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the record of shareholders of the corporation, with postage thereon prepaid. In addition to the foregoing, notice of a substitute annual meeting shall state that the annual meeting was not held on the day designated by these bylaws and that such substitute annual meeting is being held in lieu of and is designated as such annual meeting. If a meeting of shareholders is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is fixed, however, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. Section 6. Waiver of Notice. (a) A shareholder may waive any notice required by law, the articles of incorporation, or these bylaws before or after the date and time stated in the notice. The waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. Page 2 of 16 3 (b) A shareholder's attendance at a meeting: (1) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (2) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter before it is voted upon. Section 7. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, seventy (70) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days and, in the case of a meeting of shareholders, not less than ten (10) full days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired, and except where the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Page 3 of 16 4 Section 8. Voting Lists. After fixing a record date for a meeting, the Secretary of the corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders' meeting. The list shall be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. The shareholder's list shall be available for inspection by any shareholder, beginning two (2) business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, or his agent or attorney, is entitled on written demand to inspect and, subject to the requirements of N.C. Gen. Stat. Section 55-16-02(c), as may be hereafter amended, to copy the list, during regular business hours and at his expense, during the period it is available for inspection. The Secretary of the corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Section 9. Voting Groups. All shares of one or more classes or series that under the articles of incorporation or the North Carolina Business Corporation Act are entitled to vote and be counted together collectively on a matter at a meeting of shareholders constitute a voting group. All shares entitled by the articles of incorporation or the North Carolina Business Corporation Act to vote generally on a matter are for that purpose a single voting group. Classes or series of shares shall not be entitled to vote separately by voting group unless expressly authorized by the articles of incorporation or specifically required by law. Section 10. Quorum. Shares entitled to vote as a separate voting group may take action on a matter at the meeting only if a quorum of those shares exists. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. The shareholders at a meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the shares voting on the motion to adjourn; and at any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. Section 11. Proxies. Shares may be voted either in person or by one or more agents authorized by a written proxy executed by the shareholder or by his duly authorized attorney in fact. Page 4 of 16 5 An appointment of a proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes. An appointment is valid for eleven (11) months unless a different period is expressly provided in the appointment form. Section 12. Voting of Shares. Each outstanding share entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Except as otherwise provided by law, the articles of incorporation or these bylaws, if a quorum exists, action on a matter by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action. Shares of its own stock owned by the corporation directly, or indirectly through a corporation in which it owns, directly or indirectly, a majority of the shares entitled to vote for directors, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares at a given time entitled to vote; provided that this provision does not limit the power of the corporation to vote its own shares held by it in a fiduciary capacity. Section 13. Votes Required. The vote of a majority of the shares voted at a meeting of shareholders, duly held at which a quorum is present, shall be sufficient to take or authorize action upon any matter which may properly come before the meeting except as otherwise provided by law, by the articles of incorporation or by these bylaws. Any provision in these bylaws prescribing the vote required for any purpose as permitted by law may not itself be amended by a vote less than the vote prescribed therein. Section 14. Action of Shareholders Without Meeting. Any action which may be taken at a meeting of the shareholders may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents signed by all the shareholders before or after such action, describing the action taken and delivered to the corporation for inclusion in the minutes or filing with the corporate records. A consent signed under this Section has the effect of a meeting vote and may be described as such in any document. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, the Board of Directors. Page 5 of 16 6 Section 2. Number, Tenure and Qualifications. The number of directors which shall constitute the whole board shall not be less than one (1) nor more than ten (10). The first board shall consist of one (1) director. Thereafter, within such limits, the number of directors shall be determined by the shareholders. Directors need not be residents of the State of North Carolina or shareholders of the corporation. The directors shall be elected at the annual meeting of the shareholders (except as herein otherwise provided for the filling of vacancies). Those persons who receive the highest number of votes at a meeting at which a quorum is present shall be deemed to have been elected. Each initial director shall hold office until the first shareholders' meeting at which directors are elected, or until such director's death, resignation or removal. The term of every other director shall expire at the next annual shareholder's meeting following the director's election or upon such director's death, resignation or removal. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which directors are elected. A decrease in the number of directors shall not shorten an incumbent director's term. Despite the expiration of a director's term, such director shall continue to serve until a successor shall be elected or qualifies or until there is a decrease in the number of directors. Section 3. Vacancies. Except as otherwise provided by law or the articles of incorporation, any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors even though less than a quorum or by the sole remaining director. At a special meeting of shareholders the shareholders may elect a director to fill any vacancy not filled by the directors. Section 4. Removal. Any director may be removed at any time with or without cause by a vote of the shareholders holding a majority of the outstanding shares entitled to vote at an election of directors. If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director. Section 5. Compensation. The Board of Directors may compensate directors for their services as such and may provide for the payment of all expenses incurred by directors in attending meetings of the Board. Page 6 of 16 7 Section 6. Chairman of the Board. There may be a Chairman of the Board of Directors elected by the directors from their number at the annual meeting of the Board of Directors. The Chairman shall preside at all meetings of the Board of Directors and perform such other duties as may be directed by the Board. ARTICLE IV MEETINGS OF DIRECTORS Section 1. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of North Carolina for the holding of additional regular meetings without other notice than such resolution. Section 2. Special Meetings. Special meetings of the Board of Directors may be called by the President or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of North Carolina, as the place for holding any special meeting of the Board of Directors called by them. Section 3. Notice. The person calling the meeting shall give or cause to be given oral or written notice of special meetings of the Board of Directors to each director not less than three (3) days before the date of the meeting. Neither the business to be transacted at, nor the purposes of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 4. Waiver of Notice. (a) A director may waive any notice required by law, the articles of incorporation, or these bylaws before or after the date and time stated in the notice. Except as provided by subsection (b), the waiver must be in writing, signed by the director entitled to the notice, and delivered to the corporation for filing with the minutes or corporate records. (b) A director's attendance at or participation in a meeting waives any required notice to him of the meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 5. Quorum. Except as otherwise provided by law, the articles of incorporation or these bylaws, a quorum of the Page 7 of 16 8 Board of Directors consists of (a) a majority of the fixed number of directors if the corporation has a fixed board size, or (b) a majority of the number of directors prescribed, or if no number is prescribed, the number in office immediately before the meeting begins, if the corporation has a variable-range size board. Section 6. Manner of Acting. If a quorum is present when a vote is taken, the affirmative act of the majority of the directors present is the act of the Board of Directors, except as otherwise provided in these bylaws. Section 7. Presumption of Assent. A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless: (a) He objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; (b) His dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) He files written notice of his dissent or abstention with the presiding officer of the meeting before its adjournment or with the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. Section 8. Action by Directors Without Meeting. Action required or permitted by law to be taken at a Board of Directors' meeting may be taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records. Action taken under this Section is effective when the last director signs the consent unless the consent specifies a different effective date. A consent signed under this Section has the effect of a meeting vote and may be described as such in any document. Section 9. Meetings by Conference Telephone. Any one or more directors may participate in a meeting of the Board or a committee by means of a conference telephone or similar communications device by which all directors participating may simultaneously hear each other during the meeting, and such participation in a meeting shall be deemed presence in person at such meeting. Page 8 of 16 9 ARTICLE V COMMITTEES OF THE BOARD Section 1. Executive Committee. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by these bylaws, may designate two or more directors to constitute an Executive Committee, which committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors to the extent permitted by applicable law. Section 2. Other Committees. The Board of Directors may create one or more other committees and appoint members of the Board of Directors to serve on them. Each committee must have two or more members who serve at the pleasure of the Board of Directors. The creation of a committee and appointment of members to it must be approved by the greater of: (a) A majority of all the directors in office when the action is taken; or (b) The number of directors constituting a quorum under the articles of incorporation or these bylaws. Section 3. Vacancy. Any vacancy occurring in any committee shall be filled by a majority of the number of directors fixed by these bylaws at a regular or special meeting of the Board of Directors. Section 4. Removal. Any member of a committee may be removed at any time with or without cause by a majority of the number of directors fixed by these bylaws. Section 5. Minutes. Each committee shall keep regular minutes of its proceedings and report the same to the Board when required. Section 6. Responsibility of Directors. The designation of a committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility or liability imposed upon it or him by law. Any resolutions adopted or other action taken by a committee within the scope of the authority delegated to it by the Board of Directors shall be deemed for all purposes to be adopted or taken by the Board of Directors. If action taken by a committee is not thereafter formally considered by the Board, a director may dissent from such action by filing his written objection with the Secretary with reasonable promptness after learning of such action. Page 9 of 16 10 ARTICLE VI OFFICERS Section 1. Officers of the Corporation. The officers of the corporation shall consist of a President, a Secretary, a Treasurer and such Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers as the Board of Directors may from time to time appoint. The same individual may simultaneously hold more than one office in the corporation, but no individual may act in more than one capacity where action of two or more officers is required. Section 2. Appointment and Term. The officers of the corporation shall be appointed by the Board of Directors and each officer shall hold office until his death, resignation, retirement, removal, disqualification or his successor shall have been appointed. Section 3. Compensation of Officers. The compensation of all officers of the corporation shall be fixed by the Board of Directors and no officer shall serve the corporation in any other capacity and receive compensation therefor unless such additional compensation be authorized by the Board of Directors. The appointment of an officer does not itself create contract rights. Section 4. Removal of Officers. The Board of Directors may remove any officer at any time with or without cause, but such removal shall not itself affect the officer's contract rights, if any, with the corporation. Section 5. Resignation. An officer may resign at any time by communicating his or her resignation to the corporation, orally or in writing. A resignation is effective when communicated unless it specifies in writing a later effective date. If a resignation is made effective at a later date that is accepted by the corporation, the Board of Directors may fill the pending vacancy before the effective date if the Board provides that the successor does not take office until the effective date. An officer's resignation does not affect the corporation's contract rights, if any, with the officer. Section 6. Bonds. The Board of Directors may by resolution require an officer, agent, or employee of the corporation to give bond to the corporation, with sufficient sureties, conditioned upon the faithful performance of the duties of his respective office or position, and to comply with such other conditions as may from time to time be required by the Board of Directors. Page 10 of 16 11 Section 7. President. The President shall be the chief executive officer of the corporation, subject to the control of the Board of Directors, and shall in general supervise and control all of the business and affairs of the corporation. He shall, when present, preside at all meetings of the shareholders. He shall sign any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. Section 9. Vice Presidents. In the absence of the President or in the event of his death, inability or refusal to act, the Vice Presidents, in the order of the seniority of their titles or if they shall all be the same level of Vice President, in the order of their length of uninterrupted service at such level of Vice President, unless otherwise determined by the Board of Directors, shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties as from time to time be assigned to him by the President or Board of Directors. Section 10. Secretary. The Secretary shall: (a) attend all meetings of the shareholders and of the Board of Directors, keep the minutes of such meetings in one or more books provided for that purpose, and perform like duties for the standing committees when required; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents, the execution of which on behalf of the corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) have general charge of the stock transfer books of the corporation; and (f) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors or by the President, under whose supervision he shall be. The Secretary shall keep or cause to be kept at the corporation's principal office a record of the corporation's shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each, and such other records as are required to be kept at the corporation's principal office by N.C. Gen. Stat. Section 55-16-01 and any successor to such statute. Page 11 of 16 12 Section 11. Assistant Secretaries. In the absence of the Secretary or in the event of his death, inability or refusal to act, any Assistant Secretary, unless otherwise determined by the Board of Directors, shall perform the duties of the Secretary, and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary. They shall perform such other duties as may be assigned to them by the Secretary, by the President or by the Board of Directors. Section 12. Treasurer. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for money due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such depositories as shall be selected in accordance with the provisions of Article VII, Section 4 of these bylaws; and (b) in general perform all of the duties incident to the office of Treasurer, including preparing, or causing to be prepared, all financial statements required by law, and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. Section 13. Assistant Treasurers. In the absence of the Treasurer or in the event of his death, inability or refusal to act, the Assistant Treasurers in the order of their length of service as Assistant Treasurer, unless otherwise determined by the Board of Directors, shall perform the duties of the Treasurer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Treasurer. They shall perform such other duties as may be assigned to them by the Treasurer, by the President or by the Board of Directors. ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 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. Section 2. Loans. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Section 3. Checks and Drafts. All checks, drafts or other orders for the payment of money, 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. Page 12 of 16 13 Section 4. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such depositories as the Board of Directors may select. ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. The Board of Directors may authorize the issuance of some or all of the shares of the corporation's classes or series without issuing certificates to represent such shares. If shares are represented by certificates, the certificates shall be in such form as shall be determined by the Board of Directors. Certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number and class of shares and the date of issue, shall be entered on the stock transfer books of the corporation. When shares are represented by certificates, the corporation shall issue and deliver, to each shareholder to whom such shares have been issued or transferred, certificates representing the shares owned by him. When shares are not represented by certificates, then within a reasonable time after the issuance or transfer of such shares, the corporation shall send the shareholder to whom such shares have been issued or transferred a written statement of the information required by law to be on certificates. Section 2. Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, and, when shares are represented by certificates, on surrender for cancellation of the certificate for such shares. Section 3. Lost Certificates. The Board of Directors or the President may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the shareholder. When authorizing such issuance of a new certificate, the Board of Directors or the President may require that the shareholder give the corporation a bond in such sum as the Board or the President may direct as indemnity against any claim that may be made against the corporation with respect to the certificate claimed to have been lost or destroyed or may require the shareholder to agree to indemnify the corporation against any claims that may be made against the corporation with respect to the certificate claimed to have been lost or destroyed. Page 13 of 16 14 Section 4. Holder of Record. The corporation may treat as an absolute owner of shares the person in whose name the shares stand of record on its books just as if that person had full competency, capacity and authority to exercise all rights of ownership irrespective of any knowledge or notice to the contrary or any description indicating a representative, pledge or other fiduciary relation or any reference to any other instrument or to the rights of any other person appearing upon its records or upon the share certificate except that any person furnishing to the corporation proof of his appointment as a fiduciary shall be treated as if he were a holder of record of its shares. ARTICLE IX GENERAL PROVISIONS Section 1. Distributions. The Board of Directors may from time to time authorize, and the corporation may grant, distributions and share dividends pursuant to law and subject to the provisions of its articles of incorporation. Section 2. Seal. The corporate seal of the corporation shall consist of two concentric circles between which is the name of the corporation and in the center of which is inscribed SEAL; and such seal, as impressed on the margin hereof, is hereby adopted as the corporate seal of the corporation. Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed by the Board of Directors. Section 4. Pronouns. Each reference to pronouns herein shall be construed in the masculine, feminine, neuter, singular or plural, as the context may require. Section 5. Amendments. The Board of Directors may amend or repeal the bylaws, except to the extent otherwise provided by law, the articles of incorporation or a Bylaw adopted by the shareholders, and except that a Bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the Board of Directors unless the articles of incorporation or a Bylaw adopted by the shareholders authorizes the Board of Directors to adopt, amend or repeal that particular Bylaw or the bylaws generally. Section 6. Voting of Shares of Other Corporations. Authority to vote shares of another corporation or of any association held by this corporation, and to execute proxies and written waivers and consents in relation thereto, shall be vested exclusively in the President or such officer(s) and employee(s) of this corporation as shall be expressly identified by name or title from time to time by the Board of Directors of this corporation in resolutions formally adopted for that purpose. Page 14 of 16 15 ARTICLE X INDEMNIFICATION Section 1. Coverage. Any person who at any time serves or has served as a director or officer of the corporation, or in such capacity at the request of the corporation for any other corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under an employee benefit plan, shall have a right to be indemnified by the corporation to the fullest extent permitted by law against (a) reasonable expenses, including reasonable attorneys' fees, actually incurred by him in connection with any threatened, pending or completed action, suit or proceeding (and any appeal thereof), whether civil, criminal, administrative, investigative or arbitrative, and whether or not brought by or on behalf of the corporation, seeking to hold him liable by reason of the fact that he is or was acting in such capacity, and (b) reasonable payments made by him in satisfaction of any judgment, money decree, fine (including, without limitation, any excise tax assessed with respect to an employee benefit plan), penalty or settlement for which he may have become liable in any such action, suit or proceeding. Section 2. Payment. Expenses incurred by such person shall be paid in advance of the final disposition of such investigation, action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation. Section 3. Evaluation. The Board of Directors of the corporation shall take all such action as may be necessary and appropriate to authorize the corporation to pay the indemnification required by this Article X, including, without limitation, to the extent needed, making a determination that indemnification is permissible under the circumstances and a good faith evaluation of the manner in which the claimant for indemnity acted and of the amount of indemnity due him, and giving notice to and obtaining approval by the shareholders of the corporation. Section 4. Consideration. Any person who at any time after the adoption of this Article X serves or has served in any of the aforesaid capacities for or on behalf of the corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provisions of this Article X. Any repeal or modification of these indemnification provisions shall not affect any rights or obligations existing at the time of such repeal or modification. Page 15 of 16 16 Section 5. Definitions. For purposes of this Article X, terms defined by the North Carolina Business Corporation Act and used but not defined herein shall have the meanings assigned to them by the Act. Page 16 of 16 EX-3.9 10 ARTICLES OF INCORPORATION OF ITCO TIRE COMPANY 1 May 31 8:46 AM '84 [illegible] SECRETARY OF STATE [illegible] EXHIBIT 3.9 ARTICLES OF INCORPORATION OF TOWN & COUNTRY TIRE SERVICE, INC. I, the undersigned natural person of the age of eighteen (18) years or more, for the purpose of forming a business corporation under the laws of the State of North Carolina, as contained in Chapter 55 of the General Statutes of North Carolina, entitled Business Corporation Act, and the several amendments thereto, hereby set forth Articles of Incorporation as follows: ARTICLE I Name. The name of the corporation is TOWN & COUNTRY TIRE SERVICE, INC. ARTICLE II Period of Duration. The period of duration of the Corporation shall be perpetual. ARTICLE III Purpose. The purpose or purposes for which the corporation is organized are: In general, to have and exercise any and all powers that corporations have and may exercise under the laws of the State of North Carolina and as the same may be amended, except such powers as are inconsistent with the express provisions of these Articles. ARTICLE IV Capital Stock. The aggregate number of shares that the corporation shall have authority to issue is One Hundred Thousand (100,000), divided into one class. The designation of the class, number of shares of the class, series, if any, within the class, and the par value, if any, of the shares of each class, or statement that the shares of any class are without par value, is as follows:
Number of Par Value Class Series Shares Per Share - ----- ------ ------ --------- Common A 100,000 $1.00
2 -2- ARTICLE V Preferences, Etc. The preferences, limitations and relative rights in respect of the shares of each class are as follows: None. ARTICLE VI Consideration for Shares. The minimum amount of consideration for shares to be received by the corporation before it shall commence business is $500.00. ARTICLE VII Registered Office and Registered Agent. The address of the initial registered office of the corporation is: 5 West Hargett Street, Suite 1000, City of Raleigh, County of Wake, State of North Carolina 27601, and the name of the initial registered agent at such address is William D. Harazin. ARTICLE VIII Directors. The number of Directors of the corporation may be fixed by the bylaws, but shall not be less than one. The number of Directors constituting the initial Board of Directors shall be three, and the names and addresses of the persons who are to serve as Directors until the first meeting of shareholders or until their successors shall be elected and qualified are: Ernie Ray Sears, Route 1, Fuquay-Varina, NC 27526; Emerson D. Beecher, 3920 Westra Drive, Raleigh, NC 27604; and Robert Mitchell Kinton, Route 1, Fuquay-Varina, NC 27526. ARTICLE IX Incorporator. The name and address of the Incorporator is William D. Harazin, 5 West Hargett Street, Suite 1000, Raleigh, NC 27601. IN TESTIMONY WHEREOF, I have hereunto set my hand this 30th day of May, 1984, A.D. /s/ WILLIAM D. HARAZIN 3 -3- NORTH CAROLINA WAKE COUNTY This is to certify that on the 30th day of May, 1984, before me a Notary Public, personally appeared William D. Harazin, who I am satisfied is the person named in and who executed the foregoing Articles of Incorporation, and I, having first made known to him the contents thereof, he did acknowledge that he signed and delivered the same as his voluntary act and deed for the uses and purposes therein expressed. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal this 30th day of May 1984, A.D. /s/ ELIZABETH A. ROBERTS Notary Public My Commission Expires: 8-23-88 4 FILED 9:00 AM SEP 30 1993 EFFECTIVE_____________________ RUFUS L. EDMISTEN SECRETARY OF STATE NORTH CAROLINA ARTICLES OF AMENDMENT OF TOWN & COUNTRY TIRE SERVICE, INC. The undersigned corporation hereby executes these Articles of Amendment for the purpose of amending its charter: 1. The name of the corporation is Town & Country Tire Service, Inc. 2. The following amendment to the charter of the corporation was adopted by its shareholders on the 5th day of October, 1992, in the manner prescribed by law: The name of said corporation is hereby changed to ITCO Tire Company. 3. The number of shares of the corporation outstanding at the time of such adoption was 6,000; and the number of shares entitled to vote thereon was 6,000. 4. The number of shares voted for such amendment was 6,000; and the number of shares voted against such amendment was zero. 5. Any exchange, reclassification or cancellation of issued shares will be effected in the following manner: None. 6. Any change in the stated capital of the corporation will be effected in the following manner: None. 7. The amendment herein effected does not give rise to dissenter's rights to payment for the reason that the only effect of such amendment is to change the name of said corporation. IN WITNESS WHEREOF, these articles are signed by the President and Secretary of the corporation this 5th day of October 1992. TOWN & COUNTRY TIRE SERVICE, INC. BY: /s/ A. BURWELL ------------------------------------ President BY: /s/ WILLIAM E. BERRY ------------------------------------ Secretary 5 NORTH CAROLINA WILSON COUNTY I, Kathy Tant Webb, a notary public, hereby certify that on this 5th day of October, 1992, personally appeared before me Armistead Burwell and William E. Berry, each of whom being by me first duly sworn, declared that he signed the foregoing document in the capacity indicated, that he was authorized so to sign, and that the statements therein contained are true. /s/ KATHY TANT WEBB -------------------------- Notary Public My Commission Expires: 6-5-94 - --------------------------- EX-3.10 11 BY-LAWS OF ITCO TIRE COMPANY 1 EXHIBIT 3.10 ITCO TIRE COMPANY BY-LAWS ARTICLE I Offices Section 1. Principal Place of Business. The principal place of business of the corporation shall be located at Commerce Road, Wilson, North Carolina. Section 2. Registered Office. The registered office of the corporation, which by law is required to be maintained within the State of North Carolina, shall be located at Commerce Road, Wilson, North Carolina. ARTICLE II Stock Section 1. Issuance. The Board of Directors may issue, from time to time, the stock of this corporation for such consideration as the Board of Directors may deem advisable. All shares of stock so issued shall be fully paid and not subject to further call or assessment, and in the absence of actual fraud in the transaction, the valuation of the consideration as fixed by the Board of Directors shall be conclusive. Section 2. Certificate. Certificates of stock shall be issued, when authorized by the Board of Directors, in numerical order from the stock certificate book. Each certificate shall have designated upon its fact the type of share. Each certificate shall be signed by the President and by the Secretary, and the Company's seal shall be affixed thereto by the Secretary. A record of each certificate shall be kept on the stub thereof. Section 3. 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 and marked cancelled, with the date of cancellation, by the Secretary. The stock books of the company shall be closed for transfer thirty days before general elections and ten days before dividend days. ARTICLE III Stockholders Section 1. Annual Meetings. The annual meeting of the stockholders of this corporation shall be held in the principal place of business of the corporation at 10:00 a.m. on the 2nd day of August of each year, if not a legal holiday, but if a legal 2 but if a legal holiday, then on the day following. Section 2. Special Meetings. Special meetings of the stockholders may be held at the principal place of business of the corporation at any time, upon the call of the Board of Directors, or of the stockholders, holding together at least one-tenth of the stock of said corporation. Section 3. Notice of Meeting. Notice of meetings, written or printed, for every regular or special meeting of the stockholders shall be prepared and mailed to the last known post office address of each stockholder not less than ten days before any such meeting, and, if for a special meeting, such notice shall state the object or objects thereof. Provided, no notice shall be required if all of the stockholders waive notice of such meeting. Section 4. Quorum. A quorum of any meeting of the stockholders shall consist of a majority of the voting stock of the corporation, represented in person or by proxy. A majority of those voting shall decide any questions that may come before said meeting. Section 5. Presiding Officer. The President of the corporation shall preside at stockholders meetings and the Secretary of the corporation shall act as secretary thereof. In the absence of the President of the corporation, the Vice-President shall preside. Section 6. Order of Business. The order of business at the annual meeting, and as far as possible at all other meetings of the stockholders, shall be: (a) Calling of roll, (b) Proof of notice or waiver, (c) Reading and disposal of any unapproved minutes, (d) Annual reports of officers, (e) Election of directors, (f) Unfinished business, (g) New business, and (h) Adjournment. ARTICLE IV Directors Section 1. Board of Directors. There shall be a Board of Directors consisting of no less than one and no more than six persons who shall be elected annually by ballot by the stockholders for the term of one year, and they shall serve until the election and acceptance of their duly qualified successors. The directors do not have to be stockholders. Any directorship not filled by the shareholders shall be treated as vacancies to be filled by and in the discretion of the Board of Directors. If the number of shareholders is less than three, then the number of directors shall 3 be determined as provided by G.S. 55-25. Section 2. Regular Meetings. The regular meetings of the Board of Directors shall be held at the principal place of business of the corporation at 10:00 a.m. on the 2nd day of August of each year, if not a legal holiday, but if a legal holiday, then on the day following. Section 3. Special Meetings. Special meetings of the corporation shall be held in the principal place of business of the corporation at any time upon call by the president. Section 4. Notice. Notice of both regular and special meetings shall be mailed by the Secretary to each member of the Board not less than ten days before any such meetings, and notice of a special meeting shall state the purpose thereof. Provided that no notice of such meeting shall be required if all of the directors waive notice of such meeting. Section 5. Quorum. A quorum at any meeting shall consist of a majority of the entire membership of the Board. A majority of those voting shall decide any question that may come before the meeting. Section 6. Officers. Officers of the company shall be elected by ballot by the Board of Directors at their first meeting after the election of directors each year. If any office becomes vacant during the year, the Board of Directors shall fill the same for the unexpired term. The Board of Directors shall fix the compensation of the officers and agents of the company. Section 7. Order of Business. The order of business at any regular or special meeting of the Board of Directors shall be: (a) Reading and disposal of any unapproved minutes, (b) Reports of officers, (c) Unfinished business, (d) New business, and (e) Adjournment. Section 8. The corporation shall indemnify and hold harmless any of its officers, directors, employees or agents and anyone serving in any capacity at the request of the corporation in any other corporation, partnership, joint venture, trust or other enterprise or at the request of the corporation as a trustee or administrator under an employee benefit plan, when and if they shall be entitled to same under the terms and conditions of G.S. 55-20, as it may be modified and amended from time to time hereafter. Section 9. The corporation shall indemnify and hold harmless any one or more of its officers, directors, employees or agents against liability and litigation expense, including reasonable attorney's fees, arising out of their status as such or their 4 activities in any of said capacities as and to the extent permitted under G.S. 55-19(a) as the same may be modified and amended from time to time. The corporation shall further indemnify and hold harmless any person who, at the request of the corporation, is or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, to the extent and as permitted by G.S. 55-19(a). ARTICLE V Officers Section 1. Officers. The officers of the company shall be a president, a vice-president, a secretary, a treasurer and such assistant secretaries as may be necessary to conduct the business of the corporation, who shall be elected for one year and shall hold office until their successors are elected and qualified. Section 2. President. The president shall preside at all meetings; shall have general supervision of the affairs of the corporation; shall sign all certificates of stock, contracts, and other business documents and instruments of the corporation; may sign checks; shall make reports to the directors and stockholders, and shall perform all such other duties as are incident to his office or are properly required of him by the Board of Directors. Section 3. Vice-President. In the absence of the president, the vice-president shall exercise all his functions. Section 4. Secretary. The Secretary shall have the custody of all books of the company and at all reasonable times exhibit the same to any director or stockholder of the corporation upon application at the office of the corporation during business hours. He shall make such reports and perform such other duties as are properly required of him by the Board of Directors. The Secretary shall issue notices for all meetings, shall keep minutes of all meetings, shall have charge of the seal and minute book and shall countersign all stock certificates. Assistant secretaries will perform such duties as may be required of them by the Board of Directors. Section 5. Treasurer. The treasurer shall have custody of all funds and securities of the company, shall deposit the same in the name of the corporation in such bank or banks as the directors may appoint and shall have custody of all books of account. He shall make such reports and perform such other duties as are properly required of him by the Board of Directors, including the signing and countersigning of checks. Section 6. Number of Offices. No more than one office may be held by one person, subject to G.S. 55-34. 5 ARTICLE VI General Provisions Section l. Dividends. Dividends shall be declared only from the net profit at such times as the Board of Directors shall deem it prudent to direct, and no dividend shall be declared out of the capital of the company or that will diminish the capital of the company. Section 2. Seal. The corporate seal of the company shall consist of two concentric circles, between which is the name of the company, and in the center shall be inscribed the words "corporate seal" and the year incorporated. Section 3. Amendments. These by-laws or any part hereof may be repealed, altered, or amended and new by-laws adopted by any meeting of the Board of Directors upon the affirmative vote of a majority of the entire membership of the Board of Directors as then constituted. Section 4. Checks, Drafts, Etc. All notes, drafts, acceptances, checks, and endorsements or other of indebtedness may be signed by the president or vice-president or by the secretary or treasurer, or all of said officers, or in such other manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made by the president, or the vice-president, or the secretary, or the treasurer, or all of said officers, or by any other officer or agent who may be designated by resolution of the Board of Directors in such a manner as such resolution may provide. Section 5. Fiscal Year. The fiscal year of the corporation shall be established by resolution of the Board of Directors. EX-3.12 12 BY-LAWS OF ITCO TIRE COMPANY OG FEORGIA 1 Exhibit 3.12 RADIAL TIRE STORES, INC. BY-LAWS ARTICLE I Offices Section 1. Principal Place of Business. The principal place of business of the corporation shall be located at Commerce Road, Wilson, North Carolina. Section 2. Registered office. The registered office of the corporation, which by law is required to be maintained within the State of North Carolina, shall be located at Commerce Road, Wilson, North Carolina. ARTICLE II Stock Section 1. Issuance. The Board of Directors may issue, from time to time, the stock of this corporation for such consideration as the Board of Directors may deem advisable. All shares of stock so issued shall be fully paid and not subject to further call or assessment, and in the absence of actual fraud in the transaction, the valuation of the consideration as fixed by the Board of Directors shall be conclusive. Section 2. Certificate. Certificates of stock shall be issued, when authorized by the Board of Directors, in numerical order from the stock certificate book. Each certificate shall have designated upon its fact the type of share. Each certificate shall be signed by the President and by the Secretary, and the Company's seal shall be affixed thereto by the Secretary. A record of each certificate shall be kept on the stub thereof. Section 3. 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 and marked cancelled, with the date of cancellation, by the Secretary. The stock books of the company shall be closed for transfer thirty days before general elections and ten days before dividend days. ARTICLE III Stockholders Section 1. Annual Meetings. The annual meeting of the stockholders of this corporation shall be held in the principal place of business of the corporation at 10 o'clock a.m. on the 2nd day of August of each year, if not a legal holiday, but if a legal 2 holiday, then on the day following. Section 2. Special Meetings. Special meetings of the stockholders may be held at the principal place of business of the corporation at any time, upon the call of the Board of Directors, or of the stockholders, holding together at least one-tenth of the stock of said corporation. Section 3. Notice of Meeting. Notice of meetings, written or printed, for every regular or special meeting of the stockholders shall be prepared and mailed to the last known post office address of each stockholder not less than ten days before any such meeting, and, if for a special meeting, such notice shall state the object or objects thereof. Provided, no notice shall be required if all of the stockholders waive notice of such meeting. Section 4. Quorum. A quorum of any meeting of the stockholders shall consist of a majority of the voting stock of the corporation, represented in person or by proxy. A majority of those voting shall decide any questions that may come before said meeting. Section 5. Presiding Officer. The President of the corporation shall preside at stockholders meetings and the Secretary of the corporation shall act as secretary thereof. In the absence of the President of the corporation, the Vice-President shall preside. Section 6. Order of Business. The order of business at the annual meeting, and as far as possible at all other meetings of the stockholders, shall be: (a) Calling of roll, (b) Proof of notice or waiver, (c) Reading and disposal of any unapproved minutes, (d) Annual reports of officers, (e) Election of directors, (f) Unfinished business, (g) New business, and (h) Adjournment. ARTICLE IV Directors Section 1. Board of Directors. There shall be a Board of Directors consisting of no less than one and no more than six persons who shall be elected annually by ballot by the stockholders for the term of one year, and they shall serve until the election and acceptance of their duly qualified successors. The directors do not have to be stockholders. Any directorship not filled by the shareholders shall be treated as vacancies to be filled by and in the discretion of the Board of Directors. If the number of shareholders is less than three, then the number of directors shall 3 be determined as provided by G.S. 55-25. Section 2. Regular Meetings. The regular meetings of the Board of Directors shall be held at the principal place of business of the corporation at 10 o'clock a.m. on the 2nd day of August of each year, if not a legal holiday, but if a legal holiday, then on the day following. Section 3. Special Meetings. Special meetings of the corporation shall be held in the principal place of business of the corporation at any time upon call by the president. Section 4. Notice. Notice of both regular and special meetings shall be mailed by the Secretary to each member of the Board not less than ten days before any such meetings, and notice of a special meeting shall state the purpose thereof. Provided that no notice of such meeting shall be required if all of the directors waive notice of such meeting. Section 5. Quorum. A quorum at any meeting shall consist of a majority of the entire membership of the Board. A majority of those voting shall decide any question that may come before the meeting. Section 6. Officers. Officers of the company shall be elected by ballot by the Board of Directors at their first meeting after the election of directors each year. If any office becomes vacant during the year, the Board of Directors shall fill the same for the unexpired term. The Board of Directors shall fix the compensation of the officers and agents of the company. Section 7. Order of Business. The order of business at any regular or special meeting of the Board of Directors shall be: (a) Reading and disposal of any unapproved minutes, (b) Reports of officers, (c) Unfinished business, (d) New business, and (e) Adjournment. Section 8. The corporation shall indemnify and hold harmless any of its officers, directors, employees or agents and anyone serving in any capacity at the request of the corporation in any other corporation, partnership, joint venture, trust or other enterprise or at the request of the corporation as a trustee or administrator under an employee benefit plan, when and if they shall be entitled to same under the terns and conditions of G.S. 55-20, as it may be modified and amended from time to time hereafter. Section 9. The corporation shall indemnify and hold harmless any one or more of its officers, directors, employees or agents against liability and litigation expense, including reasonable attorney's fees, arising out of their status as such or their 4 activities in any of said capacities as and to the extent permitted under G.S. 55-19(a) as the same may be modified and amended from time to time. The corporation shall further indemnify and hold harmless any person who, at the request of the corporation, is or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, to the extent and as permitted by G.S. 55-19(a). ARTICLE V Officers Section 1. Officers. The officers of the company shall be a president, a vice-president, a secretary, a treasurer and such assistant secretaries as may be necessary to conduct the business of the corporation, who shall be elected for one year and shall hold office until their successors are elected and qualified. Section 2. President. The president shall preside at all meetings; shall have general supervision of the affairs of the corporation; shall sign all certificates of stock, contracts, and other business documents and instruments of the corporation; may sign checks; shall make reports to the directors and stockholders, and shall perform all such other duties as are incident to his office or are properly required of him by the Board of Directors. Section 3. Vice-President. In the absence of the president, the vice-president shall exercise all his functions. Section 4. Secretary. The Secretary shall have the custody of all books of the company and at all reasonable times exhibit the same to any director or stockholder of the corporation upon application at the office of the corporation during business hours. He shall make such reports and perform such other duties as are properly required of him by the Board of Directors. The Secretary shall issue notices for all meetings, shall keep minutes of all meetings, shall have charge of the seal and minute book and shall countersign all stock certificates. Assistant secretaries will perform such duties as may be requited of them by the Board of Directors. Section 5. Treasurer. The treasurer shall have custody of all funds and securities of the company, shall deposit the same in the name of the corporation in such bank or banks as the directors may appoint and shall have custody of all books of account. He shall make such reports and perform such other duties as are properly required of him by the Board of Directors, including the signing and countersigning of checks. Section 6. Number of Offices. No more than one office may be held by one person, subject to G.S. 55-34. 5 ARTICLE VI General Provisions Section 1. Dividends. Dividends shall be declared only from the net profit at such times as the Board of Directors shall deem it prudent to direct, and no dividend shall be declared out of the capital of the company or that will diminish the capital of the company. Section 2. Seal. The corporate seal of the company shall consist of two concentric circles, between which is the name of the company, and in the center shall be inscribed the words "corporate seal" and the year incorporated. Section 3. Amendments. These by-laws or any part hereof may be repealed, altered, or amended and new by-laws adopted by any meeting of the Board of Directors upon the affirmative vote of a majority of the entire membership of the Board of Directors as then constituted. Section 4. Checks, Drafts, Etc. All notes, drafts, acceptances, checks and endorsements or other evidences of indebtedness may be signed by the president or vice-president or by the secretary or treasurer, or all of said officers, or in such other manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made by the president, or the vice-president, or the secretary, or the treasurer, or all of said officers, or by any other officer or agent who may be designated by resolution of the Board of Directors in such a manner as such resolution may provide. Section 5. Fiscal Year. The fiscal year of the corporation shall be established by resolution of the Board of Directors. EX-3.13 13 ARTICLES OF INCORPORATION OF THE SPEED MERCHANT 1 Exhibit 3.13 809140 FILED In the office of the Secretary of State of the State of California FEB 11 1977 MARCH FUNG EU Secretary of State By: /s/ James E. Harris ----------------------------- Deputy ARTICLES OF INCORPORATION OF SPEED MERCHANTS, INC. ONE: The name of this corporation is SPEED MERCHANTS, INC. TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: The name and address in this state of the corporation's initial agent for service of process is ARTHUR C. SOARES, 345 Lincoln Avenue, San Jose, CA, FOUR: The total number of shares which the corporation is authorized to issue is one million (1,000,000). DATED: February 7, 1977 /s/ Michael T. Morrissey ------------------------------------------- MICHAEL T. MORRISSEY, incorporator I declare that I am the person who executed the above Articles of Incorporation, and such instrument is my act and deed. /s/ Michael T. Morrissey ------------------------------------------- MICHAEL T. MORRISSEY 2 NA CHANGED TO: THE SPEED MERCHANT, INC. A178699 809140 FILED In the office of the Secretary of State of the State of California JUN 14 1977 MARCH FUNG EU, Secretary of State By: /s/ James E. Harris ------------------------- Deputy CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF SPEED MERCHANTS, INC. ARTHUR C. SOARES and UFA M. SOARES certify: 1. That they constitute all of the directors of SPEED MERCHANTS, INC., a California corporation. 2. That at a meeting of the Board of Directors of said corporation, duly held at San Jose, California on May 12, 1977 the following resolution was adopted by all of the directors: RESOLVED, that Article ONE of the Articles of Incorporation of this corporation be amended to read as follows: "The name of this corporation is THE SPEED MERCHANT, INC." 3. That no shares have been issued and there are no shares subscriptions outstanding. /s/ Arthur C. Soares -------------------------------------------- ARTHUR C. SOARES, Director /s/ Ufa M. Soares -------------------------------------------- UFA M. SOARES, Director Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct. Executed at San Jose, California, on May 31, 1977. /s/ Arthur C. Soares -------------------------------------------- ARTHUR C. SOARES /s/ Ufa M. Soares -------------------------------------------- UFA M. SOARES 3 A453447 FILED In the office of the Secretary of State of the State of California OCT 31 1994 /s/ Tony Miller ----------------------------- Acting Secretary of State 0809140 SUN AGREEMENT OF MERGER OF THE SPEED MERCHANT, INC. AND ARTHUR ENTERPRISES, INC. THIS AGREEMENT OF MERGER ("Agreement") is entered into as of October 31, 1994, between The Speed Merchant, Inc., a California corporation (the "Surviving Corporation"), and Arthur Enterprises, Inc., a California corporation (the "Merging Corporation"). 1. Surviving Corporation is a California corporation organized on February 11, 1977 and has 12,000 shares of its capital stock outstanding. 2. Merging Corporation is a California corporation organized on February 6, 1992 and has 10,000 shares of its capital stock outstanding, of which 5,100 shares are owned by Surviving Corporation. 3. Merging Corporation shall be merged into Surviving Corporation. 4. Upon such merger, each outstanding share of Merging Corporation, other than shares held by Surviving Corporation, shall be converted into .432244 shares of the capital stock of Surviving Corporation. Upon issuance, the total of such shares will comprise 16% of the then outstanding and issued capital stock of the Surviving Corporation. Upon such merger, shares of Merging Corporation held by Surviving Corporation shall be cancelled. 5. Upon such merger, the outstanding shares of Surviving Corporation shall remain outstanding and are not affected by the merger. 6. Merging Corporation shall from time to time, as and when requested by Surviving Corporation, execute and deliver all such documents and instruments and take all such action necessary or desirable to evidence or carry out this Agreement. 7. The Articles of Incorporation of the Surviving Corporation are not affected by the merger. 8. The conversion of shares as provided by this Agreement shall occur automatically upon the effective date without action by the holders thereof. Each holder of such shares thereupon shall surrender his share certificate(s) to the Secretary of Surviving Corporation and shall be entitled to receive in exchange therefor a certificate or certificates 4 representing the number of shares into which his shares shall have been converted as provided above. 9. Upon such merger, the separate existence of Merging Corporation ceases and Surviving Corporation shall succeed, without other transfer, to all the rights and property of Merging Corporation and shall be subject to all the debts and liabilities thereof in the same manner as if the Surviving Corporation had itself incurred them. All rights of creditors and all liens upon the property of each corporation shall be preserved unimpaired, provided that such liens upon the property of Merging Corporation shall be limited to the property affected thereby immediately prior to the time the merger is effective. 10. The Agreement may be terminated and the proposed merger abandoned at any time prior to the effective date of the merger, whether before or after approval of this Agreement by the Board of Directors or shareholders of either corporation, by either corporation if in the opinion of its Board of Directors the consummation of this Agreement and the merger are not, for any reason, in the best interests of such corporation and its shareholders. 11. The effective date of the merger is October 31, 1994. IN WITNESS WHEREOF the parties have executed this Agreement of Merger at San Jose, Santa Clara County, California on October 28, 1994. THE SPEED MERCHANT, INC. By: /s/ Arthur Soares ------------------------------------------- Arthur Soares President By: /s/ Liz Roberts ------------------------------------------- Liz Roberts Secretary ARTHUR ENTERPRISES, INC. By: /s/ Ray Barney ------------------------------------------- Ray Barney President By: /s/ Liz Roberts ------------------------------------------- Liz Roberts Secretary 5 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER BY THE SPEED MERCHANT, INC. Arthur Soares and Liz Roberts certify that: 1. They are the President and Secretary, respectively, of The Speed Merchant, Inc., a California corporation. 2. The Agreement of Merger in the form attached was duly approved by the Board of Directors and the shareholders of the corporation. 3. The shareholder approval was by the holders of 100% of the outstanding shares of the corporation, which equaled or exceeded the vote required. 4. There is only one class of shares of the corporation and the number of shares outstanding is l2,000. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at San Jose, Santa Clara County, California on October 28, 1994. /s/ Arthur Soares -------------------------------------------- Arthur Soares President /s/ Liz Roberts -------------------------------------------- Liz Roberts Secretary 6 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER BY ARTHUR ENTERPRISES, INC. Ray Barney and Liz Roberts certify that: 1. They are the President and Secretary, respectively, of Arthur Enterprises, Inc., a California corporation. 2. The Agreement of Merger in the form attached was duly approved by the Board of Directors and the shareholders of the corporation. 3. The shareholder approval was by the holders of 100% of the outstanding shares of the corporation, which equaled or exceeded the vote required. 4. There is only one class of shares of the corporation and the number of shares outstanding is l0,000. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at San Jose, Santa Clara County, California on October 28, 1994. /s/ Ray Barney -------------------------------------------- Ray Barney President /s/ Liz Roberts -------------------------------------------- Liz Roberts Secretary EX-3.14 14 BY-LAWS OF THE SPEEC MERCHANT, INC. 1 Exhibit 3.14 BY-LAWS TABLE OF CONTENTS Article I - Directors; Management
Section Title Page - ------- ----- ---- 1.a. Powers 1 1.b. Standard of Care 2 1.c. Exception for Close Corporation 2 2. Number and Qualification 2 3. Election and Term of Office 2 4. Vacancies 3 5. Removal of Directors 3 6. Notice, Place and Manner of Meetings 3 7. Annual Meeting 4 8. Other Regular Meetings 4 9. Special Meetings - Notices - Waivers 4 10. Sole Director Provided by Articles of Incorporation 5 11. Directors Acting by Unanimous Written Consent 5 12. Quorum 5 13. Adjourned Meetings 5 14. Compensation of Directors 5 15. Committees of Directors 6 16. Committee Procedure 6 17. Advisory Directors 7 18. Resignations 7 Article II - Officers 1. Officers 7 2. Election of Officers 7 3. Subordinate Officers 8
i 2 4. Removal and Resignation of Officers 8 5. Vacancies 8 6. Chairman of the Board 8 7. President 8 8. Vice Presidents 9 9. Secretary 9 10. Chief Financial Officer 9 Article III - Indemnification of Directors, Officers, Employees, and Other Agents l. Agents, Proceedings, and Expenses 10 2. Actions Other than by the Corporation 10 3. Actions by the Corporation 11 4. Successful Defense by Agent 11 5. Required Approval 11 6. Advance of Expenses 12 7. Other Contractual Rights 12 8. Limitations 12 9. Insurance 12 10. Fiduciaries of Corporate Employee Benefit Plan 13 Article IV - Shareholders' Meetings l. Place of Meetings 13 2. Annual Meetings 13 3. Special Meetings 13 4. Notice of Meetings 14 5. Manner of Giving Notice 14 6. Quorum 15 7. Adjourned Meeting; Notice 15 8. Voting Rights; Cumulative Voting 16 9. Record Date 16 10. Proxies 17 11. Organization 17 12. Inspectors of Election 18 13. Shareholders' Agreements 18
ii 3 14. Waiver of Notice or Consent by Absent Shareholders 19 15. Shareholder Action by Written Consent Without a Meeting 19 Article V - Certificates and Transfer of Shares l. Certificates for Shares 20 2. Transfer on the Books 21 3. Lost or Destroyed Certificates 21 4. Transfer Agents and Registrars 21 5. Legend Condition 21 6. Close Corporation Certificates 22 Article VI - Records and Reports 1 Maintenance and Inspection of Share Register 22 2. Maintenance and Inspection of By-Laws 22 3. Maintenance and Inspection of Other Corporate Records 23 4. Inspection by Directors 23 5. Annual Report to Shareholders 23 6. Waiver of Annual Report 24 7. Financial Statements 24 8. Annual Statement of General Information 25 Article VII - Amendments l. Amendment by Shareholders 25 2. Amendment by Directors 25 3. Record of Amendments 25 Article VIII - Miscellaneous 1. References to Code Sections 26 2. Effect of Shareholders' Agreement 26 3. Representation of Shares in Other Corporations 26 4. Subsidiary Corporations 26
iii 4 BY-LAWS of SPEED MERCHANTS, INC. A California Corporation ARTICLE I DIRECTORS: MANAGEMENT Section 1. a. Powers Subject to the provisions of the General Corporation Law of California, effective January 1, 1977 (to which the various Section numbers quoted herein relate) and subject to any limitation in the Articles of Incorporation and the By-Laws relating to action required to be approved by the Shareholders (Sec. 153) or by the outstanding shares (Sec. 152), the business and affairs of this corporation shall be managed by and all corporate powers shall be exercised by or under direction of the Board of Directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (1) Select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the Articles of Incorporation, and with these By-Laws; fix their compensation; and require from them security for faithful service. (2) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country, and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (3) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (4) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts -1- 5 or securities cancelled, or tangible or intangible property actually received. (5) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities. b. Standard of Care Each Director shall exercise such powers and otherwise perform such duties in good faith, in the manner such Director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, using ordinary prudence, as a person in a like position would use under similar circumstances. (Sec. 309) c. Exception for Close Corporation Notwithstanding the provisions of Section 1, in the event that this corporation shall elect to become a close corporation as defined in Sec. 158, its Shareholders may enter into a Shareholders' Agreement as provided in Sec. 300(b). Said agreement may provide for the exercise of corporate powers by the Shareholders, provided however such agreement shall, to the extent and so long as the discretion or the powers of the Board in its management of corporate affairs is controlled by such agreement, impose upon each Shareholder who is a party thereof, liability for managerial acts performed or omitted by such person pursuant thereto otherwise imposed upon Directors as provided in Sec. 300 (d). Section 2. Number and Qualification The authorized number of directors shall be two (2) until changed by a duly adopted amendment to the Articles of Incorporation or by an amendment to this By-Law adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. Section 3. Election and Term of Office Directors shall be elected at each annual meeting of the Shareholders to hold office until the next annual meeting. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. -2- 6 Section 4. Vacancies Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual meeting of Shareholders or at a special meeting called for that purpose. The Shareholders may at any time elect a Director to fill any vacancy not filled by the Directors, and may elect the additional Directors at the meeting at which an amendment of the By-Laws is voted authorizing an increase in the number of Directors. A vacancy or vacancies shall be deemed to exist in case of the death, resignation or removal of any Director, or if the Shareholders shall increase the authorized number of Directors but shall fail at the meeting at which such increase is authorized, or at an adjournment thereof, to elect the additional Director so provided for, or in case the Shareholders fail at any time to elect the full number of authorized Directors. If the Board of Directors accepts the resignation of a Director tendered to take effect at a future times, the Board, or the Shareholders, shall have power to elect a successor to take office when the resignation shall become effective. No reduction of the number of Directors shall have the effect of removing any Director prior to the expiration of his term of office. Section 5. Removal of Directors The entire Board of Directors or any individual Director may be removed from office as provided by Secs. 302, 303 and 304 of the Corporations Code of the State of California. In such case, the remaining Board members may elect a successor Director to fill such vacancy for the remaining unexpired term of the Director so removed. Section 6. Notice, Place and Manner of Meetings Meetings of the Board of Directors may be called by the Chairman of the Board, or the President, or any Vice President, or the Secretary, or any two (2) Directors, and shall be held at the principal executive office of the corporation in the State of California, unless some other place is designated in the notice of the meeting. Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment so long as all members participating in such a meeting can hear one another. Accurate minutes of any meeting of the Board or any committee -3- 7 thereof, shall be maintained as required by Sec. 312 of the Code by the Secretary or other officer designated for that purpose. Section 7. Annual Meeting Immediately following each annual meeting of Shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 8. Other Regular Meetings Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice. Section 9. Special Meetings - Notices - Waivers Special meetings of the Board may be called at any time by the Chairman of the Board, the President or, if he is absent or unable or refuses to act, by any Vice President or the Secretary or by any two Directors, or by one Director if only one is provided. At least forty-eight (48) hours' notice of the time and place of special meetings shall be delivered personally to the Directors or personally communicated to them by a corporate officer by telephone or telegraph. If the notice is sent to a Director by letter, it shall be addressed to him at his address as it is shown upon the records of the corporation, (or if it is not so shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held). In case such notice is mailed, it shall be deposited in the United States mail, postage prepaid, in the place in which the principal executive office of the corporation is located at least four (4) days prior to the time of the holding of the meeting. Such mailing, telegraphing, telephoning or delivery as above provided shall be due, legal and personal notice to such Director. When all of the Directors are present at any Directors' meeting, however called or noticed, and either (i) sign a written consent thereto on the records of such meeting or, (ii) if a majority of the Directors are present and if those not present sign a waiver of notice of such meeting or a consent to holding the meeting or an approval of the minutes thereof, whether prior to or after the holding of such meeting, which said waiver, consent or approval shall be filed with the Secretary of the corporation, or (iii) if a Director attends a meeting without notice but without protesting, prior thereto -4- 8 at its commencement, the lack of notice to him, then the transactions thereof are as valid as if had at a meeting regularly called and noticed. Section 10. Sole Director Provided by Articles of Incorporation In the event only one Director is required by the By-Laws or Articles of Incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the Directors shall be deemed to refer to such notice, waiver, etc., by such sole Director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to a Board of Directors. Section 11. Directors Acting by Unanimous Written Consent Any action required or permitted to be taken by the Board of Directors may be taken without a meeting and with the same force and effect as if taken by a unanimous vote of Directors, if authorized by a writing signed individually or collectively by all members of the Board. Such consent shall be filed with the regular minutes of the Board. Section 12. Quorum A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in section 13 of this Article I. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Sec. 310 (as to approval of contacts or transactions in which a director has a direct or indirect material financial interest), Sec. 311 (as to appointment of committees), and Sec. 317(e) (as to indemnification of Directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 13. Adjourned Meetings A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned and held within twenty-four (24) hours, but if adjourned more than twenty-four (24) hours, notice shall be given to all Directors not present at the time of the adjournment. Section 14. Compensation of Directors Directors, as such, shall not receive any stated -5- 9 salary for their services, but by resolution of the Board a fixed sum and expense of attendance, if any, may be allowed for attendance at each regular and special meeting of the Board; provided that nothing herein contained shall be construed to preclude any Director from serving the Company in any other capacity and receiving compensation therefor. Section 15. Committees of Directors The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate one or more committees, each consisting of two or more Directors, to serve at the pleasure of the Board. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires the Shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the Board of Directors or in any committee; (c) the fixing of compensation of the Directors for serving on the board or on any committee; (d) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the Shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of any other committees of the Board of Directors or the members of these committees. Section 16. Committee Procedure Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article I Sections 6 (notice, place and manner of meetings), 8 (other regular meetings), 9 (special meetings), 10 (sole director), 11 (unanimous written consent), 12 (quorum), and 13 (adjourned meetings), with such changes in the context of those By-Laws as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or -6- 10 by resolution of the committee; special meetings of committees may also be called by resolution of the Board of Directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these By-Laws. Section 17. Advisory Directors The Board of Directors from time to time may elect one or more persons to be Advisory Directors who shall not by such appointment be members of the Board of Directors. Advisory Directors shall be available from time to time to perform special assignments specified by the President, to attend meetings of the Board of Directors upon invitation, and to furnish consultation to the Board. The period during which the title shall be held may be prescribed by the Board of Directors. If no period is prescribed, the title shall be held at the pleasure of the Board. Section 18. Resignations Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. ARTICLE II OFFICERS Section 1. Officers The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any number of offices may be held by the same person. Section 2. Election of Officers The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. -7- 11 Section 3. Subordinate Officers The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in the By-Laws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation of Officers Subject to the rights, it any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. Vacancies A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to such office. Section 6. Chairman of the Board The Chairman of the Board, if there shall be such an officer, shall, if present preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the By-Laws. Section 7. President Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the By-Laws. -8- 12 Section 8. Vice Presidents In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the By-Laws, and the President, or the Chairman of the Board. Section 9. Secretary The Secretary shall keep or cause to be kept at the principal executive office or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of Directors, and Shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at Directors' meetings or committee meetings, the number of shares present or represented at Shareholders' meetings, and the proceedings. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all Shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the Shareholders and of the Board of Directors required by the By-Laws or by law to be given, and he shall keep the seal of the corporation if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the By-Laws. Section 10. Chief Financial Officer This officer shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares, The books of account shall at all reasonable times be open to inspection by any Director. -9- 13 This officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his transactions and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the By-Laws. ARTICLE III INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS Section 1. Agents, Proceedings, and Expenses For the purposes of this Article, "agent" means any person who is or was a director, officer, employee, or other agent of this corporation, or is or was serving at the request of this corporation as a director, officers employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request if such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(c) of this Article. Section 2. Actions Other Than by the Corporation This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner that person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that the conduct of that person was unlawful. The termination of any 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 and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. -10- 14 Section 3. Actions by the Corporation This 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 by or in the right of this corporation to procure a judgment in its favor by reason of the fact that that person is or was an agent of this corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this Section 3: (a) In respect of any claim, issue or matter as to which that person shall have been adjudged to be liable to this corporation in the performance of that person's duty to this corporation, unless and only to the extent that the court in which that action was brought shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; (b) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (c) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. Section 4. Successful Defense by Agent To the extent that an agent of this corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article, or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 5. Required Approval Except as provided in Section 4 of this Article, any indemnification under this Article shall be made by this corporation only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article, by: (a) A majority vote of a quorum consisting of directors who are not parties to the proceeding; -11- 15 (b) Approval by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (c) The court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this corporation. Section 6. Advance of Expenses Expenses incurred in defending any proceeding may be advanced by this corporation before the final disposition of the proceeding on receipt of an undertaking by or on behalf of the agent to repay the amount of the advance unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article. Section 7. Other Contractual Rights Nothing contained in this Article shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise. Section 8. Limitations No indemnification or advance shall be made under this Article, except as provided in Section 4 or Section 5(c), in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Articles, a resolution of the Shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 9. Insurance Upon and in the event of a determination by the Board of Directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or -12- 16 arising out of the agent's status as such whether or not this corporation would have the power to indemnify the agent against that liability under the provisions of this section. Section 10. Fiduciaries of Corporate Employee Benefit Plan This Article does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law other than this Article. ARTICLE IV SHAREHOLDERS' MEETINGS Section 1. Place of Meetings Meetings of Shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, Shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. Annual Meetings The annual meetings of the Shareholders shall be held each year at the time and on the day following: Time of Meeting: 1:00 p.m. Date of Meeting: January 5th If this day shall be a legal holiday, then the meeting shall be held on the next succeeding business day, at the same hour. At the annual meeting, the Shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may be properly brought before the meeting. Section 3. Special Meetings Special meetings of the Shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, a Vice President, the Secretary, or by one or more of the Shareholders holding not less than one- tenth (1/10th) of the voting power of the corporation. Except as next provided, notice shall be given as for the annual meeting. Upon receipt of a written request addressed to the Chairman, President, Vice President, or Secretary, mailed or delivered personally to such officer by any person (other than the Board) entitled to call a special meeting of Shareholders, such officer shall cause notice to be given, to the Shareholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, -13- 17 not less than thirty-five (35) nor more than sixty (60) days after the receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the persons calling the meeting may give notice thereof in the manner provided by these By-Laws or apply to the Superior Court as provided in Sec. 305(c). Section 4. Notice of Meetings All notices of meetings of Shareholders shall be sent or otherwise given in accordance with Section 5 of this Article not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting, and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the Shareholders. The notice of any meeting at which Directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a Director has a direct or indirect financial interest, pursuant to Sec. 310, (ii) an amendment of the Articles of Incorporation, pursuant to Sec. 902, (iii) a reorganization of the corporation, pursuant to Sec. 1201, (iv) a voluntary dissolution of the corporation, pursuant to Sec. 1900, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Sec. 2007, the notice shall also state the general nature of that proposal. Section 5. Manner of Giving Notice Notice of any meeting of Shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the Shareholder at the address of that Shareholder appearing on the books of the corporation or given by the Shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that Shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the -14- 18 corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the Shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the Shareholder on written demand of the Shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any Shareholders' meeting shall be executed by the Secretary, Assistant Secretary, or any transfer agent of the Corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 6. Quorum The holders of a majority of the shares entitled to vote thereat, present in person, or represented by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, present in person, or by proxy, shall have the power to adjourn the meeting from time to time, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at a meeting as originally notified. If a quorum be initially present, the Shareholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken is approved by a majority of the Shareholders required to initially constitute a quorum. Section 7. Adjourned Meeting; Notice Any Shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article. When any meeting of Shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, -15- 19 or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the Board of Directors shall set a new record date. Notice of any such adjourned meeting shall be given to each Shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. Voting Rights; Cumulative Voting Only persons in whose names shares entitled to vote stand on the stock records of the corporation on the day of any meeting of Shareholders, unless some other day be fixed by the Board of Directors for the determination of Shareholders of record, and then on such other day, shall be entitled to vote at such meeting. Provided the candidate's name has been placed in nomination prior to the voting and one or more Shareholders has given notice at the meeting prior to the voting of the Shareholder's intent to cumulate the Shareholder's votes, every Shareholder entitled to vote at any election for Directors of any corporation for profit may cumulate his votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which his shares are entitled, or distribute his votes on the same principle among as many candidates as he things fit. The candidates receiving the highest number of votes up to the number of Directors to be elected are elected. Section 9. Record Date The Board of Directors may fix a time in the future not exceeding sixty (60) days nor less than ten (10) days preceding the date of any meeting of Shareholders or the date fixed for the payment of any dividend or distribution, or for the allotment of rights, or when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of and to vote at any such meeting, or entitled to receive any such dividend or distribution, or any allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case only Shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive such dividends, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any share on the books of the company after any record date fixed as aforesaid, The Board of Directors may close the books of the company against transfers of shares during the whole or any part of such period. -16- 20 In determining the Shareholders entitled to give consent to corporate action without a meeting, the date set by the Board of Directors shall not be more than sixty (60) days before any such action without a meeting. If the Board of Directors does not so fix a record date: (a) The record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be 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. (b) The record date for determining Shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, or (ii) when prior action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 10. Proxies Every person entitled to vote for Directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the Shareholder or the Shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sec. 705(e) and 705(f) of the Code. Section 11. Organization The President, or in the absence of the President, any Vice President, shall call the meeting of the Share- -17- 21 holders to order, and shall act as Chairman of the meeting. In the absence of the President and all of the Vice Presidents, Shareholders shall appoint a Chairman for such meeting. The Secretary of the corporation shall act as Secretary of all meetings of Shareholders, but in the absence of the Secretary at any meeting of the Shareholders, the presiding officer may appoint any person to act as Secretary of the meeting. Section 12. Inspectors of Election Before any meeting of Shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the Chairman of the meeting may, and on the request of any Shareholder or a Shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more Shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the Chairman of the meeting may, and upon the request of any Shareholder or a Shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders. Section 13. Shareholders' Agreements Notwithstanding the above provisions in the event this corporation elects to become a close corporation, an agreement between two or more Shareholders thereof, if in writing and -18- 22 signed by the parties thereof, may provide that in exercising any voting rights the shares held by them shall be voted as provided therein or in Sec. 706, and may otherwise modify these provisions as to Shareholders' meetings and actions. Section 14. Waiver of Notice or Consent by Absent Shareholders The transactions of any meeting of Shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice of consent need not specify either the business to be transacted or the purpose of any annual or special meeting of Shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 15. Shareholder Action By Written Consent Without a Meeting Any action which may be taken at any annual or special meeting of Shareholders may be taken without a meeting and without prior notice, if a content in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of Directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that a director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the Directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors. All such consents shall be filed with the Secretary of the corpo- -19- 23 ration and shall be maintained in the corporate records. Any Shareholder giving a written consent, or the Shareholder's proxy holders, or a transferee of the shares or a personal representative of the Shareholder or their respective proxy holders, may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. If the consents of all Shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such Shareholders shall not have been received, the Secretary shall give prompt notice of the corporate action approved by the Shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article. In the case of approval of (i) contracts or transactions in which a Director has a direct or indirect financial interest, pursuant to Sec. 310, (ii) indemnification of agents of the corporation, pursuant to Sec. 317, (iii) a reorganization of the corporation, pursuant to Sec. 1201, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Sec. 2007, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. ARTICLE V CERTIFICATES AND TRANSFER OF SHARES Section 1. Certificates for Shares A certificate or certificates for shares of the capital stock of the corporation shall be issued to each Shareholder when any of these shares are fully paid, and the Board of Directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the shares represented thereby; its number, date of issuance; the number of shares for which it is issued; a statement of the rights, privileges, preferences and restrictions, if any; a statement as to the redemption or conversion, if any; a statement of liens or restrictions upon transfer or voting, if any; if the shares are assessable or, if assessments are collectible by personal action, a plain statement of such facts. All certificates shall be signed in the name of the Corporation by the Chairman of the Board or Vice Chairman of the Board or the President or Vice President, and by the -20- 24 Chief Financial Officer or an assistant treasurer or the Secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the Shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. Section 2. Transfer on the Books Upon surrender to the Secretary or 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 issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Section 3. Lost or Destroyed Certificates Any person claiming a certificate of stock to be lost, stolen, or destroyed shall make an affidavit or affirmation of that fact and file it with the Secretary or Chief Financial Officer, or their assistant. The Board of Directors may then authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 4. Transfer Agents and Registrars The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company - either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the Board of Directors may designate. Section 5. Legend Condition In the event any shares of this corporation are issued pursuant to a permit or exemption therefrom requiring the imposition of a legend condition the person or persons issuing or transferring said shares shall make sure said legend appears on the certificate and on the stub relating thereto in the stock record book, and shall not be required to transfer -21- 25 any shares free of such legend unless an amendment to such permit or a new permit be first issued so authorizing such a deletion. Section 6. Close Corporation Certificates All certificates representing shares of this corporation, in the event it shall elect to become a close corporation, shall contain the legend required by Sec. 418c. ARTICLE VI RECORDS AND REPORTS Section 1. Maintenance and Inspection of Share Register The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its Shareholders, giving the names and addresses of all Shareholders and the number and class of shares held by each Shareholder. A Shareholder or Shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of Shareholders' names and addresses and shareholdings during usual business hours on five days' prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the Shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the Shareholder after the date of demand. This list shall be made available to any such Shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date of which the list is to be compiled. The record of Shareholders shall also be open to inspection on the written demand of any Shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a Shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the Shareholder or holder of a voting trust certificate making the demand. Section 2. Maintenance and Inspection of By-Laws The corporation shall keep at its principal executive office, or if its principal executive office is not -22- 26 in the State of California, at its principal business office in this state, the original or a copy of the By-laws as amended to date, which shall be open to inspection by the Shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any Shareholder, furnish to that Shareholder a copy of the By-Laws as amended to date. Section 3. Maintenance and Inspection of Other Corporate Records The accounting books and records and minutes of proceedings of the Shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any Shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a Shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 4. Inspection by Directors Every Director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a Director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. Annual Report to Shareholders The Board of Directors shall cause an annual report to be sent to the Shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) days before the annual meeting of Shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article IV of these By-Laws for giving notice to Shareholders of the corporation. The annual report shall contain a balance sheet as of the end of -23- 27 the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. Section 6. Waiver of Annual Report The foregoing requirement of an annual report may be waived by the Board so long as this corporation shall have less than one hundred (100) shareholders. Section 7. Financial Statements A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such Shareholder. If a Shareholder or Shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the Chief Financial Officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the Shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or Shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any Shareholder, mail-to the Shareholder a copy of the last annuals, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer -24- 28 of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 8. Annual Statement of General Information Within ninety (90) days after the filing of the Articles, and annually thereafter during the applicable filing period in each year, the corporation shall file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the Chief Executive Officer, Secretary, and Chief Financial Officer, the street address of its principal executive office or principal business office in this state, and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Sec. 1502 of the Code. When changing the agent for service of process or the address of such agent, the corporation shall file a complete current statement. ARTICLE VII AMENDMENTS Section 1. Amendment by Shareholders New By-Laws may be adopted or there By-Laws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorize directors of the corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. Section 2. Amendment by Directors Subject to the rights of the Shareholders as provided by Section 1 of this Article, by-laws, other than a by-law or an amendment of a by-law changing the authorized number of directors, may be adopted, amended, or repealed by the Board of Directors. Section 3. Record of Amendments Whenever an amendment or new by-law is adopted, it shall be copied in the book of By-Laws with the original By-Laws, in the appropriate place. If any by-law is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written assent was filed shall be stated in said book. -25- 29 ARTICLE VIII MISCELLANEOUS Section 1. References to Code Sections "Sec." references herein refer to the equivalent Sections of the General Corporation Law effective January 1, 1977, as amended. Section 2. Effect of Shareholders' Agreement Any Shareholders' Agreement authorized by Sec. 300(b) shall only be effective to modify the terms of these By-Laws if this corporation elects to become a close corporation with appropriate filing of or amendment to its Articles as required by Sec. 202, and shall terminate when this corporation ceases to be a close corporation. Such an agreement cannot waive or alter Secs. 158 (defining close corporations), 202 (requirements of Articles of Incorporation), 500 and 501 relative to distributions, 111 (merger), 1201(e) (reorganization), or Chapters 15 (Records and Reports), 16 (Rights of Inspection), 18 (Involuntary Dissolution), or 22 (Crimes and Penalties). Any other provisions of the Code or these By-laws may be altered or waived thereby, but to the extent they are not so altered or waived, these By-Laws shall be applicable. Section 3. Representation of Shares in Other Corporations Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the corporation by the Chairman of the Board, the President or any Vice President and the Secretary or an Assistant Secretary. Section 4. Subsidiary Corporations Shares of this corporation owned by a subsidiary shall not be entitled to vote on any matter. A subsidiary for these purposes is defined as a corporation, the shares of which possessing more than twenty-five percent (25%) of the total combined voting power of all classes of shares entitled to vote, are owned directly or indirectly through one or more subsidiaries. -26- 30 CERTIFICATE OF ADOPTION OF BY-LAWS Adoption by Incorporator or First Director(s) The undersigned, being all of the persons appointed in the Articles of Incorporation to act as the Incorporator or First Directors(s) of the above named corporation hereby adopt the same as the By-Laws of said corporation. Executed this 18th day of February, 1977. /s/ MICHAEL T. MORRISSEY ------------------------------------------ MICHAEL T. MORRISSEY, Incorporator Certificate by Secretary I DO HEREBY CERTIFY AS FOLLOWS: That I am the duly elected, qualified and acting Secretary of the above named corporation; that the foregoing By-Laws were adopted as the By-Laws of said corporation on the date set forth above by the person(s) appointed in the Articles of Incorporation to act as the Incorporator or First Directors(s) of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed the corporate seal this 12th day of May, 1977. /s/ UFA SOARES ------------------------------------------ Secretary (Seal) Certificate by Secretary of Adoption by Shareholders' Vote THIS IS TO CERTIFY: That I am the duly elected, qualified and acting Secretary of the above-named corporation and that the above and foregoing Code of By-Laws was submitted to the Shareholders at their first meeting held on the date set forth in the By-Laws and recorded in the Minutes thereof, was ratified by the vote of Shareholders entitled to exercise the majority of the voting power of said corporation. IN WITNESS WHEREOF I have hereunto set my hand this 12th day of May, 1977. /s/ UFA SOARES ------------------------------------------ Secretary -27- 31 ARTICLE VIII (As amended October 28, 1994) Section 1. Restrictions on Transfer of Shares. The sale or transfer of shares of the corporation by any of the holders thereof is restricted as follows: Before there can be a valid sale or transfer, except as hereinafter provided, of any of the shares of the corporation by any holder thereof to any person or entity, the holder of the shares to be sold or transferred shall first give notice (the "notice") in writing to the secretary of the corporation of his intention to sell or transfer such shares. The notice shall specify the proposed purchaser or purchasers, the number of shares to be sold or transferred, the price per share, and the terms upon which the holder intends to make such sale or transfer. In the event that the consideration to be received by the transferor is other than cash, the notice shall fully describe such consideration and state the fair market value thereof. The corporation, at its option and at the transferor's expense, may require the transferor to have the fair market value of such consideration determined by an independent appraiser selected by the corporation. In the case of a noncash consideration, the price per share shall be based upon the fair market value of the consideration as stated in the notice, unless the corporation exercises its option to require the aforementioned independent appraisal, in which case the price per share shall be based upon such independently appraised fair market value. A sale or transfer shall be deemed to have occurred for the purpose of this Article VIII whenever any interest in any share of stock of the corporation is transferred voluntarily, involuntarily or by operation of law, irrespective of whether any change in the record ownership results therefrom and without regard to whether or not any consideration is received for such transfer. The following are the only sales or transfers excluded from the provisions of this Article VIII: transfer by bequest, intestate succession or gift to the spouse, lineal descendants, brothers or sisters, ancestors, or adopted children, or to the spouses or adopted children of the lineal descendants, brothers or sisters, ancestors, or adopted children, or to the spouses or adopted children of the lineal descendants, brothers or sisters or ancestors, of the holder of the shares to be transferred, or to any custodian or trustee for the account of such persons. A sale or transfer which is so excluded from the provisions of this Article VIII shall not remove those shares so transferred from the restrictions contained herein and any subsequent sale or transfer shall be subject to, and comply in all respects with, said restrictions. The corporation shall have the prior right to purchase the shares referred to in the notice at the price and upon the terms and conditions stated in the notice. The corporation may elect to purchase any portion or all of the shares referred to in the notice at the price and upon the terms and conditions stated therein. If none or only a portion of the shares referred to in the notice are, elected to be purchased by the corporation in the foregoing manner, the shareholders who were holders of record of the corporation on the date the notice was received by the secretary of the corporation shall have the right to purchase the shares referred to in the notice which the corporation has not elected to purchase at the price and upon the terms and conditions stated in the notice and in accordance with the following provisions. The secretary of the corporation shall, within ten (10) days after receiving the notice, mail or deliver a copy thereof, and a statement of the number of shares, if any, which the corporation has elected to purchase 32 thereunder, to each of the other shareholders of the corporation who were holders of record on the date the notice was received by the secretary. The notice and statement may be delivered to such shareholders personally or may be mailed to them at their last known address as the same may appear on the books of the corporation. Within twenty (20) days after the notice and statement are mailed or delivered to such shareholders, each shareholder who desires to acquire any part or all of the shares referred to in the notice, and which the corporation has not elected to purchase, shall deliver by mail or otherwise to the secretary of the corporation a written offer to purchase a specific number of such shares at the price and upon the terms and conditions stated in the notice. If the total number of shares specified in all such shareholder offers exceeds the number of shares referred to in the notice and statement and available for purchase by the shareholders, each offering shareholder shall be entitled to purchase such proportion of the shares so referred to as the number of shares of the corporation which he held of record on the date the notice was received by the secretary bears to the total number of shares held of record by all offering shareholders on the date the notice was received by the secretary. If all of the shares referred to in the notice and statement are not disposed of under such apportionment, each offering shareholder desiring to purchase shares in a number in excess of his proportionate share, as provided above, shall be entitled to purchase such proportion of the shares which remain thus undisposed of as-the total number of shares which he held of record on the date the notice was received by the secretary bears to the total number of shares held of record on the date the notice was received by the secretary by all shareholders who desire to purchase shares in excess of those to which they are entitled under such apportionment. After receipt of the offering shareholder(s)' notice(s), to the extent that all of the shares referred to in the transferor's notice and statement are not disposed of under the preceding provisions, the corporation shall have the right to increase the number of said shares it has elected to purchase. Within forty (40) days after the notice is mailed or delivery to the secretary, the corporation shall deliver, by mail or otherwise, to the shareholder giving such notice a written statement of the number of shares referred to in the notice which the corporation and/or the shareholders have elected to purchase. If (i) none or only a part of the shares referred to in the notice are contracted for in the foregoing manner within the aforesaid forty (40) day period, or (ii) prior to the expiration of the aforesaid forty (40) day period, the holders of two-thirds (2/3) or more of the shares of the corporation on the date the notice was received by the secretary file with the secretary their consent in writing that such sale or transfer be made as proposed in the notice and waive their right to acquire such shares as hereinabove provided, then the shareholder desiring to sell or transfer shares may, within a period of ninety (90) days after the date of the notice, sell or transfer to the proposed purchaser or purchasers all or any part of the shares referred to in the notice; provided, however, that he shall not sell or transfer any such shares at a lower price or on terms or conditions more favorable to the purchaser or transferee than those specified in the notice. If the shareholder desiring to sell or transfer shares does not sell or transfer all shares referred to in the notice within the aforesaid ninety (90) day period, the shares which remain thus undisposed shall become again subject to the restrictions imposed by this Article VIII. Any sale or transfer, or purported sale or transfer, of shares of the corporation shall be null and void unless made in accordance with the terms, conditions and provisions of this Article VII. -2- EX-3.15 15 ARTICLES OF INCORPORATION OF PHOENIX RACING, INC. 1 EXHIBIT 3.15 FILED in the office of the Secretary of State of the State of California JAN 12 1998 /s/BILL JONES BILL JONES, Secretary of State ARTICLES OF INCORPORATION OF PHOENIX RACING, INC. ARTICLE ONE: The name of this corporation is Phoenix Racing, Inc. ARTICLE TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE THREE: The name and address in this state of the corporation's initial agent for service in this state of the corporation's initial agent for service of process is: Reed Guest, One Post Street, Suite 2100, San Francisco, CA 94104. ARTICLE FOUR: This corporation is authorized to issue only one class of shares of stock; and the total number of shares which it is authorized to issue is 1,000,000. Dated: January 9, 1998 /s/ REED GUEST ------------------------------ Reed Guest, Incorporator Each of the undersigned declares that he or she is the person who executed the above Articles of Incorporation, and such execution is his or her act or deed. /s/ REED GUEST ------------------------------ Reed Guest EX-3.16 16 BY-LAWS OF PHOENIX RACING, INC. 1 EXHIBIT 3.16 BY-LAWS OF PHOENIX RACING, INC. A Corporation Organized Pursuant to The California Corporations Code of 1977, As Amended ARTICLE I. OFFICES The principal executive office of the corporation shall be located at 1140 Campbell Avenue, San Jose, CA 95126. The Board of Directors (hereinafter referred to as the Board) shall have the authority to change the principal executive office. The corporation may have such other offices, either within or without the State of California as the Board may designate or as the business of the corporation may from time to time require. ARTICLE II. SHAREHOLDERS MEETINGS 1. Place of Meetings. Meetings of shareholders shall be held at the principal executive office of the corporation or at any other place designated by the Board or by consent, in writing, of all persons entitled to vote thereat, given before or after the meeting and filed with the Secretary. 2. Annual Meetings. The annual meeting of the shareholders shall be on the first Tuesday of October in each year, beginning with the year next following the adoption of the bylaws at 10:00 o'clock A.M., for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday such meeting shall be held on the next succeeding business day. 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Board, Chairman of the Board, President, a Vice President, Secretary or by holders of shares entitled to cast not less than 10 percent of the votes at the meeting. Except as hereafter provided notice shall be given in the same manner as notice for an annual meeting. Upon receipt of a mailed or personally delivered written request addressed to the Chairman of the Board, President, Vice President or Secretary by any person (other than the Board), entitled to call a special meeting of shareholders the officer shall, within 20 days after receipt of the request, cause to be given to the shareholders entitled to vote, a notice that a meeting will be held at a time requested by the person(s) calling the meeting, not less than 35 nor more than 60 days after receipt of such request. The person entitled to call the meeting may give the notice if the notice was not given within 20 days after receipt of the request. BY-LAWS OF PHOENIX RACING, INC. Page 1 2 4. Notice Of Meetings And Reports. Notice of annual or special meetings shall be given in writing not less than 10 nor more than 60 days before the date of the meeting, to shareholders entitled to vote thereat by the Secretary or an Assistant Secretary, or if there be no such officer, or in the case of neglect or refusal, by any director or shareholder. The notice or any reports shall be given personally or by mail or other means of written communication as provided in Corporations Code Section 601 and shall be sent to the shareholder's address appearing on the books of the corporation, or supplied to the corporation by the shareholder for the purpose of notice. In the absence thereof, notice shall be deemed to have been given if mailed to the principal executive office of the corporation or published at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice of any meeting of shareholders shall specify the place, the day and the hour of meeting, and (a) in case of a special meeting, the general nature of the business to be transacted, or (b) in the case of annual meeting, those matters which the directors at date of mailing intend to present for action by the shareholders. At any meetings where directors are to be elected, notice shall include the names of the nominees, if any, intended at date of notice to be presented by management for election. Notice shall be deemed given at the time it is delivered personally or deposited in the mail or sent by other means of written communication The officer giving such notice or report shall prepare and file an affidavit or declaration thereof. It shall not be necessary to give any notice of adjournment or of the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken; however, when a meeting is adjourned for 45 days or more, notice of the adjourned meeting shall be given in the same manner as an original meeting. 5. Quorum. At any meeting of shareholders a majority of the outstanding shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If less than said number of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 6. Voting. The shareholders entitled to notice of any meeting or to vote at any meeting shall be only the persons in BY-LAWS OF PHOENIX RACING, INC. Page 2 3 whose names shares stand on the share records of the corporation on the record date determined in accordance with these bylaws. If no record date is determined, (a) the record date for determining shareholders entitled to notice of, or to vote at a meeting of shareholders shall be 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, (b) the record date for determining shareholders entitled to give consent to corporate actions in writing without a meeting when no prior action by the Board is necessary, shall be at the close of business on the day on which the first written consent is given, and (c) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. Every shareholder entitled to vote shall be entitled to one vote for each share held, except for the election of directors. In an election for directors, if a candidate's name has been placed in nomination prior to the voting and one or more names has been placed in nomination prior to the voting and one or more shareholders has given notice at the meeting prior to the voting of the shareholder's intent to cumulate the shareholder's votes, then every shareholder entitled to vote may cumulate votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares which the shareholder is entitled to vote, or distribute the votes on the same principal among as many candidates as the shareholder chooses. The candidates receiving the highest number of votes up to the number of directors to be elected shall be elected. Upon the demand of any shareholder made before the voting begins, the election of directors shall be by ballot. 7. Proxies. Every person entitled to vote shares may do so by one or more persons authorized by proxy in writing executed by such shareholder and filed with the Secretary. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, provided however, that no proxy shall be Valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. 8. Waivers and Consents. Actions taken at a meeting of shareholders however called and noticed, where a quorum is present in person or by proxy, are as valid as if taken after regular call and notice, provided that each person entitled to vote either before or after the meeting signs a written waiver of notice or consent to the holding of the meeting or an approval of the minutes thereof. All waivers, consents and approvals shall be made BY-LAWS OF PHOENIX RACING, INC. Page 3 4 part of the minutes of the meeting. Neither the business to be conducted nor the purpose of any regular or special meeting must be set forth in any waiver of notice, except as provided by Section 601(f) of the Corporations Code. Attendance shall constitute a waiver of notice unless objection is made as provided in Section 601(e) of the Corporations Code. 9. Action Without Meeting. Any action which may be taken at an annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action taken, shall be signed by the shareholders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all sharers entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholders' approval of (a) a contract or other transaction between the corporation and one or more of its directors or another corporation, firm or association in which one or more of its directors has a material financial interest pursuant to Section 310 of the Corporations Code, (b) indemnification of an agent of the corporation, pursuant to Section 317 of the Corporations Code, (c) the principal terms of reorganization pursuant to Section 1201 of the Corporations Code, and (d) a plan of distribution as part of the winding up of the corporation pursuant to Section 2007 of the Corporations Code, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval. Prompt notice shall be given of any corporate action taken by shareholders without a meeting by less than a unanimous written consent to those shareholders entitled to vote who have not consented in writing. Notwithstanding any of the foregoing provisions of this section, directors may not be elected by written consent except by the unanimous written constant of all shares entitled to vote for the election of directors. A written consent may be revoked by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not be revoked thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares of a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the BY-LAWS OF PHOENIX RACING, INC. Page 4 5 corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. 10. Organization of Meetings. The President, or in the absence of the President any Vice President, shall call the meeting of the shareholders to order and shall act at chairman of the meeting. In the absence of the President and all of the Vice Presidents, shareholders shall appoint a chairman for such meeting. The Secretary shall act as secretary of all meetings of the shareholders, but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. The order of business at all meetings of the shareholders shall be as follows: (1) Roll call. (2) Proof of notice of meeting or waiver of notice. (3) Reading of the minutes of the preceding meeting. (4) Reports of officers. (5) Reports of committees. (6) Election of directors. (7) Unfinished business. (8) New business. ARTICLE III. BOARD OF DIRECTORS 1. General Powers. The business and affairs of the corporation shall be managed and its corporate powers exercised by its Board of Directors. The directors shall in all cases act as a board, and they may adopt such rules and regulations for the conduct of their meetings and the management of the corporation as they may deem proper, not inconsistent with these By-laws, the Articles of Incorporation, the California Corporations Code and any shareholders' agreement relating to any of the affairs of the corporation as long as it remains a close corporation. 2. Number and Tenure. The number of directors of the corporation shall be three (3). Each director shall hold office until the next annual meeting of shareholders and until the director's successor shall have been elected and qualified. The number of directors may be changed only by an amendment of the Articles of Incorporation or by a by-law adopted by the share- BY-LAWS OF PHOENIX RACING, INC. Page 5 6 holders amending this section. 3. Meetings. Immediately following each annual meeting of shareholders the Board shall hold a regular meeting for the purposes of organization, election of officers, and the transaction of other business. Regular or special meetings of the Board shall be held at any place within or without the State of California which has been designated from time to time by the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Call and notice of all regular meetings of the Board are hereby dispensed with. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman, the President, any Vice President, the Secretary, or by any two directors. Special meetings of the Board shall be held upon four days' written notice or 48 hours' notice given personally or by telephone or telegraph. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the director at the director's address shown in the records of the corporation, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Directors may participate in a meeting using communication equipment, provided that all participants can hear each other. 4. Quorum. A majority of the authorized number of directors is a quorum for the transaction of business, except to adjourn. Action taken by a majority of the directors present at a meeting held at which a quorum is present is an act of the Board of Directors unless a greater number is required by law or the Articles of Incorporation. A meeting at which a quorum is initially present may continue to transact business despite the withdrawal of directors if any action taken is approved by at least a majority of the required quorum for such meeting. 5. Vacancies In The Board Of Directors. A director may resign effective upon giving written notice to the Chairman, the President, the Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. BY-LAWS OF PHOENIX RACING, INC. Page 6 7 Vacancies, except those existing as a result of removal of a director, may be filled by a majority of the remaining directors, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. A vacancy shall be deemed to exist in case of the death, resignation, or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. Any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. A reduction of the authorized number of directors shall not cause the removal of any director prior to the expiration of the director's term of office. 6. Removal. Directors may be removed without cause if the removal is approved by a majority of all the outstanding shares entitled to vote. The remaining directors may elect a successor to complete the unexpired term of the director so removed. 7. Waiver of Notice. Action taken at a meeting of the Board, however called and noticed or wherever held, are as valid as though taken at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs, a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the minutes of the meeting. 8. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any director's meeting to another time and place, Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned, except if the meeting is adjourned for more than 24 hours. In such case notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. 9. Compensation. No compensation shall be paid to directors, as such, for their services, but by resolution of the Board a fixed sum and expenses for actual attendance at each regular or special meeting of the Board may be authorized. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving BY-LAWS OF PHOENIX RACING, INC. Page 7 8 compensation therefor. 10. Action Taken Without Meeting. Any action required or permitted to be taken by the Board may be taken without a formal board meeting, provided that all board members shall individually or collectively consent in writing to such action. The consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board. 11. Committees. Committees of the Board consisting of two or more directors may be appointed by resolution passed by a majority of the Board. Committees shall have such powers as shall be expressly delegated to them by resolution of the Board, except those powers expressly made non-delegable by Section 311 of the Corporations Code. ARTICLE IV. OFFICERS 1. Officers. The officers of the corporation shall be a president, a secretary and a chief financial officer. A chairman of the Board, one or more vice presidents and assistant officers as may be deemed necessary, may be elected or appointed by the directors. A person may hold more than one office but may not execute, acknowledge or verify an instrument in more than one capacity. 2. Election And Term Of Office. The officers of the corporation shall be elected annually at the first meeting of the directors held after each annual meeting of the shareholders. Each officer shall hold office until a successor is elected and qualified or until death, resignation or removal. 3. Removal. Any officer or agent elected or appointed by the Board may be removed by the Board whenever in their 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. Resignation. An officer may resign at any time upon written notice given to the Board, the President, or the Secretary. A resignation shall take effect on the day of receipt or any other time specified in the notice. Acceptance of a resignation shall not be necessary to make it effective. 5. Chairman of the Board. The Chairman of the Board, if there shall be one, shall preside at all meetings of the Board and exercise and perform such other powers and duties as may be authorized by the Board. 6. President. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, if there be BY-LAWS OF PHOENIX RACING, INC. Page 8 9 one, the President shall be the chief executive of officer of the corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and officers of the corporation. The President shall preside at all meetings of the shareholders and in the absence of the Chairman, or if there be none, at all meetings of the Board. The President shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of the President of the corporation, and shall have such other powers and duties as may be prescribed by the Board. 7. Vice President. In the absence or disability of the President, the Vice Presidents, in order of their rank as fixed by the Board, or if not ranked, the Vice President designated by the Board shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon the President. The Vice President shall have such other powers and perform such other duties as may be prescribed for them by the Board. 8. Secretary. The Secretary shall keep, or cause to be kept, a book of minutes at the principal executive office or such other place as the Board may designate. The book of minutes shall include minutes of all meetings of directors and shareholders with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at director's meetings, and the number of shares present or represented at shareholders' meetings. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, if any, a share register, or duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and directors required by the By-Laws or by law, and shall keep the seal of the corporation in the safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. 9. Chief Financial Officer. The Treasurer is the chief financial officer and shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares. The books of account BY-LAWS OF PHOENIX RACING, INC. Page 9 10 shall at all reasonable times be open to inspection by any director. 10. Compensation of Officers. The salaries of the officers shall be fixed, from time to time, by the Board. ARTICLE V. CORPORATE RECORDS AND REPORTS 1. Records. The corporation shall maintain adequate and correct accounts, books and records of its business and properties in accordance with generally accepted accounting principles. All of such books, records and accounts shall be kept at its principal executive office. The original or a copy of these By-Laws, as amended to date, certified by the Secretary, shall be kept at the corporation's principal executive office. 2. Inspection By Shareholders. The share register, accounting books and records and minutes of proceedings of the shareholders, the Board and committees of the Board shall be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Inspection and copying may be made in person, by agent, or by attorney. Shareholders shall also have the right to inspect the original or certified copy of these By-Laws, as amended to date, kept at the corporation's principal executive office, at all reasonable times during business hours. If any record subject to inspection pursuant to this chapter is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. 3. Inspection By Directors. Each director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and also all of its subsidiary corporations. Inspection by a director may be made in person or by agent or by attorney and includes the right to copy and obtain extracts. 4. Waiver of Annual Report. The annual report to shareholders, described in Section 1501 of the Corporations Code is hereby expressly waived. 5. Contracts, Etc. The Board of Directors, except as otherwise provided in the By-Laws may authorize any officer or BY-LAWS OF PHOENIX RACING, INC. Page 10 11 officers, agent or agents, to enter into any contract or execute any instrument in the name and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement, or to pledge its credit, or to render it liable for any purpose or to any amount. 6. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person(s) and in such manner as shall be determined from time to time by the Board. ARTICLE VI. SHARES 1. Certificates For Shares. Certificates representing shares of the corporation shall be in such form as shall be determined by the Board. Certificates shall be signed by the President and by the Secretary or by such other officers authorized by law and by the Board. They shall state the name of the record holder of the shares represented thereby, the total authorized issue, the number of shares represented by the particular certificate, the designation, if any, and class or series of shares represented thereby, and any statement or legend required by the Corporations Code. All certificates for shares shall be consecutively numbered and issued in consecutive order with the date of issuance entered thereon. Any or all the signatures on the certificates may be made by facsimile provided that they are countersigned by a transfer agent or transfer clerk and registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfers. 2. Transfer On The Books. Upon surrender to the Secretary or 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 issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its share register. 3. Lost Or Destroyed Certificates. Any person claiming a share certificate to be lost or destroyed shall make an affidavit or affirmation of that fact and shall, if the Board so require, give the corporation a bond of indemnity, in form and with one or more sureties satisfactory to the Board, in at least double the value of the shares represented by the lost certificates, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to be lost or destroyed. BY-LAWS OF PHOENIX RACING, INC. Page 11 12 4. Record Date and Closing of Transfer Books. The Board may fix in advance a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty (60) nor less than ten (10) days prior to the date of the meeting or event for the purpose for which it is fixed. When a record date is fixed, only shareholders of record on that date are entitled to notice of and to vote at that meeting, or to receive the dividend, distribution, or allotment of rights, or to exercise the rights as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. The Board may close the books of the corporation against transfers of shares during the whole or any part of a period of not more than sixty (60) days prior to the date of a shareholders' meeting, or the date when the right to any dividend, distribution, or allotment of rights vests, or the effective date of any change, conversion or exchange of shares. ARTICLE VII. MISCELLANEOUS 1. Indemnification. The corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts, actually and reasonably incurred in connection with such proceeding if the person acted in good faith, reasonably believing the acts to be in the best interest of the corporation and having no reason to believe the conduct unlawful. The corporation shall advance the expenses reasonably expected to be incurred by such agent in defending any such proceeding upon receipt of the undertaking required by Section 317(f) of the Corporations Code. The definition of "agent," "proceeding" and "expenses" in Section 317 of the Corporations Code shall apply herein. 2. Construction, Definition and References. The general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these By-Laws, unless the context requires otherwise. Corporations Code section references herein refer to the equivalent sections of the General Corporation Law, effective January 1, 1977, as amended. 3. Corporate Seal. The Board shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of incorporation, the date of incorporation and the words "Corporate Seal" or "incorporated." BY-LAWS OF PHOENIX RACING, INC. Page 12 13 ARTICLE VIII. AMENDMENTS By-Laws may be adopted, amended or repealed either by affirmative vote by a majority of the outstanding shares entitled to vote or by the Board. A By-Law changing the number of directors must be approved by the shareholders. Each adopted, amended and repealed by-law shall be inserted at the appropriate place in the original or certified copy of the By-Laws kept at the principal executive office of the corporation and the date of such adoption, amendment and repeal shall be noted therein. BY-LAWS OF PHOENIX RACING, INC. Page 13 14 CERTIFICATION OF THE ADOPTION OF THE BY-LAWS The undersigned, Secretary of the corporation, hereby certifies that the foregoing is a true and correct copy of the By-Laws of the corporation adopted as of January 28, 1998, by the Board of Directors of the corporation. Dated: January 28, 1998 /s/ LIZ ROBERTS ------------------------------ LIZ ROBERTS Corporate Secretary CERTIFICATION OF ADOPTION OF THE BY-LAWS Page 1 EX-4.1 17 INDENTURE 1 Exhibit 4.1 EXECUTION COPY ================================================================================ THE J.H. HEAFNER COMPANY, INC. Issuer 10% Senior Notes Due 2008 the Subsidiary Guarantors named herein -------------------- INDENTURE Dated as of May 15, 1998 --------------------- FIRST UNION NATIONAL BANK Trustee ================================================================================ 2 2 CROSS-REFERENCE TABLE TIA Indenture Section Section - ------- ------- 310(a)(1) .............................. 7.10 (a)(2) .............................. 7.10 (a)(3) .............................. N.A. (a)(4) .............................. N.A. (b) .............................. 7.08; 7.10 (c) .............................. N.A. 311(a) .............................. 7.11 (b) .............................. 7.11 (c) .............................. N.A. 312(a) .............................. 2.05 (b) .............................. 11.03 (c) .............................. 11.03 313(a) .............................. 7.06 (b)(1) .............................. N.A. (b)(2) .............................. 7.06 (c) .............................. 11.02 (d) .............................. 7.06 314(a) .............................. 4.02; 4.13; 11.02 (b) .............................. N.A. (c)(1) .............................. 11.04 (c)(2) .............................. 11.04 (c)(3) .............................. N.A. (d) .............................. N.A. (e) .............................. 11.05 (f) .............................. 4.13 315(a) .............................. 7.01 (b) .............................. 7.05; 11.02 (c) .............................. 7.01 (d) .............................. 7.01 (e) .............................. 6.11 316(a)(last sentence) .............................. 11.06 (a)(1)(A) .............................. 6.05 (a)(1)(B) .............................. 6.04 (a)(2) .............................. N.A. (b) .............................. 6.07 317(a)(1) .............................. 6.08 (a)(2) .............................. 6.09 (b) .............................. 2.04 318(a) .............................. 11.01 N.A. means Not Applicable. - ---------- Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture. 3 3 TABLE OF CONTENTS Page ---- ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions ........................................ 1 SECTION 1.02. Other Definitions .................................. 25 SECTION 1.03. Incorporation by Reference of Trust Indenture Act .................................... 26 SECTION 1.04. Rules of Construction .............................. 26 ARTICLE 2 The Securities SECTION 2.01. Form and Dating .................................... 27 SECTION 2.02. Execution and Authentication ....................... 27 SECTION 2.03. Registrar and Paying Agent ......................... 28 SECTION 2.04. Paying Agent To Hold Money in Trust................. 29 SECTION 2.05. Securityholder Lists ............................... 29 SECTION 2.06. Replacement Securities ............................. 29 SECTION 2.07. Outstanding Securities ............................. 30 SECTION 2.08. Temporary Securities ............................... 30 SECTION 2.09. Cancellation ....................................... 30 SECTION 2.10. Defaulted Interest ................................. 31 SECTION 2.11. CUSIP Numbers ...................................... 31 ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee ................................. 31 SECTION 3.02. Selection of Securities To Be Redeemed ......................................... 31 SECTION 3.03. Notice of Redemption ............................... 32 SECTION 3.04. Effect of Notice of Redemption ..................... 33 SECTION 3.05. Deposit of Redemption Price ........................ 33 SECTION 3.06. Securities Redeemed in Part ........................ 33 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities .............................. 33 SECTION 4.02. SEC Reports ........................................ 34 SECTION 4.03. Limitation on Indebtedness ......................... 36 SECTION 4.04. Limitation on Restricted Payments .................. 39 SECTION 4.05. Limitation on Restrictions on 4 4 Distributions from Subsidiaries .................. 41 SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock ................................. 41 SECTION 4.07. Limitation on Affiliate Transactions ............... 44 SECTION 4.08. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries ..................................... 45 SECTION 4.09. Change of Control .................................. 46 SECTION 4.10. Limitation on Liens ................................ 48 SECTION 4.11. Limitation on Sale/Leaseback Transactions ..................................... 48 SECTION 4.12. Future Guarantors .................................. 48 SECTION 4.13. Compliance Certificate ............................. 48 SECTION 4.14. Further Instruments and Acts ....................... 49 ARTICLE 5 Successor Company SECTION 5.01. When Company May Merge or Transfer Assets ........................................... 49 ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default .................................. 51 SECTION 6.02. Acceleration ....................................... 53 SECTION 6.03. Other Remedies ..................................... 54 SECTION 6.04. Waiver of Past Defaults ............................ 54 SECTION 6.05. Control by Majority ................................ 54 SECTION 6.06. Limitation on Suits ................................ 55 SECTION 6.07. Rights of Holders To Receive Payment ............... 55 SECTION 6.08. Collection Suit by Trustee ......................... 55 SECTION 6.09. Trustee May File Proofs of Claim ................... 56 SECTION 6.10. Priorities ......................................... 56 SECTION 6.11. Undertaking for Costs .............................. 56 SECTION 6.12. Waiver of Stay or Extension Laws ................... 57 ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee .................................. 57 SECTION 7.02. Rights of Trustee .................................. 58 SECTION 7.03. Individual Rights of Trustee ....................... 59 SECTION 7.04. Trustee's Disclaimer ............................... 59 SECTION 7.05. Notice of Defaults ................................. 59 SECTION 7.06. Reports by Trustee to Holders ...................... 59 5 5 SECTION 7.07. Compensation and Indemnity ......................... 60 SECTION 7.08. Replacement of Trustee ............................. 61 SECTION 7.09. Successor Trustee by Merger ........................ 62 SECTION 7.10. Eligibility; Disqualification ...................... 62 SECTION 7.11. Preferential Collection of Claims Against Company .................................. 62 ARTICLE 8 Discharge of Indenture; Defeasance SECTION 8.01. Discharge of Liability on Securities; Defeasance ....................................... 63 SECTION 8.02. Conditions to Defeasance ........................... 64 SECTION 8.03. Application of Trust Money ......................... 65 SECTION 8.04. Repayment to Company ............................... 65 SECTION 8.05. Indemnity for Government Obligations ...................................... 66 SECTION 8.06. Reinstatement ...................................... 66 ARTICLE 9 Amendments SECTION 9.01. Without Consent of Holders ......................... 66 SECTION 9.02. With Consent of Holders ............................ 67 SECTION 9.03. Compliance with Trust Indenture .................... 68 SECTION 9.04. Revocation and Effect of Consents and Waivers ...................................... 68 SECTION 9.05. Notation on or Exchange of Securities ....................................... 69 SECTION 9.06. Trustee To Sign Amendments ......................... 69 SECTION 9.07. Payment for Consent ................................ 69 ARTICLE 10 Subsidiary Guaranties SECTION 10.01. Guaranties............................................ 69 SECTION 10.02. Limitation on Liability............................... 71 SECTION 10.03. Successors and Assigns ............................... 72 SECTION 10.04. No Waiver............................................. 72 SECTION 10.05. Modification.......................................... 72 SECTION 10.06. Release of Subsidiary Guarantor....................... 72 6 6 ARTICLE 11 Miscellaneous SECTION 11.01. Trust Indenture Act Controls ......................... 73 SECTION 11.02. Notices............................................... 73 SECTION 11.03. Communication by Holders with Other Holders................................. 74 SECTION 11.04. Certificate and Opinion as to Conditions Precedent.................... 74 SECTION 11.05. Statements Required in Certificates or Opinion.............................. 74 SECTION 11.06. When Securities Disregarded........................... 74 SECTION 11.07. Rules by Trustee, Paying Agent and Registrar........................... 75 SECTION 11.08. Legal Holidays........................................ 75 SECTION 11.09. Governing Law......................................... 75 SECTION 11.10. No Recourse Against Others............................ 75 SECTION 11.11. Successors............................................ 75 SECTION 11.12. Multiple Originals.................................... 75 SECTION 11.13. Table of Contents; Headings........................... 76 Rule 144A/Regulation S Appendix Exhibit 1 - Form of Initial Security Exhibit A - Form of Exchange Security 7 INDENTURE dated as of May 15, 1998, among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), OLIVER & WINSTON, INC., a California corporation, ITCO LOGISTICS CORPORATION, a Delaware corporation, PHOENIX RACING INC., a California corporation, THE SPEED MERCHANT, INC., a California corporation, ITCO HOLDING COMPANY, INC., a North Carolina corporation, ITCO TIRE COMPANY, a North Carolina corporation, ITCO TIRE COMPANY OF GEORGIA, a Virginia corporation (collectively, the "Subsidiary Guarantors"), and FIRST UNION NATIONAL BANK, a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 10% Senior Notes Due 2008 (the "Initial Securities") and, if and when issued pursuant to a registered exchange for Initial Securities, the Company's 10% Senior Notes Due 2008 (the "Exchange Securities") and if and when issued pursuant to a private exchange for Initial Securities, the Company's 10% Senior Notes Due 2008 (the "Private Exchange Securities", together with the Exchange Securities and the Initial Securities, the "Securities"): ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person 8 2 means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Sections 4.04, 4.06 and 4.07 only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (iii) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (A) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary, (B) for purposes of Section 4.06 only, a transaction permitted by Section 4.04, or excluded from the definition of "Restricted Payment", (C) any transfer of properties or assets (including Capital Stock) that is governed by, and made in accordance with, Section 5.01 and (D) any disposition of assets with a fair market value of less than $250,000). "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Securities, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of 9 3 determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. "Banks" means the Lenders as defined in the New Credit Facility. "Bank Indebtedness" means all Obligations pursuant to the New Credit Facility. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Change of Control" means the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (i) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company 10 4 (for the purposes of this clause (i), such other person shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation, if such other person is the beneficial owner (as defined in this clause (i)), directly or indirectly, of more than 50% of the voting power of the Voting Stock of such parent corporation); (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by (x) a vote of 66-2/3% of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (y) Permitted Holders holding a majority of the aggregate voting power of the Voting Stock of the Company held by all Permitted Holders) cease for any reason to constitute a majority of the Board of Directors then in office; (iii) the adoption of a plan relating to the liquidation or dissolution of the Company; or (iv) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person (other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor and, for purposes of any provision 11 5 contained herein and required by the TIA, each other obligor on the indenture securities. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination to (ii) Consolidated Interest Expense for such four fiscal quarters (provided that with respect to Indebtedness Incurred under a revolving credit facility, instead of such historical interest, there shall be included pro forma interest on the one year projected average balance of such Indebtedness as determined in good faith by senior management of the Company); provided, however, that (1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, other than in either such case Indebtedness Incurred under a revolving credit facility, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period, and to the application of the proceeds of such Indebtedness, including the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged, or the acquisition of assets with the proceeds of such new Indebtedness, as if such application had occurred on the first day of such period, (2) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Company or such Restricted Subsidiary had not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments 12 6 used to repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition or disposition of a Permitted Investment ("Disposition"), the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Disposition for such period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness (other than Indebtedness incurred under a revolving credit facility) of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness (other than Indebtedness Incurred under a revolving credit facility) of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (4) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or a Permitted Investment or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all of an operating unit, segment or location of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness other than under a revolving credit facility) as if such Investment or acquisition occurred on the first day of such period and (5) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such 13 7 period) shall have made any Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Disposition, Investment or acquisition occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, without duplication, (i) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction (provided that interest expense attributable to leases constituting part of Sale/Leaseback Transactions in respect of warehouses owned on the date of this Indenture with a value not in excess of $10 million shall be excluded from this calculation), (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs associated with Hedging Obligations (including amortization of fees), (vii) Preferred Stock dividends in respect of all Preferred Stock held by Persons other than the Company or a Wholly Owned Subsidiary (other than non-cash dividends in respect of Preferred Stock that is not Disqualified Stock of the Company), (viii) interest incurred in connection with Investments in discontinued operations, (ix) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary and 14 8 (x) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitation contained in clause (iii) below) and (B) the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary to the extent such Restricted Subsidiary is subject to prohibitions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (iv) any gain or loss realized upon the sale or other disposition of any assets of the Company or its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; 15 9 (v) extraordinary gains or losses; and (vi) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purpose of Section 4.04 only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted pursuant to Section 4.04(a)(3)(D). "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable at the holder's option for Indebtedness or Disqualified Stock or (iii) is redeemable or must be purchased, upon the occurrence of certain events or otherwise, by such Person at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Securities; provided, however that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right 16 10 to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Securities shall not constitute Disqualified Stock if (x) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than Sections 4.06 and 4.09 and (y) any such requirement only becomes operative after compliance with such terms applicable to the Securities, including the purchase of any Securities tendered pursuant thereto; provided further, however, that any class of Capital Stock of such Person that, by its terms, authorizes such Person to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of Capital Stock that is not Disqualified Stock shall not be deemed to be Disqualified Stock. "EBITDA" for any period means the sum of Consolidated Net Income, plus Consolidated Interest Expense plus the following to the extent deducted in calculating such Consolidated Net Income: (a) all income tax expense of the Company and its consolidated Restricted Subsidiaries, (b) depreciation expense of the Company and its consolidated Restricted Subsidiaries, (c) amortization expense of the Company and its consolidated Restricted Subsidiaries and (d) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such other non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period), in each case for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements and pronouncements of the Financial Accounting Standards Board, (iii) such other 17 11 statements by such other entity as approved by a significant segment of the accounting profession and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Guaranty Agreement" means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the Company's obligations with respect to the Securities on the terms provided for herein. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Securityholder" means the Person in whose name a Security is registered on the Registrar's books. "Immaterial Subsidiary" means a Subsidiary with total assets not greater than $50,000. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the 18 12 time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, including, in each case, any premium on such indebtedness to the extent such premium has become due and payable; (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, the liquidation preference with respect to, any Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, 19 13 directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and (viii) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Indenture" means this Indenture as amended or supplemented from time to time. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (other than leases of equipment to customers in the ordinary course of business) (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and Section 4.04, (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if 20 14 positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date on which the Initial Securities are originally issued. "ITCO" means ITCO Logistics Corporation. "ITCO Facility" means the loan facility pursuant to the Loan and Security Agreement, by and among ITCO Holding Company, Inc., ITCO Tire Company of Georgia, ITCO Tire Company, Doug Duggan, Inc. and Barclays Business Credit, Inc. (now Fleet Capital Corporation), dated as of August 6, 1993, as amended. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a 21 15 result of such Asset Disposition and (iv) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means the Amended and Restated Loan and Security Agreement to be entered into by and among the Company, certain of its Subsidiaries, the lenders referred to therein, BankBoston, N.A., as Agent, and Fleet Capital Corporation and First Union National Bank, as Co-Agents, together with the related documents thereto (including the notes, guarantees and security documents thereunder), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement (and related document) governing Indebtedness incurred to Refinance, in whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or a successor Credit Agreement, whether by the same or any other lender or group of lenders. "Officer" means the Chairman of the Board, the Chief Executive Officer, President, Chief Financial Officer, any Vice President, the Treasurer or the Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Holders" means Ann H. Gaither and William H. Gaither and members of their immediate families and any spouse, parent or descendant of the foregoing, any trust the beneficiaries of which include only any of the foregoing, and any corporation, partnership or other entity 22 16 all of the Capital Stock of which (other than directors' qualifying shares) is owned by any of the foregoing. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) promissory notes issued by members of management of the Company and its Subsidiaries as payments for restricted shares of Capital Stock of the Company not to exceed $500,000 per year; and (ix) any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to Section 4.06. "Permitted Liens" means, with respect to any Person, (a) pledges or deposits by such Person under workers' compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or 23 17 deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review; (c) Liens for property taxes not yet subject to penalties for non-payment or which are being contested in good faith by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute Indebtedness; (e) survey exceptions, encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred to secure Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens securing Indebtedness, including Indebtedness Incurred pursuant to Section 4.03(b)(4), Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of such Person; provided, however, that the Lien may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness (other than any interest thereon) secured by the Lien may not be Incurred more than 180 days after the later of the acquisition, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (g) Liens to secure Indebtedness permitted under Section 4.03(b)(1) or Section 4.03(b)(5); 24 18 (h) Liens existing on (or Incurred in connection with Indebtedness committed on) the Issue Date; (i) Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Lien may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries; (j) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that such Liens are not created, Incurred or assumed in connection with, or in contemplation of, such acquisition; provided further, however, that the Liens may not extend to any other property (other than improvements thereon) owned by such Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Restricted Subsidiary of such Person; (l) Liens securing Hedging Obligations so long as such Hedging Obligations relate to Indebtedness that is, and is permitted to be under this Indenture, secured by a Lien on the same property securing such Hedging Obligations; (m) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease; (n) any attachment of a judgment Lien that does not give rise to an Event of Default; (o) Liens on inventory deemed to arise by reason of the consignment of inventory in the ordinary course of business of the Company and its Restricted Subsidiaries; and (p) Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (f), (h), (i) and (j); provided, however, that (x) such new Lien shall be limited to all 25 19 or part of the same property that secured the original Lien (plus improvements to or on such property) and (y) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (f), (h), (i) or (j) at the time the original Lien became a Permitted Lien and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (f), (i) or (j) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash pursuant to Section 4.06. For purposes of this definition, the term "Indebtedness" shall be deemed to include interest on such Indebtedness. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of a Security means the principal of the Security plus the premium, if any, payable on the Security which is due or overdue or is to become due at the relevant time. "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after (x) a Public Equity Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. 26 20 "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with this Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" with respect to any Person means (i) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person) or similar payment to the direct or indirect holders of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions to the extent payable to the Company or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to the extent made to minority stockholders (or owners of an 27 21 equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (ii) the purchase, redemption or other acquisition or retirement for value on or subsequent to the Issue Date of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than the Company or a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition) or (iv) the making of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Company that is a Subsidiary on the Issue Date and any other Subsidiary that is not an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the Securities and Exchange Commission. "Securities" means the Securities issued under this Indenture. "Senior Indebtedness" of a Person means (i) Indebtedness of such Person, whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Person to the extent post-filing interest is allowed in such proceeding) in respect of (A) indebtedness of such Person for money borrowed and 28 22 (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable unless, in the case of (i) and (ii), in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are subordinate in right of payment to the Securities; provided, however, that Senior Indebtedness shall not include (1) any obligation of the Company to any Subsidiary or of any Subsidiary Guarantor to the Company or any other Subsidiary, (2) any liability for Federal, state, local or other taxes owed or owing by such Person, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (4) any Indebtedness of such Person (and any accrued and unpaid interest in respect thereof) which is subordinate or junior in any respect to any other Indebtedness or other obligation of such Person or (5) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of this Indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Securities pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. 29 23 "Subsidiary Guarantor" means each Subsidiary of the Company that is a Subsidiary on the Issue Date (other than any Immaterial Subsidiary which is neither a borrower nor a guarantor under the New Credit Facility) and any other Subsidiary that Guarantees the Company's obligations with respect to the Securities. "Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the Company's obligations with respect to the Securities. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 360 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 360 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's 30 24 Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, (v) investments in split dollar life insurance policies on various officers, directors and shareholders of the Company and its Subsidiaries in the ordinary course of business consistent with past practices, and (vi) investments in securities with maturities of 12 months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the Issue Date. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (other than Subsidiary Guarantors) of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to 31 25 such designation (x) the Company could Incur $1.00 of additional Indebtedness under Section 4.03(a) and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Vendor Financing" means Indebtedness Incurred to finance the cost to acquire inventory to the extent such Indebtedness is issued to and held by the supplier of such inventory. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. The "voting power" of Voting Stock means the number of votes which such Voting Stock is normally entitled (without regard to the occurrence of any contingency) to vote in such an election. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries. SECTION 1.02. Other Definitions. Defined in Term Section ---- ---------- "Affiliate Transaction" .......................... 4.07 "Bankruptcy Law" ................................. 6.01 "covenant defeasance option" ..................... 8.01(b) "Custodian" ...................................... 6.01 "Event of Default" ............................... 6.01 "legal defeasance option" ........................ 8.01(b) "Legal Holiday" .................................. 11.08 "Offer" .......................................... 4.06(b) 32 26 "Paying Agent" ................................... 2.03 "Registrar"....................................... 2.03 "Successor Company" .............................. 5.01 SECTION 1.03. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC; "indenture securities" means the Securities; "indenture security holder" means a Securityholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) unsecured Indebtedness shall not be deemed to be subordinate or junior to Secured Indebtedness merely by virtue of its nature as unsecured Indebtedness; 33 27 (7) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; (8) the principal amount of any Preferred Stock shall be (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater; and (9) all references to the date the Securities were originally issued shall refer to the date the Initial Securities were originally issued. ARTICLE 2 The Securities SECTION 2.01. Form and Dating. Provisions relating to the Initial Securities, the Private Exchange Securities and the Exchange Securities are set forth in the Rule 144A/Regulation S Appendix attached hereto (the "Appendix") which is hereby incorporated in and expressly made part of this Indenture. The Initial Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to the Appendix which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities, the Private Exchange Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. The terms of the Securities set forth in the Appendix and Exhibit A are part of the terms of this Indenture. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenti- 34 28 cates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate and deliver Securities for original issue in an aggregate principal amount of $100,000,000 upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed that amount except as provided in Section 2.07. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.03. Registrar and Paying Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company or any of its 35 29 domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each due date of the principal and interest on any Security, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal and interest when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.06. Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Company and 36 30 the Trustee may charge the Holder for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. SECTION 2.07. Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.06, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.08. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. SECTION 2.09. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Trustee to deliver canceled Securities to the Company. The Company may not issue new Securities to replace Securities 37 31 it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.10. Defaulted Interest. If the Company defaults in a payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.11. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee. If the Company elects to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date and the principal amount of Securities to be redeemed. The Company shall give each notice to the Trustee provided for in this Section at least 60 days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. SECTION 3.02. Selection of Securities To Be Redeemed. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be 38 32 redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee in its sole discretion shall deem to be fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a date for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's registered address. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; and (7) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the 39 33 Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date). Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. Prior to the redemption date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancellation. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder (at the Company's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 Covenants SECTION 4.01. Payment of Securities. The Company shall promptly pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 40 34 SECTION 4.02. SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC (to the extent such filings are accepted by the SEC) and provide the Trustee and Securityholders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections. SECTION 4.03. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Company may Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto, the Consolidated Coverage Ratio exceeds 2 to 1 if such Indebtedness is Incurred prior to May 15, 2000 or 2.25 to 1 if such Indebtedness is Incurred thereafter. (b) Notwithstanding Section 4.03(a), the Company and the Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the New Credit Facility Agreement; provided, however, that, after giving effect to any such Incurrence, the aggregate principal amount of such Indebtedness then outstanding does not exceed the greater of (i) $100 million less the sum of all principal payments with respect to such Indebtedness pursuant to paragraph Section 4.06(a)(ii)(A) and (ii) the sum of (x) 65% of the book value of the inventory of the Company and its Restricted Subsidiaries and (y) 85% of the book value of the accounts receivables of the Company and its Restricted Subsidiaries; (2) Indebtedness owed to and held by the Company or a Restricted Subsidiary; provided, however, that (i) any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the obligor thereon and (ii) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior 41 35 payment in full in cash of all obligations with respect to the Securities; (3) the Securities and the Exchange Securities; (4) Vendor Financing, and Refinancing Indebtedness in respect thereof, in an aggregate amount which does not exceed, when taken together with all other Indebtedness Incurred pursuant to this clause (4) and then outstanding, including Vendor Financing outstanding on the Issue Date, $20 million; (5) Attributable Debt in respect of Sale/Leaseback Transactions, and Refinancing Indebtedness in respect thereof, in an amount which does not exceed, when taken together with all other Indebtedness Incurred pursuant to this clause (5) and then outstanding, $15 million; provided that such Sale/Leaseback Transactions comply with Section 4.11; (6) Indebtedness outstanding (or Incurred pursuant to commitments outstanding) on the Issue Date (other than Indebtedness described in clause (1), (2), (3), (4) or (5) of this Section 4.03); (7) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); provided, however, that on the date of such acquisition and after giving effect thereto, the Company would have been able to Incur at least $1.00 of additional Indebtedness pursuant to Section 4.03(a); (8) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to Section 4.03(a) or pursuant to Section 4.03(b)(3), (6), (7) or (8); provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary Incurred pursuant to Section 4.03(b)(7), such Refinancing Indebtedness shall be Incurred only by such Subsidiary; provided further however, that Indebtedness outstanding on the Issue Date pursuant to the ITCO Facility shall not be Refinanced pursuant this clause (8) but shall only be Refinanced pursuant to the Incurrence of Indebtedness under clause (b)(1) above; 42 36 (9) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Company pursuant to this Section 4.03; (10) the Subsidiary Guaranties of the Subsidiary Guarantors; and (11) Indebtedness of the Company in an aggregate principal amount which, together with all other Indebtedness of the Company outstanding on the date of such Incurrence (other than Indebtedness permitted by Section 4.03(b)(1) through (10) or Section 4.03(a)), does not exceed $15 million. (c) Notwithstanding the foregoing, the Company shall not Incur any Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Securities to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with this Section 4.03, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described herein, the Company, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described herein. SECTION 4.04. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company is not able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a); or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments since the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal 43 37 quarter immediately following the fiscal quarter during which the Securities are originally issued to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); (C) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) to an employee stock ownership plan (including a 401(k) plan that holds Capital Stock of the Company) subsequent to the Issue Date; provided, however, that if such employee stock ownership plan incurs any Indebtedness, such aggregate amount shall be limited to an amount equal to any increase in the Consolidated Net Worth of the Company resulting from principal repayments made by such employee stock ownership plan with respect to Indebtedness incurred by it to finance the purchase of such Capital Stock; (D) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); (E) an amount equal to the sum of (i) the net reduction in Investments in a Person resulting from dividends, repayments of loans or advances or other transfers of assets, in each case to the Company or any Restricted Subsidiary from such Person and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of 44 38 the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made on or after the Issue Date (and included in the calculation of Restricted Payments) by the Company or any Restricted Subsidiary in such Person; and (F) $5 million. (b) The provisions of Section 4.04(a) shall not prohibit: (i) any acquisition of any Capital Stock of the Company made out of the proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such acquisition of Capital Stock shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under Section 4.04(a)(3)(B); (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Company which is permitted to be Incurred pursuant to Section 4.03; provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section 4.04; provided, however, that at the time of payment of such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (iv) the repurchase or other acquisition of shares of, or options to purchase shares of, common stock of 45 39 the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), (x) upon death, retirement, severance or termination of employment or service or (y) pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such common stock; provided, however, that the aggregate amount of such repurchases and other acquisitions shall not exceed $1.0 million in any calendar year; provided further, however, that such repurchases and other acquisitions shall be excluded in the calculation of the amount of Restricted Payments; (v) the payment to The Kelly Springfield Tire Company or its successors and assigns of dividends on the 7,000 shares of Series A Cumulative Redeemable Preferred Stock or the 4,500 shares of Series B Cumulative Redeemable Preferred Stock held by The Kelly Springfield Tire Company to the extent required to be paid by the Company pursuant to the terms of such stock as in existence on the Issue Date; provided, however that such payment shall be excluded in the calculation of the amount of Restricted Payments; or (vi) payments to employees of ITCO in respect of certain stock appreciation rights granted by ITCO and required to be made after consummation of the Transactions (as defined in the Purchase Agreement), not to exceed $1.5 million in the aggregate; provided, however, that such payments shall be excluded in the calculation of the amount of Restricted Payments. SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company, (b) make any loans or advances to the 46 40 Company or (c) transfer any of its property or assets to the Company, except: (i) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date or the New Credit Facility as in effect on the Issue Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in Section 4.05(i) or (ii) or this clause (iii) or contained in any amendment to an agreement referred to in Section 4.05(i) or (ii) or this clause (iii); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are not, taken as a whole, materially less favorable to the Securityholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; (iv) any such encumbrance or restriction consisting of customary provisions restricting (x) assignment, subletting or other transfers contained in leases, licenses and similar agreements to the extent such provisions restrict the transfer of the lease or the property subject thereto, or (y) the assignment or other transfer of any lease or other contract; (v) in the case of clause (c) of this Section 4.05, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary or Permitted Liens to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages or Permitted Liens; and 47 41 (vi) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition. SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition and at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Company elects (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects, to acquire Additional Assets within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an offer to the holders of the Securities (and to holders of other Senior Indebtedness designated by the Company) to purchase Securities (and such other Senior Indebtedness) pursuant to and subject to the conditions of Section 4.06(b) and (c); and (D) fourth, to the extent of any balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), in any manner that does not violate this Indenture; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing 48 42 provisions of this paragraph, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this Section 4.06(a) except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this Section 4.06(a) exceeds $5 million. Pending application of Net Available Cash pursuant to this Section 4.06, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this Section 4.06, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition and (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of Securities (and other Senior Indebtedness) pursuant to Section 4.06(a)(ii)(C), the Company shall be required to purchase Securities tendered pursuant to an offer by the Company for the Securities (and other Senior Indebtedness) (the "Offer") at a purchase price of 100% of their principal amount (without premium) plus accrued but unpaid interest (or, in respect of such other Senior Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in Section 4.06(c). If the aggregate purchase price of Securities (and any other Senior Indebtedness) tendered pursuant to such Offer is less than the Net Available Cash allotted to the purchase thereof, the Company shall apply the remaining Net Available Cash in accordance with Section 4.06(a)(ii)(D). The Company shall not be required to make an Offer to purchase Securities (and other Senior Indebtedness) pursuant to this Section 4.06 if the Net Available Cash available therefor is less than $5 million (which lesser amount shall be carried forward for purposes of determining whether such an Offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (c) (1) Promptly, and in any event within 20 days after the Company becomes obligated to make an Offer, the Company shall be obligated to deliver to the Trustee and send or, at the request of the Company have the Trustee send, in the name and on behalf of the Company, by first-class mail to each Holder, a written notice stating that the 49 43 Holder may elect to have his Securities purchased by the Company either in whole or in part (subject to prorating as hereinafter described in the event the Offer is oversubscribed) in integral multiples of U.S. $1,000 of principal amount, at the applicable purchase price. The notice shall specify a purchase date not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain such information concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed decision (which at a minimum will include (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Dispositions otherwise described in the offering materials (or corresponding successor reports), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such Reports, and (iii) if material, appropriate pro forma financial information) and all instructions and materials necessary to tender Securities pursuant to the Offer, together with the information contained in clause (3). (2) Not later than the date upon which written notice of an Offer is delivered to the Trustee as provided above, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset Dispositions pursuant to which such Offer is being made and (iii) the compliance of such allocation with the provisions of Section 4.06(a). On such date, the Company shall also irrevocably deposit with the Trustee or with a paying agent (or, if the Company is acting as its own paying agent, segregate and hold in trust) in Temporary Cash Investments, maturing not later than the last day prior to the Purchase Date or the Purchase Date if funds are immediately available by open of business, an amount equal to the Offer Amount to be held for payment in accordance with the provisions of this Section. Upon the expiration of the period for which the Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancellation the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company. The Trustee shall, on the Purchase Date, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the aggregate purchase price of the Securities delivered by the Company to the Trustee is less than the Offer Amount, the Trustee shall deliver the excess funds (including income earned thereon) 50 44 to the Company immediately after the expiration of the Offer Period for application in accordance with this Section. (3) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee (or paying agent if applicable) or the Company receives not later than one Business Day prior to the Purchase Date, a telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. If at the expiration of the Offer Period the aggregate principal amount of Securities surrendered by Holders exceeds the Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of U.S. $1,000, or integral multiples thereof, shall be purchased). Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (4) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section. A Security shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (d) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 4.07. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any transaction (including the purchase, sale, lease or exchange 51 45 of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof (i) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (ii) if such Affiliate Transaction involves an amount in excess of $1 million, (1) are set forth in writing and (2) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (iii) if such Affiliate Transaction involves an amount in excess of $7.5 million, have been determined by a nationally recognized investment banking firm to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of Section 4.07(a) shall not prohibit (i) any transaction permitted pursuant to Section 4.04, or explicitly excluded from the definition of "Restricted Payment", (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $1 million in the aggregate outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no Affiliate of the Company (other than another Restricted Subsidiary) owns the Capital Stock of any such Restricted Subsidiary, (vii) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company or (viii) the amendment or extension or renewal of any transaction in effect on the Issue Date on terms no less favorable to the Company and its Restricted Subsidiaries than the terms in effect on the Issue Date. SECTION 4.08. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock except (i) to 52 46 the Company or a Wholly Owned Subsidiary, (ii) directors' qualifying shares, (iii) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary or (iv) if, immediately after giving effect to such issuance, sale or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under Section 4.04 if made on the date of such issuance, sale or other disposition. SECTION 4.09. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require that the Company repurchase such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date), in accordance with the terms set forth in Section 4.09(b). In the event that at the time of such Change of Control the terms of the Senior Indebtedness of the Company restrict or prohibit the repurchase of Securities pursuant to this Section, then prior to the mailing of the notice to Holders provided for in Section 4.09(b) below but in any event within 30 days following any Change of Control, the Company shall (i) repay in full all such Senior Indebtedness or offer to repay in full all such Senior Indebtedness and repay such Senior Indebtedness of each lender who has accepted such offer or (ii) obtain the requisite consent under the agreements governing such Senior Indebtedness to permit the repurchase of the Securities as provided for in Section 4.09(b). (b) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control (including information with 53 47 respect to pro forma historical income, cash flow and capitalization, each after giving effect to such Change of Control); (3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with this Section, that a Holder must follow in order to have its Securities purchased. (c) Holders electing to have a Security purchased will be required to surrender the Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the purchase date. Holders will be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the purchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. (d) On the purchase date, all Securities purchased by the Company under this Section shall be delivered by the Trustee for cancellation, and the Company shall pay the purchase price plus accrued and unpaid interest, if any, to the Holders entitled thereto. (e) Notwithstanding the foregoing provisions of this Section, the Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Section applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer. (f) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. 54 48 SECTION 4.10. Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any nature whatsoever on any of its properties (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, other than Permitted Liens, without effectively providing that the Securities shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured. SECTION 4.11. Limitation on Sale/Leaseback Transactions. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless (i) the Company or such Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to Section 4.03 and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the Securities pursuant to Section 4.10, (ii) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property and (iii) the Company applies the proceeds of such transaction in compliance with Section 4.06; provided that the sale by ITCO Holding Company, Inc. of its facility in Orlando owned as of the Issue Date, Florida and the subsequent lease by ITCO Holding Company, Inc. of such facility as contemplated as of the date of this Indenture, shall not be a Sale/Leaseback Transaction for purposes for this Section 4.11. SECTION 4.12. Future Guarantors. The Company shall cause each domestic Restricted Subsidiary (other than an Immaterial Subsidiary that is neither a borrower nor a guarantor under the New Credit Facility) to execute and deliver to the Trustee a Guaranty Agreement pursuant to which such Restricted Subsidiary will Guarantee payment of the Securities on the same terms and conditions as those set forth in Article 10. SECTION 4.13. Compliance Certificate. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company is taking or 55 49 proposes to take with respect thereto. The Company also shall comply with TIA Section 314(a)(4). SECTION 4.14. Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. ARTICLE 5 Successor Company SECTION 5.01. When Company or Subsidiary Guarantors May Merge or Transfer Assets. (a) The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a); (iv) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; 56 50 (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel addressed to the Trustee with respect clauses (i) through (iv); provided, however, that the requirements set forth in clauses (iii) and (iv) above shall not apply to a merger between the Company and any Wholly Owned Subsidiary; and (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. (b) The Company shall not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or series of transactions, all or substantially all of its assets to any Person (other than in a transaction or transactions to which Section 10.06 applies, provided that the Company certifies to the Trustee that the Company will comply with Section 4.06) unless: (i) the resulting, surviving or transferee Person shall be a Person (if not such Subsidiary) (the "Successor Guarantor") organized and existing under the laws of the United States of America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by a Guaranty Agreement, in a form acceptable to the Trustee, all the obligations of such Subsidiary, if any, under its Subsidiary Guaranty; (ii) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been issued by such Person at the time of such transaction), no Default shall have occurred and be continuing; and (iii) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel with respect to clauses (i) and (ii). Notwithstanding the foregoing, if any Subsidiary Guarantor is released from its obligations under its Subsidiary Guaranty pursuant to Section 10.06, then such Subsidiary Guarantor's successor or transferee shall be released from all of such Subsidiary Guarantor's obligations under its Subsidiary Guaranty. (c) The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, but the predecessor Company in the case of a 57 51 conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Securities. The Successor Guarantor shall be the successor to such Subsidiary Guarantor and shall succeed to, and be substituted for, and may exercise every right and power of, such Subsidiary Guarantor under this Indenture, but such predecessor Subsidiary Guarantor in the case of a conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Securities. ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default. An "Event of Default" occurs if: (1) the Company defaults in any payment of interest on any Security when the same becomes due and payable, and such default continues for a period of 30 days; (2) the Company (i) defaults in the payment of the principal of any Security when the same becomes due and payable at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, or (ii) fails to redeem or purchase Securities when required pursuant to this Indenture or the Securities; (3) the Company fails to comply with Section 5.01; (4) the Company fails to comply with Section 4.02, 4.03, 4.04, 4.05, 4.06 (other than a failure to purchase Securities), 4.07, 4.08, 4.09 (other than a failure to purchase Securities), 4.10, 4.11 or 4.12 and such failure continues for 30 days after the notice specified below; (5) the Company fails to comply with any of its agreements in the Securities or this Indenture (other than those referred to in clause (1), (2), (3) or (4) above) and such failure continues for 60 days after the notice specified below; (6) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the 58 52 holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million (the "cross acceleration provision"); (7) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or any similar relief is granted under any foreign laws, and, in any such case referred to in this clause (8), the order or decree remains unstayed and in effect for 60 days; (9) any final, non-appealable judgment or decree for the payment of money in excess of $10 million is entered against the Company or any Significant Subsidiary, remains outstanding for a period of 60 days following the entry of such judgment or decree and is not discharged, waived or the execution thereof stayed within 10 days after the notice specified below; or 59 53 (10) a Subsidiary Guaranty ceases to be in full force and effect (other than in accordance with the terms of such Subsidiary Guaranty) or a Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guaranty. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clauses (4), (5) or (9) is not an Event of Default until the Trustee or the holders of at least 25% in principal amount of the outstanding Securities notify the Company of the Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default under clause (6) or (10) and any event which with the giving of notice or the lapse of time would become an Event of Default under clause (4), (5) or (9), its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(7) or (8) with respect to the Company) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities by notice to the Company and the Trustee, may declare the principal of and accrued but unpaid interest on all the Securities to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.01(7) or (8) with respect to the Company occurs, the principal of and interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or 60 54 any Securityholders. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences except (i) a Default in the payment of the principal of or interest on a Security (ii) a Default arising from the failure to redeem or purchase any Security when required pursuant to this Indenture or (iii) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemni- 61 55 fication satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 6.06. Limitation on Suits. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Securityholder may pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder has given to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in principal amount of the Securities have made a written request to the Trustee to pursue the remedy; (3) such Holder or Holders have offered to the Trustee reasonable security or indemnity against any loss, liability or expense; (4) the Trustee has not complied with the request within 60 days after receipt of the request and the offer of security or indemnity; and (5) the Holders of a majority in principal amount of the Securities has not given the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. 62 56 SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. SECTION 6.10. Priorities. If the Trustee collects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and THIRD: to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Securityholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder 63 57 pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities. SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform on their face to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: 64 58 (1) this paragraph does not limit the effect of paragraph (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. 65 59 (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in the Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security (including payments pursuant to the mandatory redemption provisions of such Security, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.06. Reports by Trustee to Holders. As promptly as practicable after each May 1 beginning with the May 1 following the date of this Indenture, and in any event 66 60 prior to July 1 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 1 that complies with TIA " 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Company shall indemnify the Trustee against any and all loss, liability or expense (including attorneys' fees) incurred by it in connection with the administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent that the Company has been prejudiced by such failure. The Company shall defend the claim and the Trustee shall cooperate in the defense of any such claim. If, in the opinion of the Trustee's counsel, the Trustee has an interest adverse to the Company or a potential conflict of interest exists between the Trustee and the Company, the Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own wilful misconduct, negligence or bad faith. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. 67 61 The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(7) or (8) with respect to the Company, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. Replacement of Trustee. The Trustee may resign at any time by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee, which successor Trustee shall be reasonably acceptable to the Company. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns, is removed by the Company or by the Holders of a majority in principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. 68 62 If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 accrued or arising with respect to the period during which the retiring Trustee served shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. 69 63 ARTICLE 8 Discharge of Indenture; Defeasance SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.06) for cancellation or (ii) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 hereof and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Securities, including interest thereon to maturity or such redemption date (other than Securities replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company. (b) Subject to Sections 8.01(c) and 8.02, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11 and 4.12 and the operation of Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9) (but, in the case of Sections 6.01(7) and (8), with respect only to Significant Subsidiaries) and 6.01(10) and the limitations contained in Sections 5.01(a)(iii) and (iv) and Section 5.01(b) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9) (but, in the case of Sections 6.01(7) and (8), with respect only to Significant Subsidiaries) and 6.01(10) or because of the failure of the Company to comply with Section 5.01(a)(iii) or (iv) or Section 5.01(b). If the Company exercises its legal defeasance option or its covenant defeasance option, each Subsidiary Guarantor shall 70 64 be released from all its obligations with respect to its Subsidiary Guaranty. Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07 and 7.08 and in this Article 8 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.02. Conditions to Defeasance. The Company may exercise its legal defeasance option or its covenant defeasance option only if: (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Securities to maturity or redemption, as the case may be; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (3) 123 days pass after the deposit is made and during the 123-day period no Default specified in Sections 6.01(7) or (8) with respect to the Company occurs which is continuing at the end of the period; (4) the deposit does not constitute a default under any other agreement binding on the Company; (5) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (6) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an 71 65 Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (8) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with (provided that such Opinion need only pass upon clause (4) above with respect to material agreements known to such counsel after due inquiry). Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent shall promptly turn over to the Company upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company 72 66 upon request any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors. SECTION 8.05. Indemnity for Government Obligations. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 Amendments SECTION 9.01. Without Consent of Holders. The Company, the Subsidiary Guarantors and the Trustee may amend this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the 73 67 uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (4) to add guarantees with respect to the Securities, or to secure the Securities; (5) to add to the covenants of the Company or the Subsidiary Guarantors for the benefit of the Holders or to surrender any right or power herein conferred upon the Company or the Subsidiary Guarantors; (6) to comply with any requirements of the SEC in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; or (7) to make any change that does not adversely affect the rights of any Securityholder. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.02. With Consent of Holders. The Company, the Subsidiary Guarantors and the Trustee may amend this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange for the Securities). However, without the consent of each Securityholder affected thereby, an amendment may not: (1) reduce the amount of Securities whose Holders must consent to an amendment; (2) reduce the rate of or extend the time for payment of interest on any Security; (3) reduce the principal of or extend the Stated Maturity of any Security; (4) reduce the premium payable upon the redemption of any Security or change the time at which any Security may be redeemed in accordance with Article 3; (5) make any Security payable in money other than that stated in the Security; 74 68 (6) make any change in Section 6.04 or Section 6.07 or the second sentence of this Section; or (7) make any change in any Subsidiary Guaranty that would adversely affect the Securityholders. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents and Waivers. A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Securityholder. An amendment or waiver becomes effective upon the execution of such amendment or waiver by the Trustee. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Securityholders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. 75 69 SECTION 9.05. Notation on or Exchange of Securities. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07. Payment for Consent. Neither the Company nor any Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE 10 Subsidiary Guaranties SECTION 10.01. Guaranties. Each Subsidiary Guarantor hereby unconditionally and irrevocably guarantees, jointly and severally, to each Holder and to the Trustee and its successors and assigns (a) the full and punctual payment of principal of and interest on the Securities when due, whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under this Indenture and the Securities and (b) the full and punctual performance within applicable grace periods of all other obligations of the Company under this Indenture and the Securities (all the foregoing being hereinafter 76 77 70 collectively called the "Obligations"). Each Subsidiary Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from such Subsidiary Guarantor and that such Subsidiary Guarantor will remain bound under this Article 10 notwithstanding any extension or renewal of any Obligation. Each Subsidiary Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Obligations and also waives notice of protest for nonpayment. Each Subsidiary Guarantor waives notice of any default under the Securities or the Obligations. The obligations of each Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Securities or any other agreement; (d) the release of any security held by any Holder or the Trustee for the Obligations or any of them; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Obligations; or (f) any change in the ownership of such Subsidiary Guarantor. Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Obligations. Except as expressly set forth in Sections 8.01(b), 10.02 and 10.06, the obligations of each Subsidiary Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Subsidiary Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the obligations, or by any other act or thing 78 71 or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Subsidiary Guarantor or would otherwise operate as a discharge of such Subsidiary Guarantor as a matter of law or equity. Each Subsidiary Guarantor further agrees that its Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay the principal of or interest on any Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Obligation, each Subsidiary Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Obligations, (ii) accrued and unpaid interest on such Obligations (but only to the extent not prohibited by law) and (iii) all other monetary Obligations of the Company to the Holders and the Trustee. Each Subsidiary Guarantor agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations Guaranteed hereby may be accelerated as provided in Article 6 for the purposes of such Subsidiary Guarantor's Subsidiary Guaranty herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Subsidiary Guarantor for the purposes of this Section. Each Subsidiary Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Section. SECTION 10.02. Limitation on Liability. Any term or provision of this Indenture to the contrary notwithstanding, the maximum, aggregate amount of the 79 72 Obligations guaranteed hereunder by any Subsidiary Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. SECTION 10.03. Successors and Assigns. This Article 10 shall be binding upon each Subsidiary Guarantor and its successors and assigns and shall enure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 10.04. No Waiver. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 10 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 10 at law, in equity, by statute or otherwise. SECTION 10.05. Modification. No modification, amendment or waiver of any provision of this Article 10, nor the consent to any departure by any Subsidiary Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Subsidiary Guarantor in any case shall entitle such Subsidiary Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 10.06. Release of Subsidiary Guarantor. Upon the sale or other disposition (including by way of consolidation or merger) of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of such Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company) permitted by this Indenture, such Subsidiary Guarantor shall be deemed released from all obligations under this Article 11 without any further action required on the part of the Trustee or 80 73 any Holder. At the request of the Company, the Trustee shall execute and deliver an appropriate instrument evidencing such release. ARTICLE 11 Miscellaneous SECTION 11.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 11.02. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Company or any Subsidiary Guarantor: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Attention of Chief Financial Officer if to the Trustee: First Union National Bank 230 South Tryon Street, 9th Floor Charlotte, NC 28288 Attention: Corporate Trust Group The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. 81 74 SECTION 11.03. Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA " 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA " 312(c). SECTION 11.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the individual making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. SECTION 11.06. When Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver 82 75 or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 11.07. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 11.08. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York or the State of North Carolina. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.09. Governing Law. This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 11.10. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together 83 76 represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 11.13. Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 84 77 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. THE J.H. HEAFNER COMPANY, INC., by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary OLIVER & WINSTON, INC., by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary by /s/ DONALD C. ROOF ---------------------------------- Name: Donald C. Roof Title: Chief Financial Officer THE SPEED MERCHANT, INC., by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary by /s/ DONALD C. ROOF ---------------------------------- Name: Donald C. Roof Title: Chief Financial Officer PHOENIX RACING, INC., by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary by /s/ DONALD C. ROOF ---------------------------------- Name: Donald C. Roof Title: Chief Financial Officer 85 78 ITCO LOGISTICS CORPORATION, by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary ITCO HOLDING COMPANY, INC., by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary ITCO TIRE COMPANY, by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary ITCO TIRE COMPANY OF GEORGIA, by /s/ J. MICHAEL GAITHER ---------------------------------- Name: J. Michael Gaither Title: Secretary FIRST UNION NATIONAL BANK, as Trustee, by /s/ LEONARD TRUEBLOOD ---------------------------------- Name: Leonard Trueblood Title: Vice President 86 RULE 144A/REGULATION S APPENDIX FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO RULE 144A, AND TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S. PROVISIONS RELATING TO INITIAL SECURITIES, PRIVATE EXCHANGE SECURITIES AND EXCHANGE SECURITIES 1. Definitions 1.1 Definitions For the purposes of this Appendix the following terms shall have the meanings indicated below: "Depository" means The Depository Trust Company, its nominees and their respective successors. "Exchange Securities" means the 10% Senior Notes Due 2008 to be issued pursuant to this Indenture in connection with a Registered Exchange Offer pursuant to the Registration Rights Agreement. "Initial Purchasers" means Credit Suisse First Boston Corporation and BancBoston Securities Inc. "Initial Securities" means the 10% Senior Notes Due 2008, issued under this Indenture on or about the date hereof. "Private Exchange" means the offer by the Company, pursuant to the Registration Rights Agreement, to the Initial Purchasers to issue and deliver to each Initial Purchaser, in exchange for the Initial Securities held by the Initial Purchaser as part of its initial distribution, a like aggregate principal amount of Private Exchange Securities. "Purchase Agreement" means the Purchase Agreement dated May 15, 1998 among the Company, the Subsidiary Guarantors and the Initial Purchasers. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registered Exchange Offer" means the offer by the Company, pursuant to the Registration Rights Agreement, to certain Holders of Initial Securities, to issue and deliver to such Holders, in exchange for the Initial Securities, a like aggregate principal amount of Exchange Securities registered under the Securities Act. 87 2 "Registration Rights Agreement" means the Registration Rights Agreement dated May 15, 1998, among the Company, the Subsidiary Guarantors and the Initial Purchasers. "Securities" means the Initial Securities, the Exchange Securities and the Private Exchange Securities, treated as a single class. "Securities Act" means the Securities Act of 1933. "Securities Custodian" means the custodian with respect to a Global Security (as appointed by the Depository), or any successor person thereto and shall initially be the Trustee. "Shelf Registration Statement" means the registration statement issued by the Company, in connection with the offer and sale of Initial Securities or Private Exchange Securities, pursuant to the Registration Rights Agreement. "Transfer Restricted Securities" means Securities that bear or are required to bear the legend set forth in Section 2.3(b) hereto. 1.2 Other Definitions Defined in Term Section: "Agent Members".....................................................2.1(b) "Global Security"...................................................2.1(a) "Regulation S"......................................................2.1(a) "Rule 144A".........................................................2.1(a) 2. The Securities. 2.1 Form and Dating. The Initial Securities are being offered and sold by the Company pursuant to the Purchase Agreement. (a) Global Securities. Initial Securities offered and sold to a QIB in reliance on Rule 144A under the Securities Act ("Rule 144A") or in reliance on Regulation S under the Securities Act ("Regulation S"), in each case as provided in the Purchase Agreement, shall be issued initially in the form of one or more permanent global Securities in 88 3 definitive, fully registered form without interest coupons with the global securities legend and restricted securities legend set forth in Exhibit 1 hereto (each, a "Global Security"), which shall be deposited on behalf of the purchasers of the Initial Securities represented thereby with the Trustee, at its North Carolina office, as custodian for the Depository (or with such other custodian as the Depository may direct), and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee as hereinafter provided. (b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a Global Security deposited with or on behalf of the Depository. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(b), authenticate and deliver initially one or more Global Securities that (a) shall be registered in the name of the Depository for such Global Security or Global Securities or the nominee of such Depository and (b) shall be delivered by the Trustee to such Depository or pursuant to such Depository's instructions or held by the Trustee as custodian for the Depository. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository or by the Trustee as the custodian of the Depository or under such Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (c) Certificated Securities. Except as provided in Section 2.3 or 2.4, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities. 89 4 2.2 Authentication. The Trustee shall authenticate and deliver: (1) Initial Securities for original issue in an aggregate principal amount of $100,000,000 and (2) Exchange Securities or Private Exchange Securities for issue only in a Registered Exchange Offer or a Private Exchange, respectively, pursuant to the Registration Rights Agreement, for a like principal amount of Initial Securities, in each case upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated and whether the Securities are to be Initial Securities, Exchange Securities or Private Exchange Securities. The aggregate principal amount of Securities outstanding at any time may not exceed $100,000,000 except as provided in Section 2.06 of this Indenture. 2.3 Transfer and Exchange. (a) Transfer and Exchange of Global Securities. (i) The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor. A transferor of a beneficial interest in a Global Security shall deliver to the Registrar a written order given in accordance with the Depository's procedures containing information regarding the participant account of the Depository to be credited with a beneficial interest in the Global Security. The Registrar shall, in accordance with such instructions instruct the Depository to credit to the account of the Person specified in such instructions a beneficial interest in the Global Security and to debit the account of the Person making the transfer the beneficial interest in the Global Security being transferred. (ii) Notwithstanding any other provisions of this Appendix (other than the provisions set forth in Section 2.4), a Global Security may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (iii) In the event that a Global Security is exchanged for Securities in definitive registered form pursuant to Section 2.4 of this Appendix or Section 2.08 of the 90 5 Indenture, prior to the consummation of a Registered Exchange Offer or the effectiveness of a Shelf Registration Statement, in either case with respect to such Securities, such Securities may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Securities intended to ensure that such transfers comply with Rule 144A or Regulation S, as the case may be) and such other procedures as may from time to time be adopted by the Company. (b) Legend. (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Security certificate evidencing the Global Securities (and all Securities issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form: "THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) INSIDE THE U.S. TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (ii) OUTSIDE THE U.S. IN A TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (v) TO THE ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY 91 6 PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 under the Securities Act, in the case of any Transfer Restricted Security that is represented by a Global Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a certificated Security that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security, if the Holder certifies in writing to the Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form, and accompanied by the opinions and other information, set forth on the reverse of the Security). (iii) After a transfer of any Initial Securities or Private Exchange Securities pursuant to an effective Shelf Registration Statement with respect to such Initial Securities or Private Exchange Securities, as the case may be, all requirements pertaining to legends on such Initial Security or such Private Exchange Security will cease to apply, the requirements requiring any such Initial Security or such Private Exchange Security issued to certain Holders be issued in global form will cease to apply, and a certificated Initial Security or Private Exchange Security without legends will be available to the transferee of the Holder of such Initial Securities or Private Exchange Securities upon exchange of such transferring Holder's certificated Initial Security or Private Exchange Security or directions to transfer such Holder's interest in the Global Security, as applicable. (iv) Upon the consummation of a Registered Exchange Offer with respect to the Initial Securities pursuant to which Holders of such Initial Securities are offered Exchange Securities in exchange for their Initial Securities, subject to the last sentence of Section 2.4(a) of this Appendix, all requirements pertaining to such Initial Securities that Initial Securities issued to certain Holders be issued in global form will cease to apply and certificated Initial Securities with the restricted securities legend set forth in Exhibit 1 hereto will be available to Holders of such Initial Securities that do not exchange their Initial Securities, and Exchange Securities in certificated or global form will be available to Holders 92 7 that exchange such Initial Securities in such Registered Exchange Offer. (v) Upon the consummation of a Private Exchange with respect to the Initial Securities pursuant to which Holders of such Initial Securities are offered Private Exchange Securities in exchange for their Initial Securities, all requirements pertaining to such Initial Securities that Initial Securities issued to certain Holders be issued in global form will still apply, and Private Exchange Securities in global form with the Restricted Securities Legend set forth in Exhibit 1 hereto will be available to Holders that exchange such Initial Securities in such Private Exchange. (c) Cancellation or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for certificated Securities, redeemed, repurchased or canceled, such Global Security shall be returned to the Depository for cancellation or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for certificated or Definitive Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Security) with respect to such Global Security, by the Trustee or the Securities Custodian, to reflect such reduction. (d) Obligations with Respect to Transfers and Exchanges of Securities. (i) To permit registrations of transfers and exchanges, subject to the requirements of this Appendix, the Company shall execute and the Trustee shall authenticate certificated Securities and Global Securities at the Registrar's or co-registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charge payable upon exchange or transfer pursuant to Sections 3.06, 4.09 and 9.05). (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of 93 8 (a) any certificated Security selected for redemption in whole or in part pursuant to Article 3 of this Indenture, except the unredeemed portion of any certificated Security being redeemed in part, or (b) any Security for a period beginning 15 Business Days before the mailing of a notice of an offer to repurchase or redeem Securities or 15 Business Days before an interest payment date. (iv) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. (e) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in the Depository or other Person with respect to the accuracy of the records of the Depository or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Securities shall be given or made only to or upon the order of the registered Holders (which shall be the Depository or its nominee in the case of a Global Security). The rights of beneficial owners in any Global Security shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its members, participants and any beneficial owners. 94 9 (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depository participants, members or beneficial owners in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4 Certificated Securities. (a) A Global Security deposited with the Depository or with the Trustee as custodian for the Depository pursuant to Section 2.1 shall be transferred to the beneficial owners thereof in the form of certificated Securities in an aggregate principal amount equal to the principal amount of such Global Security, in exchange for such Global Security, only if such transfer complies with Section 2.3 and (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or if at any time such Depository ceases to be a "clearing agency" registered under the Exchange Act and a successor Depository is not appointed by the Company within 90 days of such notice, or (ii) an Event of Default has occurred and is continuing or (iii) the Company, in its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of certificated Securities under this Indenture. Notwithstanding the provisions of Section 2.3 or this Section 2.4, the issuance of certificated Securities shall be subject to the ownership certification requirements of Rule 903(c)(3)(ii)(B) of Regulation S under the Securities Act. (b) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section shall be surrendered by the Depository to the Trustee located in the Borough of Manhattan, The City of New York, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of certificated Initial Securities of authorized denominations and registered in such names as the Depository shall direct. Any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depository shall direct. Any certificated 95 10 Initial Security delivered in exchange for an interest in the Global Security shall, except as otherwise provided by Section 2.3(b), bear the restricted securities legend set forth in Exhibit 1 hereto. (c) Subject to the provisions of Section 2.4(b), the registered Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. (d) In the event of the occurrence of any of the events specified in Section 2.4(a), the Company will promptly make available to the Trustee a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. 96 EXHIBIT 1 to RULE 144A/REGULATION S APPENDIX [FORM OF FACE OF INITIAL SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE Depository TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] "THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) INSIDE THE U.S. TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (ii) OUTSIDE THE U.S. IN A TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (v) TO THE ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS 97 2 OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." 98 3 THE J.H. HEAFNER COMPANY, INC. No._______ $________ 10% Senior Notes Due 2008 The J.H. Heafner Company, Inc., a North Carolina corporation, promises to pay to _________________________, or registered assigns, the principal sum of _____________________ Dollars on May 15, 2008. Interest Payment Dates: May 15 and November 15. Record Dates: May 1 and November 1. Additional provisions of this Security are set forth on the other side of this Security. Dated: THE J.H. HEAFNER COMPANY, INC. by ______________________________ ______________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION FIRST UNION NATIONAL BANK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. by______________________________ Authorized Signatory 99 4 [FORM OF REVERSE SIDE OF INITIAL SECURITY] 10% Senior Note Due 2008 1. Interest The J.H. Heafner Company, Inc., a North Carolina corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above; provided, however, that if a Registration Default (as defined in the Registration Rights Agreement) occurs, interest will accrue on this Security at a rate of .50% per annum from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. The Company will pay interest semiannually on May 15 and November 15 of each year. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from May 20, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on the May 1 or November 1 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company. The Company will make all payments in respect of a certificated Security (including principal, premium and interest) by mailing a check to the registered address of each Holder thereof; provided, however, 100 5 that payments on a certificated Security will be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, First Union National Bank, a national banking association ("the Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of May 15, 1998 ("Indenture"), among the Company, the Subsidiary Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of those terms. The Securities are general unsecured senior obligations of the Company limited to $100,000,000 aggregate principal amount (subject to Section 2.06 of the Indenture). The Indenture contains certain covenants that, among other things, limit the Incurrence of Additional Indebtedness by the Company and its Restricted Subsidiaries, the making of Restricted Payments, the creation of restrictions on distributions from Restricted Subsidiaries, Asset Dispositions, certain transactions with Affiliates, the Incurrence of Liens and Sale/Leaseback Transactions and certain consolidations, mergers and transfers of assets. To guarantee the due and punctual payment of principal and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, 101 6 whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors have, jointly and severally, unconditionally guaranteed such obligations on a senior basis pursuant to the terms of the Indenture. 5. Optional Redemption Except as set forth in the following paragraph, the Securities will not be redeemable at the option of the Company prior to May 15, 2003. Thereafter, the Securities will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date): if redeemed during the 12-month period commencing on May 15 of the years set forth below: Redemption Period Price ------ -------- 2003.............................................. 105.000% 2004.............................................. 103.333 2005 ............................................. 101.667 2006 and thereafter............................... 100.000 In addition, at any time and from time to time prior to May 15, 2001, the Company may redeem in the aggregate up to 35% of the original principal amount of the Securities with the proceeds of one or more Public Equity Offerings following which there is a Public Market, at a redemption price (expressed as a percentage of principal amount) of 110.0% plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least $65.0 million aggregate principal amount of the Securities must remain outstanding and be held, directly or indirectly, by Persons other than the Company and its Affiliates, after each such redemption. In the case of any partial redemption, selection of the Securities for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Security of $1,000 in original principal amount or less shall be redeemed in part. If any Security is to be 102 7 redeemed in part only, the notice of redemption relating to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancelation of the original Security. 6. Notice of Redemption Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest shall cease to accrue on such Securities (or such portions thereof) called for redemption. 7. Put Provisions Upon a Change of Control, any Holder of Securities will have the right to cause the Company to repurchase all or any part of the Securities of such Holder at a repurchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued interest to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the related interest payment date) as provided in, and subject to the terms of, the Indenture. 8. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 103 8 9. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 10. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 11. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. 12. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company, the Subsidiary Guarantors and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to add guarantees with respect to the Securities or to secure the Securities, or to add additional covenants or surrender rights and powers conferred on the Company or the Subsidiary Guarantors, or to comply with any requirement of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Securityholder. 104 9 13. Defaults and Remedies Under the Indenture, Events of Default include (i) default for 30 days in payment of interest on the Securities; (ii) default in payment of principal on the Securities at maturity, upon redemption pursuant to paragraph 5 of the Securities, upon acceleration or otherwise, or failure by the Company to redeem or purchase Securities when required; (iii) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (iv) certain accelerations (including failure to pay within any grace period after final maturity) of other Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10 million; (v) certain events of bankruptcy or insolvency with respect to the Company and the Significant Subsidiaries; and (vi) certain final non-appealable judgments or decrees for the payment of money in excess of $10 million and (vii) certain events pertaining to the Subsidiary Guaranties. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 14. Trustee Dealings with the Company Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 105 10 15. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company or the Trustee shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 17. Abbreviations Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 18. Holders' Compliance with Registration Rights Agreement. Each Holder of a Security, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Rights Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. 19. Governing Law. THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 106 11 The Company will furnish to any Securityholder upon written request and without charge to the Securityholder a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Attention: Chief Financial Officer 107 12 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: ________________ Your Signature: _____________________ Sign exactly as your name appears on the other side of this Security. In connection with any transfer of any of the Securities evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Securities are being transferred in accordance with their terms: CHECK ONE BOX BELOW (1) [ ] to the Company; or (2) [ ] pursuant to an effective registration statement under the Securities Act of 1933; or (3) [ ] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 108 13 (4) [ ] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933; or (5) [ ] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (4) or (5) is checked, the Trustee may require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. _____________________________ Signature Signature Guarantee: ____________________________ _____________________________ Signature must be guaranteed Signature ________________________________________________________________________________ TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to 109 14 request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ________________ ______________________________ NOTICE: To be executed by an executive officer 110 15 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Date of Amount of decrease Amount of increase Principal amount of Signature of Exchange in Principal in Principal Amount this Global Security authorized officer Amount of this of this Global following such of Trustee or Global Security Security decrease or increase) Securities Custodian
111 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, state the amount in principal amount: $ Date: _______________ Your Signature: _____________________________ (Sign exactly as your name appears on the other side of this Security.) Signature Guarantee: _______________________________________ (Signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company) 112 EXHIBIT A [FORM OF FACE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE SECURITY] [*/] [**/] THE J.H. HEAFNER COMPANY, INC. No. $ 10% Senior Notes Due 2008 The J.H. Heafner Company, Inc., a North Carolina corporation, promises to pay to ________________, or registered assigns, the principal sum of ______________ Dollars on May 15, 2008. Interest Payment Dates: May 15 and November 15 Record Dates: May 1 and November 1. Additional provisions of this Security are set forth on the other side of this Security. Dated: THE J.H. HEAFNER COMPANY, INC. by _________________________ _________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION FIRST UNION NATIONAL BANK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. by __________________________________ Authorized Signatory ______________________________________ */ [If the Security is to be issued in global form add the Global Securities Legend from Exhibit 1 to Appendix A and the attachment from such Exhibit 1 captioned "[TO BE ATTACHED TO GLOBAL SECURITIES] - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY".] **/ [If the Security is a Private Exchange Security issued in a Private Exchange to an Initial Purchaser holding an unsold portion of its initial allotment, add the Restricted Securities Legend from Exhibit 1 to Appendix A and replace the Assignment Form included in this Exhibit A with the Assignment Form included in such Exhibit 1.] 113 2 [FORM OF REVERSE SIDE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE SECURITY] 10% Senior Note Due 2008 1. Interest The J.H. Heafner Company, Inc., a North Carolina corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above [; provided, however, that if a Registration Default (as defined in the Registration Rights Agreement) occurs, interest will accrue on this Security at a rate of .50% per annum from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured] ***/. The Company will pay interest semiannually on May 15 and November 15 of each year. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from May 20, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. _________________________ ***/ Insert if at the time of issuance of the Exchange Security or Private Exchange Security (as the case may be) neither the Registered Exchange Offer has been consummated nor a Shelf Registration Statement has been declared effective in accordance with the Registration Rights Agreement. 114 3 2. Method of Payment The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on the May 1 or November 1 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of Securities (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no U.S. dollar account maintained by the payee with a bank in the United States is designated by any holder to the Trustee or the Paying Agent at least 30 days prior to the relevant due date for payment (or such other date as the Trustee may accept in its discretion), by mailing a check to the registered address of such holder. 3. Paying Agent and Registrar Initially, First Union National Bank, a national banking association ("the Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of May 15, 1998 ("Indenture"), among the Company, the Subsidiary Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of those terms. 115 4 The Securities are general unsecured obligations of the Company limited to $100,000,000 aggregate principal amount (subject to Section 2.06 of the Indenture). The Indenture contains certain covenants that among other things, limit, the Incurrence of Additional Indebtedness by the Company and its Restricted Subsidiaries, the making of Restricted Payments, the creation of restrictions on distributions from Restricted Subsidiaries, Asset Dispositions, certain transactions with Affiliates, the Incurrence of Liens and Sale/Leaseback Transactions and certain consolidations, mergers and transfers of assets. To guarantee the due and punctual payment of principal and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Subsidiary Guarantors have, jointly and severally, unconditionally guaranteed such obligations on a senior basis pursuant to the terms of the Indenture. 5. Optional Redemption Except as set forth in the following paragraph, the Securities will not be redeemable at the option of the Company prior to May 15, 2003. Thereafter, the Securities will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date): if redeemed during the 12-month period commencing on May 15, of the years set forth below:
Redemption Period Price ------ -------- 2003............................................. 105.000% 2004............................................. 103.333 2005............................................. 101.667 2006 and thereafter.............................. 100.000
In addition, at any time and from time to time prior to May 15, 2001, the Company may redeem in the aggregate up to 35% of the original principal amount of the Securities with the proceeds of one or more Public Equity Offerings following which there is a Public Market, at a redemption price 116 5 (expressed as a percentage of principal amount) of 110.0% plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least $65.0 million aggregate principal amount of the Securities must remain outstanding and be held, directly or indirectly, by Persons other than the Company and its Affiliates, after each such redemption. In the case of any partial redemption, selection of the Securities for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Security of $1,000 in original principal amount or less shall be redeemed in part. If any Security is to be redeemed in part only, the notice of redemption relating to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancelation of the original Security. 6. Notice of Redemption Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest shall cease to accrue on such Securities (or such portions thereof) called for redemption. 7. Put Provisions Upon a Change of Control, any Holder of Securities will have the right to cause the Company to repurchase all or any part of the Securities of such Holder at a repurchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued interest to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the related 117 6 interest payment date) as provided in, and subject to the terms of, the Indenture. 8. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 9. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 10. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 11. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. 118 7 12. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company, the Subsidiary Guarantors and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to add guarantees with respect to the Securities or to secure the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any requirements of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Securityholder. 13. Defaults and Remedies Under the Indenture, Events of Default include (i) default for 30 days in payment of interest on the Securities; (ii) default in payment of principal on the Securities at maturity, upon redemption pursuant to paragraph 5 of the Securities, upon acceleration or otherwise, or failure by the Company to redeem or purchase Securities when required; (iii) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (iv) certain accelerations (including failure to pay within any grace period after final maturity) of other Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10 million; (v) certain events of bankruptcy or insolvency with respect to the Company and the Significant Subsidiaries; and (vi) certain final, non-appealable judgments or decrees for the payment of money in excess of $10 million and (vii) certain events pertaining to the Subsidiary Guaranties. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. 119 8 Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 14. Trustee Dealings with the Company Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 15. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company or the Trustee shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 17. Abbreviations Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 120 9 18. CUSIP NUMBERS Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 19. Holders' Compliance with Registration Rights Agreement. Each Holder of a Security, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Rights Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. 20. Governing Law. THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE TO THE SECURITYHOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO: THE J.H. HEAFNER COMPANY, INC. 2105 WATER RIDGE PARKWAY, SUITE 500 CHARLOTTE, NC 28217 ATTENTION: CHIEF FINANCIAL OFFICER 121 10 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: ________________ Your Signature: _____________________ Sign exactly as your name appears on the other side of this Security. 122 11 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, state the amount: $ Date: __________________ Your Signature: __________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee:_______________________________________ (Signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company) EX-9.1 18 VOTING TRUST AGREEMENT OF 10/15/96 1 EXHIBIT 9.1 VOTING TRUST AGREEMENT, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones (each a "Stockholder" and collectively, the "Stockholders") relating to The J. H. Heafner Company, Inc., a North Carolina corporation (the "Corporation"), and Ann Heafner Gaither and William H. Gaither, as trustees (the "Trustees"). The Stockholders are respectively owners of shares of the common stock of the Corporation in the amount set opposite their signature. With a view to the safe and competent management of the Corporation in the interests of the Stockholders, and as contemplated by the Stockholders' Agreement, dated October 15, 1996 (the "Stockholders' Agreement"), the Stockholders desire to create this Voting Trust. The Stockholders agree as follows: 1. Transfer of Stock to Trustees. Each of the Stockholders by execution of the stock power in the form attached hereto as Exhibit A assigns and delivers to the Trustees any certificate held by such Stockholder representing shares of stock owned by such Stockholder and shall do all things necessary for the transfer of shares to the Trustees on the books of the Corporation. 2. Trustees to Hold Subject to Agreement. The Trustees shall hold the said shares of stock so transferred to them for the common benefit of the Stockholders, under the terms and conditions hereinafter set forth. 3. Issuance of Stock Certificates to Trustees. The Trustees shall surrender to the proper officers of the Corporation for cancellation of all certificates of stock which shall be assigned and delivered to them as hereinafter provided, and in their stead shall procure new certificates to be issues to them as Trustees under this Agreement. 4. Voting Trust Certificates. The Trustees shall issue to each of the Stockholders a Voting Trust Certificate for the number of shares represented by the certificates of stock by such Stockholder transferred to the Trustees. Each such Trust Certificate shall state that it is issued under the Agreement, and shall set forth the nature and proportional amount of the beneficial interest thereunder of the person to whom it is issued, and shall be assignable, subject to the provisions of the Stockholders' Agreement, after the manner of certificates of stock on books to be kept by the Trustees. The Trustees shall keep a list of the shares of the Trust transferred to them, and shall also keep a record of all Voting Trust Certificates issued or transferred on their books, which 2 records shall contain the names and addresses of the Trust Certificate holders and the number of shares represented by each such certificate. Such list and record shall be open at all reasonable times to the inspection upon the books of the Trustees of any Trust Certificate, and the transferee shall succeed to all the rights hereunder of the transferor. The Voting Trust Certificate shall be substantially in the following form: TRUSTEE'S CERTIFICATE This is to certify that the undersigned Trustees have received a certificate or certificates issued in the name of _______________________, evidencing the ownership of _______ shares of Common Stock of the Corporation, and that such shares are held subject to all the terms and conditions of the Voting Trust Agreement, dated as of October 15, 1996, by and between Ann Heafner Gaither and William H. Gaither, as Trustees, and the Stockholders. During the period of ten years from and after October 15, 1996, the Trustees, or their successors, shall, as provided in said agreement, possess and be entitled to exercise the vote and otherwise represent all of the said shares for all purposes, being agreed that no voting right shall pass to the holder hereof by virtue of the ownership of this certificate. Upon the termination of said Trust, this certificate shall be surrendered to the Trustees by the holder hereof upon delivery to such holder of a stock certificate representing a like number of shares. The undersigned Trustees have executed this certificate as of the _____ day of __________________, 199_. ________________________________________ ________________________________________ Trustees 5. Restriction on Transfer. Each of the beneficiaries agrees that during the term of this Agreement, the Trustees' Certificate will not be sold or transferred except in accordance with the terms and conditions of the Stockholders' Agreement, so long as such Agreement remains in effect. The Trustees' Certificates shall be regarded as stock of the Corporation, within the meaning of any provision of the By-laws or other agreement (including the Stockholders' Agreement) of said Corporation imposing conditions and restrictions upon the sale of stock of the Corporation. 6. Voting. It shall be the duty of the Trustees, and they shall have full power and authority, and they are hereby fully empowered and authorized, to represent the holders of such Voting Trust Certificates and the stock transferred to the Trustees as aforesaid, and to vote upon said stock, as in the judgment of the Trustees may be for the best interest of the Corporation, at all meetings of the Stockholders of the Corporation, in -2- 3 the election of Directors and upon any and all matters in question, which may be brought before such meetings, as fully as any Stockholder might do if personally present. 7. Liability. The Trustees shall use their business judgment in voting upon the stock transferred to them, but shall not be liable for any vote cast, or consent given to them, in good faith, and in the absence of gross negligence. 8. Dividends. The Trustees shall collect and receive all dividends that may accrue upon the shares of stock subject to this Trust, and shall divide the same among the Trust Certificate holders in proportion to the number of shares respectively represented by their Trust Certificate. 9. Indemnity. The Trustees shall be entitled to be indemnified fully against all costs, charges, expenses and other liabilities properly incurred by them in the exercise of any power conferred upon them by these presents; and the Stockholders, and each of them hereby covenant with the Trustees that in the event of the monies and securities in their hands being insufficient for that purpose, the Stockholders and each of them will in proportion to the amount of their respective shares and interests hold harmless and keep indemnified the Trustees of and from all loss or damage which they may sustain or be put to by reason of anything they may lawfully do in the execution of this Trust. 10. Vacancies. In the event of any Trustee's dying or resigning or refusing or becoming unable to act, the surviving or other Trustee or Trustees shall appoint Trustee or Trustees to fill the vacancy or vacancies, and any person so appointed shall thereupon be vested with all the duties, powers and authority of a Trustee hereunder as if originally named herein. Prior to the commencement of his duties, each original Voting Trustee and each Voting Trustee subsequently appointed shall sign a copy of the Stockholders' Agreement, relating to the shares of the Corporation and shall thus signify his consent to be bound thereby and his agreement to perform the terms thereof. All of the terms, provisions and conditions of the Stockholders' Agreement shall apply to all Voting Trustees hereof and hereunder with the same force and effect as if such Voting Trustees had originally signed said Stockholders' Agreement. 11. Continuance and Termination of Trust. The Trust hereby created shall be continued until October 14, 2006, and shall then terminate, provided that this Voting Trust Agreement shall terminate upon the occurrence of the events for termination set forth in the Stockholders' Agreement. Upon termination of the Trust, the Trustees shall, upon surrender of the Trust Certificates by the respective holders thereof, assign and transfer to them the number of shares thereby represented. 12. Legend. All Voting Trust Certificates issued by the Voting Trustees hereunder shall have endorsed thereon a statement that they are held in accordance with and subject to the terms of the Stockholders' Agreement. 13. Miscellaneous. (a) This Voting Trust Agreement is entered into in -3- 4 accordance with and in pursuance of the requirement of Article III of the Stockholders' Agreement. In the event of a conflict in the provisions of said Stockholders' Agreement, the provisions of said Stockholders' Agreement shall prevail. (b) An executed copy of this Agreement shall be filed with the Secretary of the Corporation. The Stockholders shall cause the Corporation to furnish free of charge to any stockholder thereof a copy of this Agreement upon written request. (c) Any and all notices, designations, consents, offers, acceptances or any other communication provided for herein shall be made by hand delivery, first-class mail (registered or certified, return receipt requested), or overnight air courier guaranteeing next day delivery to the address set forth on Schedule I to this Agreement. Any Stockholder may change the address listed in the foregoing sentence by giving written notice to the Corporation and the other Stockholders. Except as otherwise provided in this Agreement, each such notice shall be deemed effective at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. (d) This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (e) This Agreement shall be governed and construed in accordance with the law of the State of North Carolina. (f) This Agreement shall be binding upon and shall inure to the benefit of each of the Stockholders and their respective executors, administrators and personal representatives and heirs and assigns. -4- 5 The Stockholders and the Trustees have duly executed this Agreement. /s/ ANN H. GAITHER ------------------------- TRUSTEE /s/ WILLIAM H. GAITHER ------------------------- TRUSTEE /s/ ANN H. GAITHER 911 shares ------------------------- ANN HEAFNER GAITHER /s/ WILLIAM H. GAITHER 304 shares ------------------------- WILLIAM H. GAITHER /s/ ALBERT C. GAITHER 15 shares ------------------------- ALBERT C. GAITHER /s/ SUSAN GAITHER JONES 282 shares ------------------------- SUSAN GAITHER JONES /s/ LAWSON H. GAITHER 282 shares ------------------------- LAWSON H. GAITHER /s/ ALBERT COMER GAITHER 282 shares ------------------------- ALBERT COMER GAITHER /s/ THOMAS R. JONES 4 shares ------------------------- THOMAS R. JONES -5- 6 EXHIBIT A Addresses The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093-0837 Ann Heafner Gaither Albert C. Gaither 821 Woodson Road Newton, NC 28658 William H. Gaither 814 E. Main Street Lincolnton, NC 28092 Susan Gaither and Thomas R. Jones 126 W. 6th Street Newton, NC 28658 Lawson H. Gaither 814 E. Main Street Lincolnton, NC 28092 Albert Comer Gaither 301 Watts Street Durham, NC 27701 EX-10.1 19 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.1 $100,000,000 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated as of May 20, 1998 Between THE J.H. HEAFNER COMPANY, INC. OLIVER & WINSTON, INC. ITCO HOLDING COMPANY, INC. THE SPEED MERCHANT, INC. (the Borrowers) and THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME (the Lenders) and BANKBOSTON, N.A. (the Agent) and FLEET CAPITAL CORPORATION FIRST UNION NATIONAL BANK (the Co-Agents) 2 TABLE OF CONTENTS(1)
Page ---- ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions............................................... 1 SECTION 1.2 General Interpretive Rules................................ 29 SECTION 1.3 Exhibits and Schedules.................................... 31 ARTICLE 2 COMMITMENTS SECTION 2.1 Loans..................................................... 32 SECTION 2.2 Manner of Borrowing....................................... 32 SECTION 2.3 Repayment................................................. 34 SECTION 2.4 Notes..................................................... 35 SECTION 2.5 Extension of Commitments.................................. 35 ARTICLE 3 LETTER OF CREDIT FACILITY SECTION 3.1 Agreement to Issue........................................ 36 SECTION 3.2 Amounts................................................... 36 SECTION 3.3 Conditions................................................ 36 SECTION 3.4 Issuance of Letters of Credit............................. 37 SECTION 3.5 Duties of BankBoston...................................... 37 SECTION 3.6 Payment of Reimbursement Obligations...................... 38 SECTION 3.7 Participations............................................ 38 SECTION 3.8 Indemnification, Exoneration.............................. 39 SECTION 3.9 Supporting Letter of Credit; Cash Collateral Account...... 41 ARTICLE 4 GENERAL LOAN PROVISIONS SECTION 4.1 Interest.................................................. 42 SECTION 4.2 Certain Fees.............................................. 43 SECTION 4.3 Manner of Payment......................................... 44
- -------- (1) This Table of Contents is included for reference purposes only and does not constitute part of the Loan and Security Agreement. (i) 3 SECTION 4.4 General................................................... 45 SECTION 4.5 Loan Accounts; Statements of Account...................... 45 SECTION 4.6 Reduction of Commitments; Termination of Agreement........ 45 SECTION 4.7 Making of Loans........................................... 47 SECTION 4.8 Settlement Among Lenders.................................. 48 SECTION 4.9 Mandatory Prepayments..................................... 51 SECTION 4.10 Payments Not at End of Interest Period; Failure to Borrow. 51 SECTION 4.11 Notice of Conversion or Continuation...................... 51 SECTION 4.12 Conversion or Continuation................................ 51 SECTION 4.13 Duration of Interest Periods; Maximum Number of Eurodollar Rate Loans; Minimum Increments............................ 52 SECTION 4.14 Changed Circumstances..................................... 52 SECTION 4.15 Cash Collateral Account; Investment Accounts.............. 53 SECTION 4.16 Allocation of Payments from Borrowers..................... 54 SECTION 4.17 Borrowers' Representative................................. 55 SECTION 4.18 Joint and Several Liability............................... 55 SECTION 4.19 Obligations Absolute...................................... 56 SECTION 4.20 Waiver of Suretyship Defenses............................. 57 ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1 Conditions Precedent to Initial Loans..................... 58 SECTION 5.2 All Loans; Letters of Credit.............................. 61 SECTION 5.3 Conditions as Covenants................................... 62 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS SECTION 6.1 Representations and Warranties............................ 63 SECTION 6.2 Survival of Representations and Warranties, Etc........... 71 ARTICLE 7 SECURITY INTEREST SECTION 7.1 Security Interest......................................... 72 SECTION 7.2 Continued Priority of Security Interest................... 72 ARTICLE 8 COLLATERAL COVENANTS SECTION 8.1 Collection of Receivables................................. 74
(ii) 4 SECTION 8.2 Verification and Notification............................. 75 SECTION 8.3 Disputes, Returns and Adjustments......................... 75 SECTION 8.4 Invoices.................................................. 76 SECTION 8.5 Delivery of Instruments................................... 76 SECTION 8.6 Sales of Inventory........................................ 76 SECTION 8.7 Ownership and Defense of Title............................ 76 SECTION 8.8 Insurance................................................. 77 SECTION 8.9 Location of Offices and Collateral........................ 78 SECTION 8.10 Records Relating to Collateral............................ 78 SECTION 8.11 Inspection................................................ 78 SECTION 8.12 Information and Reports................................... 79 SECTION 8.13 Power of Attorney......................................... 80 SECTION 8.14 Assignment of Claims Act.................................. 80 ARTICLE 9 AFFIRMATIVE COVENANTS SECTION 9.1 Preservation of Corporate Existence and Similar Matters... 81 SECTION 9.2 Compliance with Applicable Law............................ 81 SECTION 9.3 Maintenance of Property................................... 81 SECTION 9.4 Conduct of Business....................................... 81 SECTION 9.5 Insurance................................................. 81 SECTION 9.6 Payment of Taxes and Claims............................... 82 SECTION 9.7 Accounting Methods and Financial Records.................. 82 SECTION 9.8 Use of Proceeds........................................... 82 SECTION 9.9 Hazardous Waste and Substances; Environmental Requirements 82 SECTION 9.10 Additional Subsidiaries................................... 83 SECTION 9.11 Compliance with Senior Note Indenture..................... 83 ARTICLE 10 INFORMATION SECTION 10.1 Financial Statements...................................... 84 SECTION 10.2 Accountants' Certificate.................................. 85 SECTION 10.3 Officer's Certificate..................................... 85 SECTION 10.4 Copies of Other Reports................................... 85 SECTION 10.5 Notice of Litigation and Other Matters.................... 86 SECTION 10.6 ERISA..................................................... 86 ARTICLE 11 NEGATIVE COVENANTS SECTION 11.1 Financial Covenant........................................ 88
(iii) 5 SECTION 11.2 Debt...................................................... 88 SECTION 11.3 Guaranties................................................ 88 SECTION 11.4 Acquisitions.............................................. 89 SECTION 11.5 Capital Expenditures...................................... 90 SECTION 11.6 Restricted Distributions and Payments, Etc................ 90 SECTION 11.7 Merger, Consolidation and Sale of Assets.................. 91 SECTION 11.8 Transactions with Affiliates.............................. 91 SECTION 11.9 Liens..................................................... 91 SECTION 11.10 Sales and Leasebacks...................................... 91 SECTION 11.11 Amendments of Other Agreements............................ 91 SECTION 11.12 Commingling............................................... 91 ARTICLE 12 DEFAULT SECTION 12.1 Events of Default......................................... 92 SECTION 12.2 Remedies.................................................. 95 SECTION 12.3 Application of Proceeds................................... 97 SECTION 12.4 Power of Attorney......................................... 97 SECTION 12.5 Miscellaneous Provisions Concerning Remedies.............. 98 SECTION 12.6 Trademark License......................................... 99 ARTICLE 13 ASSIGNMENTS SECTION 13.1 Successors and Assigns; Participations................... 100 SECTION 13.2 Representation of Lenders................................ 102 ARTICLE 14 AGENT SECTION 14.1 Appointment of Agent..................................... 103 SECTION 14.2 Delegation of Duties..................................... 103 SECTION 14.3 Exculpatory Provisions................................... 103 SECTION 14.4 Reliance by Agent........................................ 104 SECTION 14.5 Notice of Default........................................ 104 SECTION 14.6 Non-Reliance on Agents and Other Lenders................. 104 SECTION 14.7 Indemnification.......................................... 105 SECTION 14.8 Agent in Its Individual Capacity......................... 106 SECTION 14.9 Successor Collateral Agent............................... 106 SECTION 14.10 Notices from Agent to Lenders............................ 107 SECTION 14.11 Declaring Events of Default.............................. 108 SECTION 14.12 Co-Agents................................................ 108
(iv) 6 ARTICLE 15 MISCELLANEOUS SECTION 15.1 Notices.................................................. 109 SECTION 15.2 Expenses................................................. 110 SECTION 15.3 Stamp and Other Taxes.................................... 111 SECTION 15.4 Setoff................................................... 111 SECTION 15.5 Consent to Advertising and Publicity..................... 112 SECTION 15.6 Reversal of Payments..................................... 112 SECTION 15.7 Injunctive Relief........................................ 112 SECTION 15.8 Accounting Matters....................................... 112 SECTION 15.9 Amendments............................................... 112 SECTION 15.10 Assignment............................................... 114 SECTION 15.11 Performance of Borrowers' Duties......................... 114 SECTION 15.12 Indemnification.......................................... 114 SECTION 15.13 All Powers Coupled with Interest......................... 115 SECTION 15.14 Survival................................................. 115 SECTION 15.15 Titles and Captions...................................... 115 SECTION 15.16 Severability of Provisions............................... 115 SECTION 15.17 Governing Law............................................ 116 SECTION 15.18 Counterparts............................................. 116 SECTION 15.19 Reproduction of Documents................................ 117 SECTION 15.20 Term of Agreement........................................ 117 SECTION 15.21 Increased Capital........................................ 117 SECTION 15.22 Pro-Rata Participation................................... 117 SECTION 15.23 Effect of Effectiveness of this Agreement................ 118
(v) 7 ANNEX A COMMITMENTS ANNEX B PRICING MATRIX EXHIBIT A FORM OF AMENDED AND RESTATED PROMISSORY NOTE EXHIBIT B FORM OF BORROWING BASE CERTIFICATE EXHIBIT C FORM OF SETTLEMENT REPORT EXHIBIT D FORM OF ASSIGNMENT AND ACCEPTANCE EXHIBIT E FORM OF COMPLIANCE CERTIFICATE EXHIBIT F FORM OF SUBSIDIARY GUARANTY Schedule 1.1A Permitted Investments Schedule 1.1B Permitted Liens Schedule 1.1C Clearing Banks Schedule 1.1D CPW Acquisition Documents Schedule 1.1E ITCO Merger Documents Schedule 6.1(a) Jurisdictions in Which Borrowers are Qualified as Foreign Corporations Schedule 6.1(b) Capitalization Schedule 6.1(c) Subsidiaries; Ownership of Stock Schedule 6.1(e) Compliance with Laws Schedule 6.1(f) Business of Borrowers Schedule 6.1(g) Governmental Approvals Schedule 6.1(h) Title to Properties Schedule 6.1(i) Liens Schedule 6.1(j) Indebtedness and Guaranties Schedule 6.1(k) Litigation Schedule 6.1(l) Tax Matters Schedule 6.1(m) Burdensome Provisions Schedule 6.1(n) Undisclosed Material Obligations Schedule 6.1(p) ERISA Schedule 6.1(t) Location of Offices and Receivables Schedule 6.1(u) Location of Inventory and Equipment Schedule 6.1(v) Corporate and Fictitious Names Schedule 6.1(y) Employee Relations Schedule 6.1(aa) Trade Names Schedule 6.1(bb) Bank Accounts Schedule 6.1(dd) Real Property Schedule 9.8 Use of Proceeds Schedule 11.8 Affiliate Transactions (vi) 8 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made as of May 20, 1998 by and between THE J.H. HEAFNER COMPANY, INC., OLIVER & WINSTON, INC., THE SPEED MERCHANT, INC., ITCO HOLDING COMPANY, INC., the financial institutions party to this Agreement from time to time as the Lenders FLEET CAPITAL CORPORATION and FIRST UNION NATIONAL BANK as Co-Agents, and BANKBOSTON, N.A., as administrative agent for the Lenders. PRELIMINARY STATEMENT The J.H. Heafner Company, Inc., Oliver & Winston, Inc., BankBoston, N.A., Fleet Capital Corporation and, by assignment from BankBoston N.A. and Fleet Capital Corporation, First Union National Bank, are parties to a Loan and Security Agreement dated as of May 7, 1997 (as amended to date, the "Existing Loan Agreement"). At the request of The J.H. Heafner Company, Inc., the parties to the Existing Loan Agreement have agreed to increase the amount available to be borrowed on a revolving credit basis, permit the outstanding Term Loans (under and as defined in the Existing Loan Agreement) to be prepaid without premium or penalty, consent to additional acquisitions, adjust the applicable interest rates, modify certain covenants and make other changes to the Existing Loan Agreement, and for the convenience of the parties, to effect such increase, permission, consent, adjustments, modifications and other changes by amending and restating the Existing Loan Agreement in its entirety as hereinafter set forth, upon and subject to all of the terms, conditions and provisions hereof. Accordingly, in consideration of the Existing Loan Agreement, the financial accommodations outstanding thereunder, the mutual promises hereinafter set forth and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. For the purposes of this Agreement: "Account Debtor" means a Person who is obligated on a Receivable. "Acquire" or "Acquisition", as applied to any Business Unit or Investment, means the acquisition of such Business Unit or Investment by purchase, exchange, issuance of stock or other securities, or by merger, reorganization or any other method. 9 "Acquired Debt" means Debt of a Person that becomes a Consolidated Subsidiary after the Effective Date or is otherwise Acquired by a Loan Party after the Effective Date and Debt secured by property included in a Business Unit Acquired by a Loan Party after the Effective Date, which Debt was outstanding immediately prior to such Acquisition but was not incurred or created in contemplation of such Acquisition. "Additional Reserves" means reserves other than the Letter of Credit Reserve, the Rent Reserve or the Dilution Reserve against the Borrowing Base established by the Agent from time to time in the exercise of its reasonable credit judgment. "Affiliate" (and with corollary meaning, "Affiliated") means, with respect to a Person, (a) any partner, officer, shareholder (if holding more than ten percent (10%) of the outstanding shares of capital stock of such Person), member, director, employee, manager or managing agent of such Person, (b) any spouse, parents, siblings, children or grandchildren of such Person, and (c) any other Person (other than a Subsidiary) that, (i) directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such given Person, (ii) directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting stock or partnership or other voting interest of such Person or any Subsidiary of such Person, or (iii) ten percent (10%) or more of the voting stock or partnership or other voting interest of which is directly or indirectly beneficially owned or held by such Person or a Subsidiary of such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or partnership or other voting interest, by contract or otherwise. So long as it is not a holder, beneficially or of record, of issued and outstanding shares of common stock of Heafner or otherwise in control of Heafner, The 1818 Mezzanine Fund, L.P. will not be deemed to be an Affiliate of Heafner by reason of its holding the Warrant nor will Wingate Partners II, L.P. (or any of its Affiliates) be deemed to be an Affiliate of Heafner solely by reason of its ownership of the Class B Stock issued on or about the Effective Date. "Agency Account" means an account of a Loan Party maintained by it with a Clearing Bank pursuant to an Agency Account Agreement. "Agency Account Agreement" means an agreement among a Loan Party, the Agent and a Clearing Bank, in form and substance satisfactory to the Agent, concerning the collection and transfer of payments which represent the proceeds of Receivables or of any other Collateral. "Agent" means BankBoston, N.A., a national banking association, and any successor agent appointed pursuant to SECTION 14.9 hereof. "Agent's Office" means the office of the Agent specified in or determined in accordance with the provisions of SECTION 15.1. 2 10 "Agreement" means and includes this Amended and Restated Loan and Security Agreement, including all Schedules, Exhibits and other attachments hereto, and all amendments, modifications and supplements hereto and thereto and restatements hereof and thereof. "Agreement Date" means the date as of which this Agreement is dated. "Applicable Law" means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and of all orders and decrees of all courts and arbitrators, including, without limitation, Environmental Laws. "Applicable Margin" means (a) as to Base Rate Loans, 0.25% and (b) as to Eurodollar Rate Loans, 1.75%, subject to quarterly adjustment as follows: From and after the delivery of the consolidated quarterly financial statements of Heafner and its Consolidated Subsidiaries for the Fiscal Quarter ending December 31, 1998 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 Funded Debt to EBITDA reflected in such financial statements and the related certificate. "Assignment and Acceptance" means an assignment and acceptance in the form attached hereto as EXHIBIT D assigning all or a portion of a Lender's interests, rights and obligations under this Agreement pursuant to SECTION 13.1. "Attributable Debt" in respect of a sale leaseback transaction means, as at the date of determination, the present value (discounted at the interest rate borne by the Senior Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such sale leaseback transaction (including any period for which such lease has been extended). "BankBoston" means BankBoston, N.A., a national banking association in its individual capacity and not as Agent hereunder. "Base Rate" means at any time an interest rate per annum equal to the greater of (i) the rate of interest publicly announced from time to time by BankBoston at its head office at 100 Federal Street, Boston, Massachusetts as its "base" rate as in effect at such time, and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upward, if necessary, to the next 1/8 of 1%). "Base Rate Loan" means each Borrowing of Base Rate Loans on the same day, a specified principal amount of Base Rate Loans outstanding, and any Non-Ratable Loan. "Benefit Plan" means an "employee pension benefit plan" as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) in respect of which a Borrower or any Related Company is, or within the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA, including such plans as may be established after the Agreement Date. 3 11 "Borrower" means each of Heafner, Winston, CPW and ITCO. "Borrowing" means Loans of the same Type hereunder made (or continued or converted) by the Lenders Ratably on the same date, and, in the case of Eurodollar Rate Loans, for the same Interest Period. "Borrowing Base" means at any time an amount equal to the lesser of: (a) the aggregate Commitments, MINUS the sum of (i) the Letter of Credit Reserve, PLUS (ii) the Rent Reserve, PLUS (iii) any Additional Reserves, and (b) an amount equal to (i) 85% (or such lesser percentage as the Agent may in its reasonable credit judgment determine from time to time) of the face value of Eligible Receivables due and owing at such time, PLUS (ii) 65% as to Inventory consisting of tires and 50% as to all other Inventory (or in either case, such lesser percentage as the Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of applicable Eligible Inventory, at such time, MINUS (iii) the sum of (A) the Letter of Credit Reserve, PLUS (B) the Rent Reserve, PLUS (C) the Dilution Reserve, PLUS (D) any Additional Reserves. "Borrowing Base Certificate" means a certificate in the form attached hereto as EXHIBIT B or in such other form as the Borrowers and the Agent may agree. "Business Day" means any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia are authorized to close and, when used with respect to Eurodollar Rate Loans, means any such day on which dealings are also carried on in the applicable interbank Eurodollar market. "Business Unit" means assets constituting a business, whether all of the assets of any Person or the assets of a division or operating unit of any Person. 4 12 "CPW" means The Speed Merchant, Inc., a California corporation, doing business as "The Speed Merchant" and as "Competition Parts Warehouse" and a Wholly Owned Subsidiary of Heafner. "CPW Acquisition" means the Acquisition by Heafner of all of the issued and outstanding capital stock of CPW pursuant to the CPW Acquisition Agreement and the consummation of the other transactions contemplated to occur on or before the Closing Date pursuant to (and as such term is defined in) the CPW Acquisition Agreement. "CPW Acquisition Agreement" means the Stock Purchase Agreement dated as of March 11, 1998 between Heafner and each stockholder of CPW named as a "Seller" therein, as amended and in effect on the Agreement Date and as thereafter amended in accordance with the provisions thereof and hereof. "CPW Acquisition Documents" means the CPW Acquisition Agreement and the other instruments, certificates, opinions, agreements and other documents contemplated thereby to be executed and delivered on or prior to the Closing Date (as defined in the CPW Acquisition Agreement), including, without being limited to, the items listed on SCHEDULE 1.1D -- CPW ACQUISITION DOCUMENTS. "Capital Expenditures" means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (other than Inventory or assets that constitute a Business Unit) which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years. "Capitalized Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means Indebtedness represented by obligations under a Capitalized Lease, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Collateral" means collateral consisting of cash or Cash Equivalents on which the Agent, for the benefit of itself as Agent and the Lenders, has a first priority Lien. "Cash Collateral Account" means a special interest-bearing deposit account consisting of cash maintained at the principal office of the Agent and under the sole dominion and control of the Agent, for its benefit and for the benefit of the Lenders, established pursuant to the provisions of SECTION 4.15(a) for purposes set forth therein. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; 5 13 (b) commercial paper maturing no more than one year from the date issued and, at the time of acquisition thereof, rated at least A-1 by S&P or at least P-1 by Moody's; (c) certificates of deposit or bankers' acceptances issued in Dollar denominations and maturing within one year from the date of issuance thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $100,000,000 and, unless issued by the Agent or a Lender, not subject to set-off or offset rights in favor of such bank arising from any banking relationship with such bank; and (d) repurchase agreements in form and substance and for amounts satisfactory to the Agent. "Class B Stock" means Heafner's Class B Common Stock, par value $.01 per share, issued pursuant to the recapitalization of Heafner on the Effective Date. "Clearing Bank" means each bank listed on SCHEDULE 1.1C - CLEARING BANKS and any other banking institution with which an Agency Account has been established pursuant to an Agency Account Agreement. "Co-Agent" means each of Fleet and FUNB. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means and includes all of each Loan Party's right, title and interest in and to each of the following, wherever located and whether now or hereafter existing or now owned or hereafter acquired or arising: (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of 6 14 lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts (EXCLUDING, HOWEVER, the equity securities of any Subsidiary), to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of a Loan Party with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of a Loan Party in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, 7 15 (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. "Commitment" means, as to each Lender, the amount set forth opposite such Lender's name on ANNEX A hereto or, from and after the date hereof, as set forth in the Register, representing such Lender's obligation, upon and subject to the terms and conditions of this Agreement (including the applicable provisions of SECTION 13.1), to make its Proportionate Share of Loans and to purchase participations in Letters of Credit. "Commitment Percentage" means, as to any Lender at the time of determination, the percentage obtained by dividing such Lender's Commitment at such time by the aggregate amount of the Commitments at such time. "Consolidated Subsidiary" means each Subsidiary of Heafner the financial results of which, at the time in question, are consolidated with those of Heafner in accordance with GAAP. "Contaminant" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste. "Controlled Disbursement Account" means one or more accounts maintained by and in the name of the Borrowers (or any of them) with a Disbursing Bank for the purposes of disbursing Loan proceeds and amounts deposited thereto. "Current Assets" means, with respect to any Person, the aggregate amount of assets of such Person which should properly be classified as current assets in accordance with GAAP, after deducting adequate reserves in each case where a reserve is appropriate in accordance with GAAP. "Current Liabilities" means, with respect to any Person, the aggregate amount of all Liabilities of such Person which should properly be classified as current liabilities in accordance with GAAP. "Debt" means (a) Indebtedness for money borrowed, (b) Indebtedness, whether or not in any such case the same was for money borrowed, 8 16 (i) represented by notes payable, drafts accepted and reimbursement obligations under letters of credit, including Reimbursement Obligations, and similar instruments that represent extensions of credit, (ii) constituting obligations evidenced by bonds, debentures, notes or similar instruments, or (iii) upon which interest charges are customarily paid or that was issued or assumed as full or partial payment for property (other than trade credit that is incurred in the ordinary course of business), (c) Capitalized Lease Obligations, and (d) Indebtedness that is such by virtue of CLAUSE (c) of the definition thereof, but only to the extent that the obligations Guaranteed are Debt. The KS Preferred is not Debt for purposes of this Agreement or the other Loan Documents. "Default" means any of the events specified in SECTION 12.1 which with the passage of time or giving of notice or both would constitute an Event of Default. "Default Margin" means 2.0%. "Deposit Account" has the meaning set forth in the definition "Collateral." "Dilution Reserve" means an amount equal to the EXCESS of (i) non-cash reductions to the Loan Parties' Receivables (on a combined basis) during a 12-month period prior to the date of determination as established by the Loan Parties' records or by a field examination conducted by the Agent's or a Co-Agent's employees or representatives, expressed as a percentage of the Loan Parties' Receivables (on a combined basis) outstanding during the same period OVER (ii) 5%, MULTIPLIED by an amount equal to Eligible Receivables as of the date of determination. "Disbursing Bank" means any commercial bank with which a Controlled Disbursement Account is maintained after the Effective Date. "Dollar" and "$" means freely transferable United States dollars. "EBIT" for any specified accounting period means Net Income of Heafner and its Consolidated Subsidiaries on a consolidated basis for such period before provision for net interest expense and income taxes. "EBITDA" for any specified accounting period means EBIT for such period PLUS depreciation and amortization expense deducted in computing EBIT, with any part of such accounting period that occurred prior to the Effective Date being adjusted on a pro forma basis in such manner as may be acceptable to the Agent, for the effect of events occurring on or after the Effective Date, including the CPW Acquisition, the ITCO Merger, the issuance of the Senior 9 17 Notes and the Class B Stock, the repayment of Debt (including the Acquisition Sub Debt, as defined in the Existing Loan Agreement), and any other event. "ERISA" means the Employee Retirement Income Security Act of 1974, as in effect from time to time. "ERISA Event" means (a) a "Reportable Event" as defined in Section 4043(c) of ERISA, but excluding any such event as to which the provision for 30 days' notice to the PBGC is waived under applicable regulations, (b) the filing of a notice of intent to terminate a Benefit Plan subject to Title IV of ERISA under a distress termination under Section 4041(c) of ERISA or the treatment of an amendment to such a Benefit Plan as a termination under Section 4041(c) of ERISA, (c) the institution of proceedings by the PBGC to terminate a Benefit Plan subject to Title IV of ERISA or the appointment of a trustee to administer any such Benefit Plan or an event or condition that might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan subject to Section 4042, (d) the imposition of any liability under Title IV of ERISA other than for PBGC premiums due but not yet payable, (e) the filing of an application for a minimum funding waiver under Section 412 of the Code, (f) a withdrawal by a Borrower or any Related Company from a Benefit Plan subject to Section 4063 of ERISA during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA), (g) a Benefit Plan intending to qualify under Section 401(a) of the Code losing such qualified status (other than because of a Remediable Defect), (h) the failure to make a material required contribution to a Benefit Plan, (i) a Borrower or any Related Company being in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan because of its complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer or Plan, or (j) the occurrence of a material non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA with respect to any Benefit Plan that is not cured within 60 days after a Borrower has knowledge thereof. "Effective Date" means the later of: (a) the Agreement Date, and (b) the first date on which all of the conditions set forth in ARTICLE 5 shall have been fulfilled. "Effective Interest Rate" means each rate of interest per annum on the Loans in effect from time to time pursuant to the provisions of SECTIONS 4.1(a), (b) AND (d). "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof, having total assets in excess of $10,000,000,000; (ii) any commercial finance or asset based lending company that is an Affiliate of a commercial bank having total assets in excess of $10,000,000,000; and (iii) any Lender listed on the signature page of this Agreement; PROVIDED that the representation contained in SECTION 13.2 hereof shall be applicable with respect to any such Person. 10 18 "Eligible Inventory" means items of Inventory of a Loan Party held for sale in the ordinary course of the business of such Loan Party (but not including packaging or shipping materials or maintenance supplies) that meet all of the following requirements: (a) such Inventory is owned by a Loan Party, is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien; (b) such Inventory consists of raw materials or finished goods and does not consist of work-in-process, supplies or consigned goods; (c) such Inventory is in good condition and meets all standards applicable to such goods, their use or sale imposed by any governmental agency, or department or division thereof, having regulatory authority over such matters; (d) such Inventory is currently either usable or saleable, at prices approximating at least the cost thereof, in the normal course of the applicable Loan Party's business; (e) such Inventory is not obsolete or returned or repossessed or used goods taken in trade; (f) such Inventory is located within the United States at one of the Permitted Inventory Locations; (g) such Inventory is in the possession and control of a Loan Party and not any third party and if located in a warehouse or other facility leased by a Loan Party, the lessor has delivered to the Agent a waiver and consent in form and substance satisfactory to the Agent or such facility is reflected in the Rent Reserve; and (h) such Inventory is not determined by the Agent, in the exercise of its reasonable credit judgment, to be ineligible for any reason. "Eligible Receivable" means the unpaid portion of a Receivable payable in Dollars to a Loan Party net of any returns, discounts, credits, or other allowances or deductions agreed to by a Loan Party and net of any amounts owed by a Loan Party to the Account Debtor on such Receivable, which Receivable meets all of the following requirements: (a) such Receivable is owned by a Loan Party and represents a complete bona fide transaction which requires no further act under any circumstances on the part of any Loan Party to make such Receivable payable by the Account Debtor; (b) such Receivable is not past due more than 60 days after its due date, which due date shall not be later than 90 days after the invoice date; (c) such Receivable does not arise out of any transaction with any Subsidiary, Affiliate, creditor, lessor or supplier of a Loan Party; (d) such Receivable is not owing by an Account Debtor more than 15% of whose then-existing accounts owing to the Loan Parties do not meet the requirements set forth in CLAUSE (B) above; (e) if the Account Debtor with respect thereto is located outside of the United States of America, Canada or Puerto Rico, the goods which gave rise to such Receivable were shipped after receipt by the applicable Loan Party from the Account Debtor of an irrevocable letter of credit that has been confirmed by a financial institution acceptable to the Agent and is in form and substance acceptable to the Agent, payable in the full face amount of the face value of the Receivable in Dollars at a place of payment located within the United States and has been duly assigned to the Agent, except that up to $1,000,000 of such Receivables outstanding at any time that are otherwise Eligible Receivables, may be included in Eligible Receivables without such letter of credit support; (f) the Account Debtor with respect to such Receivable is not located in a state which imposes conditions on the enforceability of Receivables with which the applicable Loan Party has not complied; (g) such Receivable is not subject to the Assignment of Claims Act of 1940, as amended from time to time, or any applicable law now or hereafter existing similar in effect thereto, as determined in the sole discretion of the Agent, or to any provision prohibiting its assignment or requiring notice of or consent to such assignment; (h) the Loan Party that is the obligee thereof is not in breach of any 11 19 express or implied representation or warranty with respect to the goods the sale of which gave rise to such Receivable; (i) the Account Debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending, which might, in the Agent's judgment, have a Materially Adverse Effect on such Account Debtor; (j) the goods the sale of which gave rise to such Receivable were shipped or delivered to the Account Debtor on an absolute sale basis and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis or on the basis of any other similar understanding, and such goods have not been returned or rejected; (k) such Receivable is not owing by an Account Debtor or a group of affiliated Account Debtors whose then-existing accounts owing to the Loan Parties exceed in face amount 20% of the Loan Parties' total Eligible Receivables; (l) such Receivable is evidenced by an invoice or other documentation in form acceptable to the Agent containing only terms normally offered by the applicable Loan Party, and dated no later than the date of shipment; (m) such Receivable is a valid, legally enforceable obligation of the Account Debtor with respect thereto and is not subject to any present, or contingent (and no facts exist which are the basis for any future), offset, deduction or counterclaim, dispute or other defense on the part of such Account Debtor; (n) such Receivable is not evidenced by chattel paper or an instrument of any kind; (o) other than mechanical services performed by Winston or CPW, such Receivable does not arise from the performance of services, including services under or related to any warranty obligation of a Loan Party or out of service charges by a Loan Party or other fees for the time value of money; (p) such Receivable is subject to the Security Interest, which is perfected as to such Receivable, and is subject to no other Lien whatsoever other than a Permitted Lien and the goods giving rise to such Receivable were not, at the time of the sale thereof, subject to any Lien other than a Permitted Lien; and (q) such Receivable is not determined by the Agent, in the exercise of its reasonable credit judgment, to be ineligible for any reason. "Environmental Laws" means all federal, state, local and foreign laws now or hereafter in effect relating to pollution or protection of the environment, including laws relating to emissions, discharges, Releases or threatened Releases of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, removal, transport, or handling of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, notices or demand letters issued, entered, promulgated or approved thereunder; such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., as amended; the Clean Air Act, 46 U.S.C. Section 7401 et seq., as amended; and state and federal lien and environmental cleanup programs. "Environmental Lien" means a Lien in favor of any governmental entity for (a) any liability under Environmental Laws or (b) damages arising from, or costs incurred by such governmental entity in response to, a Release or threatened Release of Contaminant into the environment. 12 20 "Eurodollar Rate" means, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, a simple per annum interest rate determined pursuant to the following formula: Eurodollar Rate = Interbank Offered Rate ------------------------------------------------ 1 - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "Eurodollar Rate Loan" means any Loan (or Loans made (or converted or continued) by the Lenders Ratably on the same date for the same Interest Period), bearing interest determined with reference to the Eurodollar Rate. "Eurodollar Reserve Percentage" means that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended from time to time, or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Rate Loans is determined), whether or not any Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Rate Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to any Lender. "Existing Loan Agreement" has the meaning specified in the Preliminary Statement. "Event of Default" means any of the events specified in SECTION 12.1, PROVIDED that any requirement for notice or lapse of time or any other condition has been satisfied. "FUNB" means First Union National Bank, a national banking association. "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve system arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by BankBoston from three federal funds brokers of recognized standing selected by BankBoston. "Financed Capex" means Capital Expenditures funded with the proceeds of Debt (excluding Loans) or represented by Capitalized Lease Obligations. 13 21 "Financial Officer" means the chief financial officer, Treasurer or Controller of Heafner. "Financing Statements" means any and all Uniform Commercial Code financing statements, in form and substance satisfactory to the Agent, executed and delivered by a Loan Party to the Agent or assigned to the Agent by BankBoston, naming the Agent, for the benefit of the Lenders, as secured party or assignee and the applicable Loan Party as debtor, in connection with this Agreement. "Fiscal Quarter" means each three-month accounting period of Heafner ending March 31, June 30, September 30 and December 31 of each Fiscal Year. "Fiscal Year" means the fiscal year of Heafner commencing on January 1 of each year and ending on December 31 of the same year. "Fleet" means Fleet Capital Corporation, a Rhode Island corporation. "Fleet Financing" means the Loan and Security Agreement dated as of August 4, 1993, as amended and in effect on the Effective Date, to which Fleet (f/k/a Barclays Business Credit, Inc.) and ITCO (f/k/a ITCO Tire Company) are parties, and the transactions contemplated thereby. "Funded Debt" means the outstanding principal amount of all Debt of Heafner and its Consolidated Subsidiaries on a consolidated basis (other than the Funded Debt Exclusions). "Funded Debt to EBITDA" means for any specified accounting period, the ratio of Funded Debt as of the last day of such period to EBITDA for such period. For purposes of computing such ratio, Loans shall be included in "Funded Debt" in an amount equal to the average daily outstanding principal amount thereof during the period of four consecutive Fiscal Quarters preceding the date of determination (or, if a shorter period, during the period from the Effective Date through the last day of the Fiscal Quarter ended on or immediately prior to the date of determination). "GAAP" means generally accepted accounting principles consistently applied and maintained throughout the period indicated and, when used with reference to a Borrower or any Subsidiary, consistent with the prior financial practice of Heafner, as reflected on the financial statements referred to in SECTION 6.1(n); PROVIDED, HOWEVER, that, in the event that changes shall be mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing, or shall be recommended by Heafner's independent public accountants, such changes shall be included in GAAP as applicable to Heafner and its Consolidated Subsidiaries only from and after such date as the Borrowers, the Required Lenders, the Agent and the Co-Agents shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants set forth in ARTICLE 11. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all governmental bodies, whether federal, state, local or foreign national or provincial and all agencies thereof. 14 22 "Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation of another Person shall mean and include (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation of such other Person, and (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation of such other Person whether by (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, (iv) repayment of amounts drawn down by beneficiaries of letters of credit, or (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. "Heafner" means The J.H. Heafner Company, Inc., a North Carolina corporation. "ITCO" means ITCO Holding Company, Inc., a North Carolina corporation and a Wholly Owned Subsidiary of Heafner. "ITCO Logistics" means ITCO Logistics Corporation, a Delaware corporation, the surviving corporation of the ITCO Merger and a Wholly Owned Subsidiary of Heafner. "ITCO Merger" means the merger of ITCO Merger Corporation, a Delaware corporation and a Wholly Owned Subsidiary of Heafner formed for the purpose of effecting such merger, with and into ITCO Logistics Corporation, a Delaware corporation, with the result that upon completion Heafner owns of all of the issued and outstanding capital stock of ITCO Logistics, and the consummation of the other transactions contemplated to occur at or before the Effective Time pursuant to (and as such term is defined in) the ITCO Merger Agreement. 15 23 "ITCO Merger Agreement" means the Agreement and Plan of Merger dated as of March 10, 1998 among Heafner, ITCO Merger Corporation, a Delaware corporation, ITCO Logistics Corporation, a Delaware corporation, and the stockholders of said ITCO Logistics Corporation, as amended and in effect on the Agreement Date and as thereafter amended in accordance with the provisions thereof and hereof. "ITCO Merger Documents" means the ITCO Merger Agreement and the other instruments, certificates, opinions, agreements and other documents contemplated thereby to be executed and delivered at or prior to the Effective Time (as defined in the ITCO Merger Agreement), including, without being limited to, the items listed on SCHEDULE 1.1E -- ITCO MERGER DOCUMENTS. "Indebtedness" of any Person means, without duplication, all Liabilities of such Person, and to the extent not otherwise included in Liabilities, the following: (a) all obligations for money borrowed or for the deferred purchase price of property or services or in respect of drafts accepted or similar instruments or reimbursement obligations under letters of credit, (b) all obligations (including, during the noncancellable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (c) all obligations of other Persons which such Person has Guaranteed, including, but not limited to, all obligations of such Person consisting of recourse liability with respect to accounts receivable sold or otherwise disposed of by such Person, (d) all obligations of such Person in respect of Interest Rate Protection Agreements, and (e) in the case of the Borrowers (without duplication) all obligations under the Loans and the Reimbursement Obligations. "Initial Notice of Borrowing" means the Notice of Borrowing given by the Borrowers with respect to the Initial Loans which shall also specify the method of disbursement. "Initial Loans" means the Loans made to the Borrowers on the Effective Date pursuant to the Initial Notice of Borrowing. "Interbank Offered Rate" for an Interest Period means the rate per annum (rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Rate Loan for any Interest Period 16 24 therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; PROVIDED, HOWEVER, that if more than one rate is specified on the Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Interest Payment Date" means the first day of each calendar month commencing June 1, 1998. "Interest Period" means with respect to each Eurodollar Rate Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Rate Loan and ending one, two, three, six or, if available in the Agent's reasonable judgment, twelve months thereafter, as the Borrowers may elect in the applicable Notice of Borrowing or Notice of Conversion or Continuation; PROVIDED, that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall, subject to the provisions of CLAUSE (iii) below, be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to CLAUSE (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Termination Date shall end on the Termination Date; and (iv) notwithstanding CLAUSE (iii) above, no Interest Period shall have a duration of less than one month and if any applicable Interest Period would be for a shorter period, such Interest Period shall not be available hereunder. "Interest Rate Protection Agreement" shall mean an interest rate swap, cap or collar agreement or similar arrangement between any Person and a financial institution providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "Inventory" has the meaning set forth in the definition "Collateral." "Investment" means, with respect to any Person: (a) the acquisition or ownership by such Person of any share of capital stock, evidence of Indebtedness or other security issued by any other Person, 17 25 (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person, excluding advances to employees in the ordinary course of business for business expenses, (c) any Guaranty of the obligations of any other Person, (d) any other investment (other than the Acquisition of a Business Unit) in any other Person, and (e) any commitment or option to make any of the investments listed in CLAUSES (a) through (d) above if, in the case of an option, the consideration therefor exceeds $100. "Investment Account" has the meaning set forth in the definition "Collateral." "Investment Property" has the meaning set forth in the definition "Collateral." "IRS" means the Internal Revenue Service. "KS Preferred" means up to 7,000 shares of Series A Cumulative Redeemable Preferred Stock and up to 4,500 shares of Series B Cumulative Redeemable Preferred Stock of Heafner issued by Heafner and sold to The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company, pursuant to the KS Preferred Stock Purchase Agreement. "KS Preferred Stock Purchase Agreement" means the Securities Purchase Agreement dated May 7, 1997 between Heafner and The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company, as modified in accordance with the terms of the Existing Loan Agreement and this Agreement. "Lender" means at any time any financial institution party to this agreement at such time, including any such Person becoming a party hereto pursuant to the provisions of ARTICLE 13 and including BankBoston as an issuer of Letters of Credit and as lender of Non-Ratable Loans. "Letter of Credit" means (i) each letter of credit issued by BankBoston for the account of Heafner or Winston under the Existing Loan Agreement and outstanding on the Effective Date and (ii) any Letter of Credit issued by BankBoston for the account of a Borrower or any Subsidiary pursuant to ARTICLE 3. "Letter of Credit Amount" means, at any time with respect to any Letter of Credit, the aggregate maximum amount at any time available for drawing under such Letter of Credit at such time (assuming all conditions to drawing are satisfied). "Letter of Credit Availability" means, as of the date of determination, the aggregate face amount of Letter of Credit Obligations available to be incurred hereunder at the time of determination in accordance with SECTION 3.2, which shall be an amount equal to the lesser of (i) the Letter of Credit Facility MINUS the Letter of Credit Obligations and (ii) the Loan Availability, on such date. 18 26 "Letter of Credit Facility" means a subfacility under the Commitments, providing for the issuance of Letters of Credit as described in ARTICLE 3, up to an aggregate amount of Letter of Credit Obligations at any one time outstanding not to exceed $10,000,000. "Letter of Credit Obligations" means, at any time, the sum of (a) the Reimbursement Obligations at such time, PLUS (b) the aggregate Letter of Credit Amount of Letters of Credit outstanding at such time, PLUS (c) the aggregate Letter of Credit Amount of Letters of Credit the issuance of which has at such time been authorized by the Agent and BankBoston pursuant to SECTION 3.4(b) but that have not yet been issued, in each case as determined by the Agent. "Letter of Credit Reserve" means, at any time, the aggregate Letter of Credit Obligations at such time, other than Letter of Credit Obligations that are fully secured by Cash Collateral. "Liabilities" of any Person means all items (except for items of capital stock, including specifically as to Heafner the KS Preferred, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. "Lien" as applied to the property of any Person means: (a) any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, (c) any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, except to the extent being disputed or contested by such Person by appropriate proceedings and in respect of which any reserve required by GAAP has been appropriately established and maintained, (d) the filing of, or any agreement to give, any financing statement under the UCC or its equivalent in any jurisdiction (excluding informational financing statements relating to property leased by a Borrower or any Subsidiary), and (e) in the case of Real Estate, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances. 19 27 "Loan" means (i) each Revolving Credit Loan under and as defined in the Existing Loan Agreement outstanding on the Effective Date, (ii) each advance made to the Borrowers by a Lender pursuant to SECTION 2.1, including any Non-Ratable Loan, and (iii) a specified principal amount of such advances outstanding hereunder. "Loan Account" and "Loan Accounts" have the meanings specified in SECTION 4.5. "Loan Availability" means, as of the date of determination, the aggregate principal amount of Loans available to be borrowed by the Borrowers hereunder at the time in accordance with SECTION 2.1, which shall be an amount equal to the remainder derived by subtracting the aggregate principal amount of Loans outstanding on such date from the Borrowing Base on such date. "Loan Documents" means collectively this Agreement, the Notes, the Security Documents and each other instrument, agreement or document executed by a Loan Party or any Affiliate or Subsidiary of a Loan Party in connection with this Agreement whether prior to, on or after the Effective Date and each other instrument, agreement or document referred to herein or contemplated hereby. "Loan Party" means any Borrower or Subsidiary Guarantor. "Lockbox" means each U. S. Post Office Box specified in a Lockbox Agreement. "Lockbox Agreement" means each agreement between a Borrower and a Clearing Bank concerning the establishment of a Lockbox for the collection of Receivables. "Margin Stock" means margin stock as defined in Section 221.1(h) of Regulation U, as the same may be amended or supplemented from time to time. "Materially Adverse Effect" means any act, omission, situation, circumstance, event or undertaking which would, singly or in any combination with one or more other acts, omissions, situations, circumstances, events or undertakings, have, or reasonably be expected by the Agent to have, a materially adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of Heafner and its Consolidated Subsidiaries taken as a whole, (b) the value of the whole or any material part of the Collateral, (c) the Security Interest or the priority of the Security Interest, (d) the ability of Heafner and its Consolidated Subsidiaries taken as a whole to perform any material obligation under this Agreement or any other Loan Document, or (e) other than solely and directly by reason of any release given or other action taken by the Agent or any Lender, the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document or the ability of the Agent or the Lenders to enforce in any material respect any rights or remedies under or in connection with any Loan Document. "Minimum Commitment" means $10,000,000. "Moody's" means Moody's Investors Service, Inc. 20 28 "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which a Borrower or a Related Company is required to contribute or has contributed within the immediately preceding six years. "Net Amount" means, with respect to any Investments made by any Person, the gross amount of all such Investments MINUS the aggregate amount of all cash received and the fair value, at the time of receipt by such Person, of all property received as payments of principal or premiums, returns of capital, liquidating dividends or distributions, proceeds of sale or other dispositions with respect to such Investments. "Net Income" or "Net Loss" means, as applied to any Person for any accounting period, the net income or net loss, as the case may be, of such Person for the period in question after giving effect to deduction of or provision for all operating expenses, all taxes and reserves (including reserves for deferred taxes) and all other proper deductions, all determined in accordance with GAAP, PROVIDED that there shall be excluded: (a) the net income or net loss of any Person accrued prior to the date it becomes a Subsidiary of, or is merged into or consolidated with, the Person whose Net Income is being determined or a Subsidiary of such Person, (b) the net income or net loss of any Person in which the Person whose Net Income is being determined or any Subsidiary of such Person has an ownership interest, except, in the case of net income, to the extent that any such income has actually been received by such Person or such Subsidiary in the form of cash dividends or similar distributions, (c) any restoration of any contingency reserve, except to the extent that provision for such reserve was made out of income during such period, (d) any net gains or losses on the sale or other disposition, not in the ordinary course of business, of Investments, Business Units and other capital assets, provided that there shall also be excluded any related charges for taxes thereon, (e) any net gain arising from the collection of the proceeds of any insurance policy, (f) any write-up of any asset, and (g) any other extraordinary item. "Net Outstandings" of any Lender means, at any time, the sum of (a) all amounts paid by such Lender (other than pursuant to SECTION 14.7) to the Agent in respect of Loans by such Lender, MINUS (b) all amounts received by the Agent and paid by the Agent to such Lender for application, pursuant to this Agreement, to reduction of the outstanding principal balance of the outstanding Loans of such Lender. "Net Worth" means, with respect to any Person, such Person's total shareholder's equity (including specifically as to Heafner the KS Preferred and including any other capital 21 29 stock, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear as such on a balance sheet of such Person prepared in accordance with GAAP. "Non-Ratable Loan" means a Base Rate Loan made by BankBoston in accordance with the provisions of SECTION 4.8(c). "Note" means each Amended and Restated Promissory Note made by the Borrowers payable to the order of a Lender evidencing the obligation of the Borrowers to pay the aggregate unpaid principal amount of the Loans made to it by such Lender (and any promissory note or notes that may be issued from time to time in substitution, renewal, extension, replacement or exchange therefor whether payable to such Lender or to a different Lender in connection with a Person becoming a Lender after the Effective Date or otherwise) substantially in the form of EXHIBIT A hereto, with all blanks properly completed, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "Notice of Borrowing" means a written notice, or telephonic notice followed by a confirming same-day written notice, requesting a Borrowing of Base Rate Loans or Eurodollar Rate Loans, which is given by telex or facsimile transmission in accordance with the applicable provisions of SECTION 2.2 and which specifies (i) the amount of the requested Borrowing, (ii) the date of the requested Borrowing, and (iii) if the requested Borrowing is of Eurodollar Rate Loans, the duration of the applicable Interest Period. "Notice of Conversion or Continuation" has the meaning specified in SECTION 4.13. "Overadvance" means at any time the amount by which the aggregate outstanding principal amount of Loans exceeds the Borrowing Base. "Overadvance Condition" means and is deemed to exist any time the aggregate outstanding principal amount of Loans exceeds the Borrowing Base. "Overadvance Loan" means a Base Rate Loan made at a time an Overadvance Condition exists or which results in an Overadvance Condition. "PBGC" means the Pension Benefit Guaranty Corporation and any successor agency. "Permitted Inventory Locations" means each location listed on SCHEDULE 6.1(u) and from time to time each other location within the continental United States which Heafner has notified the Agent is a location at which Inventory of a Loan Party is maintained together with such evidence as the Agent may reasonably require that the Inventory at such location is subject to the Security Interest and to no other Lien other than Permitted Liens. "Permitted Investments" means (a) Investments of Heafner and its Consolidated Subsidiaries in: 22 30 (i) cash and Cash Equivalents in an aggregate amount not greater than $5,000,000, (ii) sales of inventory on credit in the ordinary course of business, (iii) shares of capital stock, evidence of Debt or other security acquired in consideration for or as evidence of past-due or restructured Receivables in an aggregate face amount of such Receivables as to Heafner and its Subsidiaries at any time not to exceed $2,500,000, (iv) any Loan Party, and (v) those items described on SCHEDULE 1.1A - PERMITTED INVESTMENTS; and (b) Investments of any Loan Party in any Subsidiary that is not a Loan Party to the extent in existence on the Effective Date, as such Investments may increase by reason of the profitable operations of such Subsidiary. "Permitted Liens" means: (a) Liens securing taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, but (i) in all cases only if payment shall not at the time be required to be made in accordance with SECTION 9.6, and (ii) in the case of warehousemen or landlords, only if such liens are junior to the Security Interest in any of the Collateral or the relevant premises are reflected in the Rent Reserve, (b) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation or under payment or performance bonds, (c) Liens constituting encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the use thereof in the business of the applicable Borrower, (d) Liens shown on SCHEDULE 1.1B - PERMITTED LIENS and any additional Liens exclusively affecting tire Inventory of a Loan Party, for the benefit of the vendor of such Inventory, as security for the payment or repayment of amounts (including trade accounts) owing by such Loan Party to such vendor), (e) Liens of the Agent, for the benefit of the Lenders, arising under this Agreement and the other Loan Documents, (f) Liens on Margin Stock, 23 31 (g) Liens in existence immediately prior to the Effective Date that are satisfied in full and released on the Effective Date or promptly thereafter by application of the proceeds of the Loans or cash on hand, (h) the Lien of FUNB as Trustee under the Senior Note Indenture pursuant to Section 7.07 thereof on certain property in its possession as security for payment of fees and other amounts owing to it in its capacity as such Trustee, and (i) additional Liens in accordance with the provisions of SECTION 11.9. "Person" means an individual, corporation, limited liability company, partnership, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Projections" means the forecasted (a) balance sheets, (b) income statements and (c) cash flow statements of the Borrowers for each Fiscal Year, prepared annually by the Borrowers on a consolidated monthly basis, together with appropriate supporting details (including stand-alone forecasts for each Borrower) and a statement of underlying assumptions. "Proportionate Share" or "Ratable Share" or "Ratable" (and with corollary meaning, "Ratably") means, as to a Lender, such Lender's share of an amount in Dollars or of other property at the time of determination equal to (i) the Commitment Percentage of such Lender, or (ii) if the Commitments are terminated, the percentage obtained by dividing the principal amount of the Loans then owing to such Lender by the total principal amount of all Loans then owing to all Lenders, or (iii) if no Loans are outstanding, the percentage obtained by dividing such Lender's participation in the total Letter of Credit Obligations then outstanding by the total Letter of Credit Obligations then outstanding. "Proprietary Rights" means as to any Person, such Person's rights, title and interest in and to intellectual property and all other rights (including rights as a licensee thereof) under any patents, trademarks, trade names, tradestyles, copyrights and all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. "Purchase Money Lien" means any Lien securing Debt created to finance the payment of all or any part of the purchase price (not in excess of the fair market value thereof) of any tangible personal property (other than Inventory) and incurred at the time of or within 10 days prior to or after the acquisition of such tangible asset, but only if such Lien shall at all times be confined solely to the property (other than Inventory) the purchase price of which was financed through the incurrence of such Debt. "Purchase Price" has the meaning specified in SECTION 11.4. "Real Estate" means all real property now or hereafter owned or leased by Heafner or any Subsidiary, including, without limitation, all fees, leaseholds and future interests. "Receivables" has the meaning set forth in the definition "Collateral." 24 32 "Register" has the meaning specified in SECTION 13.1(d). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Reimbursement Agreement" means, with respect to a Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single document or several documents) as BankBoston may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by BankBoston and the Borrowers, PROVIDED that such application and agreement and any modifications thereto are not inconsistent with the terms of this Agreement. "Reimbursement Obligations" means the unsatisfied reimbursement or repayment obligations of the Borrowers to BankBoston pursuant to SECTION 3.6 or (but without duplication) pursuant to a Reimbursement Agreement with respect to amounts that have been drawn under Letters of Credit. "Related Company" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Heafner; (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with Heafner; or (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as Heafner, any corporation described in CLAUSE (i) above or any partnership, trade or business described in CLAUSE (ii) above. "Release" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Contaminants through or in the air, soil, surface water or groundwater. "Remediable Defect" means an operational defect or violation that could disqualify a Benefit Plan intended to qualify under Section 401(a) (and, if applicable, Section 401(k)) of the Code and that can be remedied under the IRS's Closing Agreement Program, Voluntary Compliance Resolution Program, or Administrative Policy Regarding Self-Correction, without in any case a payment to any governmental authority with respect to such Benefit Plan and any other Benefit Plan of more than $100,000 in any calendar year. "Remedial Action" means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Rent Reserve" means an amount approximately equal to the aggregate monthly rental payable by the Borrowers on all leased Real Estate in respect of which landlord's or 25 33 warehouseman's waivers, in form and substance acceptable to the Agent, are not in effect or such greater amount as the Agent may, in its reasonable credit judgment, determine to be appropriate after notice to the Borrowers. "Required Lenders" means, at any time, any combination of two or more Lenders whose Commitment Percentages at such time aggregate in excess of 50%. "Restricted Distribution" by any Person means (a) its retirement, redemption, purchase, or other acquisition or retirement for value of any capital stock or other equity securities (except equity securities acquired on the conversion or exercise thereof into other equity securities of such Person) or partnership interests issued by such Person, (b) the declaration or payment of any dividend or distribution in cash or property on or with respect to any such securities (other than dividends payable solely in shares of its capital stock) or partnership interests, EXCLUDING, HOWEVER, any such dividend, distribution or payment to a Loan Party by any of its Subsidiaries, (c) any Investment (other than a Permitted Investment) by such Person in, the holder of any of such securities or partnership interests, and (d) any other payment by such Person in respect of such securities or partnership interests. "Restricted Payment" means (a) any redemption or prepayment or other retirement, prior to the stated maturity thereof or prior to the due date of any regularly scheduled installment or amortization payment with respect thereto, of any Debt (other than the Loans) or of any Indebtedness that is junior and subordinate to the Secured Obligations, (b) any payment on or with respect to any Subordinated Debt other than in accordance with the subordination provisions thereof, (c) the payment by any Person of the principal amount of or interest on any Indebtedness (other than trade accounts payable and employee compensation in the ordinary course of business, consistent with past practices and non-compete payments or bonuses in accordance with the provisions of the CPW Acquisition Agreement) owing to an Affiliate of such Person or to any Affiliate of any such Affiliate and (d) the payment of any management, consulting or similar fee by any Person to any Affiliate of such Person. "S&P" means Standard & Poor's Ratings Group. "Schedule of Inventory" means a schedule delivered by the Borrowers to the Agent pursuant to the provisions of SECTION 8.12(b). "Schedule of Receivables" means a schedule delivered by the Borrowers to the Agent pursuant to the provisions of SECTION 8.12(a). "Secured Obligations" means, in each case whether now in existence or hereafter arising, (a) the principal of and interest on the Loans, (b) the Reimbursement Obligations and all other obligations of the Borrowers to the Agent or any Lender arising in connection with the issuance of Letters of Credit, 26 34 (c) all obligations of the Borrowers to any Lender or any Affiliate of a Lender under any Interest Rate Protection Agreement, and (d) all indebtedness, liabilities, obligations, covenants and duties of the Borrowers or any Subsidiary to the Agent or to the Lenders or to any Affiliate of the Agent or any Lender of every kind, nature and description arising under or in respect of this Agreement, the Notes or any of the other Loan Documents, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, including without limitation, fees required to be paid pursuant to ARTICLE 4 and expenses required to be paid or reimbursed pursuant to SECTION 15.2. "Security Documents" means the Financing Statements, the Subsidiary Security Agreements and each other writing executed and delivered by a Loan Party or any other Person securing the Secured Obligations or assuring rights of the Agent or the Lenders in respect of the Collateral. "Security Interest" means the Liens of the Agent, for the benefit of itself as the Agent and the Lenders and Affiliates of the Lenders, on and in the Collateral effected hereby or by any of the Security Documents or pursuant to the terms hereof or thereof. "Senior Note Indenture" means the Indenture dated as of May 15, 1998 between Heafner and First Union National Bank, Trustee. "Senior Notes" means Heafner's 10% Senior Notes due 2008 in the original principal amount of $100,000,000, issued pursuant to the Senior Note Indenture, including any "Exchange Securities" and "Private Exchange Securities" issued (and as defined) thereunder. "Settlement Date" means each Business Day after the Effective Date selected by the Agent in its sole discretion subject to and in accordance with the provisions of SECTION 4.8(b)(i) as of which a Settlement Report is delivered by the Agent and on which settlement is to be made among the Lenders in accordance with the provisions of SECTION 4.8. "Settlement Report" means each report substantially in the form of EXHIBIT C or as the Agent and the Lenders may otherwise agree, prepared by the Agent and delivered to each Lender and setting forth, among other things, as of the Settlement Date indicated thereon and as of the next preceding Settlement Date, the aggregate principal balance of all Loans outstanding, each Lender's Proportionate Share thereof, each Lender's Net Outstandings and all Non-Ratable Loans made, and all payments of principal and interest in respect of Loans and of fees received by the Agent from the Borrower during the period beginning on such next preceding Settlement Date and ending on such Settlement Date. "Subordinated Debt" means any Debt of Heafner or any Subsidiary that is subordinated to the Secured Obligations on terms and conditions acceptable to the Required Lenders in their sole discretion. 27 35 "Subsidiary" (a) when used to determine the relationship of a Person to another Person, means a Person of which an aggregate of 50% or more of the stock of any class or classes or 50% or more of other ownership interests is owned of record or beneficially by such other Person, or by one or more Subsidiaries of such other Person, or by such other Person and one or more Subsidiaries of such Person, (i) if the holders of such stock, or other ownership interests, (A) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or other individuals performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency, or (B) are entitled, as such holders, to vote for the election of a majority of the directors (or individuals performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency, or (ii) in the case of such other ownership interests, if such ownership interests constitute a majority voting interest and (b) when used without other designation of ownership, means a Subsidiary of Heafner. "Subsidiary Guarantor" means ITCO Tire Company, Inc., ITCO Tire Company of Georgia, Inc., Phoenix Racing, Inc. and each other Subsidiary of Heafner that is not a Borrower and that has, at the Agent's request or with its consent, executed and delivered a Subsidiary Guaranty and a Subsidiary Security Agreement. "Subsidiary Guaranty" means a Guaranty of the Secured Obligations substantially in the form of EXHIBIT F attached hereto or as otherwise acceptable to the Agent and Heafner. "Subsidiary Security Agreement" means one or more agreements in form and substance satisfactory to the Agent in its reasonable judgment, sufficient to create in favor of the Agent a security interest in all of the Receivables, Inventory and proceeds thereof of any Subsidiary Guarantor. "Termination Date" means May 20, 2003, such earlier date as all Secured Obligations shall have been irrevocably paid in full and the Commitments shall have been terminated, or such later date to which the same may be extended pursuant to the provisions of SECTION 2.5. "Type" when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. "UCC" means the Uniform Commercial Code as in effect from time to time in the applicable jurisdiction. 28 36 "Unfunded Vested Accrued Benefits" means at any time, with respect to any Benefit Plan that is a pension plan within the meaning of Section 3(2) of ERISA, the amount (if any) by which (a) the present value of all vested nonforfeitable benefits under such Benefit Plan exceeds (b) the fair market value of all such Benefit Plan assets allocable to such benefits, as determined using the valuation date and such reasonable actuarial assumptions and methods as are specified in the Schedule B (Actuarial Information) to the most recent Annual Report (Form 5500) filed with respect to such Benefit Plan. "Unused Commitments" has the meaning specified in SECTION 4.2(b). "Warrant" means the warrant to purchase common stock of Heafner issued to The 1818 Mezzanine Fund II, L.P. pursuant to the Senior Subordinated Note and Warrant Purchase Agreement dated as of May 7, 1997 between Heafner and said Fund, as amended in accordance with the provisions of the Existing Loan Agreement and this Agreement. "Wholly Owned Subsidiary" when used to determine the relationship of a Subsidiary to a Person means a Subsidiary all of the issued and outstanding shares (other than directors' qualifying shares) of the capital stock of which shall at the time be owned by such Person or one or more of such Person's Wholly Owned Subsidiaries or by such Person and one or more of such Person's Wholly Owned Subsidiaries. "Winston" means Oliver & Winston, Inc., a California corporation and a Wholly Owned Subsidiary of Heafner. "Winston Purchase Agreement" means the Stock Purchase Agreement dated as of April 9, 1997, between Heafner, William S. Johnstone as trustee of The Sam M. Winston Separate Property Trust dated July 26, 1989, the Trust dated December 20, 1976 f/b/o Melissa Winston Alfieri, the Trust dated December 20, 1976 f/b/o Sam M. Winston, II, the Trust dated December 21, 1982 f/b/o Melissa Winston Alfieri, the Trust dated December 21, 1982 f/b/o Sam M. Winston, II, The William S. Johnstone, Jr. Separate Property Trust dated October 5, 1993 and as Sellers' Representative (as defined in said Agreement) and Thomas J. Bonburg. "Year 2000 Compliant" as to any Person means that all software, embedded microchips and other processing capabilities utilized by, and material to the business operations or financial condition of, such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates in and after the calendar year 2000. SECTION 1.2 General Interpretive Rules. (a) All terms of an accounting nature not specifically defined herein shall have the meaning ascribed thereto by GAAP. (b) The terms accounts, chattel paper, contract rights, documents, equipment, instruments, general intangibles, inventory and proceeds, as and when used in this Agreement or the Security Documents, shall have the meanings given those terms in the UCC. 29 37 (c) Unless otherwise specified, the words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision, section or subsection of this Agreement. (d) Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Words denoting individuals include corporations and vice versa. (e) References to any legislation or statute or code, or to any provisions of any legislation or statute or code, shall include any modification or reenactment of, or any legislative, statutory or code provision substituted for, such legislation, statute or code or provision thereof. (f) References to any document or agreement (including this Agreement) shall include references to such document or agreement as amended, novated, supplemented, modified or replaced from time to time, so long as and to the extent that such amendment, novation, supplement, modification or replacement is not prohibited by the terms of this Agreement or is consented to, if such consent is required, in accordance with the applicable provisions of this Agreement. (g) Except where specifically restricted in a Loan Document, references to any Person include its successors or permitted substitutes and assigns permitted or not prohibited under such Loan Document. (h) References to the time of day are to the time of day in the city in which the Agent's Office is located. (i) The terms "payment", "prepayment", "distribution" and similar terms used in the definitions of "Restricted Distribution" and "Restricted Payment" and in SECTION 11.6, shall include payment by means of the transfer of funds or of property and, in the event of a transfer of property, the payment shall be deemed to be in an amount equal to the greater of the fair market value and the book value of the property at the time of the transfer. (j) Titles of Articles and Sections in this Agreement are for convenience only, do not constitute part of this Agreement and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, subsections, paragraphs, clauses, subclauses, Schedules or Exhibits shall refer to the corresponding Article, Section, subsection, paragraph, clause or subclause of, or Schedule or Exhibit attached to, this Agreement, unless specific reference is made to the articles, sections or other subdivisions or divisions of, or to schedules or exhibits to, another document or instrument. (k) Whenever from the context it appears appropriate, the term "Loan", including such terms as used as part of a defined term including the term "Loan", shall mean and include a Loan made by all Lenders to the Borrowers as well as a Lender's Proportionate Share of any Loan. 30 38 (l) Whenever the phrase "to the knowledge of the Borrower" or words of similar import relating to the knowledge of the Borrowers (or any of them) are used herein, such phrase shall mean and refer to the actual knowledge of the President or chief financial officer of such Borrower. (m) Unless otherwise specified herein, any Lien created or purported to be created hereby or by or pursuant to any Loan Documents in favor of the Agent and each payment made to the Agent, is and shall be deemed to have been created in favor of the Agent, for its benefit as the Agent and for the Ratable benefit of the Lenders, or made to and received by the Agent for the Ratable benefit of the Lenders, as the case may be. SECTION 1.3 Exhibits and Schedules. All Exhibits and Schedules attached hereto are by reference made a part hereof. 31 39 ARTICLE 2 COMMITMENTS SECTION 2.1 Loans. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, each Lender agrees, severally, but not jointly, to make Loans to the Borrowers from time to time from the Effective Date to but not including the Termination Date, as requested or deemed requested by the Borrowers in accordance with the terms of SECTION 2.2, in amounts equal to such Lender's Proportionate Share of each Loan requested or deemed requested hereunder up to an aggregate amount at any one time outstanding equal to such Lender's Proportionate Share of the Borrowing Base; PROVIDED, HOWEVER, that no Borrowing shall exceed the Loan Availability at the time and the aggregate principal amount of all outstanding Loans (after giving effect to the Loans requested) shall not exceed the Borrowing Base. It is expressly understood and agreed that the Lenders may and at present intend to use the Borrowing Base as a maximum ceiling on Loans made to the Borrower; PROVIDED, HOWEVER, that it is agreed that should the aggregate outstanding amount of such Loans exceed the ceiling so determined or any other limitation set forth in this Agreement, such Loans shall nevertheless constitute Secured Obligations and, as such, shall be entitled to all benefits thereof and security therefor. The principal amount of any Loans which is repaid may be reborrowed by the Borrowers, subject to the terms and conditions of this Agreement, in accordance with the terms of this SECTION 2.1. The Agent's and each Lender's books and records reflecting the date and the amount of each Loan and each repayment of principal thereof shall constitute prima facie evidence of the accuracy of the information contained therein, subject to the provisions of SECTION 4.5. SECTION 2.2 Manner of Borrowing. Borrowings shall be made as follows: (a) Requests for Borrowing. (i) Base Rate Loans. A request for the Borrowing of Base Rate Loans shall be made, or shall be deemed to be made, in the following manner: (A) with respect to the Initial Loans, which shall be Base Rate Loans, the Borrowers' representative shall give the Agent the Initial Notice of Borrowing at least two Business Days prior to the proposed date of the Borrowing, and, with respect to each subsequent Borrowing, the Borrowers may request a Base Rate Loan by giving the Agent a Notice of Borrowing, before noon on the proposed date of the Borrowing, PROVIDED that if such notice is received after noon on the proposed date of Borrowing, the proposed Borrowing may be postponed by the Agent to the next Business Day; (B) whenever a check or other item is presented to a Disbursing Bank for payment against a Controlled Disbursement Account in an amount greater than the then available balance in such account, such Disbursing 32 40 Bank shall, and is hereby irrevocably authorized by the Borrowers to, give the Agent notice thereof, which notice shall be deemed to be a request for a Base Rate Loan on the date of such notice in an amount equal to the excess of such check or other item over such available balance, and such request shall be irrevocable; (C) unless payment is otherwise made by the Borrowers, the becoming due of any amount required to be paid under this Agreement or any of the Notes as interest shall be deemed to be a request for a Base Rate Loan on the due date in the amount required to pay such interest, and such request shall be irrevocable; (D) unless payment is otherwise made by the Borrowers, a becoming due of any other Secured Obligation shall be deemed to be a request for a Base Rate Loan on the due date in the amount then so due, and such request shall be irrevocable; and (E) the receipt by the Agent of notification from BankBoston to the effect that a drawing has been made under a Letter of Credit and that the Borrowers have failed to reimburse BankBoston therefor in accordance with the terms of the Letter of Credit, the Reimbursement Agreement and ARTICLE 3, shall be deemed to be a request for a Base Rate Loan on the date such notification is received in the amount of such drawing which is so unreimbursed. (ii) Eurodollar Rate Loans. At any time after the Effective Date, and so long as no Default or Event of Default has occurred and is continuing, the Borrowers may request a Eurodollar Rate Loan by giving the Agent a Notice of Borrowing (which notice shall be irrevocable) not later than 11:30 a.m. on the date three Business Days before the day on which the requested Eurodollar Rate Loan is to be made. The Borrowers may direct the Agent to apply the proceeds of a Eurodollar Rate Loan to Secured Obligations as described in SECTIONS 2.2(a)(i)(B), (C), (D) and (E) and the Agent shall comply with such direction to the extent that proceeds of a Borrowing of Eurodollar Rate Loans are available to be so applied and in such case, no duplicative Borrowing of Base Rate Loans will be deemed to have been requested. (iii) Notification of Lenders. In the case of each Eurodollar Rate Loan and, unless the Agent has elected periodic settlements pursuant to SECTION 4.8, in the case of each Base Rate Loan, the Agent shall promptly notify the Lenders of any notice of Borrowing given or deemed given pursuant to this SECTION 2.2(a) by 12:00 noon on the proposed Borrowing date (in the case of Base Rate Loans) or by 3:00 p.m. three Business Days before the proposed Borrowing date (in the case of Eurodollar Rate Loans). If the Agent does so promptly notify the Lenders, then not later than 1:30 p.m. on the proposed Borrowing date, each Lender will make available to the Agent, for the account of the Borrowers, at the Agent's Office in 33 41 funds immediately available to the Agent, such Lender's Proportionate Share of the Base Rate Loan or Eurodollar Rate Loan, as the case may be. (b) Disbursement of Loans. The Borrowers hereby irrevocably authorize the Agent to disburse the proceeds of each Borrowing requested, or deemed to be requested, pursuant to this SECTION 2.2(a) as follows: (i) the proceeds of each Borrowing requested under SECTIONS 2.2(a)(i)(A) (other than the Borrowing of the Initial Loans) or (B) or 2.2(a)(ii) shall be disbursed by the Agent in Dollars in immediately available funds by wire transfer to a Controlled Disbursement Account or, in the absence of a Controlled Disbursement Account, by wire transfer to such other account as may be agreed upon by the Borrowers and the Agent from time to time, and the proceeds of the Initial Loans under SECTION 2.2(a)(i)(A) shall be disbursed in accordance with the Initial Notice of Borrowing. (ii) the proceeds of each Borrowing deemed requested under SECTION 2.2(a)(i)(C) or (D) shall be disbursed by the Agent by way of direct payment of the relevant Secured Obligation, and (iii) the proceeds of each Borrowing deemed requested under SECTION 2.2(a)(i)(E) shall be disbursed by the Agent directly to BankBoston on behalf of the Borrowers for application to the Reimbursement Obligations. SECTION 2.3 Repayment. The Loans will be repaid as follows: (a) The outstanding principal amount of all Loans is due and payable, and shall be repaid by the Borrowers, as their joint and several obligation, in full, not later than the Termination Date; (b) If at any time the aggregate outstanding unpaid principal amount of the Loans exceeds the Borrowing Base in effect at such time, but subject to the provisions of SECTION 4.7(d), the Borrowers shall repay the Loans in an amount sufficient to reduce the aggregate unpaid principal amount of the Loans by an amount equal to such excess, together with accrued and unpaid interest on the amount so repaid to the date of repayment; and (c) The Borrowers hereby instruct the Agent to repay the Loans outstanding on any day in an amount equal to the amount received by the Agent on such day pursuant to SECTION 8.1(c); PROVIDED that payments received in excess of outstanding Loans or payments received (when no Default or Event of Default exists) on account of Eurodollar Rate Loans which would otherwise result in prepayment of such Loans prior to the end of the Interest Period applicable thereto may, upon the instruction of the Borrowers to the Agent not later than 1:00 p.m. on any Business Day, be applied to the Cash Collateral Account or any Investment Account. Repayments pursuant to SECTION 2.3(b) or (c) shall be applied first to the Base Rate Loans and then to Eurodollar Rate Loans. 34 42 SECTION 2.4 Notes. Each Lender's Loans and the joint and several obligation of the Borrowers to repay such Loans shall also be evidenced by a Note payable to the order of such Lender. Each Note shall be dated the Effective Date (or later "effective date" under any Assignment and Acceptance) and be duly and validly executed and delivered by the Borrowers. SECTION 2.5 Extension of Commitments. Upon the request of the Borrowers, all, but not less than all, of the Lenders may, in their sole discretion, effective as of any anniversary of the Effective Date, agree to extend the Commitments for a period such that the Termination Date would fall on a date that is up to but not in excess of five years after such anniversary date. Any such extension may be effected solely by the delivery to the Borrowers of a written notice to that effect by the Lenders, not less than 30 days prior to such anniversary date. 35 43 ARTICLE 3 LETTER OF CREDIT FACILITY SECTION 3.1 Agreement to Issue. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, BankBoston agrees to issue for the account of any Borrower or Subsidiary one or more Letters of Credit in accordance with this ARTICLE 3, from time to time during the period commencing on the Effective Date and ending on the Termination Date. SECTION 3.2 Amounts. BankBoston shall not have any obligation to issue any Letter of Credit at any time: (a) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of the Borrowers would exceed the Letter of Credit Facility then in effect or (ii) the aggregate principal amount of Loans outstanding would exceed the Borrowing Base (after reduction for the Letter of Credit Reserve in respect of such Letter of Credit) or (iii) if no Loans are outstanding, the aggregate Letter of Credit Obligations would exceed the Borrowing Base; or (b) which has a term longer than one calendar year or an expiration date after the last Business Day that is more than 30 days prior to the Termination Date. SECTION 3.3 Conditions. The obligation of BankBoston to issue any Letter of Credit is subject to the satisfaction of (a) the applicable conditions precedent contained in ARTICLE 5 and (b) the following additional conditions precedent in a manner satisfactory to the Agent and BankBoston: (i) the Borrower shall have delivered to BankBoston and the Agent at such times and in such manner as BankBoston or the Agent may prescribe an application in form and substance satisfactory to BankBoston and the Agent for the issuance of the Letter of Credit, a Reimbursement Agreement and such other documents as may be required pursuant to the terms thereof, and the form and terms of the proposed Letter of Credit shall be satisfactory to BankBoston and the Agent; and (ii) as of the date of issuance, no order of any court, arbitrator or governmental authority having jurisdiction or authority over BankBoston shall purport by its terms to enjoin or restrain banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to banks generally and no request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over banks generally shall prohibit, or request that BankBoston refrain from, the issuance of letters of credit generally or the issuance of such Letter of Credit. 36 44 SECTION 3.4 Issuance of Letters of Credit. (a) Request for Issuance. A Borrower shall give BankBoston and the Agent written notice of such Borrower's request for the issuance of a Letter of Credit no later than six Business Days prior to the proposed date of issuance of the Letter of Credit. Such notice shall be irrevocable and shall specify the name of the Subsidiary (if other than such Borrower) which should appear as the account party on the face of such Letter of Credit, the original face amount of the Letter of Credit requested, the effective date (which date shall be a Business Day) of issuance of such requested Letter of Credit, whether such Letter of Credit may be drawn in a single or in multiple draws, the date on which such requested Letter of Credit is to expire (which date shall be a Business Day earlier than the 30th day prior to the Termination Date), the purpose for which such Letter of Credit is to be issued and the beneficiary of the requested Letter of Credit. The Borrower shall attach to such notice the form of the Letter of Credit that the Borrower requests be issued. (b) Responsibilities of the Agent; Issuance. The Agent shall determine, as of the Business Day immediately preceding the requested effective date of issuance of the Letter of Credit set forth in the notice from the Borrowers pursuant to SECTION 3.4(a), the amount of Letter of Credit Availability. If (i) the form of the Letter of Credit delivered by the Borrowers to the Agent is acceptable to BankBoston and the Agent in their sole, reasonable discretion, (ii) the undrawn face amount of the requested Letter of Credit is less than or equal to the Letter of Credit Availability and (iii) the Agent has received a certificate from the Borrowers stating that the applicable conditions set forth in ARTICLE 5 have been satisfied, then BankBoston will cause the Letter of Credit to be issued. (c) Notice of Issuance. Promptly after the issuance of any Letter of Credit, BankBoston shall give the Agent written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit, and the Agent shall give each Lender a periodic written report, not less frequently than monthly, of each Letter of Credit outstanding as of the date thereof, the amount available to be drawn thereunder and the expiration date thereof. (d) No Extension or Amendment. No Letter of Credit shall be extended or amended unless the requirements of this SECTION 3.4 are met as though a new Letter of Credit were being requested and issued. SECTION 3.5 Duties of BankBoston. Any action taken or omitted to be taken by BankBoston under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not result in any liability of BankBoston to any Lender or relieve any Lender of its obligations hereunder to BankBoston. In determining whether to pay under any Letter of Credit, BankBoston shall have no obligation to any Lender other than to confirm that any documents required to be delivered under such Letter of Credit in connection with such drawing have been presented and appear on their face to comply with the requirements of such Letter of Credit. 37 45 SECTION 3.6 Payment of Reimbursement Obligations. (a) Payment to Issuer. Notwithstanding any provisions to the contrary in any Reimbursement Agreement, the Borrowers agree to reimburse BankBoston for any drawings (whether partial or full) under each Letter of Credit issued by BankBoston and agrees to pay to BankBoston the amount of all other Reimbursement Obligations and other amounts payable to BankBoston under or in connection with such Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which the Borrowers may have at any time against BankBoston or any other Person. (b) Recovery or Avoidance of Payments. In the event any payment by or on behalf of the Borrowers with respect to any Letter of Credit (or any Reimbursement Obligation relating thereto) received by BankBoston, or by the Agent and distributed by the Agent to the Lenders on account of their respective participations therein, is thereafter set aside, avoided or recovered from BankBoston or the Agent in connection with any receivership, liquidation or bankruptcy proceeding, the Lenders shall, upon demand by the Agent, pay to the Agent, for the account of the Agent or BankBoston, their respective Proportionate Shares of such amount set aside, avoided or recovered together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. SECTION 3.7 Participations. (a) Purchase of Participations. Immediately upon the Effective Date as to Letters of Credit outstanding on the Effective Date and immediately upon issuance by BankBoston of any other Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, an undivided interest and participation in such Letter of Credit, equal to such Lender's Proportionate Share of the face amount thereof (including, without limitation, all obligations of the Borrowers with respect thereto, other than amounts owing to BankBoston under SECTION 4.2(d), and any security therefor or guaranty pertaining thereto). (b) Sharing of Letter of Credit Payments. In the event that BankBoston makes a payment under any Letter of Credit and BankBoston shall not have been repaid such amount pursuant to SECTION 3.6, then BankBoston shall be deemed to have made a Non-Ratable Loan in the amount of such payment, and notwithstanding the occurrence or continuance of a Default or Event of Default at the time of such payment, such Non-Ratable Loan shall be deemed to satisfy the Borrowers' Reimbursement Obligations in respect to such payment and such Non-Ratable Loan shall be subject to the provisions of SECTION 4.8(b) and the absolute obligations of the Lenders to pay for their respective participation interests therein. (c) Sharing of Reimbursement Obligation Payments. Whenever BankBoston receives a payment from or on behalf of the Borrowers on account of a Reimbursement Obligation as to which the Agent has previously received for the account of BankBoston payment from a Lender pursuant to this SECTION 3.7, BankBoston shall promptly pay to the Agent, for the benefit of such Lender, such Lender's Proportionate Share of the amount of such payment from the Borrowers in Dollars. Each such payment shall be made by BankBoston on 38 46 the Business Day on which BankBoston receives immediately available funds from the Agent pursuant to the immediately preceding sentence, if received prior to 11:00 a.m. on such Business Day, and otherwise on the next succeeding Business Day. (d) Documentation. Upon the request of any Lender, the Agent shall furnish to such Lender copies of any Letter of Credit, Reimbursement Agreement or application for any Letter of Credit and such other documentation as may reasonably be requested by such Lender. (e) Obligations Irrevocable. The obligations of each Lender to make payments to the Agent with respect to any Letter of Credit and their participations therein pursuant to the provisions of SECTION 4.8(b) hereof or otherwise and the obligations of the Borrower to make payments to BankBoston or to the Agent, for the account of Lenders, shall be irrevocable, shall not be subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Lenders to make such payments, that the Letter of Credit has been issued in accordance with SECTION 3.4), including, without limitation, any of the following circumstances: (i) Any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) The existence of any claim, set-off, defense or other right which the Borrowers (or any of them) may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, BankBoston or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrowers or any other Person and the beneficiary named in any Letter of Credit); (iii) Any draft, certificate or any other document presented under the Letter of Credit upon which payment has been made in good faith and according to its terms proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) The surrender or impairment of any Collateral or any other security for the Secured Obligations or the performance or observance of any of the terms of any of the Loan Documents; (v) The occurrence of any Default or Event of Default; or (vi) BankBoston's or the Agent's failure to deliver the notice provided for in SECTION 3.4(c). SECTION 3.8 Indemnification, Exoneration. (a) Indemnification. In addition to amounts payable as elsewhere provided in this ARTICLE 3, the Borrowers, jointly and severally, agree to protect, indemnify, pay and save 39 47 harmless the Lenders and the Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which any Lender or the Agent may incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of any Letter of Credit, other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction, or (ii) the failure of BankBoston to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto governmental authority (all such acts or omissions being hereinafter referred to collectively as "Government Acts"). (b) Assumption of Risk by the Borrowers. As among the Borrowers, the Lenders and the Agent, the Borrowers assume all risks of the acts and omissions of, or misuse of any of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the applications for the issuance of Letters of Credit, the Lenders and the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any Letter of Credit of the proceeds of any drawing under such Letter of Credit; or 40 48 (viii) any consequences arising from causes beyond the control of the Lenders or the Agent, including, without limitation, any Government Acts. None of the foregoing shall affect, impair or prevent the vesting of any of the Agent's rights or powers under this SECTION 3.8. (c) Exoneration. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Agent, BankBoston or any Lender under or in connection with any of the Letters of Credit or any related certificates, if taken or omitted in good faith, shall not result in any liability of any Lender or the Agent to the Borrowers or relieve any Borrower of any of its obligations hereunder to any such Person. SECTION 3.9 Supporting Letter of Credit; Cash Collateral Account. Upon the occurrence of an Event of Default or, if, notwithstanding the provisions of SECTION 3.2(b), any Letter of Credit is outstanding on the Termination Date, then on or prior to the Termination Date, the Borrowers shall, as their joint and several obligation, promptly on demand by the Agent, deposit with the Agent, for the ratable benefit of the Lenders, with respect to each Letter of Credit then outstanding, as the Agent shall specify, either (a) a standby letter of credit (a "Supporting Letter of Credit") in form and substance satisfactory to the Agent, issued by an issuer satisfactory to the Agent in its sole and absolute judgment in an amount equal to the greatest amount for which such Letter of Credit may be drawn, under which Supporting Letter of Credit the Agent shall be entitled to draw amounts necessary to reimburse the Agent and the Lenders for payments made by the Agent and the Lenders under such Letter of Credit or under any reimbursement or guaranty agreement with respect thereto, or (b) Cash Collateral in an amount necessary to reimburse the Agent and the Lenders for payments made by the Agent and the Lenders under such Letter of Credit or under any reimbursement or guaranty agreement with respect thereto. Such Supporting Letter of Credit or Cash Collateral shall be held by the Agent for the benefit of the Lenders, as security for, and to provide for the payment of, the Reimbursement Obligations. In addition, the Agent may at any time after such Event of Default or the Termination Date apply any or all of such Cash Collateral to the payment of any or all of the Secured Obligations then due and payable. The Cash Collateral shall be deposited in the Cash Collateral Account or an Investment Account and shall be administered in accordance with the provisions of SECTION 4.15. 41 49 ARTICLE 4 GENERAL LOAN PROVISIONS SECTION 4.1 Interest. (a) Base Rate Loans. Subject to the provisions of SECTION 4.1(d), the Borrowers will pay interest on the unpaid principal amount of each Base Rate Loan, for each day from the day such Loan is made (or is converted to a Base Rate Loan) until such Loan is paid (whether at maturity, by reason of acceleration, or otherwise) or is converted to a Loan of a different Type, at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Base Rate, payable monthly in arrears as it accrues on each Interest Payment Date. (b) Eurodollar Rate Loans. Subject to the provisions of SECTION 4.1(d), the Borrowers will pay interest on the unpaid principal amount of each Eurodollar Rate Loan for the applicable Interest Period at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Eurodollar Rate, payable on the last day of such Interest Period and, if such Interest Period is longer than three months, at three-month intervals during such Interest Period. (c) Other Secured Obligations. The Borrowers will, to the extent permitted by Applicable Law, pay interest on the unpaid principal amount of any Secured Obligation that is due and payable other than the Loans in accordance with SECTIONS 4.1(a) or (d), as applicable, as if such Secured Obligation were a Base Rate Loan. (d) Default Rate. If a payment default pursuant to SECTION 12.1(a) shall occur and be continuing or there shall occur and be continuing, uncured and unwaived for 30 days, any other Event of Default, at the election of the Required Lenders, the unpaid principal amount of the Loans and other Secured Obligations shall no longer bear interest in accordance with the terms of SECTION 4.1(a), 4.1(b) or 4.1(c), as applicable, but shall bear interest for each day from the date of such payment default or the 30th day after such other Event of Default until such payment default or other Event of Default shall have been cured or waived at a rate per annum equal to the sum of (i) the Default Margin and (ii) the rate otherwise applicable to such Loan, payable on demand. The interest rate provided for in the preceding sentence shall, to the extent permitted by Applicable Law, apply to and accrue on the amount of any judgment entered with respect to any Secured Obligation and shall continue to accrue at such rate during any proceeding described in SECTION 12.1(g) or (h). (e) Calculation of Interest. The interest rates provided for in SECTIONS 4.1(a), (b), (c) and (d) shall be computed on the basis of a year of 360 days and the actual number of days elapsed. Each interest rate determined with reference to the Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Base Rate. (f) Maximum Rate. It is not intended by the Lenders, and nothing contained in this Agreement or the Notes shall be deemed, to establish or require the payment of a rate of interest in excess of the maximum rate permitted by Applicable Law (the "Maximum Rate"). If, in any month, the Effective Interest Rate, absent such limitation, would have exceeded the 42 50 Maximum Rate, then the Effective Interest Rate for that month shall be the Maximum Rate, and, if in future months, the Effective Interest Rate would otherwise be less than the Maximum Rate, then the Effective Interest Rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Secured Obligations, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would have been paid or accrued if the Effective Interest Rate (without regard to any limitation hereunder) had at all times been in effect, then the Borrowers shall, to the extent permitted by Applicable Law, pay to the Lenders an amount equal to the excess, if any, of (i) the lesser of (A) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued had the Effective Interest Rate (without reference to any limitation hereunder), at all times, been in effect and (ii) the amount of interest actually paid or accrued under this Agreement. In the event the Lenders receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall be applied to the reduction of the principal balance of the Secured Obligations, and if no such principal is then outstanding, such excess or part thereof remaining, shall be paid to the Borrowers. For the purposes of computing the Maximum Rate, to the extent permitted by applicable law, all interest and charges, discounts, amounts, premiums or fees deemed to constitute interest under applicable law, shall be amortized, prorated, allocated and spread in substantially equal parts throughout the full term of this Agreement. The provisions of this SECTION 4.1(f) shall be deemed to be incorporated into every Loan Document (whether or not any provision of this SECTION 4.1(f) is specifically referred to therein). SECTION 4.2 Certain Fees. (a) Agent Fee. For administration and other services performed by the Agent in connection with its continuing administration of this Agreement, the Borrowers, jointly and severally, shall pay to the Agent, for its own account, and not for the account of the Lenders, an annual fee of $50,000, payable annually in advance, on the Effective Date and on each anniversary thereof for so long as any Secured Obligations shall remain outstanding or the Commitments shall not have been terminated. (b) Commitment Fee. In connection with and as consideration for the holding available for the use of the Borrowers hereunder the full amount of the Commitments, the Borrowers will pay a fee to the Agent, for the Ratable benefit of the Lenders, for each day from the Effective Date until the Termination Date, in an amount equal to 0.375% per annum of the Unused Commitments for such day, SUBJECT, HOWEVER to quarterly adjustment in accordance with the pricing matrix attached hereto as ANNEX B, on the dates specified for adjustments to the Applicable Margin. "Unused Commitments" means an amount equal to the aggregate Commitments, LESS the aggregate outstanding principal amount of Loans, LESS the total amount of Letter of Credit Obligations, in each case on the date of determination. Such fee shall be payable monthly in arrears on each Interest Payment Date and on the date of any permanent reduction in the aggregate Commitments. 43 51 (c) Facility Fee. As compensation to BankBoston for its activity in structuring and approving the credit facilities available hereunder, on the Effective Date the Borrowers shall pay to BankBoston a facility fee in an amount agreed upon between them pursuant to a separate letter agreement. (d) Letter of Credit Fees. (i) The Borrowers, jointly and severally, agree to pay to the Agent, for the Ratable benefit of the Lenders, Letter of Credit fees on each Letter of Credit equal to the Applicable Margin per annum (or, in the case of commercial or documentary Letters of Credit, such Applicable Margin minus 0.50%) applicable to Eurodollar Rate Loans on the date of issuance of such Letter of Credit payable quarterly in arrears on the first day of each January, April, July and October on the average daily Letter of Credit Amount of such Letters of Credit outstanding during the preceding Fiscal Quarter. Such fees shall be calculated based on a year of 360 days and the actual number of days elapsed. (ii) The Borrowers agree to pay to Agent, for the account of BankBoston, the standard fees and charges of BankBoston for issuing, administering, amending, renewing, paying and canceling letters of credit, as and when assessed as to any Letters of Credit, and an additional "up-front" or fronting fee at a rate of 0.125% per annum of the Letter of Credit Amount of each Letter of Credit, payable quarterly in arrears on the first day of each January, April, July and October, on the average daily Letter of Credit Amounts of all Letters of Credit from time to time outstanding during the preceding Fiscal Quarter. (e) General. All fees provided for in this SECTION 4.2 and otherwise in this Agreement or any other Loan Document, shall be fully earned when due and payable and, except as otherwise set forth herein or required by applicable law, shall not be subject to refund or rebate. All such fees are for compensation for services and are not, and shall not be deemed to be, interest or a charge for the use of money. SECTION 4.3 Manner of Payment. (a) Except as otherwise expressly provided in SECTION 8.1(c), each payment (including prepayments) by the Borrowers on account of the principal of or interest on the Loans or of any other amounts payable to the Agent or the Lenders under this Agreement or any Note or other Loan Document shall be made not later than 12:00 noon on the date specified for payment under this Agreement to the Agent, at the Agent's Office, in Dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. on such day shall be deemed a payment on such date for the purposes of SECTION 12.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. (b) The Borrowers hereby irrevocably authorize each Lender and each Affiliate of such Lender and each participant herein to charge any account of a Borrower 44 52 maintained with such Lender or such Affiliate or participant with such amounts as may be necessary from time to time to pay any Secured Obligations (whether or not owed to such Lender, Affiliate or participant) which are not paid when due. SECTION 4.4 General. If any payment under this Agreement or any Note shall be specified to be made on a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. SECTION 4.5 Loan Accounts; Statements of Account. (a) Each Lender shall open and maintain on its books a loan account in Heafner's name (each, a "Loan Account" and collectively, the "Loan Accounts"). Each such Loan Account shall show as debits thereto each Loan made under this Agreement by such Lender to the Borrowers and as credits thereto all payments received by such Lender and applied to principal of such Loans, so that the balance of the Loan Account at all times reflects the principal amount due such Lender from the Borrowers. (b) The Agent shall maintain on its books a control account for the Borrowers in which shall be recorded (i) the amount of each disbursement made hereunder, (ii) the amount of any principal or interest due or to become due from the Borrowers hereunder, and (iii) the amount of any sum received by the Agent hereunder from or on behalf of the Borrowers and each Lender's share therein. (c) The entries made in the accounts pursuant to SUBSECTIONS (a) and (b) shall be prima facie evidence, in the absence of manifest error, of the existence and amounts of the obligations of the Borrowers therein recorded and in case of discrepancy between such accounts, in the absence of manifest error, the accounts maintained pursuant to SUBSECTION (b) shall be controlling. (d) The Agent will account separately to the Borrowers monthly with a statement of Loans, charges and payments made to and by the Borrowers pursuant to this Agreement, and such accounts rendered by the Agent shall be deemed final, binding and conclusive, save for manifest error, unless the Agent is notified by the Borrowers in writing to the contrary within 30 days of the date the account to the Borrowers was so rendered. Such notice by the Borrowers shall be deemed an objection to only those items specifically objected to therein. Failure of the Agent to render such account shall in no way affect the rights of the Agent or of the Lenders hereunder. SECTION 4.6 Reduction of Commitments; Termination of Agreement. (a) Reduction of Commitments. (i) The Borrowers shall have the right, at any time and from time to time, upon at least seven days' prior irrevocable, written notice to the Agent, to reduce permanently and Ratably in part the Commitments; PROVIDED, HOWEVER, that any such partial reduction shall be in an amount equal to $5,000,000 or any larger 45 53 integral, multiple of $1,000,000 and shall not reduce the aggregate Commitments below an amount equal to the sum of the Letter of Credit Reserve PLUS the Rent Reserve PLUS any Additional Reserves. As of the date of reduction set forth in such notice, the Commitments shall be permanently reduced to the amount stated in the Borrowers' notice (and each Lender's Commitment shall be reduced Ratably) for all purposes herein, and the Borrowers shall pay the amount necessary to reduce the amount of the outstanding Loans to any amount that does not exceed the aggregate Commitments (as reduced), together with accrued interest on any amounts so prepaid and an early termination fee in an amount equal to (A) 1% of the amount of such reduction if effected prior to the first anniversary of the Effective Date or (B) 1/2 of 1% of the amount of such reduction if effected on or after the first anniversary of the Effective Date but prior to the second anniversary of the Effective Date. (ii) The aggregate Commitments shall be automatically reduced to zero on the Termination Date. (iii) The aggregate Commitments shall be reduced as provided in SECTION 4.9. (iv) The Commitments or any portion thereof terminated or reduced pursuant to this SECTION 4.6 may not be reinstated. (b) Termination of Agreement. The Borrowers shall have the right, at any time, to terminate this Agreement upon not less than 10 Business Days' prior written notice, which notice shall specify the effective date of such termination. Upon receipt of such notice, the Agent shall promptly notify each Lender thereof. On the date specified in such notice, such termination shall be effected, PROVIDED, that the Borrowers shall, on or prior to such date, pay to the Agent, for its account and the account of the Lenders, in same day funds, an amount equal to all Secured Obligations (other than with respect to Letter of Credit Obligations) outstanding on such date, including, without limitation, all (i) accrued interest thereon, (ii) all accrued fees provided for hereunder, (iii) any amounts payable to the Agent or the Lenders pursuant to SECTIONS 4.10, 4.15, 15.2, 15.3, 15.14 and 15.23, and, in addition thereto, shall deliver to the Agent, in respect of each outstanding Letter of Credit, either a Supporting Letter of Credit or Cash Collateral as provided in SECTION 3.9, and (iv) if such termination occurs prior to the first anniversary of the Effective Date, an early termination fee in an amount equal to 1% of the amount of the Commitments so terminated or if such termination occurs on or after the first anniversary of the Effective Date but prior to the second anniversary of the Effective Date, an early termination fee in an amount equal to 1/2 of 1% of the amount of the Commitments so terminated, PROVIDED, that such fee shall be payable only if contemporaneously with such termination and repayment, the Borrowers (or any of them) issue additional Debt in a private placement, a public offering, or to one or more institutional lenders, PROVIDED FURTHER, that if Loan Availability has been reduced by 10% or more during the six-month period preceding such termination as a result of the Agent's having, without the agreement of Heafner, reduced any advance rate specified in the definition "Borrowing Base" or declared in the exercise of its reasonable credit judgment any otherwise Eligible Inventory or Eligible Receivables to be ineligible, then such early termination fee will not be payable notwithstanding that any such other 46 54 Debt is incurred. Additionally, the Borrowers shall provide the Agent and the Lenders with indemnification in form and substance satisfactory to the Agent in its reasonable judgment with respect to such customary matters as the Agent and the Lenders shall reasonably require. Following a notice of termination as provided for in this SECTION 4.6(b) and upon payment in full of the amounts specified in this SECTION 4.6(b), and execution and delivery of any required indemnification, this Agreement shall be terminated and the Agent, the Lenders and the Borrowers shall have no further obligations to any other party hereto, except for the obligations to the Agent and the Lenders pursuant to SECTION 15.12 hereof, which shall survive any termination of this Agreement. SECTION 4.7 Making of Loans. (a) Nature of Obligations of Lenders to Make Loans. The obligations of the Lenders under this Agreement to make the Loans are several and are not joint or joint and several. (b) Assumption by Agent. Subject to the provisions of SECTION 4.8 and notwithstanding the occurrence or continuance of a Default or Event of Default or other failure of any condition to the making of Loans hereunder subsequent to the Initial Loans, unless the Agent shall have received notice from a Lender prior to a proposed Borrowing date that such Lender will not make available to the Agent such Lender's Proportionate Share of the Loan to be borrowed on such date, the Agent may assume that such Lender will make such Proportionate Share available to the Agent in accordance with SECTION 2.2(a), and the Agent may, in reliance upon such assumption, make available to the Borrowers on such date a corresponding amount. If and to the extent a Lender shall not make its Proportionate Share of any Loan available to the Agent, and the Agent has made a corresponding amount available to the Borrowers, such Lender, on the one hand, and the Borrowers, jointly and severally on the other hand, severally agree to repay to the Agent forthwith on demand such corresponding amount (the "Make-Whole Amount"), together with interest thereon for each day from the date such amount is made available to the Borrowers until the date such amount is repaid to the Agent at (i) the Federal Funds Effective Rate if repaid by the Lender or (ii) the Effective Interest Rate or, if lower, subject to SECTION 4.1(f), the Maximum Rate, if repaid by the Borrowers. If such Lender shall repay to the Agent such corresponding amount, the amount so repaid shall constitute such Lender's Proportionate Share of the Loan made on such Borrowing date for purposes of this Agreement. The Agent shall not be required to make any Loan as to which it shall have received notice by a Lender of such Lender's intention not to make its Ratable Share of such Loan available to the Agent. The failure of any Lender to make its Proportionate Share of any Loan available shall not (without regard to whether the Borrowers shall have returned the amount thereof to the Agent in accordance with this SECTION 4.7) relieve it or any other Lender of its obligation, if any, hereunder to make its Proportionate Share of the Loan available on such Borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Proportionate Share of a Loan available on the Borrowing date. (c) Delegation of Authority to Agent. Without limiting the generality of SECTION 14.1, each Lender expressly authorizes the Agent to determine on behalf of such Lender (i) any reduction or increase of advance rates applicable to the Borrowing Base, so long as such 47 55 advance rates do not at any time exceed the rates set forth in the Borrowing Base definition as in effect on the Agreement Date, (ii) the creation or elimination of Additional Reserves and (iii) whether or not Inventory or Receivables shall be deemed to constitute Eligible Inventory or Eligible Receivables. Any withdrawal of authorization under this SECTION 4.7(c) shall not affect the validity of any Loans made prior to the effectiveness thereof. (d) Overadvances. Notwithstanding anything to the contrary contained elsewhere in this SECTION 4.7 or this Agreement or the other Loan Documents and whether or not a Default or Event of Default exists at the time, the Agent may in its discretion require all Lenders to honor requests or deemed requests by the Borrowers for Loans at a time that an Overadvance Condition exists or which would result in an Overadvance Condition and each Lender shall be obligated to continue to make its Proportionate Share of any such Overadvance Loan up to a maximum amount outstanding equal to its Commitment, so long as such Overadvance is not known by the Agent to exceed $3,000,000 or to exist for more than five consecutive Business Days or more than 10 days in any Fiscal Year. SECTION 4.8 Settlement Among Lenders. (a) Loans. It is agreed that each Lender's Net Outstandings are intended by the Lenders to be equal at all times to such Lender's Ratable Share of the aggregate principal amount of all Loans outstanding. Notwithstanding such agreement, the several and not joint obligation of each Lender to make its Ratable Share of Loans in accordance with the terms of this Agreement and each Lender's right to receive its Ratable Share of principal payments on Loans, the Lenders agree that in order to facilitate the administration of this Agreement and the Loan Documents that settlement among them may take place on a periodic basis in accordance with the provisions of this SECTION 4.8. (b) Settlement Procedures. To the extent and in the manner hereinafter provided in this SECTION 4.8, settlement among the Lenders as to Base Rate Loans may occur periodically on Settlement Dates determined from time to time by the Agent, which may occur before or after the occurrence or during the continuance of a Default or Event of Default and whether or not all of the conditions set forth in SECTION 5.2 have been met. On each Settlement Date payments shall be made by or to BankBoston and the other Lenders in the manner provided in this SECTION 4.8 in accordance with the Settlement Report delivered by the Agent pursuant to the provisions of this SECTION 4.8 in respect of such Settlement Date, so that as of each Settlement Date, and after giving effect to the transactions to take place on such Settlement Date, each Lender's Net Outstandings shall equal such Lender's Ratable Share of the Loans. (i) Selection of Settlement Dates. If the Agent elects, in its discretion, but subject to the consent of BankBoston, to settle accounts among the Lenders with respect to principal amounts of Base Rate Loans less frequently than each Business Day, then the Agent shall designate periodic Settlement Dates which may occur on any Business Day after the Effective Date; PROVIDED, HOWEVER, that (A) the Agent shall designate as a Settlement Date any Business Day which is an Interest Payment Date, (B) a Settlement Date shall occur not less often than every five Business Days, and (C) settlements with respect to Eurodollar Rate Loans shall take place on the 48 56 Borrowing date for such Loan, on the last day of each Interest Period applicable thereto and on any other date during such Interest Period on which interest is payable thereon. The Agent shall designate a Settlement Date by delivering to each Lender a Settlement Report not later than 12:00 noon on the proposed Settlement Date, which Settlement Report shall be with respect to the period beginning on the next preceding Settlement Date and ending on such designated Settlement Date. (ii) Non-Ratable Loans and Payments. Between Settlement Dates, the Agent shall request and BankBoston may (but shall not be obligated to) advance to the Borrower out of BankBoston's own funds, the entire principal amount of any Base Rate Loan requested or deemed requested pursuant to SECTION 2.2(a) (any such Base Rate Loan being referred to as a "Non-Ratable Loan"). The making of each Non-Ratable Loan by BankBoston shall be deemed to be a purchase by BankBoston of a 100% participation in each other Lender's Proportionate Share of such Non-Ratable Loan. All payments of principal, interest and any other amount with respect to such Non-Ratable Loan shall be payable to and received by the Agent for the account of BankBoston. Upon demand by BankBoston, with notice thereof to the Agent, each other Lender shall pay to BankBoston, as the repurchase of such participation, an amount equal to 100% of such Lender's Proportionate Share of the principal amount of such Non- Ratable Loan. Any payments received by the Agent between Settlement Dates which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of the Loans, shall be paid over to and retained by BankBoston for such application, and such payment to and retention by BankBoston shall be deemed, to the extent of each other Lender's Proportionate Share of such payment, to be a purchase by each such other Lender of a participation in the Loans (including the repurchase of participations in Non-Ratable Loans) held by BankBoston. Upon demand by another Lender, with notice thereof to the Agent, BankBoston shall pay to the Agent, for the account of such other Lender, as a repurchase of such participation, an amount equal to such other Lender's Proportionate Share of any such amounts (after application thereof to the repurchase of any participations of BankBoston in such other Lender's Proportionate Share of any Non-Ratable Loans) paid only to BankBoston by the Agent. (iii) Settlement. On each Settlement Date each Lender shall transfer to the Agent and the Agent shall transfer to each Lender such amounts as are necessary to insure that, after giving effect to all such transfers, each Lender's Net Outstandings are equal to such Lenders Proportionate Share of the aggregate principal amount of all Loans then outstanding. (iv) Return of Payments. If any amounts received by BankBoston in respect of the Secured Obligations are later required to be returned or repaid by BankBoston to the Borrower or any other obligor or their respective representatives or successors in interest, whether by court order, settlement or otherwise, in excess of the BankBoston's Proportionate Share of all such amounts required to be returned by all Lenders, each other Lender shall, upon demand by BankBoston with notice to 49 57 the Agent, pay to the Agent for the account of BankBoston, an amount equal to the excess of such Lender's Proportionate Share of all such amounts required to be returned by all Lenders over the amount, if any, returned directly by such Lender. (v) Payments to Agent, Lenders. (A) Payment by any Lender to the Agent pursuant to this SECTION 4.8 shall be made not later than 1:00 p.m. on the Business Day such payment is due, PROVIDED that if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 10:00 a.m. on such Business Day. Payment by the Agent to any Lender shall be made by wire transfer, promptly following the Agent's receipt of funds for the account of such Lender and in the type of funds received by the Agent, PROVIDED that if the Agent receives such funds at or prior to 1:00 p.m., the Agent shall pay such funds to such Lender by 2:00 p.m. on such Business Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 2:00 p.m. on the first Business Day following the date of such demand. (B) If a Lender shall, at any time, fail to make any payment to the Agent required hereunder, the Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Agent may elect in its sole discretion. (C) With respect to the payment of any funds under this SECTION 4.8(b), whether from the Agent to a Lender or from a Lender to the Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Effective Rate. (c) Settlement of Other Secured Obligations. All other amounts received by the Agent on account of, or applied by the Agent to the payment of, any Secured Obligation owed to the Lenders (including, without limitation, fees payable to the Lenders pursuant to SECTIONS 4.2(b) and (d) and proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default) that are received by the Agent on or prior to 1:00 p.m. on a Business Day will be paid by the Agent to each Lender on the same Business Day, and any such amounts that are received by the Agent after 1:00 p.m. will be paid by the Agent to each Lender on the following Business Day. Unless otherwise stated herein, the Agent shall distribute to each Lender such Lender's Proportionate Share of fees payable to the Lenders pursuant to SECTIONS 4.2(b) and (d) and shall distribute to each Lender such Lender's Proportionate Share (or if different, such Lender's share based upon the amount of the Secured Obligations then owing to each Lender) of the proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default. 50 58 SECTION 4.9 Mandatory Prepayments. The Borrowers shall permanently reduce the Commitments (Ratably) by an amount equal to any amount that would otherwise constitute "Net Available Cash" as defined in the Senior Note Indenture and be required by the terms thereof to be applied to the prepayment of the Senior Notes. To the extent necessary to comply with the provisions of SECTION 2.3(b) after giving effect to such reduction, the Borrowers shall also prepay the Loans. Any such prepayment pursuant to this SECTION 4.9 shall be applied first to Base Rate Loans to the extent thereof and then to Eurodollar Rate Loans. If any payments are received which result in prepayment of Eurodollar Rate Loans prior to the end of the applicable Interest Period, the Borrowers shall also pay any amounts due pursuant to SECTION 4.10. SECTION 4.10 Payments Not at End of Interest Period; Failure to Borrow. If for any reason any payment of principal with respect to any Eurodollar Rate Loan is made on any day prior to the last day of the Interest Period applicable to such Eurodollar Rate Loan or, after having given a Notice of Borrowing with respect to any Eurodollar Rate Loan or a Notice of Conversion or Continuation with respect to any Loan to be continued as or converted into a Eurodollar Rate Loan, such Loan is not made or is not continued as or converted into a Eurodollar Rate Loan due to the Borrowers' failure to borrow or to fulfill the applicable conditions set forth in ARTICLE 5, the Borrowers shall pay to each Lender, an amount equal to such Lender's costs and expenses incurred as a result of such failure, including in connection with obtaining deposits to fund its Ratable Share of such new (or continued or converted) Loan and redeploying such deposits. The Borrowers shall pay such amount upon presentation by the Agent of a statement setting forth the amount and the applicable Lender's calculation thereof in reasonable detail, which statement shall be deemed true and correct absent manifest error. SECTION 4.11 Notice of Conversion or Continuation. Whenever the Borrowers desire, subject to the provisions of SECTION 4.7, to convert an outstanding Loan into a Loan or Loans of a different Type or to continue all or a portion of an outstanding Eurodollar Rate Loan for a subsequent Interest Period, the Borrowers shall notify the Agent in writing (which notice shall be irrevocable) by telecopy not later than 11:30 a.m. on the date two Business Days before the day on which such proposed conversion or continuation is to be effective (and such effective date of any continuation shall be the last day of the Interest Period for the Eurodollar Rate Loan). Each such notice (a "Notice of Conversion or Continuation") shall (i) identify the Loan to be converted or continued, the aggregate outstanding principal balance thereof and, if a Eurodollar Rate Loan, the last day of the Interest Period applicable to such Loan, (ii) specify the effective date of such conversion or continuation, (iii) specify the principal amount of such Loan to be converted or continued and, if converted, the Type or Types into which the same is to be converted, and (iv) the Interest Period to be applicable to the Eurodollar Rate Loan as converted or continued, and shall be immediately followed by a written confirmation thereof by the Borrowers in a form acceptable to the Agent, PROVIDED that if such written confirmation differs in any respect from the action taken by the Lenders, the records of the Agent shall control absent manifest error. SECTION 4.12 Conversion or Continuation. Provided that no Event of Default shall have occurred and be continuing (but subject to the provisions of SECTIONS 4.11 and 51 59 4.13), the Borrowers may request that all or any part of any outstanding Loan be converted into a Loan or Loans of a different Type or be continued as a Loan or Loans of the same Type, in the same aggregate principal amount, on any Business Day (which, in the case of continuation of a Eurodollar Rate Loan, shall be the last day of the Interest Period applicable to such Loan), upon notice (which notice shall be irrevocable) given in accordance with SECTION 4.11. SECTION 4.13 Duration of Interest Periods; Maximum Number of Eurodollar Rate Loans; Minimum Increments. (a) Subject to the provisions of the definition "Interest Period," the duration of each Interest Period applicable to a Eurodollar Rate Loan shall be as specified in the applicable Notice of Borrowing or Notice of Conversion or Continuation. The Borrowers may elect a subsequent Interest Period to be applicable to any Eurodollar Rate Loan by giving a Notice of Conversion or Continuation with respect to such Loan in accordance with SECTION 4.11. (b) If the Agent does not receive a notice of election in accordance with SECTION 4.11 with respect to the continuation of Eurodollar Rate Loan within the applicable time limits specified in said SECTION 4.11, or if, when such notice must be given, an Event of Default exists or such Type of Loan is not available, the Borrowers shall be deemed to have elected to convert such Eurodollar Rate Loan in whole into a Base Rate Loan on the last day of the Interest Period therefor. (c) Notwithstanding the foregoing, the Borrowers may not select an Interest Period that would end, but for the provisions of the definition "Interest Period," after the Termination Date. (d) In no event shall there be more than six Eurodollar Rate Loans outstanding hereunder at any time. For the purpose of this SUBSECTION (d), each Loan having a distinct Interest Period shall be deemed to be a separate Loan hereunder. (e) Each Eurodollar Rate Loan shall be in a minimum amount of $1,000,000 or an integral multiple of $250,000 in excess thereof. SECTION 4.14 Changed Circumstances. (a) If the introduction of or any change in or in the interpretation of (in each case, after the date hereof) any law or regulation makes it unlawful, or any Governmental Authority asserts, after the date hereof, that it is unlawful, for any Lender to perform its obligations hereunder to make Eurodollar Rate Loans or to fund or maintain Eurodollar Rate Loans hereunder, such Lender shall notify the Agent of such event and the Agent shall notify the Borrowers of such event, and the right of the Borrowers to select Eurodollar Rate Loan for any subsequent Interest Period or in connection with any subsequent conversion of any Loan shall be suspended until the Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and the Borrowers shall forthwith prepay in full all Eurodollar Rate Loans then outstanding and shall pay all interest accrued thereon through the date of such prepayment or conversion, unless the Borrowers, within three Business Days after such notice 52 60 from the Agent, request the conversion of all Eurodollar Rate Loans then outstanding into Base Rate Loans; PROVIDED, that if the date of such repayment or proposed conversion is not the last day of the Interest Period applicable to such Eurodollar Rate Loans, the Borrowers shall also pay any amount due pursuant to SECTION 4.10. (b) If the Agent shall, at least one Business Day before the date of any requested Borrowing or the effective date of any conversion or continuation of an existing Loan to be made or continued as or converted into a Eurodollar Rate Loan (each such requested Borrowing made and Loan to be converted or continued, a "Pending Loan"), notify the Borrowers that the Eurodollar Rate will not adequately reflect the cost to the Lenders of making or funding such Pending Loan as a Eurodollar Rate Loan or that the Interbank Offered Rate is not determinable from any interest rate reporting service of recognized standing, then the right of the Borrowers to select Eurodollar Rate Loan for such Pending Loan, any subsequent Loan or in connection with any subsequent conversion or continuation of any Loan shall be suspended until the Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and each Pending Loan and each such subsequent Loan requested to be made, continued or converted shall be made or continued as or converted into a Base Rate Loan. SECTION 4.15 Cash Collateral Account; Investment Accounts. (a) Cash Collateral Account. The Borrowers shall establish a Cash Collateral Account in which to deposit Collateral consisting of cash or Cash Equivalents from time to time (i) representing payments received pursuant to SECTION 2.3(c) in excess of then outstanding Loans or on account of Eurodollar Rate Loans which would otherwise result in repayment of such Loans prior to the end of the Interest Period applicable thereto, (ii) with respect to Letter of Credit Obligations (x) at the request of the Agent upon the occurrence of an Event of Default, or (y) for the purposes set forth in SECTION 4.6 in the event of termination of this Agreement, or (iii) for any other purpose as may be agreed between the Agent and the Borrowers to provide security for the Secured Obligations. On the last day of the applicable Interest Period as to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (i) above or if a drawing under a Letter of Credit occurs with respect to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (ii) above, the Borrowers hereby authorize the Agent to use the monies deposited in the Cash Collateral Account to make payment to the payee with respect to such Loan or drawing. The Cash Collateral Account shall be in the name of the Agent and the Agent shall have sole dominion and control over, and sole access to, the Cash Collateral Account. Neither any Borrower nor any Person claiming on behalf of or through any Borrower shall have any right to withdraw any of the funds held in the Cash Collateral Account. The Borrowers agree that they will not at any time (x) sell or otherwise dispose of any interest in the Cash Collateral Account or any funds held therein or (y) create or permit to exist any Lien upon or with respect to the Cash Collateral Account or any funds held therein, except as 53 61 provided in or contemplated by this Agreement. The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords other funds deposited with the Agent, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any funds held in the Cash Collateral Account. Subject to the right of the Agent to withdraw funds from the Cash Collateral Account as provided herein, the Agent will, so long as no Default or Event of Default shall have occurred and be continuing, from time to time invest funds on deposit in the Cash Collateral Account, reinvest proceeds of any such investments which may mature or be sold, and invest interest or other income received from any such investments, in each case, in Cash Equivalents, as the Borrowers may direct prior to the occurrence of a Default or Event of Default and as the Agent may select after the occurrence and during the continuance of a Default or Event of Default. Such proceeds, interest and income which are not so invested or reinvested in Cash Equivalents shall be deposited and held by the Agent in the Cash Collateral Account. The Agent makes no representation or warranty as to, and shall not be responsible for, the rate of return, if any, earned in any Cash Collateral. Any earnings on Cash Collateral shall be held as additional Cash Collateral on the terms set forth in this SECTION 4.15. (b) Investment Accounts. The Borrowers may from time to time establish one or more Investment Accounts with the Agent, any Lender or any Affiliate of a Lender, for the purpose of investing in Cash Equivalents any Cash Collateral representing payments received pursuant to SECTION 2.3(c) in excess of then outstanding Loans or on account of Eurodollar Rate Loans which would otherwise result in repayment of such Loans prior to the end of the Interest Period applicable thereto. The Borrowers hereby acknowledge and agree that each such Investment Account shall constitute Collateral hereunder and shall be maintained with the Agent, a Lender or Affiliate of a Lender as security for the Secured Obligations. Notwithstanding the foregoing, until such time as the Agent shall otherwise instruct the Lender or the Affiliate of a Lender maintaining such account, the Borrowers shall be entitled to direct the investment of the funds deposited therein. The Borrowers agree that they will not at any time (x) sell or otherwise dispose of any interest in any Investment Account or any funds held therein other than by application thereof to any Secured Obligation, or (y) create or permit to exist any Lien upon or with respect to any Investment Account or any funds held therein, except as provided in or contemplated by this Agreement. The Borrowers agree that at any time, and from time to time, at the expense of the Borrowers, the Borrowers will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent or any Lender may request, in order to perfect and protect any security interest in any Investment Account granted or purported to be granted hereby or to enable the Borrowers, for their respective benefit and the benefit of the Lenders, to exercise and enforce its rights and remedies hereunder with respect to such Investment Account. SECTION 4.16 Allocation of Payments from Borrowers. All monies to be applied to the Secured Obligations, whether such monies represent voluntary payments by the Borrowers or are received pursuant to demand for payment or realized from any disposition of Collateral, shall be allocated among the Agent and such of the Lenders and other holders of the Secured Obligations as are entitled thereto (and, with respect to monies allocated to the Lenders, on a Ratable basis unless otherwise provided in this SECTION 4.16): (i) first, to BankBoston to pay 54 62 principal and accrued interest on any portion of any Non-Ratable Loan which BankBoston may have advanced on behalf of any Lender and for which BankBoston has not been reimbursed by such Lender or the Borrowers; (ii) second, to the Agent to pay the amount of expenses that have not been reimbursed to the Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iii) third, to the Agent to pay any indemnified amount that has not been paid to the Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iv) fourth, to the Agent to pay any fees due and payable to the Agent under this Agreement; (v) fifth, to the Lenders for any indemnified amount that they have paid to the Agent and for any expenses that they have reimbursed to the Agent; (vi) sixth, to the Lenders in payment of the unpaid principal and accrued interest in respect of the Loans and any other Secured Obligations then outstanding and held by any Lender to be shared among Lenders on a Ratable basis, or on such other basis as may be agreed upon in writing by all of the Lenders (which agreement or agreements may be entered into without notice to or the consent or approval of the Borrowers); and (vii) seventh, to the holders of the other Secured Obligations who are not Lenders on a pro rata basis. The allocations set forth in this SECTION 4.16 are solely to determine the rights and priorities of the Agent and the Lenders as among themselves and may be changed by the Agent and the Lenders without notice to or the consent or approval of the Borrowers or any other Person. Whenever allocation is made pursuant to this SECTION 4.16 to the holder of Secured Obligations in which another Lender acquires a participation, the monies received by such holder shall be shared as between such holder and such participants on a Ratable basis. SECTION 4.17 Borrowers' Representative. Heafner shall act under this Agreement as the representative of all Borrowers, and each other Borrower hereby appoints Heafner as its representative, hereunder, for all purposes, including, without being limited to, requesting borrowings and receiving account statements and other notices and communications to the Borrowers (or any of them) from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any request for borrowing, disbursement instruction, report, information or any other notice or communication made or given by Heafner, whether in its own name, on behalf of any other Borrower or on behalf of "the Borrowers," and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction, report, information, notice or communication, nor shall the joint and several character of the Borrowers' liability for the Secured Obligations be affected. The Agent and each Lender intend to maintain a single Loan Account in the name of "The J.H. Heafner Company, Inc." hereunder and each Borrower expressly agrees to such arrangement and confirms that such arrangement shall have no effect on the joint and several character of its liability for the Secured Obligations. SECTION 4.18 Joint and Several Liability. (a) Joint and Several Liability. The Secured Obligations shall constitute one joint and several direct and general obligation of all of the Borrowers. Notwithstanding anything to the contrary contained herein, each of the Borrowers shall be jointly and severally, with each other Borrower, directly and unconditionally liable to the Agent and the Lenders for all Secured Obligations and shall have the obligations of co-maker with respect to the Loans, the Notes, and the Secured Obligations, it being agreed that the advances to each Borrower inure to the benefit 55 63 of all Borrowers, and that the Agent and the Lenders are relying on the joint and several liability of the Borrowers as co-makers in extending the Loans hereunder. Each Borrower hereby unconditionally and irrevocably agrees that upon default in the payment when due (whether at stated maturity, by acceleration or otherwise) of any principal of, or interest on, any Loan or other Secured Obligation payable to the Agent or any Lender, it will forthwith pay the same, without notice or demand. (b) No Modification or Release of Obligations. No payment or payments made by any of the Borrowers or any other Person or received or collected by the Agent or any Lender from any of the Borrowers or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Secured Obligations shall be deemed (except to the extent Secured Obligations are satisfied) to modify, release or otherwise affect the liability of each Borrower under this Agreement, which shall remain liable for the Secured Obligations until the Secured Obligations are paid in full and the Commitments are terminated. SECTION 4.19 Obligations Absolute. Each Borrower agrees that the Secured Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Agent or any Lender with respect thereto. All Secured Obligations shall be conclusively presumed to have been created in reliance hereon. The liabilities under this Agreement shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any Loan Documents or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payments of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver thereof or any consent to departure therefrom, including, but not limited to, any increase in the Secured Obligations resulting from the extension of additional credit to any Borrower or otherwise; (c) any taking, exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; (d) any change, restructuring or termination of the corporate structure or existence of any Borrower; or (e) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Borrower or a guarantor. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by the Agent or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though such payment had not been made. 56 64 SECTION 4.20 Waiver of Suretyship Defenses. Each Borrower agrees that the joint and several liability of the Borrowers provided for in SECTION 4.18 shall not be impaired or affected by any modification, supplement, extension or amendment or any contract or agreement to which the other Borrowers may hereafter agree (other than an agreement signed by the Agent and the Lenders specifically releasing such liability), nor by any delay, extension of time, renewal, compromise or other indulgence granted by the Agent or any Lender with respect to any of the Secured Obligations, nor by any other agreements or arrangements whatever with the other Borrowers or with anyone else, each Borrower hereby waiving all notice of such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consenting to be bound thereby as fully and effectually as if it had expressly agreed thereto in advance. The liability of each Borrower is direct and unconditional as to all of the Secured Obligations, and may be enforced without requiring the Agent or any Lender first to resort to any other right, remedy or security. Each Borrower hereby expressly waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations, the Notes, this Agreement or any other Loan Document (other than notices expressly required in this Agreement or by any of the Loan Documents) and any requirement that the Agent or any Lender protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Borrower or any other Person or any collateral, including any rights any Borrower may otherwise have under the New York General Obligations Law. 57 65 ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1 Conditions Precedent to Initial Loans. Notwithstanding any other provision of this Agreement, this Agreement shall not become effective nor shall the Lenders have any obligation to make the Initial Loans unless and until the following conditions precedent are satisfied: (a) Documents. The Agent shall have received on or before the Effective Date the following, each in form and substance satisfactory to the Agent, its special counsel and the Lenders and (except for the Notes) in sufficient copies for each Lender: (1) Agreement. This Agreement, duly executed and delivered by the Borrowers and the other Lenders; (2) Notes. The Notes, each dated the Effective Date and duly executed and delivered by the Borrowers; (3) Articles, Bylaws and Resolutions. A certificate, dated the Effective Date, of the Secretary or an Assistant Secretary of each Loan Party, as to and having attached thereto copies of the articles of incorporation and by-laws and shareholder agreements of such Loan Party as in effect on the Effective Date and all corporate action, including shareholder approval, if necessary, taken by such Loan Party and/or its shareholders to authorize the execution, delivery and performance of this Agreement and the other Loan Documents to which such Loan Party is a party and, in the case of each Borrower, the Borrowings under this Agreement; (4) Incumbency Certificates. A certificate, dated the Effective Date, of the Secretary or an Assistant Secretary of each Loan Party, as to the incumbency and specimen signatures of each of the officers of such Loan Party who is authorized to execute and deliver this Agreement or any other Loan Document on behalf of such Loan Party or any document, certificate or instrument to be delivered in connection with this Agreement or the other Loan Documents to which such Loan Party is a party and, in the case of each Borrower, to request Borrowings under this Agreement; (5) Good Standing Certificates. A certificate as of a recent date evidencing the good standing of each Loan Party in the jurisdiction of its incorporation and in each other jurisdiction in which it is qualified as a foreign corporation to transact business; (6) Financing Statements. The Financing Statements to be delivered by the Loan Parties duly executed and delivered by the Loan Parties, and evidence satisfactory to the Agent that the Financing Statements have been filed in each jurisdiction where such filing may be necessary or appropriate to perfect the Security Interest or, at the Agent's discretion, in appropriate form for such filing; 58 66 (7) Landlord's Waiver. Landlord's waiver and consent agreements duly executed on behalf of each landlord of real property on which any Collateral is located, except to the extent that the Rent Reserve appropriately reflects the absence of such a waiver; (8) Schedules of Inventory and Receivables. A Schedule of Inventory and a Schedule of Receivables, each prepared as of a recent date; (9) Insurance Coverage. Certificates or binders of insurance relating to each of the policies of insurance covering any of the Collateral together with loss payable clauses which comply with the terms of SECTION 8.8(b); (10) Solvency Letter. A certificate of the chief financial officer of Heafner as to the solvency of the Borrowers, having attached thereto the pro forma opening balance sheet and projections referred to in SECTION 6.1(n) and a pro forma opening balance sheet of the Borrowers prepared on the same basis as such first-mentioned pro forma but reflecting the fair values of the Borrowers' assets; (11) Agency Account Agreements. Such Agency Account Agreements duly executed by the applicable Clearing Bank and Loan Party and confirmations of effective directions to pay the Agent affecting each account of a Loan Party to which Collateral proceeds are deposited, as may be required by the Agent; (12) Borrowing Base Certificate. A Borrowing Base Certificate prepared as of the Effective Date duly executed and delivered by the Financial Officer demonstrating Loan Availability of not less than $25,000,000, after giving effect to the Initial Loans, the consummation of the CPW Acquisition and the ITCO Merger, the issuance of the Senior Notes and the Class B Stock, the repayment of Debt of Heafner and other Loan Parties, and the completion of the other transactions contemplated by this Agreement, the CPW Acquisition Documents or the ITCO Merger Documents to occur on or before the Effective Date; (13) Notice of Borrowing. The Initial Notice of Borrowing dated the Effective Date from the Borrowers to the Agent requesting the Initial Loans and specifying the method of disbursement; (14) Financial Statements. Copies of all the financial statements referred to in SECTION 6.1(n) and meeting the requirements thereof; (15) Officer's Certificate. A certificate of the President or a Vice President of Heafner stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, (a) all of the representations and warranties made or deemed to be made under this Agreement are true and correct as of the Effective Date, both with and without giving effect to the Initial Loans and the application of the proceeds thereof, and (b) as of the Effective Date, no Default or Event of Default exists; 59 67 (16) Release of Liens. Payoff letters as of the Effective Date or the Business Day next prior to the Effective Date, from Fleet, in its capacity as a lender to ITCO Logistics and its Subsidiaries, and Deutsche Bank, in its capacity as a lender to CPW, together with evidence satisfactory to the Agent of the release and termination of (or agreement to release and terminate or to assign to the Agent at its request) all Liens other than Permitted Liens; (17) Fact Certificate. A certification from an appropriate officer of each Borrower as to such factual matters as shall be required by the Agent; (18) Other Loan Documents. Copies of each of the other Loan Documents dated the Effective Date, duly executed by the parties thereto with evidence satisfactory to the Agent and its counsel of the due authorization, binding effect and enforceability of each such Loan Document on each such party and such other documents and instruments as the Agent may reasonably request; (19) Legal Opinions. An opinion dated the Effective Date of each of J. Michael Gaither, general counsel of Heafner, Howard Darby & Levin, counsel for the Borrowers, Hahn & Hahn, counsel for Winston, Beaman & King, P.A., counsel for ITCO, Jackson, Tufts, Cole Black, counsel for CPW and of such local counsel as the Agent shall deem necessary or desirable, opining as to such matters in connection with this Agreement as the Agent or its counsel may reasonably request; (20) Fees. The Agent shall have received from the Borrowers all of the fees payable on the Effective Date referred to herein; (21) Priority. The Agent shall have received satisfactory evidence that the Agent (for the benefit of Lenders) has a valid and perfected first priority security interest as of such date in all of the Collateral, subject only to Permitted Liens; and (22) Fleet Financing. A letter agreement, in form and substance satisfactory to the Agent, each Lender and each Loan Party, setting forth the conditions pursuant to which the Fleet Financing will be permitted by the Lenders and the Agent to remain in effect, subject to the conditions of such letter agreement and SECTION 12.1(p) duly executed by each Lender and each Loan Party. (b) Litigation. The Agent shall have received evidence satisfactory to it that no action, proceeding, investigation, regulation or legislation, shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of, the CPW Acquisition, the ITCO Acquisition, this Agreement, or the consummation of the transactions contemplated thereby or hereby, or which may otherwise have a Materially Adverse Effect. (c) CPW Acquisition. The CPW Acquisition shall have been consummated in accordance with the terms of the CPW Acquisition Agreement, without any waiver of any 60 68 material provision thereof by Heafner; and the Agent shall have received copies of the CPW Acquisition Agreement and all agreements, documents and instruments delivered in connection with the consummation of the transactions thereunder, including, without being limited to, copies of the legal opinions issued in connection therewith, addressed to the Agent and the Lenders or accompanied by reliance letters in favor of the Agent and the Lenders. (d) ITCO Merger. The ITCO Merger shall have been consummated in accordance with the terms of the ITCO Merger Agreement, without any waiver of any material provision thereof by Heafner; and the Agent shall have received copies of the ITCO Merger Agreement and all other agreements, documents and instruments delivered in connection with the consummation of the transactions contemplated thereby, including, without being limited to, copies of the legal opinions issued in connection therewith, addressed to the Agent and the Lenders or accompanied by reliance letters in favor of the Agent and the Lenders. (e) Senior Notes. Heafner shall have received gross proceeds equal to at least $100,000,000 from the issuance of Senior Notes in accordance with the terms and provisions of the Senior Note Indenture and the Agent shall have received copies of the Senior Note Indenture and all instruments (other than the Senior Notes), certificates and other documents delivered in connection with the issuance of the Senior Notes thereunder. (f) No Material Adverse Change. There shall not have occurred any event or series of events or circumstances or group of circumstances which individually or in the aggregate, in the sole judgment of the Agent, would have a Materially Adverse Effect. SECTION 5.2 All Loans; Letters of Credit. The obligation of the Lenders to make (but not to continue or convert any outstanding Loan, which shall be subject to the provisions of SECTION 4.12) any Loan hereunder, including the Loans constituting the Initial Loans and all subsequent Loans, and of BankBoston to issue any Letter of Credit are further subject to the following: (a) at such time, both with and without giving effect to the Loans to be made or Letters of Credit to be issued at such time and the application of the proceeds thereof, (1) no Default or Event of Default shall exist nor (2) shall any event have occurred or condition exist that could reasonably be expected to have a Materially Adverse Effect, and (b) the corporate actions of the Loan Parties referred to in SECTION 5.1(a)(3) shall remain in full force and effect and the incumbency of officers shall be as stated in the certificates of incumbency delivered pursuant to SECTION 5.1(a)(4) or as subsequently modified and reflected in a certificate of incumbency delivered to the Agent. Each request or deemed request for any Borrowing or other advance or submission of any application for any Letter of Credit hereunder shall be deemed to be a certification by the Borrowers to the Agent and the Lenders as to the matters set forth in SECTION 5.2(a) and (b) and the Agent and the Lenders may, without waiving either condition, consider the conditions specified in SECTIONS 5.2(a) and (b) fulfilled and a representation by the Borrowers to such effect made, if no written 61 69 notice to the contrary is received by the Agent prior to the making of the Loan then to be made or the issuance of the Letter of Credit so requested. SECTION 5.3 Conditions as Covenants. In the event that the Lenders permit this Agreement to become effective and make the Initial Loans or permit BankBoston to issue a Letter of Credit prior to the satisfaction of all conditions precedent set forth in SECTION 5.1, and such conditions are not waived in writing by the Agent, the Borrowers shall nevertheless cause such condition or conditions to be satisfied within thirty days after the making of such Initial Loans or the issuance of such Letter of Credit. 62 70 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS SECTION 6.1 Representations and Warranties. The Borrowers represent and warrant to the Agent and to the Lenders as follows: (a) Organization; Power; Qualification. Each Borrower and each of its Subsidiaries is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, having the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. The jurisdictions in which each of the Borrowers and each of their respective Subsidiaries is qualified to do business as a foreign corporation are listed on SCHEDULE 6.1(a). (b) Capitalization; Shareholder Agreements. The outstanding capital stock of the Borrowers has been duly and validly issued and is fully paid and nonassessable, and the number and owners of such shares of capital stock of the Borrowers are set forth on SCHEDULE 6.1(b). Except as set forth on SCHEDULE 6.1(b), the issuance and sale of the Borrowers' capital stock have been registered or qualified under applicable federal and state securities laws or are exempt therefrom and there are no shareholders agreements, options, subscription agreements or other agreements or understandings to which any Borrower is a party in effect with respect to the capital stock of a Borrower, including, without limitation, agreements providing for special voting requirements or arrangements for approval of corporate actions or other matters relating to corporate governance or restrictions on share transfer or providing for the issuance of any securities convertible into shares of the capital stock of any Borrower, any warrants or other rights to acquire any shares or securities convertible into such shares, or any agreement that obligates a Borrower, either by its terms or at the election of any other Person, to repurchase such shares under any circumstances. (c) Subsidiaries. SCHEDULE 6.1(c) correctly sets forth the name of each Subsidiary of any Borrower, its jurisdiction of incorporation, the name of its immediate parent or parents, and the percentage of its issued and outstanding securities owned by the Borrowers or any other Subsidiary of any Borrower. Except as set forth on SCHEDULE 6.1(c), (i) no Subsidiary has issued any securities convertible into shares of such Subsidiary's capital stock or any options, warrants or other rights to acquire any shares or securities convertible into such shares, (ii) the outstanding stock and securities of each Subsidiary are owned by a Borrower or a Wholly Owned Subsidiary of a Borrower, or by a Borrower and one or more of its Wholly Owned Subsidiaries, free and clear of all Liens, warrants, options and rights of others of any kind whatsoever, and (iii) no Borrower has any Subsidiaries. 63 71 The outstanding capital stock of each Subsidiary has been duly and validly issued and is fully paid and nonassessable by the issuer, and the number and owners of the shares of such capital stock are set forth on SCHEDULE 6.1(c). (d) Authorization of Agreement, Notes, Loan Documents and Borrowing. Each Loan Party has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement and each of the Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the Loan Documents have been duly executed and delivered by the duly authorized officers of each Loan Party and each is, or each when executed and delivered in accordance with this Agreement will be, a legal, valid and binding obligation of each such Loan Party, enforceable in accordance with its terms. (e) Compliance of Agreement, Notes, Loan Documents and Borrowing with Laws, Etc. Except as set forth on SCHEDULE 6.1(e), the execution, delivery and performance of this Agreement and each of the Loan Documents in accordance with their respective terms and the borrowings hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to a Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation, by-laws or any shareholders' agreement of a Borrower or any of its Subsidiaries, (iii) conflict with, result in a breach of or constitute a default under any material provisions of any indenture, agreement or other instrument to which a Borrower or any of its Subsidiaries is a party or by which a Borrower, any of its Subsidiaries or any of any Borrower's or such Subsidiaries' property may be bound or any Governmental Approval relating to a Borrower or any of its Subsidiaries, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by a Borrower other than the Security Interest. (f) Business. Each Borrower is engaged in the business described on SCHEDULE 6.1(f). (g) Compliance with Law; Governmental Approvals. Except as set forth in SCHEDULE 6.1(g), each Borrower and each of its Subsidiaries (i) has all Governmental Approvals, including permits relating to federal, state and local Environmental Laws, ordinances and regulations, required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any 64 72 pending or, to the knowledge of any Borrower, threatened attack by direct or collateral proceeding, and (ii) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it, including, without being limited to, all Environmental Laws and all occupational health and safety laws applicable to any Borrower, any of its Subsidiaries or their respective properties, except for instances of noncompliance which would not, singly or in the aggregate, cause a Default or Event of Default or have a Materially Adverse Effect and in respect of which appropriate reserves have been established. (h) Title to Properties. Except as set forth in SCHEDULE 6.1(h), each Borrower and each of the Subsidiaries has valid and legal title to or leasehold interest in all personal property, Real Estate and other assets used in its business, including, but not limited to, those reflected on the most recent balance sheet of the Borrowers delivered pursuant to SECTION 6.1(n). (i) Liens. Except as set forth in SCHEDULE 6.1(i), none of the properties and assets of any Borrower or any Subsidiary is subject to any Lien, except Permitted Liens. Other than the Financing Statements, no financing statement under the UCC of any State or other instrument evidencing a Lien which names a Borrower or any Subsidiary as debtor has been filed (and has not been terminated) in any State or other jurisdiction, and neither any Borrower nor any Subsidiary has signed any such financing statement or other instrument or any security agreement authorizing any secured party thereunder to file any such financing statement or instrument, except to perfect those Liens listed on SCHEDULE 6.1(i). (j) Indebtedness and Guaranties. SCHEDULE 6.1(j) is a complete and correct listing of all (i) Debt and (ii) Guaranties of each Borrower and each of its Subsidiaries. Each Borrower and each of its Subsidiaries has performed and is in compliance in all material respects with all of the terms of such Debt and Guaranties and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with notice or lapse of time, or both, would constitute such a default or event of default, exists with respect to any such Debt or Guaranty. (k) Litigation. Except as set forth on SCHEDULE 6.1(k), as of the Effective Date there are no actions, suits or proceedings pending (nor, to the knowledge of any Borrower, are there any actions, suits or proceedings threatened, or any reasonable basis therefor) against or in any other way relating to or affecting a Borrower or its Subsidiaries or any of their respective properties in any court or before any arbitrator of any kind or before or by any governmental body, EXCEPT actions, suits or proceedings of the character normally incident to the kind of business conducted by the Borrowers and their Subsidiaries which, if adversely determined, would not singly or in the aggregate have a Materially Adverse Effect, and there are no strikes or walkouts in progress, pending or contemplated relating to any labor contracts to which a Borrower or any of its Subsidiaries is a party, relating to any labor contracts being negotiated, or otherwise. 65 73 (l) Tax Returns and Payments. Except as set forth on SCHEDULE 6.1(l), all United States federal, state and local as well as foreign national, provincial and local and other tax returns of each Borrower and each of its Subsidiaries required by Applicable Law to be filed have been duly filed, and all United States federal, state and local and foreign national, provincial and local and other taxes, assessments and other governmental charges or levies upon a Borrower or any of its Subsidiaries or their respective property, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under SECTION 9.6. The charges, accruals and reserves on the books of the Borrowers and each Subsidiary as of the Effective Date in respect of United States federal, state and local and foreign national, provincial and local taxes for all fiscal years and portions thereof since January 1, 1988 are in the judgment of the Borrowers adequate, and the Borrowers know of no reason to anticipate any additional assessments for any of such years which, singly or in the aggregate, might have a Materially Adverse Effect. (m) Burdensome Provisions. Except as set forth on SCHEDULE 6.1(m), neither Borrower nor any Subsidiary is a party to any indenture, agreement, lease or other instrument, or subject to any charter or corporate restriction, Governmental Approval or Applicable Law compliance with the terms of which is reasonably likely to have a Materially Adverse Effect. (n) Financial Statements. (i) The Borrowers have furnished to the Agent and the Lenders (1) the audited closing balance sheet of Winston as of May 7, 1997, (2) copies of Heafner's consolidating and audited consolidated balance sheets as at December 31, 1997 and the related consolidating and audited consolidated statements of income, cash flow and shareholders equity for the Fiscal Year then ended, which financial statements present fairly and in all material respects in accordance with GAAP the financial positions of Heafner and its consolidated Subsidiaries as at December 31, 1997, and the results of operations of Heafner and its consolidated Subsidiaries for such Fiscal Year, together with the report of Arthur Andersen LLP on such consolidated financial statements, (3) copies of the audited consolidated balance sheet of CPW and its consolidated Subsidiaries as of October 31, 1997 and the related audited consolidated statements of income, cash flow and stockholders equity of CPW and its consolidated Subsidiaries for its fiscal year then ended, reported on by KPMG Peat Marwick L.L.P. and of the unaudited consolidated balance sheet of CPW and its consolidated Subsidiaries as of January 31, 1998 and the related unaudited consolidated statements of income, cash flow and stockholders equity of CPW and its consolidated Subsidiaries for the fiscal quarter of CPW then ended, (5) copies of the audited consolidated balance sheet of ITCO Logistics and its consolidated Subsidiaries as of September 30, 1997 and the related audited consolidated statements of income, cash flow and stockholders equity of ITCO Logistics and its consolidated Subsidiaries for its fiscal year then ended, reported on by Ernst & Young L.L.P. and of the unaudited consolidated balance sheet of ITCO Logistics and its consolidated Subsidiaries as of December 31, 1997 and the related unaudited consolidated statements of income, cash flow and stockholders equity of ITCO Logistics and its consolidated Subsidiaries for the fiscal quarter of ITCO then ended, 66 74 and (6) a pro forma opening consolidated balance sheet of Heafner and its Consolidated Subsidiaries (in the form attached to the solvency certificate delivered pursuant to SECTION 5.1(a)(10)), as of a date on or about the Effective Date, giving effect to the consummation of the CPW Acquisition, the ITCO Merger, the issuance of the Senior Notes, and the Class B Stock, the repayment of Debt of CPW and its Subsidiaries, of ITCO Logistics and its Subsidiaries and of the Acquisition Sub Debt (as defined in the Existing Loan Agreement), the making of the Initial Loans, and all related transactions contemplated by this Agreement, the CPW Acquisition Documents, the ITCO Merger Documents or the Senior Note Indenture to occur on or before the Effective Date. (ii) Except as set forth on SCHEDULE 6.1(n) or as disclosed or reflected in the financial statements described in CLAUSE (i) above, neither Heafner nor any other Borrower nor any of their respective Subsidiaries has any material liabilities, contingent or otherwise. (iii) The pro forma balance sheet described in SECTION 6.1(n)(i)(6) presents fairly the Borrowers' good faith estimate of their consolidated financial condition of Heafner, the other Borrowers and their respective Subsidiaries as of the Effective Date on the basis recited therein, subject to normal year-end adjustments and to purchase accounting adjustments. (o) Adverse Change. Since the date of the latest financial statements referred to in SECTION 6.1(n)(i), (i) no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of such Heafner, the other Borrowers and their respective Subsidiaries taken as a whole, and (ii) no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a Materially Adverse Effect. (p) ERISA. Neither any Borrower nor any Related Company maintains or contributes to any Benefit Plan other than those listed on SCHEDULE 6.1(p). Except as set forth on SCHEDULE 6.1(p), and subject to correction of possible Remediable Defects, each Benefit Plan is in substantial compliance with ERISA and the Code, including but not limited to those provisions thereof relating to reporting and disclosure, and neither any Borrower nor any Related Company has received any notice asserting that a Benefit Plan is not in compliance with ERISA. No material liability to the PBGC or to a Multiemployer Plan has been, or is expected to be, incurred by any Borrower or any Related Company. Except as set forth on SCHEDULE 6.1(p), and subject to correction of possible Remediable Defects, each Benefit Plan intended to qualify under Section 401(a) of the Code so qualifies and any related trust is exempt from federal income tax under Section 501(a) of the Code. A favorable determination letter from the IRS has been issued or applied for with respect to each such plan and trust and nothing that is not a Remediable Defect has occurred since the date of such determination letter that would adversely affect such qualification or tax-exempt status. No Benefit Plan subject to the minimum funding 67 75 standards of the Code has failed to meet such standards. Neither the Borrower or any Related Company has transferred any pension plan liability in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. Except as set forth on SCHEDULE 6.1(p), neither any Borrower nor any Related Company has any liability, actual or contingent, with respect to any Benefit Plan other than to make payments to the Benefit Plan in accordance with its terms, and there are no pending or threatened claims against a Benefit Plan. No non-exempt prohibited transaction with the meaning of Section 4975 of the Code or Section 406 of ERISA has occurred with respect to a Benefit Plan. Except under plans listed on SCHEDULE 6.1(p), no employee or former employee of any Borrower or any Related Company is or may become entitled to any benefit under a Benefit Plan that is a "welfare plan" within the meaning of Section 3(1) of ERISA following such employee's termination of employment. Except as set forth on SCHEDULE 6.1(p), each such welfare plan that is a group health plan has been operated in compliance with the provision of Section 4980B of the Code and Sections 601-609 of ERISA and any applicable provisions of state law that are similar. (q) Absence of Defaults. No Borrower nor any Subsidiary is in default under its articles or certificate of incorporation or by-laws and no event has occurred, which has not been remedied, cured or waived, (i) which constitutes a Default or an Event of Default, or (ii) which constitutes, or which with the passage of time or giving of notice, or both, would constitute, a default or event of default by a Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) or judgment, decree or order to which such Borrower or any of its Subsidiaries is a party or by which such Borrower, any of its Subsidiaries or any of such Borrower's or any of its Subsidiaries' properties may be bound or which would require a Borrower or any Subsidiary to make any payment under any thereof prior to the scheduled maturity date therefor, except, in the case only of any such agreement, for alleged defaults which are being contested in good faith by appropriate proceedings and with respect to which reserves in respect of a Borrower's or such Subsidiary's reasonably anticipated liability have been established on the appropriate books. (r) Accuracy and Completeness of Information. (i) As of the Effective Date, no fact is known to the Borrowers which has had, or is reasonably likely in the future to have (so far as the Borrowers can reasonably foresee), a Materially Adverse Effect which has not been set forth in the financial statements or disclosure delivered to the Agent and the Lenders prior to the Effective Date. No document furnished or written statement made to the Agent or any Lender by the Borrowers (or any of them) prior to the Agreement Date, in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contained, except to the extent corrected or superseded prior to the Agreement Date, any untrue statement of a fact material to the creditworthiness of a Borrower or omitted to state a material fact necessary in order to make the statements contained therein not misleading. 68 76 (ii) The Borrowers have no reason to believe that any document furnished or written statement made to the Agent or any Lender prior to the Agreement Date by any Person other than the Borrowers in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contained any incorrect statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, that has not been corrected or superseded prior to the Effective Date. (s) Solvency. In each case after giving effect to the Debt represented by the Loans outstanding and to be incurred, the transactions contemplated by this Agreement, the CPW Acquisition Documents and the ITCO Merger Documents, the issuance of the Senior Notes and the Class B Stock, the repayment of the Acquisition Sub Debt (as defined in the Existing Loan Agreement) and other Debt of Heafner, CPW, ITCO Logistics and their respective Subsidiaries, each Borrower and each of its Subsidiaries is solvent, having assets of a fair salable value which exceeds the amount required to pay its debts as they become absolute and matured (including contingent, subordinated, unmatured and unliquidated liabilities), and each Borrower and each of its Subsidiaries is able to and anticipates that it will be able to meet its debts as they mature and has adequate capital to conduct the business in which it is or proposes to be engaged. (t) Receivables. (i) Status. (1) Each Receivable reflected in the computations included in any Borrowing Base Certificate meets the criteria enumerated in CLAUSES (a) through (p) of the definition "Eligible Receivables," except as disclosed in such Borrowing Base Certificate or as disclosed in a timely manner in a subsequent Borrowing Base Certificate or otherwise in writing to the Agent. (2) No Borrower has any knowledge of any fact or circumstance not disclosed to the Agent in a Borrowing Base Certificate or otherwise in writing which would impair the validity or collectibility of any Receivable of $250,000 or more or of Receivables which (regardless of the individual amount thereof) aggregate $500,000 or more. (ii) Chief Executive Office. The chief executive office of each Borrower and the books and records relating to the Receivables are located on the Effective Date at the address or addresses set forth on SCHEDULE 6.1(t). (u) Inventory. (i) Schedule of Inventory. All Inventory included in any Schedule of Inventory or Borrowing Base Certificate delivered to the Agent on or prior to the Effective Date meets the criteria enumerated in CLAUSES (a) through (g) of the 69 77 definition "Eligible Inventory," except as disclosed in such Schedule of Inventory or Borrowing Base Certificate. (ii) Condition. All Inventory is in good condition, meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use or sale, and is currently either usable or salable in the normal course of the applicable Borrower's business, except to the extent reserved against in the financial statements referred to in SECTION 6.1(n) or a Borrowing Base Certificate delivered pursuant to SECTION 5.1. (iii) Location. All Inventory is located at a Permitted Inventory Location or is in transit to a Permitted Inventory Location. (v) Corporate and Fictitious Names. Except as otherwise disclosed on SCHEDULE 6.1(v), during the five-year period preceding the Agreement Date, neither any Borrower nor any predecessor thereof has been known as or used any corporate or fictitious name other than the corporate name of such Borrower on the Effective Date. (w) Federal Reserve Regulations. Neither any Borrower nor any of its Subsidiaries is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted terms is defined or used in Regulations G and U of the Board of Governors of the Federal Reserve System). (x) Investment Company Act. No Borrower is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). (y) Employee Relations. The Borrowers and each Subsidiary have stable work forces in place and none of them is, except as set forth on SCHEDULE 6.1(y), party to any collective bargaining agreement nor has any labor union been recognized as the representative of a Borrower's or any of its Subsidiaries' employees, and the Borrowers know of no pending, threatened or contemplated strikes, work stoppage or other labor disputes involving a Borrower's or any Subsidiary's employees. (z) Proprietary Rights. Each Borrower owns or has the right to use all Proprietary Rights necessary or desirable in the conduct of its business as conducted on the Agreement Date and as expected on the Agreement Date to be conducted in the future. To the best of the Borrowers' knowledge, none of such Proprietary Rights infringes on or conflicts with any other Person's property, and no other Person's property infringes on or conflicts with the Proprietary Rights. (aa) Trade Names. All trade names or styles under which any Loan Party sells Inventory or creates Receivables, or to which instruments in payment of Receivables are made payable, all as of the Effective Date, are listed on SCHEDULE 6.1(aa). 70 78 (bb) Bank Accounts. Attached hereto as SCHEDULE 6.1(bb) is a complete and correct list of all checking accounts, depository accounts, special deposit accounts and other accounts maintained by any Borrower or Subsidiary with any commercial bank or savings bank as of the Effective Date and each such account (except any account indicated by an asterisk (*)) is either (i) subject to an Agency Account Agreement or (ii) subject to directions from the account holder to the institution maintaining such account, in form and substance approved by the Agent, to transfer all collected funds therein daily to the Agent. (cc) Equipment. All machinery, equipment, fixtures and other tangible property (other than Inventory) of each Borrower and their respective Subsidiaries, other than obsolete equipment no longer used or useful in the business of the Borrowers and their Subsidiaries, is in good order and repair, ordinary wear and tear excepted. (dd) Real Property. No Borrower nor any Subsidiary owns any Real Estate nor leases any Real Estate other than that described on SCHEDULE 6.1(dd) and other than Real Estate acquired or leased after the Effective Date. (ee) Year 2000 Compliant. Each Borrower has (i) undertaken a detailed inventory, review and assessment of all areas within its business and operations that could be adversely affected by the failure of such Borrower to be Year 2000 Compliant on a timely basis, (ii) developed a detailed plan and time schedule for becoming Year 2000 Compliant on a timely basis, and (iii) as of the Agreement Date, has implemented such plan in accordance with such time schedule in all material respects, such that the Borrowers anticipate that they will be Year 2000 Compliant on a timely basis. SECTION 6.2 Survival of Representations and Warranties, Etc. All representations and warranties set forth in this ARTICLE 6 and all statements contained in any certificate, financial statement, or other instrument, delivered by or on behalf of the Borrowers pursuant to or in connection with this Agreement or any of the Loan Documents (including, but not limited to, any such representation, warranty or statement made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Agreement Date and at and as of the Effective Date, except that representations and warranties which, by their terms are applicable only to one such date shall be deemed to be made only at and as of such date. All representations and warranties made or deemed to be made under this Agreement shall survive and not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lender or any borrowing hereunder. 71 79 ARTICLE 7 SECURITY INTEREST SECTION 7.1 Security Interest. (a) Heafner and Winston hereby confirm the mortgage, pledge and assignment to the Agent under the Existing Loan Agreement of the Collateral and the creation in favor of the Agent, of a continuing security interest in the Collateral, all as security for the Secured Obligations, and each Borrower hereby mortgages, pledges and assigns all of the Collateral to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, and grants to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, a continuing security interest in, and a continuing Lien upon, all of the Collateral as security for the payment, observance and performance of the Secured Obligations. (b) As additional security for all of the Secured Obligations, the Borrowers grant to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, a security interest in, and assigns to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, all of the Borrowers' right, title and interest in and to, any deposits or other sums at any time credited by or due from each Lender and each Affiliate of a Lender to a Borrower, or credited by or due from any participant of any Lender to a Borrower, with the same rights therein as if the deposits or other sums were credited by or due from such Lender. Each Borrower hereby authorizes each Lender and each Affiliate of such Lender and each participant to pay or deliver to the Agent, for the account of the Lenders, without any necessity on the Agent's or any Lender's part to resort to other security or sources of reimbursement for the Secured Obligations, at any time during the continuation of any Event of Default or in the event that the Agent, on behalf of the Lenders, should make demand for payment hereunder in accordance with the terms hereof, then and without further notice to any Borrower (such notice being expressly waived), any of the aforesaid deposits (general or special, time or demand, provisional or final) or other sums for application to any Secured Obligation, irrespective of whether any demand has been made or whether such Secured Obligation is mature, and the rights given the Agent, the Lenders, their Affiliates and participants hereunder are cumulative with such Person's other rights and remedies, including other rights of set-off. The Agent will promptly notify the Borrowers of its receipt of any such funds for application to the Secured Obligations, but failure to do so will not affect the validity or enforceability thereof. The Agent may give notice of the above grant of a security interest in and assignment of the aforesaid deposits and other sums, and authorization, to, and make any suitable arrangements with, any Lender, any such Affiliate of any Lender or participant for effectuation thereof, and each Borrower hereby irrevocably appoints the Agent as its attorney to collect any and all such deposits or other sums to the extent any such payment is not made to the Agent or any Lender by such Lender, Affiliate or participant. SECTION 7.2 Continued Priority of Security Interest. (a) The Security Interest granted by the Borrowers shall at all times be valid, perfected and enforceable against each Borrower and all third parties in accordance with the 72 80 terms of this Agreement, as security for the Secured Obligations, and the Collateral shall not at any time be subject to any Liens that are prior to, on a parity with or junior to the Security Interest, other than Permitted Liens. (b) The Borrowers shall, at their sole cost and expense, take all action that may be necessary or desirable, or that the Agent may reasonably request, so as at all times to maintain the validity, perfection, enforceability and rank of the Security Interest in the Collateral in conformity with the requirements of SECTION 7.2(a), or to enable the Agent and the Lenders to exercise or enforce their rights hereunder, including, but not limited to: (i) paying all taxes, assessments and other claims lawfully levied or assessed on any of the Collateral, except to the extent that such taxes, assessments and other claims constitute Permitted Liens, (ii) obtaining, after the Agreement Date, landlords', mortgagees', bailees', warehousemen's or processors' releases, subordinations or waivers (except as to premises reflected in the Rent Reserve), and using all reasonable efforts to obtain mechanics' releases, subordinations or waivers, (iii) delivering to the Agent, for the benefit of the Lenders, endorsed or accompanied by such instruments of assignment as the Agent may specify, and stamping or marking, in such manner as the Agent may specify, any and all chattel paper, instruments, letters and advices of guaranty and documents evidencing or forming a part of the Collateral, and (iv) executing and delivering financing statements, pledges, designations, hypothecations, notices and assignments in each case in form and substance satisfactory to the Agent relating to the creation, validity, perfection, maintenance or continuation of the Security Interest under the UCC or other Applicable Law. (c) The Agent is hereby authorized to file one or more financing or continuation statements or amendments thereto without the signature of or in the name of a Borrower for any purpose described in SECTION 7.2(b). The Agent will give the Borrowers notice of the filing of any such statements or amendments, which notice shall specify the locations where such statements or amendments were filed. A carbon, photographic, xerographic or other reproduction of this Agreement or of any of the Security Documents or of any financing statement filed in connection with this Agreement is sufficient as a financing statement. (d) Each Borrower shall mark its books and records as directed by the Agent and as may be necessary or appropriate to evidence, protect and perfect the Security Interest and shall cause its financial statements to reflect the Security Interest. 73 81 ARTICLE 8 COLLATERAL COVENANTS Each Borrower covenants and agrees that until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided in SECTION 15.11: SECTION 8.1 Collection of Receivables. (a) The Borrowers will and will cause each other Loan Party to cause all monies, checks, notes, drafts and other payments relating to or constituting proceeds of trade accounts receivable, other Receivables and other Collateral to be deposited in (i) an Agency Account in accordance with the procedures set out in the corresponding Agency Account Agreement or (ii) an account subject to instructions from the account holder, in form and substance satisfactory to the Agent, requiring the transfer of collected balances in such account to the Agent not less often than each Business Day. In particular, each Borrower will and will cause each other Loan Party to advise each Account Debtor that makes payment to such Borrower or other Loan Party by wire transfer, automated clearinghouse ("ACH") transfer or similar means to make payment directly to an Agency Account or, if the applicable Borrower or other Loan Party is not party to an Agency Account Agreement, then to an account subject to such instructions. (b) If average Loan Availability is less than $20,000,000 for any period of 10 Business Days or is at any time less than $15,000,000, without limiting the ability of the Agent and the Lenders to exercise other rights and remedies hereunder, the Required Lenders may require that any or all of the Loan Parties establish Lockboxes to which monies, checks, notes, drafts and other payments relating to or constituting proceeds of Collateral shall be sent and if such requirement is imposed, each Borrower will and will cause each other Loan Party to: (i) advise each Account Debtor on trade accounts receivable that does not make payments directly to an Agency Account to address all remittances with respect to amounts payable on account thereof to a specified Lockbox, and (ii) stamp all invoices relating to trade accounts receivable with a legend satisfactory to the Agent indicating that payment is to be made to such Borrower or other Loan Party via a specified Lockbox. (c) The Borrowers and the Agent shall cause all collected balances in each Agency Account and the Borrowers shall, and shall cause each other Loan Party to, cause all collected balances in each other bank account subject to transfer instructions approved by the Agent, to be transmitted daily by wire transfer, ACH transfer, depository transfer check or other means in accordance with the procedures set forth in the corresponding Agency Account Agreement or such instructions, to the Agent at the Agent's Office: (i) for application, on account of the Secured Obligations, as provided in SECTIONS 2.3(c), 12.2, and 12.3, such credits to be entered as of the Business Day they are received if they are received prior to 1:30 p.m. and to be conditioned upon 74 82 final payment in cash or solvent credits of the items giving rise to them (PROVIDED that a collection fee shall be payable by the Borrowers with respect to any such credit received in other than immediately available funds, equal to one day's interest, at the rate applicable to Base Rate Loans, on such amount), and (ii) with respect to the balance, so long as no Default or Event of Default has occurred and is continuing, for transfer by wire transfer, ACH transfer or depository transfer check to a Controlled Disbursement Account. (d) Any monies, checks, notes, drafts or other payments referred to in SUBSECTION (a) or (b) of this SECTION 8.1 which, notwithstanding the terms of such subsection, are received by or on behalf of the applicable Borrower will be held in trust for the Agent and will be delivered to the Agent or a Clearing Bank or a bank with which an account subject to satisfactory transfer instructions is maintained, as promptly as possible, in the exact form received, together with any necessary endorsements for application by the Agent directly to the Secured Obligations or, as applicable, for deposit in the Agency Account maintained with such Clearing Bank and processing in accordance with the terms of the corresponding Agency Account Agreement or for deposit in such account and processing and transfer in accordance with such instructions. SECTION 8.2 Verification and Notification. The Agent shall have the right at any time and from time to time, (a) in the name of the Agent, the Lenders or in the name of a Borrower, to verify the validity, amount or any other matter relating to any Receivables by mail, telephone, telegraph or otherwise, (b) to review, audit and make extracts from all records and files related to any of the Receivables, and (c) if a Default or Event of Default has occurred and is continuing, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Agent, for the benefit of the Lenders, and to direct such Account Debtor or obligors to make payment of all amounts due or to become due thereunder directly to the Agent, for the account of the Lenders, and, upon such notification and at the expense of the Borrowers, to enforce collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the applicable Borrower might have done. SECTION 8.3 Disputes, Returns and Adjustments. (a) In the event any amounts due and owing under any Receivable for an amount in excess of $250,000 are in dispute between the Account Debtor and the applicable Borrower, the Borrowers shall provide the Agent with prompt written notice thereof. (b) The Borrowers shall notify the Agent promptly of all returns and credits in excess of $250,000 in respect of any Receivable, which notice shall specify the Receivable affected. 75 83 (c) The Borrowers may, in the ordinary course of business unless a Default or an Event of Default has occurred and is continuing, grant any extension of time for payment of any Receivable or compromise, compound or settle the same for less than the full amount thereof, or release wholly or partly any Person liable for the payment thereof, or allow any credit or discount whatsoever therein; PROVIDED that (i) no such action results in the reduction of more than $250,000 in the amount payable with respect to any Receivable or of more than $1,000,000 with respect to all Receivables in any Fiscal Year (in each case, excluding the allowance of credits or discounts generally available to Account Debtors in the ordinary course of the applicable Borrower's business), and (ii) the Agent is promptly notified of the amount of such adjustments and the Receivable(s) affected thereby (by reflecting such reduction in an appropriate Borrowing Base Certificate or Schedule of Receivables). SECTION 8.4 Invoices. (a) No Borrower will issue invoices other than in its own name or in a trade name of which the Agent has received prior written notice, accompanied by such evidence as the Agent may reasonably require that all actions required pursuant to ARTICLE 7 with respect to Receivables or other Collateral created or held in such name have been taken. (b) The Borrowers will not use any invoices other than invoices in the forms delivered to the Agent prior to the Agreement Date without giving the Agent prior notice of the intended use of a different form of invoice together with a copy of such different form and such evidence as the Agent may reasonably require that any actions required pursuant to ARTICLE 7 with respect to any (i) name, (ii) address or (iii) remittance instructions appearing on such invoice have been taken. (c) Upon the request of the Agent, the Borrowers shall deliver to the Agent, at the Borrowers' expense, copies of customers' invoices or the equivalent, original shipping and delivery receipts or other proof of delivery, customers' statements, customer address lists, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to Receivables and such other documents and information relating to the Receivables as the Agent shall specify. SECTION 8.5 Delivery of Instruments. In the event any Receivable is at any time evidenced by a promissory note, trade acceptance or any other instrument for the payment of money, the Borrowers will, promptly upon request by the Agent, deliver such instrument to the Agent, appropriately endorsed to the Agent, for the benefit of the Lenders. SECTION 8.6 Sales of Inventory. All sales of Inventory will be made in compliance with all requirements of Applicable Law. SECTION 8.7 Ownership and Defense of Title. (a) Except for Permitted Liens, the Borrowers shall be or shall cause another Loan Party to be at all times the sole owners or lessees of each and every item of Collateral and shall not create nor permit any other Loan Party to create any lien on, or sell, lease, exchange, 76 84 assign, transfer, pledge, hypothecate, grant a security interest or security title in or otherwise dispose of, any of the Collateral or any interest therein, except for sales of Inventory in the ordinary course of business, for cash or on open account or on terms of payment ordinarily extended to its customers, and except for dispositions that are otherwise expressly permitted under this Agreement or any Subsidiary Security Agreement. (b) Each Borrower shall defend and cause each other Loan Party to defend its title or leasehold interest in and to, and the Security Interest in, the Collateral against the claims and demands of all Persons. SECTION 8.8 Insurance. (a) The Borrowers shall at all times maintain and cause the other Loan Parties to maintain insurance on the Collateral and their other property against loss or damage by fire, theft (excluding theft by employees), burglary, pilferage, loss in transit and such other hazards as the Agent shall reasonably specify, in amounts not to exceed those obtainable at commercially reasonable rates and under policies issued by insurers acceptable to the Agent in the exercise of its reasonable judgment. All premiums on such insurance shall be paid by the Borrowers and copies of the policies delivered to the Agent. The Borrowers will not use or permit the Inventory or its other property to be used in violation of Applicable Law or in any manner which might render inapplicable any insurance coverage. (b) All insurance policies required under SECTION 8.8(a) relating to Collateral shall name the Agent, for the benefit of the Lenders, as an additional insured and shall contain loss payable clauses in the form submitted to the Borrowers by the Agent, or otherwise in form and substance satisfactory to the Required Lenders, naming the Agent, for the benefit of the Lenders, as loss payee, as its interests may appear, and providing that (i) all proceeds thereunder shall be payable to the Agent, for the benefit of the Lenders, (ii) no such insurance shall be affected by any act or neglect of the insurer or owner of the property described in such policy, and (iii) such policy and loss payable clauses may be canceled, amended or terminated only upon at least 10 days' prior written notice given to the Agent. (c) Any proceeds of insurance referred to in this SECTION 8.8 which are paid to the Agent, for the account of the Lenders, shall be, at the option of the Required Lenders in their sole discretion, either (i) applied to replace the damaged or destroyed property, or (ii) applied to the payment or prepayment of the Secured Obligations, PROVIDED that in the event that the proceeds from any single casualty do not exceed $250,000, then, upon the Borrowers' written request to the Agent, provided that no Default or Event of Default shall have occurred and be continuing, such proceeds shall be disbursed by the Agent to the Borrowers pursuant to such procedures as the Agent shall reasonably establish for application to the replacement of the damaged or destroyed property. 77 85 SECTION 8.9 Location of Offices and Collateral. (a) No Borrower will change the location of its chief executive office or the place where it keeps its books and records relating to the Collateral from the address set forth for it on SCHEDULE 6.1(t) or change its name, its identity or corporate structure from that in effect on the Effective Date, or use any trade name not listed on SCHEDULE 6.1(aa), without giving the Agent 30 days' prior written notice thereof accompanied by such evidence as the Agent may reasonably require that all actions required to be taken pursuant to ARTICLE 7 have been taken. (b) All Inventory, other than Inventory in transit to any such location, will at all times be kept by the applicable Borrower at one or more Permitted Inventory Locations and shall not, without the prior written consent of the Agent, be kept elsewhere (except as a result of sales of Inventory permitted under SECTION 8.7(a)). (c) If any Inventory is in the possession or control of any of a Borrower's agents or processors, the Borrowers shall notify such agents or processors of the Security Interest (and shall promptly provide copies of any such notice to the Agent and the Lenders) and, upon the occurrence of an Event of Default, shall instruct them (and cause them to acknowledge such instruction) to hold all such Inventory for the account of the account of the Lenders, subject to the instructions of the Agent. SECTION 8.10 Records Relating to Collateral. (a) The Borrowers will and will cause their Subsidiaries to at all times (i) keep complete and accurate records of Inventory on a basis consistent with past practices of Heafner so as to permit comparison of Inventory records relating to different time periods, itemizing and describing the kind, type and quantity of Inventory and the applicable Borrower's or Subsidiary's cost thereof and a current price list for such Inventory, and (ii) keep complete and accurate records of all other Collateral. (b) The Borrowers will prepare a physical listing of all Inventory, wherever located, at least annually. SECTION 8.11 Inspection. The Agent and each Lender (by any of their officers, employees or agents) shall have the right, to the extent that the exercise of such right shall be within the control of a Borrower, at any time or times to (a) visit the properties of the Borrowers and the Subsidiaries, inspect the Collateral and the other assets of the Borrowers and the Subsidiaries and inspect and make extracts from the books and records of the Borrowers and the Subsidiaries, including but not limited to management letters prepared by independent accountants, all during customary business hours at such premises; 78 86 (b) discuss the Borrowers' and the Subsidiaries' business, assets, liabilities, financial condition, results of operations and business prospects, insofar as the same are reasonably related to the rights of the Agent or the Lenders hereunder or under any of the Loan Documents, with the Borrowers' and the Subsidiaries' (i) principal officers, (ii) independent accountants, and (iii) any other Person (except that any such discussion with any third parties shall be conducted only in accordance with the Agent's or such Lender's standard operating procedures relating to the maintenance of the confidentiality of confidential information of borrowers); and (c) verify the amount, quantity, value and condition of, or any other matter relating to, any of the Collateral and in this connection to review, audit and make extracts from all records and files related to any of the Collateral. The Borrowers will deliver to the Agent, upon the Agent's request, any instrument necessary for it to obtain records from any service bureau maintaining records on behalf of the Borrowers or any Subsidiary. SECTION 8.12 Information and Reports. (a) Schedule of Receivables. The Borrowers shall deliver to the Agent on or before the Effective Date and not later than the 20th day of each calendar month thereafter a Schedule of Receivables which (i) shall be as of the last Business Day of the immediately preceding month, (ii) shall be reconciled to the Borrowing Base Certificate as of such last Business Day, and (iii) shall set forth a detailed aged trial balance of all of the Borrowers' then existing Receivables, specifying the names, addresses and balance due for each Account Debtor obligated on a Receivable so listed. (b) Schedule of Inventory. The Borrowers shall deliver to the Agent on or before the Effective Date and not later than the 20th day of each calendar month thereafter a Schedule of Inventory as of the last Business Day of the immediately preceding month of the Borrowers, itemizing and describing the kind, type and quantity of Inventory, the applicable Borrower's cost thereof and the location thereof. (c) Borrowing Base Certificate. The Borrowers shall deliver to the Agent on the 20th day of each month, subject to the provisions of SECTION 8.12(e), a Borrowing Base Certificate prepared as of the last Business Day of the preceding month. (d) Notice of Diminution of Value. The Borrowers shall give prompt notice to the Agent of any matter or event which has resulted in, or may result in, the diminution in excess of $500,000 in the value of any of its Collateral, except for any such diminution in the value of any Receivables or Inventory in the ordinary course of business which has been 79 87 appropriately reserved against, as reflected in financial statements previously delivered to the Agent and the Lenders pursuant to ARTICLE 10. (e) Additional Information. The Agent may in its reasonable discretion from time to time request that the Borrowers deliver the schedules and certificates described in SECTIONS 8.12(a), (b), (c) and (d) more or less often and on different schedules than specified in such Sections and the Borrowers will comply with such requests. The Borrowers will also furnish to the Agent and each Lender such other information with respect to the Collateral as the Agent or any Lender may from time to time reasonably request. SECTION 8.13 Power of Attorney. Each Borrower hereby appoints the Agent as its attorney, with power (a) to endorse the name of such Borrower on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Agent's or any Lender's possession, and (b) if a Default or Event of Default exists, to sign the name of such Borrower on any invoice or bill of lading relating to any Receivable, Inventory or other Collateral, on any drafts against customers related to letters of credit, on schedules and assignments of Receivables furnished to the Agent or any Lender by such Borrower, on notices of assignment, financing statements and other public records relating to the perfection or priority of the Security Interest, verifications of account and notices to or from customers. SECTION 8.14 Assignment of Claims Act. Upon the request of the Agent, the Borrowers shall execute any documents or instruments and shall take such steps or actions reasonably required by the Agent so that all monies due or to become due under any contract with the United States of America, the District of Columbia or any state, county, municipality or other domestic or foreign governmental entity, or any department, agency or instrumentality thereof, will be assigned to the Agent, for the benefit of itself and the Lenders, and notice given thereof in accordance with the requirements of the Assignment of Claims Act of 1940, as amended, or any other laws, rules or regulations relating to the assignment of any such contract and monies due to or to become due. 80 88 ARTICLE 9 AFFIRMATIVE COVENANTS The Borrowers covenant and agree that the Borrowers will, as their joint and several obligation, duly and punctually pay the principal of, and interest on, and all other amounts payable with respect to, the Loans and all other Secured Obligations in accordance with the terms of the Loan Documents and that until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided for in SECTION 15.11, each of the Borrowers will, and will cause each of the Subsidiaries to: SECTION 9.1 Preservation of Corporate Existence and Similar Matters. Preserve and maintain its corporate existence, rights, franchises, licenses and privileges in the jurisdiction of its incorporation and qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization (except where any failure so to qualify could not reasonably be expected to have a Materially Adverse Effect). SECTION 9.2 Compliance with Applicable Law. Comply in all material respects with all Applicable Law relating to the Borrowers or such Subsidiary except to the extent being contested in good faith by appropriate proceedings and for which reserves in respect of a Borrower's or such Subsidiary's reasonably anticipated liability have been established in accordance with GAAP. SECTION 9.3 Maintenance of Property. In addition to, and not in derogation of, the requirements of SECTION 8.7 and of the Security Documents, (a) protect and preserve all properties material to its business, including copyrights, patents, trade names and trademarks, and maintain in good repair, working order and condition in all material respects, with reasonable allowance for wear and tear, all tangible properties, and (b) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties necessary for the conduct of its business, so that the business carried on in connection therewith in the ordinary course and in a manner consistent with past practices of Heafner. SECTION 9.4 Conduct of Business. At all times conduct its business in accordance with sound business practices and engage only in the business(es) described in SCHEDULE 6.1(f). SECTION 9.5 Insurance. Maintain, in addition to the coverage required by SECTION 8.8 and the Security Documents, insurance with responsible insurance companies against such risks and in such amounts as is customarily maintained by similar businesses or as may be required by Applicable Law, and from time to time deliver to the Agent or any Lender upon its request a detailed list of the insurance then in effect, stating the names of the insurance 81 89 companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 9.6 Payment of Taxes and Claims. Pay or discharge when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, except that real property ad valorem taxes shall be deemed to have been so paid or discharged if the same are paid before they become delinquent, and (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any properties of any Borrower; except that this SECTION 9.6 shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings and for which reserves in respect of reasonably anticipated liability have been established in accordance with GAAP. SECTION 9.7 Accounting Methods and Financial Records. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and notify the Agent promptly, and in any event within five days after any such account is opened, of the existence, location, number and title of any bank account of a Loan Party not listed on SCHEDULE 6.1(bb). SECTION 9.8 Use of Proceeds. (a) Use the proceeds of (i) the Initial Loans to pay amounts indicated on SCHEDULE 9.8 to the Persons indicated thereon, and (ii) all subsequent Loans only for working capital and general business purposes, including, without being limited to, payment of interest on the Senior Notes and dividends on the KS Preferred in accordance with the provisions of this Agreement, and (b) not use any part of such proceeds to purchase or, to carry or reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or, in any event, for any purpose which would involve a violation of such Regulation U or of Regulation T or X of such Board of Governors, or for any purpose prohibited by law or by the terms and conditions of this Agreement. SECTION 9.9 Hazardous Waste and Substances; Environmental Requirements. In addition to, and not in derogation of, the requirements of SECTION 9.2 and of 82 90 the Security Documents, comply with all Environmental Laws and all Applicable Laws relating to occupational health and safety (except for instances of noncompliance that are being contested in good faith by appropriate proceedings if reserves in respect of any Borrower's or such Subsidiary's reasonably anticipated liability therefor have been appropriately established), promptly notify the Agent of its receipt of any notice of a violation of any such Environmental Laws or other such Applicable Laws and indemnify and hold harmless the Agent and the Lenders from all loss, cost, damage, liability, claim and expense incurred by or imposed upon the Agent or any Lender on account of a Borrower's failure to perform its obligations under this SECTION 9.9. SECTION 9.10 Additional Subsidiaries. Cause each Person that becomes a domestic Subsidiary of Heafner after the Effective Date, promptly upon request by the Agent, to execute and deliver a Subsidiary Guaranty and a Subsidiary Security Agreement or, if requested by the Agent, enter into and cause any such new Subsidiary or any existing Subsidiary Guarantor to enter into an amendment to this Agreement or such other documents as may reasonably be determined by the Agent to be necessary or desirable to add such Subsidiary as an additional "Borrower" hereunder, in each case together with such allonges to the Notes, restated promissory notes, Financing Statements, legal opinions and other certificates, instruments and documents as the Agent may reasonably request. SECTION 9.11 Compliance with Senior Note Indenture. Comply with the terms and provisions of the Senior Note Indenture and the Senior Notes and cause each Guarantor of Heafner's obligations under the Senior Notes to comply with the terms of the Guaranty applicable to it. 83 91 ARTICLE 10 INFORMATION Until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 15.11, the Borrowers will furnish to the Agent and to each Lender at its offices then designated for notices pursuant to SECTION 15.1, the statements, reports, certificates, and other information provided for in this ARTICLE 10. All written information, reports, statements and other papers and data furnished to the Agent or any Lender by or at the request of the Borrowers, whether pursuant to this ARTICLE 10 or any other provision of this Agreement or of any other Loan Document, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Agent and the Lenders true and accurate knowledge of the subject matter. Specifically, the Borrowers will so furnish: SECTION 10.1 Financial Statements. (a) Audited Year-End Statements. As soon as available, but in any event within 90 days after the end of each Fiscal Year, copies of the consolidated and consolidating balance sheets of Heafner and its Consolidated Subsidiaries as at the end of such Fiscal Year and the related consolidated and consolidating statements of income, shareholders' equity and cash flows of Heafner and its Consolidated Subsidiaries for such Fiscal Year, in each case setting forth in comparative form the figures for the previous Fiscal Year, and, as to such consolidated financial statements, reported on, without qualification, by Arthur Andersen LLP or other independent certified public accountants of nationally recognized standing; (b) Monthly Financial Statements. As soon as available after the end of each accounting month, but in any event within 30 days after the end of each accounting month (or 45 days after the end of any such month that is the last month of a Fiscal Quarter), copies of the unaudited consolidated and consolidating balance sheets of Heafner and its Consolidated Subsidiaries as at the end of such accounting month and the related unaudited consolidated and consolidating statements of income and cash flows for Heafner and its Consolidated Subsidiaries for such month and for the portion of the Fiscal Year through such month, certified by a Financial Officer as presenting fairly the financial condition and results of operations of the Borrowers (subject to normal year-end audit adjustments) for the applicable period(s); (c) Opening Balance Sheet. As soon as available after the Effective Date, but in any event on or before July 15, 1998, the opening consolidating and consolidated balance sheets of Heafner and its Consolidated Subsidiaries as of the Effective Date, prepared by Arthur Andersen LLP; all such financial statements to be complete and correct in all material respects and prepared in accordance with GAAP (except, with respect to interim financial statements, for the omission of notes and for the effect of normal year-end audit adjustments) applied consistently throughout the periods reflected therein; and 84 92 (d) Projections. As soon as available, but in any event not later than 30 days after the first day of each Fiscal Year beginning after the Effective Date, Projections for such Fiscal Year in such format and detail as the Agent may reasonably specify. SECTION 10.2 Accountants' Certificate. Together with the financial statements referred to in SECTION 10.1(a), a certificate of such accountants addressed to the Agent (a) stating that in making the examination necessary for the certification of such financial statements, nothing has come to their attention to lead them to believe that any Default or Event of Default exists and, in particular, they have no knowledge of any Default or Event of Default or, if such is not the case, specifying such Default or Event of Default and its nature, and (b) having attached the calculations, prepared by the Borrowers and reviewed by such accountants, required to establish whether or not the Borrowers are in compliance with the covenants contained in SECTIONS 11.1, 11.2, 11.4 and 11.5 as at the date of such financial statements. SECTION 10.3 Officer's Certificate. At the time that the Borrowers furnish the financial statements pursuant to SECTION 10.1(b) for the last month in a Fiscal Quarter, a certificate of the President of Heafner or of a Financial Officer in substantially the form attached hereto as EXHIBIT E, (a) setting forth as at the end of such Fiscal Quarter or Fiscal Year, as the case may be, the calculations required to establish whether or not the Borrowers were in compliance with the requirements of SECTIONS 11.1, 11.2, 11.4 and 11.5 as at the end of each respective period, and (b) stating that, based on a reasonably diligent examination, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default. SECTION 10.4 Copies of Other Reports. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to the Borrowers or the Board of Directors of Heafner by the Borrowers' independent public accountants, including, without limitation, any management report. (b) As soon as practicable, copies of all financial statements and reports that Heafner sends to its shareholders generally in their capacity as such and of all registration statements and all regular or periodic reports which any Borrower shall file with the Securities and Exchange Commission or any successor commission. (c) From time to time and as soon as reasonably practicable following each request, such data, certificates, reports, statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or 85 93 business prospects of a Borrower or any Subsidiary as the Agent or any Lender may reasonably request and that a Borrower has or (except in the case of legal opinions relating to the perfection or priority of the Security Interest) without unreasonable expense can obtain; PROVIDED, HOWEVER, that the Lenders shall, to the extent reasonably practicable, coordinate examinations of the Borrowers' records by their respective internal examiners. The rights of the Agent and the Lenders under this SECTION 10.4 are in addition to and not in derogation of their rights under any other provision of this Agreement or of any other Loan Document. (d) If requested by the Agent or any Lender, the Borrowers will furnish to the Agent and the Lenders statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of the Board of Governors of the Federal Reserve System. SECTION 10.5 Notice of Litigation and Other Matters. Prompt notice of: (a) the commencement, to the extent a Borrower is aware of the same, of all proceedings and investigations by or before any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any other way relating to or affecting any Borrower, any of its Subsidiaries or any of a Borrower's or any of its Subsidiaries' properties, assets or businesses, which is reasonably likely to, singly or together with other pending proceedings or investigations, result in the occurrence of a Default or an Event of Default, or have a Materially Adverse Effect, (b) any amendment of the articles of incorporation or by-laws of a Borrower or any of its Subsidiaries, (c) any change in the business, assets, liabilities, financial condition, results of operations or business prospects of a Borrower or any of its Subsidiaries which has had or is reasonably likely to have, singly or in the aggregate, a Materially Adverse Effect and any change in the executive officers of a Borrower, (d) the discovery or determination by any Loan Party that any computer application (including any computer application of any key supplier, vendor or customer) that is material to the business or operations of any Borrower will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Materially Adverse Effect, (e) the receipt of any notice from or giving of any notice to the trustee under the Senior Note Indenture, together with a copy of such notice, and (f) any Default or Event of Default or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by a Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) to which such Borrower or any of its Subsidiaries is a party or by which any Borrower, any of its Subsidiaries or any Borrower's or any Subsidiary's properties may be bound. SECTION 10.6 ERISA. As soon as possible and in any event within 30 days after a Borrower knows, or has reason to know, that: 86 94 (a) any ERISA Event with respect to a Benefit Plan has occurred or will occur, or (b) the aggregate present value of the Unfunded Vested Accrued Benefits under all Benefit Plans is equal to an amount in excess of $0, or (c) a Borrower or any Subsidiary is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Benefit Plan required by reason of a Borrower's or such Subsidiary's complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan, the Borrowers will furnish to the Agent a certificate of the President of Heafner or a Financial Officer setting forth the details of such event and the action which is proposed to be taken with respect thereto, together with any notice or filing which may be required by the PBGC or other agency of the United States government with respect to such event. 87 95 ARTICLE 11 NEGATIVE COVENANTS Until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 15.11, the Borrowers will not directly or indirectly and, in the case of SECTIONS 11.2 through 11.12, will not permit any Subsidiaries to: SECTION 11.1 Financial Covenants. (a) Permit Net Worth of Heafner and its Consolidated Subsidiaries on a consolidated basis as of the Effective Date to be less than $25,000,000, adjusted by adding to such amount, the excess of the consolidated Net Worth of the Borrowers reflected in the opening balance sheet of Heafner and its Consolidated Subsidiaries, including purchase accounting adjustments thereto, through the Effective Date, over $32,600,000, or, if the consolidated Net Worth of the Borrowers, as adjusted, reflected in such opening balance sheet is less than $32,600,000, by subtracting the amount of such deficit from $25,000,000. (b) Permit Loan Availability at any time to be less than $15,000,000. SECTION 11.2 Debt. Create, assume, or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding any Debt, except that this SECTION 11.2 shall not apply to: (a) Debt of the Loan Parties represented by the Loan Documents, (b) Subordinated Debt, (c) Debt of the Loan Parties represented by the Senior Notes, (d) Debt reflected on SCHEDULE 6.1(j) and refinancings thereof that do not result in an increase in the principal amount of any such Debt outstanding on the date of refinancing or in any other Person becoming obligated thereon, but excluding any such scheduled Debt that is to be paid in full on the Effective Date, (e) Acquired Debt permitted in accordance with SECTION 11.4 and Attributable Debt permitted in accordance with SECTION 11.10, (f) vendor loans, advances and similar financings in an aggregate principal amount outstanding at any time not to exceed $20,000,000, and (g) other Debt in an aggregate principal amount outstanding at any time not to exceed $15,000,000. SECTION 11.3 Guaranties. Become or remain liable with respect to any Guaranty of any obligation of any other Persons, except as listed on SCHEDULE 6.1(j) or pursuant 88 96 to a Guaranty by a Borrower or any Subsidiary of the obligations of a Loan Party (including specifically the Subsidiaries' Guarantees of Heafner's obligations in respect of the Senior Notes). SECTION 11.4 Acquisitions. (a) Acquire, after the Agreement Date, any Business Unit or Investment or, after the Agreement Date, maintain any Investment other than Permitted Investments and the Investments contemplated by the CPW Acquisition Agreement and the ITCO Merger Agreement, EXCEPT that this SECTION 11.4 shall not apply to Acquisitions by Heafner or another Loan Party after the Effective Date of (A) Investments in the capital stock of any other Person organized under the laws of the United States of America or any state thereof which thereupon becomes a Wholly Owned Subsidiary or (B) Business Units located in the United States, provided, that: (i) the aggregate Purchase Price of all such Acquisitions does not exceed $25,000,000 in any Fiscal Year or $40,000,000 during the term of this Agreement, (ii) Heafner or the applicable Loan Party has made available to the Agent, not later than 10 Business Days prior to the proposed date of such Acquisition, the results of any investigation performed by or on behalf of such Loan Party of the target and copies of the Acquisition documents and historical financial statements of the target for at least the three previous years. (iii) the Agent shall have received evidence satisfactory to it of the Loan Parties' continued compliance with the provisions of this Agreement and the other Loan Documents, including, without being limited to, the provisions of SECTIONS 9.4, 9.11 and 11.1, on a pro forma basis after giving effect to such Acquisition, (iv) to the extent financed with Debt other than Acquired Debt or Loans, such Debt shall be payable to the seller and shall be subordinated to the prior payment of the Secured Obligations on terms and conditions satisfactory to the Agent and the Required Lenders, (v) the Agent shall have received evidence satisfactory to it demonstrating on a pro forma basis that Net Income of the target, before provision for interest expense, taxes, depreciation and amortization for the period of 12 consecutive calendar months ended nearest the date of determination, is at least equal to the sum of interest expense and scheduled principal payments on any Debt incurred in connection with payment of the Purchase Price (including Loans and Acquired Debt), and (vi) as requested by the Agent, any new Subsidiary shall have executed and delivered the Subsidiary Guaranty and a Subsidiary Security Agreement, or all Loan Parties, as appropriate, and such new Subsidiary shall have executed and delivered an amendment to this Agreement sufficient to cause such new Subsidiary to become a "Borrower" hereunder, and in either case shall have delivered or caused to be delivered as to such Subsidiary the items referred to in SECTIONS 5.1(a)(3), (4), (5), (6), and (8) and an opinion of counsel for such Subsidiary as to such matters in connection with the 89 97 transactions contemplated by the Subsidiary Guaranty and Subsidiary Security Agreement or such amendment to this Agreement as the Agent may reasonably request. "Purchase Price" means an amount equal to the total consideration paid for such Acquisition, including all cash payments (whether classified as purchase price, noncompete payments, consulting payments, "earn out" or otherwise and without regard to whether such amount is paid in whole or in part at the closing of the Acquisition or over time thereafter, but excluding any finance charges attributable to deferred payments and excluding any salary or other employment compensation paid to a seller for the purpose of retaining such seller's services as an active employee of a Borrower or a Subsidiary), the principal amount of all Acquired Debt and of any Subordinated Debt owing to the seller, and the value (as determined by the board of directors of Heafner, including pursuant to the applicable purchase agreement between the relevant Borrower and the seller, in the case of any property, the fair value of which is not readily ascertainable) of all other property, other than capital stock of Heafner, transferred by Heafner to the seller. (b) Notwithstanding any provision of this Agreement to the contrary, in connection with any merger (or other distribution of the assets) of a Subsidiary that is not a Loan Party with and into (or to) a Loan Party, or any Acquisition of a Business Unit, whether by purchase of stock, merger, or purchase of assets and whether in a single transaction or series of related transactions, by a Borrower, where the value of the assets of such Subsidiary or the Purchase Price of such Acquisition, as the case may be: (i) is less than $10,000,000, Heafner shall have the right to determine whether the Inventory and Receivables so acquired are included in the Borrowing Base, subject to the provision of the definitions "Borrowing Base," "Eligible Inventory" and Eligible Receivables" and any other provisions of this Agreement and the other Loan Documents applicable to the computation and reporting of the Borrowing Base, and if Heafner elects so to include such acquired Inventory and Receivables, then any Subsidiary that owns any such acquired Inventory or Receivables shall execute and deliver to the Agent the agreements, certificates, instruments and other documents referred to in SECTION 11.4(a)(vi) or (ii) is $10,000,000 or more, the Required Lenders shall have the right to determine whether any Inventory or Receivables so acquired are included in the Borrowing Base (subject to the other applicable provisions of this Agreement). SECTION 11.5 Capital Expenditures. Make or incur any Capital Expenditures (excluding Financed Capex and expenditures pursuant to SECTION 11.4) in the aggregate in excess of $12,000,000 for any Fiscal Year, PROVIDED that any amount of such allowance not used in a Fiscal Year may be carried forward, but only to the succeeding Fiscal Year. SECTION 11.6 Restricted Distributions and Payments, Etc. Declare or make any Restricted Distribution or Restricted Payment which, when added to all other Restricted Distributions and Restricted Payments made in the same Fiscal Year of Heafner, would exceed $2,000,000 (exclusive of payments in an aggregate amount not greater than 90 98 $1,500,000 made on or prior to the first anniversary of the Effective Date to employees of ITCO in respect of stock appreciation rights). SECTION 11.7 Merger, Consolidation and Sale of Assets. Merge or consolidate with any other Person or sell, lease or transfer or otherwise dispose of all or a substantial portion of its assets to any Person other than sales of Inventory in the ordinary course of business, EXCEPT that any Loan Party may merge with and into another Loan Party (provided that Heafner shall be the surviving corporation of any merger to which it is a party) and, subject to the provisions of SECTION 11.4(b). any Subsidiary may merge into a Loan Party with such Loan Party as the surviving corporation. SECTION 11.8 Transactions with Affiliates. Except as described on SCHEDULE 11.8, effect any transaction with any Affiliate on a basis less favorable to a Loan Party than would be the case if such transaction had been effected with a Person not an Affiliate. SECTION 11.9 Liens. Create, assume or permit or suffer to exist or to be created or assumed any Lien on any of the Collateral or its other assets, other than Liens listed in CLAUSES (a) through (g) of the definition "Permitted Liens" and (a) Liens securing Acquired Debt, which Liens affect solely capital or fixed assets (and not Receivables or Inventory or proceeds thereof) of the Business Unit Acquired, existing on the date of the related Acquisition and not created in contemplation thereof, (b) Liens securing vendor loans permitted pursuant to SECTION 11.2(f) and (c) Purchase Money Liens (including Capitalized Lease Obligations) securing Debt otherwise permitted pursuant to SECTION 11.2. SECTION 11.10 Sales and Leasebacks. Enter into any arrangement with any Person providing for a Loan Party's leasing from such Person any real or personal property which has been or is to be sold or transferred, directly or indirectly, by a Loan Party to such Person, if the associated Attributable Debt, when added to all other outstanding Attributable Debt (exclusive of any Attributable Debt arising out of the sale/leaseback by ITCO of its Orlando, Florida facility, as contemplated on the Effective Date), would exceed $15,000,000. SECTION 11.11 Amendments of Other Agreements. Amend the interest rate or principal amount or schedule of payments of principal and interest with respect to any Debt (other than the Secured Obligations) or any dividend rate or redemption schedule, applicable to any preferred stock of a Borrower, other than to reduce the interest or dividend rate or to extend any such schedule of payments or redemption schedule, or amend or cause or permit to be amended in any material respect or in any respect that may be adverse to the interests of the Agent or the Lenders, (i) the KS Preferred Stock Purchase Agreement, (ii) the Senior Note Indenture, (iii) prior to consummation of the transactions contemplated thereby, the CPW Acquisition Documents or the ITCO Merger Documents or (iv) the articles or certificate of incorporation of any Loan Party. SECTION 11.12 Commingling. Commingle or permit the commingling of Collateral or proceeds of Collateral with other property of or under the control of any of Heafner or any of its Subsidiaries that is not Collateral or proceeds thereof. 91 99 ARTICLE 12 DEFAULT SECTION 12.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) Default in Payment. The Borrowers shall default in any payment of principal of or interest on any Loan or any Note when and as due (whether at maturity, by reason of acceleration or otherwise). (b) Other Payment Default. The Borrowers shall default in the payment, as and when due, of principal of or interest on, any other Secured Obligation, and such default shall continue for a period of 10 days after written notice thereof has been given to the Borrowers by the Agent. (c) Misrepresentation. Any representation or warranty made or deemed to be made by the Borrowers under this Agreement or any Loan Document, or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made. (d) Default in Performance. The Borrowers shall default in the performance or observance of any term, covenant, condition or agreement to be performed by the Borrowers, contained in (i) ARTICLES 8 (other than SECTIONS 8.3 and 8.4(a)) or 11, or SECTIONS 9.1 (insofar as it requires the preservation of the corporate existence of the Borrowers), 9.8, 10.1, 10.2 OR 10.3, and the Agent shall have delivered to the Borrowers written notice of such default, or (ii) this Agreement (other than as specifically provided for otherwise in this SECTION 12.1) and such default shall continue for a period of 30 days after written notice thereof has been given to the Borrowers by the Agent. (e) Debt Cross-Default. (i) A Borrower or any Subsidiary shall fail to pay when due and payable the principal of or interest on any Debt (other than the Loans) in an amount in excess of $1,000,000, or (ii) the maturity of any such Debt outstanding in a principal amount greater than $1,000,000 shall have (A) been accelerated in accordance with the provisions of any indenture, contract or instrument providing for the creation of or concerning such Indebtedness, or (B) been required to be prepaid prior to the stated 92 100 maturity thereof, including, without being limited to, upon a "Change of Control" as defined in the Senior Note Indenture, or (iii) any event shall have occurred and be continuing which would permit any holder or holders of such Debt outstanding in an amount in excess of $1,000,000, any trustee or agent acting on behalf of such holder or holders or any other Person so to accelerate such maturity, and the Borrowers shall have failed to cure such default prior to the expiration of any applicable cure or grace period. (f) Other Cross-Defaults; Mandatory Redemption. A Borrower or any Subsidiary shall default in the payment when due, or in the performance or observance, of any obligation or condition of any agreement, contract or lease (other than this Agreement, the Security Documents or any such agreement, contract or lease relating to Debt), if the existence of any such defaults, singly or in the aggregate, could in the reasonable judgment of the Agent have a Materially Adverse Effect, PROVIDED, that for the purposes of this provision, where such a default could result only in a monetary loss, a Material Adverse Effect shall not be deemed to have occurred unless the aggregate of such losses would exceed $1,000,000, or any event shall occur or circumstances exist that would result in or permit the holder thereof to require the redemption of the KS Preferred. (g) Voluntary Bankruptcy Proceeding. A Borrower or any Subsidiary shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (h) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against a Borrower or any Subsidiary in any court of competent jurisdiction seeking 93 101 (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of a Borrower, any Subsidiary or of all or any substantial part of the assets, domestic or foreign, of a Borrower or any Subsidiary, and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the relief requested in such case or proceeding against such Borrower or Subsidiary (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (i) Loan Documents. Any "Event of Default" under any Loan Document (other than this Agreement) shall occur or a Borrower shall default in the performance or observance of any material term, covenant, condition or agreement contained in, or the payment of any other sum covenanted to be paid by the Borrowers under any Loan Document (other than this Agreement) that does not expressly provide for "Events of Default," or any provision thereof, other than any nonmaterial provision rendered unenforceable by operation of law, shall cease to be valid and binding. (j) Failure of Agreements. A Borrower shall challenge the validity and binding effect of any provision of any Loan Document after delivery thereof hereunder or shall state in writing its intention to make such a challenge, or any Security Document, after delivery thereof hereunder, shall for any reason (except to the extent permitted by the terms thereof) cease to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. (k) Judgment. A final, unappealable judgment or order for the payment of money in an amount that exceeds the uncontested insurance available therefor by $1,000,000 or more shall be entered against a Borrower by any court and such judgment or order shall continue undischarged or unstayed for 30 days. (l) Attachment. A warrant or writ of attachment or execution or similar process which exceeds $1,000,000 in value shall be issued against any property of a Borrower and such warrant or process shall continue undischarged or unstayed for 30 days. (m) ERISA. In addition to the breach of any other representation and warranty, any ERISA Event with respect to a Benefit Plan shall occur. (n) Qualified Audits. The independent certified public accountants retained by Heafner shall refuse to deliver an opinion in accordance with SECTION 10.1(a) with respect to the annual consolidated financial statements of Heafner and its Consolidated Subsidiaries. (o) Change of Control. Heafner shall cease to own, directly or indirectly, 100% of the issued and outstanding stock of each other Loan Party or a "Change of Control" for purposes of the Senior Note Indenture, the Class B Stock or the Warrant shall occur. 94 102 (p) Fleet Financing. After July 15, 1998, any amount owed to Fleet under and pursuant to the Fleet Financing shall remain outstanding and unpaid or the Fleet Financing shall not have been terminated in writing or any Lien of a tire company vendor to ITCO or its Subsidiaries affecting accounts or other property, other than Inventory, of ITCO or any of its Subsidiaries, shall remain in effect (unless such Lien shall have been subordinated to the Security Interest at least to the same extent that it is subordinated to the Lien in favor of Fleet under the Fleet Financing, or otherwise to the satisfaction of the Agent, such that such accounts or other property, to the extent they otherwise constitute Eligible Receivables, could be included in the computation of the Borrowing Base). SECTION 12.2 Remedies. (a) Automatic Acceleration and Termination of Facilities. Upon the occurrence of an Event of Default specified in SECTION 12.1(g) or (h), (i) the principal of and the interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, shall thereupon become due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything in this Agreement or any of the Loan Documents to the contrary notwithstanding, and (ii) the Commitments and the right of the Borrowers to request Borrowings under this Agreement shall immediately terminate. (b) Other Remedies. If any Event of Default shall have occurred, and during the continuance of any Event of Default, the Agent may, and at the direction of the Required Lenders in their sole and absolute discretion shall, do any of the following: (i) declare the principal of and interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the Loan Documents to the contrary notwithstanding; (ii) terminate the Commitments and any other right of the Borrowers to request borrowings hereunder; (iii) notify, or request the Borrowers to notify, in writing or otherwise, any Account Debtor or obligor with respect to any one or more of the Receivables to make payment to the Agent, for the benefit of the Lenders, or any agent or designee of the Agent, at such address as may be specified by the Agent and if, notwithstanding the giving of any notice, any Account Debtor or other such obligor shall make payments to the Borrowers, the Borrowers shall hold all such payments received in trust for the Agent, for the account of the Lenders, without commingling the same with other funds or property of, or held by, the Borrowers, and shall deliver the same to the Agent or any such agent or designee of the Agent 95 103 immediately upon receipt by the Borrowers in the identical form received, together with any necessary endorsements; (iv) settle or adjust disputes and claims directly with Account Debtors and other obligors on Receivables for amounts and on terms which the Agent considers advisable and in all such cases only the net amounts received by the Agent, for the account of the Lenders, in payment of such amounts, after deductions of costs and attorneys' fees, shall constitute Collateral and the Borrowers shall have no further right to make any such settlements or adjustments or to accept any returns of merchandise; (v) enter upon any premises in which Inventory may be located and, without resistance or interference by the Borrowers, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as the Agent shall choose, without being liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; (vi) require the Borrowers to and the Borrowers shall, without charge to the Agent or any Lender, assemble the Inventory and maintain or deliver it into the possession of the Agent or any agent or representative of the Agent at such place or places as the Agent may designate and as are reasonably convenient to both the Agent and the applicable Borrower; (vii) at the expense of the Borrowers, cause any of the Inventory to be placed in a public or field warehouse, and the Agent shall not be liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; (viii) without notice, demand or other process, and without payment of any rent or any other charge, enter any of the Borrowers' premises and, without breach of the peace, until the Agent, on behalf of the Lenders, completes the enforcement of its rights in the Collateral, take possession of such premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Borrowers' equipment, for the purpose of (A) completing any work in process, preparing any Inventory for disposition and disposing thereof, and (B) collecting any Receivable, and the Agent for the benefit of the Lenders is hereby granted a license or sublicense and all other rights as may be necessary, appropriate or desirable to use the Proprietary Rights in connection with the foregoing, and the rights of the Borrowers under all licenses, sublicenses and franchise agreements shall inure to the Agent for the benefit of the Lenders (PROVIDED, HOWEVER, that any use of any federally registered trademarks as to any goods shall be subject to the control as to the quality of such goods of the owner of such trademarks and the goodwill of the business symbolized thereby); 96 104 (ix) exercise any and all of its rights under any and all of the Security Documents; (x) apply any Collateral consisting of cash to the payment of the Secured Obligations in any order in which the Agent, on behalf of the Lenders, may elect or use such cash in connection with the exercise of any of its other rights hereunder or under any of the Security Documents; (xi) establish or cause to be established one or more Lockboxes or other arrangement for the deposit of proceeds of Receivables, and, in such case, the Borrowers shall cause to be forwarded to the Agent at the Agent's Office, on a daily basis, copies of all checks and other items of payment and deposit slips related thereto deposited in such Lockboxes, together with collection reports in form and substance satisfactory to the Agent; and (xii) exercise all of the rights and remedies of a secured party under the UCC and under any other Applicable Law, including, without limitation, the right, without notice except as specified below and with or without taking possession thereof, to sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Agent, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. Each Borrower agrees that, to the extent notice of sale shall be required by law, at least 10 days' notice to the Borrowers of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. SECTION 12.3 Application of Proceeds. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an Event of Default shall be applied or paid over in accordance with the provisions of SECTION 4.16. THE BORROWERS SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH INTEREST THEREON AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE SECURED OBLIGATIONS. SECTION 12.4 Power of Attorney. In addition to the authorizations granted to the Agent under SECTION 9.13 or under any other provision of this Agreement or of any other Loan Document, during the continuance of an Event of Default, each Borrower hereby irrevocably designates, makes, constitutes and appoints the Agent (and all Persons designated by the Agent from time to time) as the Borrower's true and lawful attorney, and agent in fact, and the 97 105 Agent, or any agent of the Agent, may, without notice to the Borrowers, and at such time or times as the Agent or any such agent in its sole discretion may determine, in the name of a Borrower, the Agent or the Lenders, (a) demand payment of the Receivables, (b) enforce payment of the Receivables by legal proceedings or otherwise, (c) exercise all of any Borrower's rights and remedies with respect to the collection of Receivables, (d) settle, adjust, compromise, extend or renew any or all of the Receivables, (e) settle, adjust or compromise any legal proceedings brought to collect the Receivables, (f) discharge and release the Receivables or any of them, (g) prepare, file and sign the name of a Borrower on any proof of claim in bankruptcy or any similar document against any Account Debtor, (h) prepare, file and sign the name of a Borrower on any notice of Lien, assignment or satisfaction of Lien, or similar document in connection with any of the Collateral, (i) endorse the name of a Borrower upon any chattel paper, document, instrument, notice, freight bill, bill of lading or similar document or agreement relating to the Receivables, the Inventory or any other Collateral, (j) use the stationery of the Borrowers and sign the names of the Borrowers to verifications of the Receivables and on any notice to the Account Debtors, (k) open the Borrowers' mail, (l) notify the post office authorities to change the address for delivery of the Borrowers' mail to an address designated by the Agent, and (m) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Receivables, Inventory or other Collateral to which any Borrower has access. SECTION 12.5 Miscellaneous Provisions Concerning Remedies. (a) Rights Cumulative. The rights and remedies of the Agent and the Lenders under this Agreement, the Notes and each of the Loan Documents shall be cumulative and not exclusive of any rights or remedies which it or they would otherwise have. In exercising such rights and remedies the Agent and the Lenders may be selective and no failure or delay by the Agent or any Lender in exercising any right shall operate as a waiver of it, nor shall any single or 98 106 partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. (b) Waiver of Marshalling. Each Borrower hereby waives any right to require any marshalling of assets and any similar right. (c) Limitation of Liability. Nothing contained in this ARTICLE 12 or elsewhere in this Agreement or in any of the Loan Documents shall be construed as requiring or obligating the Agent, any Lender or any agent or designee of the Agent or any Lender to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any Receivable or any other Collateral or the monies due or to become due thereunder or in connection therewith, or to take any steps necessary to preserve any rights against prior parties, and the Agent, the Lenders and their agents or designees shall have no liability to the Borrowers for actions taken pursuant to this ARTICLE 12, any other provision of this Agreement or any of the Loan Documents so long as the Agent or such Lender shall act in good faith and in a commercially reasonable manner. (d) Appointment of Receiver. In any action under this ARTICLE 12, the Agent shall be entitled during the continuance of an Event of Default, to the fullest extent permitted by Applicable Law, to the appointment of a receiver, without notice of any kind whatsoever, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon such receiver. SECTION 12.6 Trademark License. Each Borrower hereby grants to the Agent for its benefit as Agent and for the benefit of the Lenders, the nonexclusive right and license to use its trademarks for the purposes set forth in SECTION 12.2(b)(viii) and for the purpose of enabling the Agent to realize on the Collateral and to permit any purchaser of any portion of the Collateral through a foreclosure sale or any other exercise of the Agent's rights and remedies under this Agreement and the other Security Documents to use, sell or otherwise dispose of the Collateral bearing any such trademark. Such right and license is granted free of charge, without the requirement that any monetary payment whatsoever be made to the Borrowers or any other Person by the Lenders or the Agent or any purchaser or purchasers of the Collateral. The Borrowers hereby represent, warrant, covenant and agree that they presently have, and shall continue to have, the right, without the approval or consent of others, to grant the license set forth in this SECTION 12.6. 99 107 ARTICLE 13 ASSIGNMENTS SECTION 13.1 Successors and Assigns; Participations. (a) This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Lenders, the Agent, all future holders of the Notes, and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of each Lender. (b) Each Lender may with the consent of the Agent and, so long as no Default or Event of Default has occurred and is continuing, Heafner (which consent shall not be unreasonably withheld) assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Loans at the time owing to it and the Notes held by it) (PROVIDED that no consent shall be required with respect to any assignment to an Eligible Assignee as part of the assigning Lender's Transfer of all or substantially all of its assets of a similar type in connection with any acquisition or divestiture or otherwise); PROVIDED, HOWEVER, that (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender that is subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than the Minimum Commitment (or the assigning Lender's entire remaining Commitment, if less) (except that a Lender may assign less than the Minimum Commitment to its Affiliate), (iii) in the case of a partial assignment, the amount of the Commitment that is retained by the assigning Lender (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than the Minimum Commitment, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register an Assignment and Acceptance, together with any Note or Notes subject to such assignment and an assignment fee in the amount of $2,500, (v) such assignment shall not, without the consent of the Borrowers, require the Borrowers to file a registration statement with the Securities and Exchange Commission or apply to or qualify the Loans or the Notes under the blue sky laws of any state, and (vi) the representation contained in SECTION 13.2 hereof shall be true with respect to any such proposed assignee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (B) the Lender assignor thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement. (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, 100 108 such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in SECTION 6.1(n) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Lender assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitment and Proportionate Share of, and principal amount of the Loans and owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes and evidence satisfactory to the Agent of the Borrowers' consent thereto (if applicable), subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in the form of EXHIBIT D, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and the Borrowers, and (vi) promptly deliver a copy of such Acceptance and Assignment to the Borrowers. Within five Business Days after receipt of notice, the Borrowers shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes. Each surrendered Note or Notes shall be canceled and returned to the Borrowers. 101 109 (f) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment hereunder and the Loans owing to it and the Notes held by it); PROVIDED, HOWEVER, that (i) each such participation (other than to a Lender's own Affiliate) shall be in an amount not less than the Minimum Commitment, (ii) such Lender's obligations under this Agreement (including, without limitation, its Commitment hereunder) shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement, (v) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; PROVIDED, that such Lender may agree with any participant that such Lender will not, without such participant's consent, agree to or approve any waivers or amendments which would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the commitments of such participant, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal or release Collateral securing the Loans (other than Collateral disposed of pursuant to SECTION 8.7 hereof or otherwise in accordance with the terms of this Agreement or the Security Documents), and (vi) any such disposition shall not, without the consent of the Borrowers, require any Borrower to file a registration statement with the Securities and Exchange Commission to apply to qualify the Loans or the Notes under the blue sky law of any state. The Lender selling a participation to any bank or other entity that is not an Affiliate of such Lender shall give prompt notice thereof to the Agent, the other Lenders and the Borrowers. (g) Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this SECTION 13.1, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers, PROVIDED that, prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree with the Borrowers or such Lender (which in the case of an agreement with only such Lender, the Borrowers shall be recognized as third party beneficiaries thereof) to preserve the confidentiality of any confidential information relating to the Borrowers received from such Lender. SECTION 13.2 Representation of Lenders. Each Lender hereby represents that it will make each Loan hereunder as a commercial loan for its own account in the ordinary course of its business; PROVIDED, HOWEVER, that subject to SECTION 13.1 hereof, the disposition of the Notes or other evidence of the Secured Obligations held by any Lender shall at all times be within its exclusive control. 102 110 ARTICLE 14 AGENT SECTION 14.1 Appointment of Agent. Each Lender hereby irrevocably designates and appoints (1) BankBoston as the Agent of such Lender and (2) each of Fleet and FUNB as a Co-Agent under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Agent, as the Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, including, without limitation, to make determinations as to the eligibility of Inventory and Receivables, to establish Additional Reserves and to adjust the advance ratios contained in the definition of "Borrowing Base" (so long as such advance ratios, as adjusted, do not exceed those set forth in the definition of "Borrowing Base" as of the Agreement Date), together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or the other Loan Documents, the Agent shall not have any duties or responsibilities except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. SECTION 14.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. The Agent hereby appoints, authorizes and directs each Lender to act as collateral sub-agent for the Agent for the purposes of perfecting security interests and Liens in Collateral held by such Lender. SECTION 14.3 Exculpatory Provisions. Neither the Agent nor any of its trustees, officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender (or any Lender's participants) for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's, as the case may be, own gross negligence or willful misconduct), or (ii) responsible in any manner to any Lender (or any Lender's participants) for any recitals, statements, representations or warranties made by the Borrowers or any of its Subsidiaries, any Affiliate thereof or any other Person or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the existence, value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or any Collateral or the Security Interest or other Lien or other interest therein or for any failure of the Borrowers, or any Subsidiary of the Borrower or any Affiliate of the Borrowers to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrowers. 103 111 SECTION 14.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with SECTION 13.1. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders (or all Lenders if such action or inaction would have the effect of amending or waiving a breach of any provision of this Agreement that only all the Lenders may amend or waive in accordance with the provisions of SECTION 15.11(b)), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 14.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Borrowers referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders; PROVIDED that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) continue making Loans to the Borrowers on behalf of the Lenders in reliance on the provisions of SECTION 4.7 and take such other action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Lenders. SECTION 14.6 Non-Reliance on Agents and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any Co-Agent nor any of their respective officers, directors, counsel, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent or any Co-Agent hereafter taken, including any review of the affairs of the Borrowers, any Subsidiary or any Affiliate of the Borrowers, shall be deemed to constitute any representation or warranty by the Agent or any Co-Agent to any Lender. Each Lender represents to the Agent and each Co-Agent that it has, independently and without reliance upon the Agent or any Co-Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial (and other) condition and creditworthiness of the Borrowers and the Subsidiaries, and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any Co-Agent or any other Lender, and 104 112 based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial (and other) condition and creditworthiness of the Borrowers and the Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or under the other Loan Documents neither the Agent nor any Co-Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial (and other) condition or creditworthiness of the Borrowers or the Subsidiaries or the Affiliates of the Borrowers which may come into the possession of the Agent, any Co-Agent or any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. SECTION 14.7 Indemnification. (a) The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrowers and without limiting the obligation of the Borrowers or any other Person to do so), Ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, attorneys' fees, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, attorneys' fees, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct or resulting solely from transactions or occurrences that occur at a time after such Lender has assigned all of its interests, rights and obligations under this Agreement pursuant to SECTION 13.1 or, in the case of a Lender to which an assignment is made hereunder pursuant to SECTION 13.1, at a time before such assignment. The agreements in this SECTION 14.7 shall survive the payment of the Notes, the Secured Obligations and all other amounts payable hereunder and the termination of this Agreement. (b) Without limiting the generality of the foregoing provisions of this SECTION 14.7, if the Agent should be sued by any receiver, trustee in bankruptcy, debtor-in-possession or other Person on account of any alleged preference or fraudulent transfer received or alleged to have been received from the Borrowers, any Subsidiary or any other Person as the result of any transaction under the Loan Documents, then any monies paid by the Agent in settlement or satisfaction of such suit, together with all costs and expenses (including attorneys' fees and expenses) incurred by Agent in the defense of same, shall be promptly reimbursed to the Agent by the Lenders to the extent of each Lender's Proportionate Share. (c) Further, without limiting the generality of the foregoing provisions of this SECTION 14.7, if at any time (whether prior to or after the Termination Date) any action or proceeding shall be brought against the Agent by the Borrowers, any Subsidiary, or by any other 105 113 Person claiming by, through or under the Borrowers or any Subsidiary, to recover damages for any act taken or omitted by the Agent under any of the Loan Documents or in the performance of any rights, powers or remedies of the Agent against the Borrowers, any Account Debtor, any Subsidiary, the Collateral or with respect to any Loans, or to obtain any other relief of any kind on account of any transaction between the Agent and the Borrowers, any Subsidiary or any other Person under or in relation to any of the Loan Documents, the Lenders agree to indemnify and hold the Agent harmless with respect thereto and to pay to Agent their respective Proportionate Shares of such amount as the Agent shall be required to pay by reason of a judgment, decree or other order entered in such action or proceeding or by reason of any compromise or settlement agreed to by the Agent, including all interest and costs assessed against the Agent in defending or compromising such action, together with attorneys' fees and other legal expenses paid or incurred by the Agent in connection therewith; PROVIDED, HOWEVER, that no Lender shall be liable to the Agent for any of the foregoing to the extent that they arise from the willful misconduct or gross negligence of the Agent. In the Agent's discretion, the Agent may also reserve for or satisfy any such judgment, decree or order from proceeds of Collateral prior to any distributions therefrom to or for the account of Lenders. SECTION 14.8 Agent in Its Individual Capacity. The institution at the time acting as the Agent and its Affiliates may make loans to, issue letters of credit to or for the account of, accept deposits from and generally engage in any kind of business with the Borrowers, any Subsidiary or any Affiliate of the Borrowers as if it were not the Agent hereunder. With respect to its Commitment, the Loans made or renewed by it and any Note issued to it and any Letter of Credit issued by it, such institution shall have and may exercise the same rights and powers under this Agreement and the other Loan Documents and shall be subject to the same obligations and liabilities as and to the extent set forth herein and in the other Loan Documents for any other Lender. The terms "Lenders" and "Required Lenders" or any other term shall, unless the context clearly otherwise indicates, include such institution in its individual capacity as a Lender or one of the Required Lenders. SECTION 14.9 Successor Collateral Agent. (a) The Agent may resign as Agent upon 30 days' notice to the Lenders and the Borrowers or may be removed by the Lenders (other than the Lender who is also the Agent), or, if there are more than two other Lenders by the Lenders whose Commitment Percentages equal at least 51% of the total Commitment Percentage of all other Lenders; PROVIDED, HOWEVER that such resignation shall not take effect until a successor agent has been appointed. If the Agent shall resign as Agent under this Agreement or be removed, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders and, so long as no Event of Default has occurred and is continuing, subject to approval by the Borrowers (which approval shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. If the Required Lenders have failed to appoint a successor Agent within 30 days of the resignation notice given by the Agent as provided above, then the Agent shall be entitled to appoint a successor agent from among the 106 114 Lenders, subject, so long as no Event of Default has occurred and is continuing, to approval by the Borrowers (which approval shall not be unreasonably withheld). After any retiring Agent's resignation hereunder as Agent or the removal of any Agent, the provisions of SECTION 14.7 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. (b) It is intended that there shall be no violation of any Applicable Law denying or restricting the right of financial institutions to transact business as agent in any jurisdiction. It is recognized that, in case of litigation under any of the Loan Documents, or in case the Agent deems that by reason of present or future laws of any jurisdiction the Agent might be prohibited from or restricted in exercising any of the powers, rights or remedies granted to the Agent or the Lenders hereunder or under any of the Loan Documents or from holding title to or a Lien upon any Collateral or from taking any other action which may be necessary or desirable hereunder or under any of the Loan Documents, the Agent may appoint an additional individual or institution as a separate collateral agent or co-collateral agent which is not so prohibited from or restricted in taking any of such actions or exercising any of such powers, rights or remedies. If the Agent shall appoint an additional individual or institution as a separate collateral agent or co-collateral agent as provided above, each and every remedy, power, right, claim, demand or cause of action intended by any of the Loan Documents to be exercised by or vested in or conveyed to the Agent with respect thereto shall be exercisable by and vested in such separate collateral agent or co-collateral agent, but only to the extent necessary to enable such separate collateral agent or co-collateral agent to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate collateral agent or co-collateral agent shall run to and be enforceable by either of them. Should any instrument from the Lenders be required by the separate collateral agent or co-collateral agent so appointed by Agent in order more fully and certainly to vest in and confirm to him or it such rights, powers, duties and obligations, including without limitation indemnification of such collateral agent or co-collateral agent, any and all of such instruments shall, on request, be executed, acknowledged and delivered by the Lenders. In case any separate collateral agent or co-collateral agent, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, duties and obligations of such separate collateral agent or co-collateral agent, so far as permitted by Applicable Law, shall vest in and be exercised by the Agent until the appointment of a new collateral agent or successor to such separate collateral agent or co-collateral agent. SECTION 14.10 Notices from Agent to Lenders. The Agent shall promptly, upon receipt thereof, forward to each Lender copies of any updated Schedules and of any written notices, reports or other information supplied to it by the Borrowers or any Subsidiary (but which such Person is not required to supply directly to the Lenders). Except to the extent expressly provided in this Agreement or in the other Loan Documents, the Agent shall not be obligated to deliver or disclose to any Lender any of the Agent's internal reports, analysis or investigation or any records or other information in its possession relating to the Borrowers or any of the Subsidiaries or the Affiliates of the Borrowers. 107 115 SECTION 14.11 Declaring Events of Default. Upon the occurrence of a Default, the Agent may, and at the direction of the Required Lenders shall, give such notice or take such other action as may be required hereunder to declare an Event of Default. SECTION 14.12 Co-Agents. For avoidance of doubt, it is expressly acknowledged and agreed by the Agent and each Lender for the benefit of the Co-Agents that, other than any rights or obligations explicitly reserved to or imposed upon the Co-Agents under this Agreement, no Co-Agent, in such capacity, has any rights or obligations hereunder nor shall any Co-Agent, in such capacity, be responsible or accountable to any other party hereto for any action or failure to act hereunder, other than in connection with such explicitly reserved rights or such obligations and then only for claims, damages, losses (other than consequential losses) and other liabilities arising out of such Co-Agent's own gross negligence or willful misconduct. 108 116 ARTICLE 15 MISCELLANEOUS SECTION 15.1 Notices. (a) Method of Communication. Except as specifically provided in this Agreement or in any of the Loan Documents, all notices and the communications hereunder and thereunder shall be in writing or by telephone, subsequently confirmed in writing. Notices in writing shall be delivered personally or sent by certified or registered mail, postage pre-paid, or by overnight courier, telex or facsimile transmission and shall be deemed received in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next Business Day after delivery to the courier, and in the case of telex and facsimile transmission, upon transmittal, PROVIDED that in the case of notices to the Agent, notice shall be deemed to have been given only when such notice is actually received by the Agent. A telephonic notice to the Agent, as understood by the Agent, will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address of which all the other parties are notified in writing by such first party: If to the Borrowers: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093 Attn: Donald C. Roof Facsimile No.: 704 735-6699 with a copy to: J. Michael Gaither, Esq. The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093 Facsimile No.: 704 732-6480 If to the Agent: BankBoston, N.A. 115 Perimeter Center Place, N.E. Suite 500 Atlanta, GA 30346 Attn: Christopher R. Nairne Facsimile No.: 770 393-4166 If to a Lender: At the address of such Lender set forth on the signature pages hereof. 109 117 (c) Agent's Office. The Agent hereby designates its office located at 100 Federal Street, Boston, Massachusetts 02110, or any subsequent office which shall have been specified for such purpose by written notice to the Borrowers, as the office to which payments due are to be made and at which Loans will be disbursed. SECTION 15.2 Expenses. The Borrowers agree, jointly and severally, to pay or reimburse on demand all costs and expenses reasonably (other than pursuant to subsection (b) below as to which such requirement shall not apply) incurred (a) by or on behalf of the Agent, including, without limitation, the reasonable fees and disbursements of counsel, in connection with (i) the negotiation, preparation, execution, delivery, administration, enforcement and termination of this Agreement and each of the other Loan Documents, whenever the same shall be executed and delivered, including, without limitation (A) reasonable out-of-pocket costs and expenses incurred in connection with the administration and interpretation of this Agreement and the other Loan Documents; (B) reasonable costs and expenses of appraisals of the Collateral; (C) the costs and expenses of lien searches; and (D) taxes, fees and other charges for filing the Financing Statements and continuations and the costs and expenses of taking other actions to perfect, protect, and continue the Security Interests; (ii) the preparation, execution and delivery of any waiver, amendment, supplement or consent by the Agent and the Lenders relating to this Agreement or any of the Loan Documents; (iii) sums paid or incurred to pay any amount or take any action required of the Borrowers under the Loan Documents that the Borrowers fail to pay or take; (iv) costs of inspections and verifications of the Collateral, including, without limitation, standard per diem fees charged by the Agent or the Lenders, travel, lodging, and meals for inspections of the Collateral and the Borrowers' operations and books and records by the Agent's and/or the Lenders' agents up to two times per year and whenever an Event of Default exists; (v) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining each Controlled Disbursement Account, Agency Account and Lockbox; and (vi) costs and expenses of preserving and protecting the Collateral; and 110 118 (b) by or on behalf of the Agent or any Lender in connection with (i) consulting, after the occurrence of a Default, with one or more Persons, including appraisers, accountants and lawyers, concerning the value of any Collateral for the Secured Obligations or related to the nature, scope or value of any right or remedy of the Agent or any Lender hereunder or under any of the Loan Documents, including any review of factual matters in connection therewith, which expenses shall include the fees and disbursements of such Persons; and (ii) costs and expenses paid or incurred to obtain payment of the Secured Obligations, enforce the Security Interests, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to prosecute or defend any claim in any way arising out of, related to or connected with, this Agreement or any of the Loan Documents, which expenses shall include the reasonable fees and disbursements of counsel and of experts and other consultants retained by the Agent or any Lender. The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrowers. The Borrowers hereby authorize the Agent and the Lenders to debit the Borrowers' Loan Accounts (by increasing the principal amount of the Loans) in the amount of any such costs and expenses owed by the Borrowers when due. SECTION 15.3 Stamp and Other Taxes. The Borrowers will pay any and all stamp, registration, recordation and similar taxes, fees or charges and shall indemnify the Agent and the Lenders against any and all liabilities with respect to or resulting from any delay in the payment or omission to pay any such taxes, fees or charges, which may be payable or determined to be payable in connection with the execution, delivery, performance or enforcement of this Agreement and any of the Loan Documents or the perfection of any rights or security interest thereunder, including, without limitation, the Security Interest. SECTION 15.4 Setoff. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender, any participant with such Lender in the Loans and each Affiliate of each Lender are hereby authorized by the Borrowers at any time or from time to time, without notice to the Borrowers or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by any Lender or any Affiliate of any Lender or any participant to or for the credit or the account of the Borrowers against and on account of the Secured Obligations irrespective or whether or not (a) the Agent or such Lender shall have made any demand under this Agreement or any of the Loan Documents, or 111 119 (b) the Agent or such Lender shall have declared any or all of the Secured Obligations to be due and payable as permitted by SECTION 12.2 and although such Secured Obligations shall be contingent or unmatured. SECTION 15.5 Consent to Advertising and Publicity. With the prior written consent of the Borrowers, which consent shall not be unreasonably withheld, the Agent, on behalf of the Lenders, may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement, including the name and address of the Borrowers, the amount, interest rate, maturity, collateral for and a general description of the credit facilities provided hereunder and of the Borrowers' business. SECTION 15.6 Reversal of Payments. The Agent and each Lender shall have the continuing and exclusive right to apply, reverse and re-apply any and all payments to any portion of the Secured Obligations in a manner consistent with the terms of this Agreement. To the extent the Borrowers make a payment or payments to the Agent, for the account of the Lenders, or any Lender receives any payment or proceeds of the Collateral for the Borrowers' benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect, as if such payment or proceeds had not been received by the Agent or such Lender. SECTION 15.7 Injunctive Relief. The Borrowers recognize that, in the event the Borrowers fail to perform, observe or discharge any of their obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Agent and the Lenders; therefore, the Borrowers agree that if any Event of Default shall have occurred and be continuing, the Agent and the Lenders, if the Agent or any Lender so requests, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damages. SECTION 15.8 Accounting Matters. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrowers to determine whether they are in compliance with any covenant contained herein, shall, unless this Agreement otherwise provides or unless Required Lenders shall otherwise consent in writing, be performed in accordance with GAAP. SECTION 15.9 Amendments. (a) Except as set forth in SUBSECTION (b) below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived, and any departure therefrom may be consented to by the Required Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders and, in the case of an amendment (other than an amendment described in SECTION 15.9(d)), by the Borrowers, PROVIDED that no such amendment, unless consented to by the Agent, shall alter or affect the rights or responsibilities of the Agent, and in any such event, the failure to observe, 112 120 perform or discharge any such term, covenant, agreement or condition (whether such amendment is executed or such waiver or consent is given before or after such failure) shall not be construed as a breach of such term, covenant, agreement or condition or as a Default or an Event of Default. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. In the event that any such waiver or amendment is requested by the Borrowers, the Agent and the Lenders may require and charge a fee in connection therewith and consideration thereof in such amount as shall be determined by the Agent and the Required Lenders in their discretion. (b) Without the prior unanimous written consent of the Lenders, (i) no amendment, consent or waiver shall (A) affect the amount or extend the time of the obligation of any Lender to make Loans or (B) extend the originally scheduled time or times of payment of the principal of any Loan or (C) alter the time or times of payment of interest on any Loan or of any fees payable for the account of the Lenders or (D) alter the amount of the principal of any Loan or the rate of interest thereon (except with respect to application of the Default Margin under SECTION 5.1(d)) or (E) alter the amount of any commitment fee or other fee payable hereunder for the account of the Lenders or (F) permit any subordination of the principal of or interest on any Loan or (G) permit the subordination of the Security Interests in any Collateral, (ii) no Collateral having an aggregate value greater than $250,000 shall be released by the Agent in any 12-month period other than as specifically permitted in this Agreement or the Security Documents nor shall any Collateral be released at a time when the Agent is entitled to exercise remedies hereunder upon default, nor shall the Borrower or the Guarantor be released from its liability for the Secured Obligations, (iii) except to the extent expressly provided in SECTIONS 4.7 and 14.1, no amendment shall be made to the definition of any of the following terms, "Applicable Margin", "Borrowing Base" (except as otherwise expressly contemplated hereunder) and the defined terms used in such definition, "Eligible Assignee", "Proportionate Share", "Ratable", "Ratable Share", "Commitment Percentage", "Secured Obligations", or "Commitment", (iv) none of the provisions of this SECTION 15.9, the definitions "Lenders" or "Required Lenders", or the provisions of ARTICLE 12 shall be amended, and (v) neither the Agent nor any Lender shall consent to any amendment to or waiver of the amortization, deferral or subordination provisions of any instrument or agreement evidencing or relating to obligations (whether or not Debt) of the Borrowers that are expressly subordinate to any of the Secured Obligations if such amendment or waiver would be adverse to the Lenders in their capacities as Lenders hereunder; 113 121 (vi) no amendment shall be made to any provision in ARTICLE 14, and (vii) no extension of the Termination Date shall be effected; PROVIDED, HOWEVER, that anything herein to the contrary notwithstanding, the Required Lenders shall have the right to waive any Default or Event of Default and the consequences hereunder of such Default or Event of Default provided only that such Default or Event of Default does not arise under SECTION 12.1(g) OR (h) or out of a breach of or failure to perform or observe any term, covenant or condition of this Agreement or any other Loan Document (other than the provisions of ARTICLE 12 of this Agreement) the amendment of which requires the unanimous consent of the Lenders. The Required Lenders shall have the right, with respect to any Default or Event of Default that may be waived by them, to enter into an agreement with the Borrowers providing for the forbearance from the exercise of any remedies provided hereunder or under the other Loan Documents without thereby waiving any such Default or Event of Default. (c) The making of Loans hereunder by the Lenders during the existence of a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default. (d) Notwithstanding any provision of this Agreement or the other Loan Documents to the contrary, no consent, written or otherwise, of the Borrowers shall be necessary or required in connection with any amendment to ARTICLE 14 or Section 4.8, and any amendment to such provisions may be effected solely by and among the Agent and the Lenders, PROVIDED that no such amendment shall impose any obligation on the Borrowers or limit or reduce any right granted hereunder or thereunder to the Borrowers. SECTION 15.10 Assignment. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their rights under this Agreement. SECTION 15.11 Performance of Borrowers' Duties. (a) The Borrowers' obligations under this Agreement and each of the Loan Documents shall be performed by the Borrowers at their sole cost and expense. (b) If the Borrowers shall fail to do any act or thing which they have covenanted to do under this Agreement or any of the Loan Documents, the Agent, on behalf of the Lenders, may (but shall not be obligated to) do the same or cause it to be done either in the name of the Agent or the Lenders or in the name and on behalf of the Borrowers, and each Borrower hereby irrevocably authorizes the Agent so to act. SECTION 15.12 Indemnification. The Borrowers agree to reimburse the Agent and the Lenders for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold harmless the Agent and the Lenders from and against all losses suffered by, the Agent or any Lender in connection with 114 122 (a) the exercise by the Agent or any Lender of any right or remedy granted to it under this Agreement or any of the Loan Documents, (b) any claim, and the prosecution or defense thereof, arising out of or in any way connected with this Agreement or any of the Loan Documents, and (c) the collection or enforcement of the Secured Obligations or any of them, other than such costs, expenses and liabilities arising out of the Agent's or any Lender's gross negligence or willful misconduct. SECTION 15.13 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Agent and the Lenders and any Persons designated by the Agent or the Lenders pursuant to any provisions of this Agreement or any of the Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Secured Obligations remain unpaid or unsatisfied. SECTION 15.14 Survival. Notwithstanding any termination of this Agreement, (a) until all Secured Obligations have been irrevocably paid in full or otherwise satisfied, the Agent, for the benefit of the Lenders, shall retain its Security Interest and shall retain all rights under this Agreement and each of the Security Documents with respect to such Collateral as fully as though this Agreement had not been terminated, (b) the indemnities to which the Agent and the Lenders are entitled under the provisions of this ARTICLE 15 and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Agent and the Lenders against events arising after such termination as well as before, and (c) in connection with the termination of this Agreement and the release and termination of the Security Interests, the Agent, on behalf of itself as agent and the Lenders, may require such assurances and indemnities as it shall reasonably deem necessary or appropriate to protect the Agent and the Lenders against loss on account of such release and termination, including, without limitation, with respect to credits previously applied to the Secured Obligations that may subsequently be reversed or revoked. SECTION 15.15 Titles and Captions. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 15.16 Severability of Provisions. Any provision of this Agreement or any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. 115 123 SECTION 15.17 Governing Law; Waiver of Jury Trial. (a) This Agreement and the Notes shall be governed by and construed in accordance with the laws of the State of New York. (b) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent, BankBoston as the issuer of any Letter of Credit or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Borrower or its properties in the courts of any jurisdiction. (c) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in PARAGRAPH (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in SECTION 15.1. Nothing in this Agreement will affect the right of any party to this Agreement to service of process in any other manner permitted by law. (e) Each Borrower, the Agent and each Lender hereby knowingly, intentionally and voluntarily waive trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced by or against a Borrower, the Agent or such Lender arising out of this Agreement, the Collateral or any assignment thereof or by reason of any other cause or dispute whatsoever between the Borrowers and the Agent or any Lender of any kind or nature. SECTION 15.18 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. 116 124 SECTION 15.19 Reproduction of Documents. This Agreement, each of the Loan Documents and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by the Agent or any Lender, and (c) financial statements, certificates and other information previously or hereafter furnished to the Agent or any Lender, may be reproduced by the Agent or such Lender by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Person may destroy any original document so produced. Each party hereto stipulates that, to the extent permitted by Applicable Law, any such reproduction shall be as admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original shall be in existence and whether or not such reproduction was made by the Agent or such Lender in the regular course of business), and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 15.20 Term of Agreement. This Agreement shall remain in effect from the Agreement Date through the Termination Date and thereafter until all Secured Obligations shall have been irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. SECTION 15.21 Increased Capital. If any Lender shall have determined that the adoption of any applicable law, rule, regulation, guideline, directive or request (whether or not having force of law) regarding capital requirements for banks or bank holding companies, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, in each case after the Agreement Date, or compliance by such Lender with any of the foregoing, imposes or increases a requirement by such Lender to allocate capital resources to such Lender's Commitment to make Loans hereunder which has or would have the effect of reducing the return on such Lender's capital to a level below that which such Lender could have achieved (taking into consideration such Lender's then existing policies with respect to capital adequacy and assuming full utilization of such Lender's capital) but for such adoption, change or compliance by any amount deemed by such Lender to be material: (i) such Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) the Borrowers shall pay to such Lender as an additional fee from time to time on demand such amount as such Lender certifies to be the amount that will compensate it for such reduction. A certificate of such Lender claiming compensation under this SECTION 15.21 shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder and the method by which such amounts were determined. In determining such amount, such Lender may use any reasonable averaging and attribution methods. SECTION 15.22 Pro-Rata Participation. (a) Each Lender agrees that if, as a result of the exercise of a right of setoff, banker's lien or counterclaim or other similar right or the receipt of a secured claim it receives any payment in respect of the Secured Obligations, it shall promptly notify the Agent thereof (and the Agent shall promptly notify the other Lenders). If, as a result of such payment, such 117 125 Lender receives a greater percentage of the Secured Obligations owed to it under this Agreement than the percentage received by any other Lender, such Lender shall purchase a participation (which it shall be deemed to have purchased simultaneously upon the receipt of such payment) in the Secured Obligations then held by such other Lenders so that all such recoveries of principal and interest with respect to all Secured Obligations owed to each Lender shall be pro rata on the basis of its respective amount of the Secured Obligations owed to all Lenders, PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered by or on behalf of the Borrower from such Lender, such purchase shall be rescinded and the purchase price paid for such participation shall be returned to such Lender to the extent of such recovery, together with interest thereon at the rate, if any, required to be paid on the amount recovered from such purchasing Lender. (b) Each Lender which receives such a secured claim shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this SECTION 15.22 to share in the benefits of any recovery on such secured claim. (c) Each Lender shall include in any arrangement or agreement it enters into with any participant in such Lender's interests hereunder, an undertaking by such participant substantially similar to the foregoing SUBSECTIONS (a) and (b). (d) The Borrowers expressly consent to the foregoing arrangements and agree that any holder of a participation in any Secured Obligation so purchased or otherwise acquired of which such Borrower has received notice may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by such Borrower to such holder as fully as if such holder were a holder of such Secured Obligation in the amount of the participation held by such holder. SECTION 15.23 Effect of Effectiveness of this Agreement. From and after the Effective Date, all references in this Agreement or in any other Loan Document (whether delivered pursuant to this Agreement or pursuant to the Existing Loan Agreement) to this Agreement or the "Loan Agreement," and the words "herein," "hereof" and words of like import referring to the Existing Loan Agreement, shall mean and be references to the Existing Loan Agreement as amended and restated in its entirety by this Agreement and all references in this Agreement, in any other Loan Documents (whether delivered pursuant to this Agreement or pursuant to the Existing Loan Agreement) or in any Note to a "Revolving Credit Note," a "Note" and the words "hereof," "herein" and words of like import referring to any Note, shall mean and be references to the Amended and Restated Notes in the form attached to this Agreement as EXHIBIT A, appropriately completed and duly executed and delivered by the Borrowers. 118 126 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts all as of the day and year first written above. BORROWERS: THE J.H. HEAFNER COMPANY, INC. [CORPORATE SEAL] Attest: By: /s/ WILLIAM H. GAITHER ------------------------------------- William H. Gaither /s/ J. MICHAEL GAITHER Chief Executive Officer and President - ------------------------------ J. Michael Gaither Secretary OLIVER & WINSTON, INC. [CORPORATE SEAL] Attest: By: /s/ WILLIAM H. GAITHER ------------------------------------ William H. Gaither /s/ J. MICHAEL GAITHER Chairman and Chief Executive Officer - ------------------------------ J. Michael Gaither Secretary By: /s/ DONALD C. ROOF ------------------------------------- Name: -------------------------------- Title: ------------------------------- ITCO LOGISTICS CORPORATION [CORPORATE SEAL] Attest: By: /s/ WILLIAM H. GAITHER ------------------------------------- Name: -------------------------------- /s/ J. MICHAEL GAITHER Title: - ------------------------------- ------------------------------- Secretary 127 THE SPEED MERCHANT, INC. [CORPORATE SEAL] Attest: By: /s/ WILLIAM H. GAITHER ------------------------------------- Name: -------------------------------- /s/ J. MICHAEL GAITHER Title: - -------------------------------- ------------------------------- Secretary By: /s/ DONALD C. ROOF ------------------------------------- Name: -------------------------------- Title: ------------------------------- 128 AGENT: BANKBOSTON, N.A. By: /s/ CHRISTIAN B. COLSON ----------------------------------- Christian B. Colson Managing Director 129 CO-AGENTS AND LENDERS: FLEET CAPITAL CORPORATION, as Co-Agent and as a Lender By: /s/ ELIZABETH L. WALLER ------------------------------------- Name: -------------------------------- Title: V.P. ------------------------------- Address: Fleet Capital Corporation 300 Galleria Parkway Suite 800 Atlanta, Georgia 30339 Attn: Loan Officer Facsimile No.: (770) 859-2437 130 FIRST UNION NATIONAL BANK, as Co-Agent and as a Lender By: /s/ DOUG BOOTHE ------------------------------------ Name: Doug Boothe Title: Vice President Address: First Union National Bank 301 South College Street, DC-5 Charlotte, North Carolina 28288 Attn: Facsimile No.: (704) 374-2703 131 BANKBOSTON, N.A., as a Lender By: /s/ CHRISTIAN B. COLSON Christian B. Colson Managing Director Address: BankBoston, N.A. 115 Perimeter Center Place, NE Suite 500 Atlanta, Georgia 30346 Attn: Christian B. Colson Facsimile No.: (770) 393-4166 EX-10.2 20 LETTER DATED MAY 20,1998 1 EXHIBIT 10.2 [J. H. HEAFNER COMPANY, INC. LETTERHEAD] May 20, 1998 BankBoston, N.A. Boston, Massachusetts Fleet Capital Corporation Atlanta, Georgia First Union National Bank Charlotte, North Carolina Amended and Restated Loan and Security Agreement dated as of May 20, 1998 Ladies and Gentlemen: We refer to the captioned agreement (the "1998 Loan Agreement") to which each of you is a party as a Lender with one or more of us and to the Loan and Security Agreement dated as of August 4, 1993 (as amended and in effect on the date hereof, the "Fleet Loan Agreement") to which Fleet Capital Corporation is a party as the lender with one or more of us. Unless otherwise defined herein, terms defined in the 1998 Loan Agreement are used herein as therein defined. Pursuant to the Fleet Financing, Fleet makes loans and extends other financial accommodations to ITCO, secured by a security interest in, among other things, the accounts receivable of ITCO and the proceeds thereof ("ITCO's Accounts"). Certain of ITCO's Accounts, at least to the extent they constitute proceeds of ITCO tire inventory, are also subject to security interests in favor of the tire company vendors to ITCO and its Affiliates listed on Annex A hereto (each, a "Vendor"). At or about the date of the Fleet Loan Agreement, ITCO obtained for Fleet's benefit an agreement with each such Vendor to the effect that such Vendor's security interest in ITCO's tire inventory (or a specified part thereof) was senior to the security interest of Fleet in such inventory, while Fleet's interest in ITCO's Accounts was senior to any interest of such Vendor in ITCO's Accounts (the "Vendor Subordination Agreements"), copies of which have been furnished to the Lenders and the Agent. 2 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 2 It is not clear that the Vendor Subordination Agreements can effectively be assigned by Fleet to the Agent for the benefit of the Lenders under the 1998 Loan Agreement in connection with the repayment of all amounts outstanding under the Fleet Financing. Heafner is unable to obtain release of the Vendor's liens or confirmation of the Vendor Subordination Agreements or new, acceptable subordination agreements in favor of the Agent prior to the date established as the closing date of the ITCO Merger and the CPW Acquisition. So long as the Vendors' security interests in ITCO's Accounts are or may be prior to the Lien in favor of the Agent thereon, ITCO's Accounts cannot be included as "Eligible Receivables" in the computation of the Borrowing Base under the 1998 Loan Agreement. Heafner has requested that the Fleet Financing be permitted to remain in effect in accordance with its terms, but subject to the terms, conditions and provisions of this letter agreement, until the Vendors' security interests in ITCO's Accounts are released or Heafner can obtain confirmation of the Vendor Subordination Agreements or new subordination agreements, in either case in favor of the Agent for the benefit of the Lenders, and the Agent and the Lenders and Fleet, in its capacity as the lender under the Fleet Loan Agreement, have agreed to grant such request, upon and subject to the terms, conditions and provisions of this letter agreement. Accordingly, this letter will, upon your execution and delivery thereof, evidence the agreement of the undersigned Loan Parties and each of you in your respective capacities as Lenders, Co-Agents and Agent under the 1998 Loan Agreement and, as to Fleet, in its capacity as lender under the Fleet Loan Agreement as follows (notwithstanding any contrary provision in the 1998 Loan Agreement or any Loan Document or the Fleet Loan Agreement or related loan documents): 1. The Fleet Financing may remain in effect in accordance with its terms until the earlier of (a) July 15, 1998 and (b) the date on which Heafner has delivered to the Agent from each Vendor (i) a confirmation that the Vendor Subordination Agreement to which such Vendor is a party continues in effect for the benefit of the Agent and the Lenders under the 1998 Loan Agreement or (ii) a new subordination agreement at least as favorable to the Agent and the Lenders as the existing Vendor Subordination Agreement to which such Vendor is a party or (iii) evidence satisfactory to the Agent of the complete release of the security interest in favor of such Vendor in the ITCO Accounts, together with appropriate UCC-3s or other necessary release documents in form and substance satisfactory to the Agent. 3 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 3 2. On the earlier of July 15, 1998 and the date on which the condition specified in paragraph 1(b) is satisfied, all amounts outstanding and unpaid under the Fleet Financing, including any charge for prepayment, shall be paid in full, any other obligations provided for to Fleet's satisfaction, the Fleet Financing terminated in writing and Heafner shall obtain and furnish to the Agent signed UCC-3 termination statements and any other documents necessary to evidence of record the release of any and all Liens existing in favor of Fleet as security for the Fleet Financing. 3. During the period from the Effective Date to (but excluding) the date on which the conditions specified in paragraph 2 are satisfied (the "Exception Period"), no Collateral of ITCO or any Subsidiary of ITCO shall be included in computing the Borrowing Base and the aggregate Commitments shall be equal to $50 million (with each Lender's Commitment being proportionately reduced to 50% of the amount shown on Annex A to the 1998 Loan Agreement). 4. During the Exception Period, Fleet shall continue to administer the Fleet Financing in accordance with its past practices and its discretion as the lender thereunder, and neither ITCO nor any of its Subsidiaries shall, nor shall Heafner cause ITCO or any of its Subsidiaries to, (1) make any dividend payment, loan, advance or other distribution to any Loan Party other than ITCO or its Subsidiaries, (2) transfer any assets to any other Person other than in the ordinary course of business of ITCO or such Subsidiary, consistent with past practices, or (3) change the location of any of its offices, the location(s) at which it maintains its books and records or the locations at which Inventory is located, provided that, notwithstanding any provisions of the Fleet Financing to the contrary, unless the Lenders and the Agent otherwise agree in writing, (a) consummation of the ITCO Merger and the execution, delivery and performance (subject to the provisions of this letter agreement) by ITCO, ITCO Logistics and ITCO's Subsidiaries of the Loan Documents to which they are parties shall not constitute a default or event of default under the Fleet Financing, (b) any Event of Default under the 1998 Loan Agreement shall constitute an event of default under the Fleet Loan Agreement, and (c) Fleet shall not declare any default or event of default under the Fleet Loan Agreement or accelerate the obligations owing to Fleet under the Fleet Financing or exercise or attempt to exercise any remedies available to it in respect of the Fleet Financing on default if no Event of Default under the 1998 Loan Agreement or default under the provisions of this paragraph 4 has occurred and is continuing. 4 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 4 5. During the Exception Period, none of the existence of the Fleet Financing, the Liens securing the Fleet Financing, the application of proceeds of collateral for the Fleet Financing to amounts owing to Fleet thereunder, or any other aspect of the Fleet Financing shall constitute a Default or Event of Default under the 1998 Loan Agreement. 6. During the Exception Period, the Borrowers will make no Acquisitions (without the prior approval of the Agent and the Required Lenders). 7. In addition to any other fees or charges payable on the Effective Date or thereafter to the Agent or the Lenders under the Loan Agreement, the borrowers shall pay to the Agent for the ratable benefit of the Lenders, in consideration of the transactions contemplated by this letter agreement, a fee in the amount of $150,000. The parties acknowledge and agree that their intention is to permit ITCO's Accounts to remain acceptable collateral for loans to ITCO (including by Fleet in accordance with the terms and subject to the conditions of the Fleet Financing) without materially increasing the overall amount of Debt that would have been available to the Borrowers had ITCO's Accounts been Eligible Receivables from and after the Effective Date and without subjecting either Fleet under the Fleet Financing or the Agent and the Lenders under the 1998 Loan Agreement to risks not contemplated by the Fleet Financing or the 1998 Loan Agreement, as the case may be. The parties agree that they will cooperate reasonably with each other to give effect to such shared intention and will take such actions and execute and deliver such additional documents and instruments as may reasonably be requested by any other party and necessary to give effect to such shared intention. By their signatures below, each of the Loan Parties, Fleet and each Lender, Co-Agent and the Agent, in their various capacities under the Fleet Financing and the 1998 Loan Agreement, evidence their agreement to the foregoing and their ratification, as applicable, of the terms of the Fleet Financing, the 1998 Loan Agreement and the other Loan Documents, except to the extent expressly modified hereby. Very truly yours, THE J.H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ 5 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 5 OLIVER & WINSTON, INC. By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ THE SPEED MERCHANT, INC. By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ ITCO HOLDING COMPANY, INC. By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ ITCO TIRE COMPANY By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ ITCO TIRE COMPANY OF GEORGIA By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ PHOENIX RACING, INC. By: /s/ WILLIAM H. GAITHER Name: _________________ Title: __________________ 6 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 6 Acknowledged and agreed this 20th day of May 1998: BANK BOSTON, N.A. By: /s/ CHRISTIAN B. COLSON Christian B. Colson Managing Director FLEET CAPITAL CORPORATION By:_________________________ Name:____________________ Title:___________________ FIRST UNION NATIONAL BANK By:_________________________ Name:____________________ Title:___________________ 7 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 6 Acknowledged and agreed this 20th day of May 1998: BANK BOSTON, N.A. By:____________________________ Christian B. Colson Managing Director FLEET CAPITAL CORPORATION By: /s/ ELIZABETH L. WALLER Name: E. L. Waller Title: V.P. FIRST UNION NATIONAL BANK By:____________________________ Name:_______________________ Title:______________________ 8 BankBoston, N.A. Fleet Capital Corporation First Union National Bank May 20, 1998 Page 6 Acknowledged and agreed this 20th day of May 1998: BANK BOSTON, N.A. By:____________________________ Christian B. Colson Managing Director FLEET CAPITAL CORPORATION By:____________________________ Name:_______________________ Title:______________________ FIRST UNION NATIONAL BANK By: /s/ DOUG BOOTHE Name: Doug Boothe Title: Vice President 9 ANNEX A VENDORS Pirelli Armstrong Tire Corporation Dayton Tire, Division of Bridgestone/Firestone, Inc. Michelin Tire Corporation The Uniroyal Goodrich Tire Company The Kelly-Springfield Tire Company TBC Corporation Lee Tire & Rubber Company Dunlop Tire Corporation Bridgestone Tire, a division of Bridgestone/Firestone, Inc. EX-10.3 21 GUARANTIES DATED MAY 20, 1998 1 EXHIBIT 10.3 GUARANTY (Subsidiary) Dated as of May 20, 1998 ITCO TIRE COMPANY, a North Carolina corporation (the "Guarantor"), hereby agrees in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent for the financial institutions party from time to time to the Loan Agreement (as defined below), as follows: Section 1. Cross References and Definitions. (a) Reference is made to the Amended and Restated Loan and Security Agreement, dated on or about the date hereof (the same as it may hereafter be amended, modified, supplemented or restated from time to time being referred to as the "Loan Agreement"), by and among The J.H. Heafner Company, Inc., a California corporation, Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders parties thereto from time to time, the Co-Agents and the Agent. (b) For the purposes of this Guaranty: "Agent" and "Lender" each have the meaning ascribed to such term in the Loan Agreement and "Lender" also means and includes each subsequent holder of a Note. "Obligor" means any obligor, maker, endorser, acceptor, surety or guarantor (other than the Guarantor), from time to time, of any Secured Obligation. (c) Unless otherwise defined in this Guaranty, terms used herein which are defined in the Loan Agreement shall have the same meaning herein as therein ascribed to them. Section 2. Guaranty. (a) Guaranty. In consideration of the execution and delivery by the Lenders of the Loan Agreement and as a condition precedent to the making of loans and other financial accommodations to the Borrowers by the Lenders thereunder, the Guarantor, as primary obligor and not as surety merely, hereby guarantees absolutely and unconditionally to the Agent and the Lenders the due and punctual payment, when and as due (whether upon demand, at maturity, by reason of acceleration or otherwise), and performance of all Secured Obligations, whether now existing or hereafter arising (hereinafter referred to as the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, but not limited to, reasonable legal fees and disbursements) which may be incurred by the Agent or any Lender in enforcing their respective rights under this Guaranty. The liability of the Guarantor under this Guaranty is primary, unlimited and unconditional, and shall be enforceable before, concurrently or after any claim or demand is made or suit is filed against any Borrower or any other Obligor and before, 2 concurrently or after any proceeding by the Agent against any Collateral or other security for the Guaranteed Obligations and shall be effective regardless of the solvency or insolvency of any Borrower or any other Obligor at any time, the extension or modification of any of the Guaranteed Obligations by operation of law or the subsequent reorganization, merger or consolidation of any Borrower or any change in its composition, nature, ownership, personnel or location, and this Guaranty shall be a continuing guaranty of any and all notes given in extension or renewal of the Guaranteed Obligations. The Guarantor acknowledges, agrees and confirms that this is a guaranty of payment and not of collection only and that demand for payment may be made hereunder on any number of occasions in the amount of all or any portion of the Guaranteed Obligations then due and no single demand shall exhaust the rights of the Agent or the Lenders hereunder. Further, the Guarantor hereby agrees that all proceeds of Collateral owned by it shall be applied to the Secured Obligations on a daily basis as and when received by the Agent as provided in the Loan Agreement as fully as if such Collateral and proceeds were owned by the Borrowers. (b) Payment by Guarantor. If the Borrowers shall fail to pay, when due and payable, any Guaranteed Obligation, the Guarantor will, without demand or notice, immediately pay the same to the Agent for the account of the Lenders. If any Guaranteed Obligation would be subject to acceleration, but such acceleration is enjoined or stayed, the Guarantor will to the extent permitted by Applicable Law, purchase such Guaranteed Obligation for a price equal to the outstanding principal amount thereof, plus such accrued interest and other amounts as would have been payable had such Guaranteed Obligation been paid or prepaid at the time of such purchase. All payments by the Guarantor under this Guaranty shall be made without any setoff, counterclaim or deduction whatsoever, and in the same currency and funds as are required to be paid by the Borrowers. (c) Waiver. The Guarantor waives without any requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, (i) diligence, presentment, demand, protest and notice of any kind whatsoever, (ii) any requirement that the Agent or any Lender exhaust any right or take any action against any Obligor or other Person or any of the Collateral or other security for the Guaranteed Obligations, (iii) the benefit of all principles or provisions of Applicable Law which are or might be in conflict with the terms of this Guaranty, (iv) notice of acceptance hereof, (v) notice of Default or Event of Default, (vi) notice of any and all favorable and unfavorable information, financial or other, about the Borrowers, any Obligor or other Person, heretofore, now or hereafter learned or acquired by the Agent or any Lender, (vii) all other notice to which such Guarantor or Obligor might otherwise be entitled, (viii) all defenses, set-offs and counterclaims of any kind whatsoever (but not the right to bring an independent action), (ix) notice of the existence or creation of any Guaranteed Obligations, (x) notice of any alteration, amendment, increase, extension or exchange of any of the Guaranteed Obligations, (xi) notice of any amendments, modifications or supplements to the Loan Agreement or any Loan Document, (xii) notice of any release of Collateral or other security for the Guaranteed Obligations or any compromise or settlement with respect thereto, (xiii) all diligence in collection or protection of or realization upon the Collateral 2 3 or any of the Guaranteed Obligations, and (xiv) the right to require the Agent to proceed against any Obligor. (d) Consents. The Guarantor consents without the requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, that (i) the time of payment of any Guaranteed Obligation may be extended, (ii) any provision of the Loan Agreement or any Loan Document may be amended, waived or modified, (iii) any Obligor may be released from its obligations or other obligors or Guarantor substituted therefor or added, (iv) any Collateral or other property now or hereafter securing the Guaranteed Obligations may be released, exchanged, substituted, compromised or subordinated in whole or in part or any security may be added, and (v) the Agent may proceed against the Guarantor or any Obligor without proceeding against any other Obligor. (e) Guarantor Bound. The Guarantor will remain bound under this Guaranty notwithstanding any changes, extensions, exchanges, substitutions, releases, compromises, subordinations, amendments, waivers or modifications or any other circumstances, whether or not referred to in CLAUSES (c) OR (d) above, which might otherwise constitute a legal or equitable discharge of a guaranty. (f) Absolute Obligation. The obligations of the Guarantor hereunder are irrespective of and shall not be dependent upon or affected by (i) the validity, legality or enforceability of the Loan Agreement, the Note(s) or any Loan Document, (ii) the existence, value or condition of any of the Collateral or other security for the Guaranteed Obligations, (iii) the validity, perfection or priority of the Security Interest in any of the Collateral or other security, (iv) any action or failure to take action by the Agent or any Lender under, or with respect to, the Loan Agreement, the Note(s), any Loan Document, any Guaranteed Obligation, any Obligor or any of the Collateral or other security, (v) any other dealings among the Agent, the Lenders, the Borrowers or any Obligor, or (vi) any present or future law or order of any government or agency thereof purporting to reduce, amend or otherwise affect any obligations of the Borrowers or any Guarantor. (g) Recovery of Payments. In the event that any or all of the amounts guaranteed by the Guarantor are or were paid by the Borrowers or any other Obligor or are or were paid or reduced by application of the proceeds of any Collateral, and all or any part of such payment is recovered from the Agent or any Lender under any applicable bankruptcy or insolvency law or otherwise, the liability of the Guarantor under this Guaranty shall continue and remain in full force and effect to the extent permitted by Applicable Law. (h) Waiver of Reimbursement, Subrogation. The Guarantor hereby waives, to the fullest extent permitted by Applicable Law, any and all rights of subrogation, indemnification, reimbursement, contribution or similar rights which the Guarantor may have against the Borrowers or any Obligor or any Collateral, other security or otherwise until all Secured Obligations have been paid in full. The provisions of this SUBSECTION (h) shall survive the termination of this Guaranty. 3 4 (i) Binding Nature of Certain Adjudications. Upon written notice of the institution by the Agent or any Lender of any action or proceedings, legal or otherwise, for the adjudication of any controversy with the Borrowers, the Guarantor will be conclusively bound by the adjudication in any such action or proceedings and by a judgment, award or decree entered therein. The Guarantor waives the right to assert in any action or proceeding brought by the Agent or any Lender, upon the Loan Agreement, the Note(s) or any Loan Document, any offsets or counterclaims which such Guarantor may have with respect thereto (other than (subject to SECTION 2(g)) payment of the Secured Obligations). (j) Validity and Enforceability of Guaranty. The Guarantor will take all action required so that the guaranty contained herein will at all times be a binding obligation of the Guarantor enforceable in accordance with its terms. Section 3. Representations and Warranties. The Guarantor represents and warrants to the Agent and the Lenders as follows: (a) Organization; Power; Qualification. The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) Authorization of Guaranty. The Guarantor has the right and power and has taken all necessary action to authorize it to guarantee the Guaranteed Obligations hereunder and to execute, deliver and perform this Guaranty in accordance with its terms. This Guaranty has been duly executed and delivered by the duly authorized officers of the Guarantor and is a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms. (c) Compliance of Guaranty With Laws, Etc. The execution, delivery and performance of this Guaranty in accordance with its terms and the guaranty of the Guaranteed Obligations hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to the Guarantor, (ii) conflict with, result in a breach of or constitute a default under (A) the articles of incorporation or by-laws of the Guarantor, (B) any material provisions of any indenture, agreement or other instrument to which the Guarantor is a party or by which it or any of its properties may be bound or (C) any Governmental Approval, or (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 the Guarantor, except Liens created pursuant to the Loan Documents. (d) Financial Interest. The Guarantor is a Wholly Owned Subsidiary of The J.H. Heafner Company and is engaged in a related and mutually interdependent business with the Borrowers and will derive indirect financial and business advantages and benefits from the Loans and other financial accommodations that the Lenders may make to the Borrowers 4 5 Section 4. Litigation. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE GUARANTOR ARISING OUT OF THIS GUARANTY OR OUT OF THE GUARANTOR'S SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AMONG OR BETWEEN THE GUARANTOR, ANY LENDER AND THE AGENT, OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE GUARANTOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY AGREE THAT THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND THE AGENT OR SUCH LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS GUARANTY OR THE LOAN DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. THE GUARANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE GUARANTOR AT THE ADDRESS OF THE GUARANTOR SET FORTH HEREIN. THE NONEXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY APPROPRIATE JURISDICTION. Section 5. Right of Setoff. Upon the occurrence and during the continuation of any Event of Default, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Guarantor against any and all of the Guaranteed Obligations now or hereafter existing, whether or not demand shall have been made under this Guaranty and although such Guaranteed Obligations may be contingent and unmatured. Each Lender agrees promptly to notify the Guarantor after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to any other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 6. Titles and Captions. Titles and captions of Sections and subsections in this Guaranty are for convenience only, and neither limit nor amplify the provisions of this Guaranty. 5 6 Section 7. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 8. Governing Law. This Guaranty shall be construed in accordance with and governed by the law of the State of New York, without regard to principles of conflicts of laws. Section 9. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns. Section 10. Miscellaneous. This Guaranty and the other agreements contemplated by this Guaranty supersede all prior negotiations, agreements and understandings, and constitute the entire agreement between the parties with respect to the subject matter thereof. All the provisions of this Guaranty shall be binding upon the Guarantor and its successors and assigns, and each Lender may assign or transfer any of its rights under this Guaranty in connection with the transfer of its interests under the Loan Agreement in accordance with the terms thereof. Any term, covenant, agreement or condition of this Guaranty may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by the Agent and the Required Lenders and, in the case of any amendment, also by the Guarantor. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the instance and for the specific purpose for which given and no waiver of any condition, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Guaranty, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, provision, warranty, representation, agreement or covenant contained in this Guaranty. The failure of the Agent or any Lender at any time or times to require performance of any provisions of this Guaranty shall in no manner affect the right to enforce the same. Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. Section 11. Notices. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 15.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of the Guarantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof, and the address of the Lenders shall be as provided from time to time pursuant to SECTION 15.1 of the Loan Agreement. The Guarantor agrees that if any notification of intended disposition of Collateral or other security for the Guaranteed Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such 6 7 notification given in accordance with the provisions of this SECTION 11, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. Section 12. Limitation on Guaranteed Obligations. The obligations of the Guarantor hereunder shall be limited to an aggregate amount that is equal to the largest amount that would not render the obligations of the Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code (Title 11 of the United States Code) or any comparable provision of Applicable Law. 7 8 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed by its duly authorized officer(s) as of the day and year first written above. [Corporate Seal] ITCO TIRE COMPANY By: /s/ WILLIAM H. GAITHER Name:________________________ Title:_______________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, North Carolina 27893 Attest: /s/ J. MICHAEL GAITHER Name:___________________ Title:__________________ 8 9 GUARANTY (Subsidiary) Dated as of May 20, 1998 ITCO TIRE COMPANY OF GEORGIA, a Virginia corporation (the "Guarantor"), hereby agrees in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent for the financial institutions party from time to time to the Loan Agreement (as defined below), as follows: Section 1. Cross References and Definitions. (a) Reference is made to the Amended and Restated Loan and Security Agreement, dated on or about the date hereof (the same as it may hereafter be amended, modified, supplemented or restated from time to time being referred to as the "Loan Agreement"), by and among The J.H. Heafner Company, Inc., a California corporation, Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders parties thereto from time to time, the Co-Agents and the Agent. (b) For the purposes of this Guaranty: "Agent" and "Lender" each have the meaning ascribed to such term in the Loan Agreement and "Lender" also means and includes each subsequent holder of a Note. "Obligor" means any obligor, maker, endorser, acceptor, surety or guarantor (other than the Guarantor), from time to time, of any Secured Obligation. (c) Unless otherwise defined in this Guaranty, terms used herein which are defined in the Loan Agreement shall have the same meaning herein as therein ascribed to them. Section 2. Guaranty. (a) Guaranty. In consideration of the execution and delivery by the Lenders of the Loan Agreement and as a condition precedent to the making of loans and other financial accommodations to the Borrowers by the Lenders thereunder, the Guarantor, as primary obligor and not as surety merely, hereby guarantees absolutely and unconditionally to the Agent and the Lenders the due and punctual payment, when and as due (whether upon demand, at maturity, by reason of acceleration or otherwise), and performance of all Secured Obligations, whether now existing or hereafter arising (hereinafter referred to as the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, but not limited to, reasonable legal fees and disbursements) which may be incurred by the Agent or any Lender in enforcing their respective rights under this Guaranty. The liability of the Guarantor under this Guaranty is primary, unlimited and unconditional, and shall be enforceable before, concurrently or after any claim or demand is made or suit is filed against any Borrower or any other Obligor and before, 10 concurrently or after any proceeding by the Agent against any Collateral or other security for the Guaranteed Obligations and shall be effective regardless of the solvency or insolvency of any Borrower or any other Obligor at any time, the extension or modification of any of the Guaranteed Obligations by operation of law or the subsequent reorganization, merger or consolidation of any Borrower or any change in its composition, nature, ownership, personnel or location, and this Guaranty shall be a continuing guaranty of any and all notes given in extension or renewal of the Guaranteed Obligations. The Guarantor acknowledges, agrees and confirms that this is a guaranty of payment and not of collection only and that demand for payment may be made hereunder on any number of occasions in the amount of all or any portion of the Guaranteed Obligations then due and no single demand shall exhaust the rights of the Agent or the Lenders hereunder. Further, the Guarantor hereby agrees that all proceeds of Collateral owned by it shall be applied to the Secured Obligations on a daily basis as and when received by the Agent as provided in the Loan Agreement as fully as if such Collateral and proceeds were owned by the Borrowers. (b) Payment by Guarantor. If the Borrowers shall fail to pay, when due and payable, any Guaranteed Obligation, the Guarantor will, without demand or notice, immediately pay the same to the Agent for the account of the Lenders. If any Guaranteed Obligation would be subject to acceleration, but such acceleration is enjoined or stayed, the Guarantor will to the extent permitted by Applicable Law, purchase such Guaranteed Obligation for a price equal to the outstanding principal amount thereof, plus such accrued interest and other amounts as would have been payable had such Guaranteed Obligation been paid or prepaid at the time of such purchase. All payments by the Guarantor under this Guaranty shall be made without any setoff, counterclaim or deduction whatsoever, and in the same currency and funds as are required to be paid by the Borrowers. (c) Waiver. The Guarantor waives without any requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, (i) diligence, presentment, demand, protest and notice of any kind whatsoever, (ii) any requirement that the Agent or any Lender exhaust any right or take any action against any Obligor or other Person or any of the Collateral or other security for the Guaranteed Obligations, (iii) the benefit of all principles or provisions of Applicable Law which are or might be in conflict with the terms of this Guaranty, (iv) notice of acceptance hereof, (v) notice of Default or Event of Default, (vi) notice of any and all favorable and unfavorable information, financial or other, about the Borrowers, any Obligor or other Person, heretofore, now or hereafter learned or acquired by the Agent or any Lender, (vii) all other notice to which such Guarantor or Obligor might otherwise be entitled, (viii) all defenses, set-offs and counterclaims of any kind whatsoever (but not the right to bring an independent action), (ix) notice of the existence or creation of any Guaranteed Obligations, (x) notice of any alteration, amendment, increase, extension or exchange of any of the Guaranteed Obligations, (xi) notice of any amendments, modifications or supplements to the Loan Agreement or any Loan Document, (xii) notice of any release of Collateral or other security for the Guaranteed Obligations or any compromise or settlement with respect thereto, (xiii) all diligence in collection or protection of or realization upon the Collateral 2 11 or any of the Guaranteed Obligations, and (xiv) the right to require the Agent to proceed against any Obligor. (d) Consents. The Guarantor consents without the requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, that (i) the time of payment of any Guaranteed Obligation may be extended, (ii) any provision of the Loan Agreement or any Loan Document may be amended, waived or modified, (iii) any Obligor may be released from its obligations or other obligors or Guarantor substituted therefor or added, (iv) any Collateral or other property now or hereafter securing the Guaranteed Obligations may be released, exchanged, substituted, compromised or subordinated in whole or in part or any security may be added, and (v) the Agent may proceed against the Guarantor or any Obligor without proceeding against any other Obligor. (e) Guarantor Bound. The Guarantor will remain bound under this Guaranty notwithstanding any changes, extensions, exchanges, substitutions, releases, compromises, subordinations, amendments, waivers or modifications or any other circumstances, whether or not referred to in CLAUSES (c) OR (d) above, which might otherwise constitute a legal or equitable discharge of a guaranty. (f) Absolute Obligation. The obligations of the Guarantor hereunder are irrespective of and shall not be dependent upon or affected by (i) the validity, legality or enforceability of the Loan Agreement, the Note(s) or any Loan Document, (ii) the existence, value or condition of any of the Collateral or other security for the Guaranteed Obligations, (iii) the validity, perfection or priority of the Security Interest in any of the Collateral or other security, (iv) any action or failure to take action by the Agent or any Lender under, or with respect to, the Loan Agreement, the Note(s), any Loan Document, any Guaranteed Obligation, any Obligor or any of the Collateral or other security, (v) any other dealings among the Agent, the Lenders, the Borrowers or any Obligor, or (vi) any present or future law or order of any government or agency thereof purporting to reduce, amend or otherwise affect any obligations of the Borrowers or any Guarantor. (g) Recovery of Payments. In the event that any or all of the amounts guaranteed by the Guarantor are or were paid by the Borrowers or any other Obligor or are or were paid or reduced by application of the proceeds of any Collateral, and all or any part of such payment is recovered from the Agent or any Lender under any applicable bankruptcy or insolvency law or otherwise, the liability of the Guarantor under this Guaranty shall continue and remain in full force and effect to the extent permitted by Applicable Law. (h) Waiver of Reimbursement, Subrogation. The Guarantor hereby waives, to the fullest extent permitted by Applicable Law, any and all rights of subrogation, indemnification, reimbursement, contribution or similar rights which the Guarantor may have against the Borrowers or any Obligor or any Collateral, other security or otherwise until all Secured Obligations have been paid in full. The provisions of this SUBSECTION (h) shall survive the termination of this Guaranty. 3 12 (i) Binding Nature of Certain Adjudications. Upon written notice of the institution by the Agent or any Lender of any action or proceedings, legal or otherwise, for the adjudication of any controversy with the Borrowers, the Guarantor will be conclusively bound by the adjudication in any such action or proceedings and by a judgment, award or decree entered therein. The Guarantor waives the right to assert in any action or proceeding brought by the Agent or any Lender, upon the Loan Agreement, the Note(s) or any Loan Document, any offsets or counterclaims which such Guarantor may have with respect thereto (other than (subject to SECTION 2(g)) payment of the Secured Obligations). (j) Validity and Enforceability of Guaranty. The Guarantor will take all action required so that the guaranty contained herein will at all times be a binding obligation of the Guarantor enforceable in accordance with its terms. Section 3. Representations and Warranties. The Guarantor represents and warrants to the Agent and the Lenders as follows: (a) Organization; Power; Qualification. The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) Authorization of Guaranty. The Guarantor has the right and power and has taken all necessary action to authorize it to guarantee the Guaranteed Obligations hereunder and to execute, deliver and perform this Guaranty in accordance with its terms. This Guaranty has been duly executed and delivered by the duly authorized officers of the Guarantor and is a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms. (c) Compliance of Guaranty With Laws, Etc. The execution, delivery and performance of this Guaranty in accordance with its terms and the guaranty of the Guaranteed Obligations hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to the Guarantor, (ii) conflict with, result in a breach of or constitute a default under (A) the articles of incorporation or by-laws of the Guarantor, (B) any material provisions of any indenture, agreement or other instrument to which the Guarantor is a party or by which it or any of its properties may be bound or (C) any Governmental Approval, or (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 the Guarantor, except Liens created pursuant to the Loan Documents. (d) Financial Interest. The Guarantor is a Wholly Owned Subsidiary of The J.H. Heafner Company and is engaged in a related and mutually interdependent business with the Borrowers and will derive indirect financial and business advantages and benefits from the Loans and other financial accommodations that the Lenders may make to the Borrowers 4 13 Section 4. Litigation. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE GUARANTOR ARISING OUT OF THIS GUARANTY OR OUT OF THE GUARANTOR'S SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AMONG OR BETWEEN THE GUARANTOR, ANY LENDER AND THE AGENT, OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE GUARANTOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY AGREE THAT THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND THE AGENT OR SUCH LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS GUARANTY OR THE LOAN DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. THE GUARANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE GUARANTOR AT THE ADDRESS OF THE GUARANTOR SET FORTH HEREIN. THE NONEXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY APPROPRIATE JURISDICTION. Section 5. Right of Setoff. Upon the occurrence and during the continuation of any Event of Default, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Guarantor against any and all of the Guaranteed Obligations now or hereafter existing, whether or not demand shall have been made under this Guaranty and although such Guaranteed Obligations may be contingent and unmatured. Each Lender agrees promptly to notify the Guarantor after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to any other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 6. Titles and Captions. Titles and captions of Sections and subsections in this Guaranty are for convenience only, and neither limit nor amplify the provisions of this Guaranty. 5 14 Section 7. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 8. Governing Law. This Guaranty shall be construed in accordance with and governed by the law of the State of New York, without regard to principles of conflicts of laws. Section 9. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns. Section 10. Miscellaneous. This Guaranty and the other agreements contemplated by this Guaranty supersede all prior negotiations, agreements and understandings, and constitute the entire agreement between the parties with respect to the subject matter thereof. All the provisions of this Guaranty shall be binding upon the Guarantor and its successors and assigns, and each Lender may assign or transfer any of its rights under this Guaranty in connection with the transfer of its interests under the Loan Agreement in accordance with the terms thereof. Any term, covenant, agreement or condition of this Guaranty may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by the Agent and the Required Lenders and, in the case of any amendment, also by the Guarantor. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the instance and for the specific purpose for which given and no waiver of any condition, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Guaranty, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, provision, warranty, representation, agreement or covenant contained in this Guaranty. The failure of the Agent or any Lender at any time or times to require performance of any provisions of this Guaranty shall in no manner affect the right to enforce the same. Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. Section 11. Notices. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 15.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of the Guarantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof, and the address of the Lenders shall be as provided from time to time pursuant to SECTION 15.1 of the Loan Agreement. The Guarantor agrees that if any notification of intended disposition of Collateral or other security for the Guaranteed Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such 6 15 notification given in accordance with the provisions of this SECTION 11, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. Section 12. Limitation on Guaranteed Obligations. The obligations of the Guarantor hereunder shall be limited to an aggregate amount that is equal to the largest amount that would not render the obligations of the Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code (Title 11 of the United States Code) or any comparable provision of Applicable Law. 7 16 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed by its duly authorized officer(s) as of the day and year first written above. [Corporate Seal] ITCO TIRE COMPANY OF GEORGIA By: /s/ WILLIAM H. GAITHER Name:________________________ Title:_______________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, North Carolina 27893 Attest: /s/ J. MICHAEL GAITHER Name:___________________ Title:__________________ 8 17 GUARANTY (Subsidiary) Dated as of May 20, 1998 ITCO LOGISTICS CORPORATION, a Delaware corporation (the "Guarantor"), hereby agrees in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent for the financial institutions party from time to time to the Loan Agreement (as defined below), as follows: Section 1. Cross References and Definitions. (a) Reference is made to the Amended and Restated Loan and Security Agreement, dated on or about the date hereof (the same as it may hereafter be amended, modified, supplemented or restated from time to time being referred to as the "Loan Agreement"), by and among The J.H. Heafner Company, Inc., a California corporation, Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders parties thereto from time to time, the Co-Agents and the Agent. (b) For the purposes of this Guaranty: "Agent" and "Lender" each have the meaning ascribed to such term in the Loan Agreement and "Lender" also means and includes each subsequent holder of a Note. "Obligor" means any obligor, maker, endorser, acceptor, surety or guarantor (other than the Guarantor), from time to time, of any Secured Obligation. (c) Unless otherwise defined in this Guaranty, terms used herein which are defined in the Loan Agreement shall have the same meaning herein as therein ascribed to them. Section 2. Guaranty. (a) Guaranty. In consideration of the execution and delivery by the Lenders of the Loan Agreement and as a condition precedent to the making of loans and other financial accommodations to the Borrowers by the Lenders thereunder, the Guarantor, as primary obligor and not as surety merely, hereby guarantees absolutely and unconditionally to the Agent and the Lenders the due and punctual payment, when and as due (whether upon demand, at maturity, by reason of acceleration or otherwise), and performance of all Secured Obligations, whether now existing or hereafter arising (hereinafter referred to as the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, but not limited to, reasonable legal fees and disbursements) which may be incurred by the Agent or any Lender in enforcing their respective rights under this Guaranty. The liability of the Guarantor under this Guaranty is primary, unlimited and unconditional, and shall be enforceable before, concurrently or after any claim or demand is made or suit is filed against any Borrower or any other Obligor and before, 18 concurrently or after any proceeding by the Agent against any Collateral or other security for the Guaranteed Obligations and shall be effective regardless of the solvency or insolvency of any Borrower or any other Obligor at any time, the extension or modification of any of the Guaranteed Obligations by operation of law or the subsequent reorganization, merger or consolidation of any Borrower or any change in its composition, nature, ownership, personnel or location, and this Guaranty shall be a continuing guaranty of any and all notes given in extension or renewal of the Guaranteed Obligations. The Guarantor acknowledges, agrees and confirms that this is a guaranty of payment and not of collection only and that demand for payment may be made hereunder on any number of occasions in the amount of all or any portion of the Guaranteed Obligations then due and no single demand shall exhaust the rights of the Agent or the Lenders hereunder. Further, the Guarantor hereby agrees that all proceeds of Collateral owned by it shall be applied to the Secured Obligations on a daily basis as and when received by the Agent as provided in the Loan Agreement as fully as if such Collateral and proceeds were owned by the Borrowers. (b) Payment by Guarantor. If the Borrowers shall fail to pay, when due and payable, any Guaranteed Obligation, the Guarantor will, without demand or notice, immediately pay the same to the Agent for the account of the Lenders. If any Guaranteed Obligation would be subject to acceleration, but such acceleration is enjoined or stayed, the Guarantor will to the extent permitted by Applicable Law, purchase such Guaranteed Obligation for a price equal to the outstanding principal amount thereof, plus such accrued interest and other amounts as would have been payable had such Guaranteed Obligation been paid or prepaid at the time of such purchase. All payments by the Guarantor under this Guaranty shall be made without any setoff, counterclaim or deduction whatsoever, and in the same currency and funds as are required to be paid by the Borrowers. (c) Waiver. The Guarantor waives without any requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, (i) diligence, presentment, demand, protest and notice of any kind whatsoever, (ii) any requirement that the Agent or any Lender exhaust any right or take any action against any Obligor or other Person or any of the Collateral or other security for the Guaranteed Obligations, (iii) the benefit of all principles or provisions of Applicable Law which are or might be in conflict with the terms of this Guaranty, (iv) notice of acceptance hereof, (v) notice of Default or Event of Default, (vi) notice of any and all favorable and unfavorable information, financial or other, about the Borrowers, any Obligor or other Person, heretofore, now or hereafter learned or acquired by the Agent or any Lender, (vii) all other notice to which such Guarantor or Obligor might otherwise be entitled, (viii) all defenses, set-offs and counterclaims of any kind whatsoever (but not the right to bring an independent action), (ix) notice of the existence or creation of any Guaranteed Obligations, (x) notice of any alteration, amendment, increase, extension or exchange of any of the Guaranteed Obligations, (xi) notice of any amendments, modifications or supplements to the Loan Agreement or any Loan Document, (xii) notice of any release of Collateral or other security for the Guaranteed Obligations or any compromise or settlement with respect thereto, (xiii) all diligence in collection or protection of or realization upon the Collateral 2 19 or any of the Guaranteed Obligations, and (xiv) the right to require the Agent to proceed against any Obligor. (d) Consents. The Guarantor consents without the requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, that (i) the time of payment of any Guaranteed Obligation may be extended, (ii) any provision of the Loan Agreement or any Loan Document may be amended, waived or modified, (iii) any Obligor may be released from its obligations or other obligors or Guarantor substituted therefor or added, (iv) any Collateral or other property now or hereafter securing the Guaranteed Obligations may be released, exchanged, substituted, compromised or subordinated in whole or in part or any security may be added, and (v) the Agent may proceed against the Guarantor or any Obligor without proceeding against any other Obligor. (e) Guarantor Bound. The Guarantor will remain bound under this Guaranty notwithstanding any changes, extensions, exchanges, substitutions, releases, compromises, subordinations, amendments, waivers or modifications or any other circumstances, whether or not referred to in CLAUSES (c) OR (d) above, which might otherwise constitute a legal or equitable discharge of a guaranty. (f) Absolute Obligation. The obligations of the Guarantor hereunder are irrespective of and shall not be dependent upon or affected by (i) the validity, legality or enforceability of the Loan Agreement, the Note(s) or any Loan Document, (ii) the existence, value or condition of any of the Collateral or other security for the Guaranteed Obligations, (iii) the validity, perfection or priority of the Security Interest in any of the Collateral or other security, (iv) any action or failure to take action by the Agent or any Lender under, or with respect to, the Loan Agreement, the Note(s), any Loan Document, any Guaranteed Obligation, any Obligor or any of the Collateral or other security, (v) any other dealings among the Agent, the Lenders, the Borrowers or any Obligor, or (vi) any present or future law or order of any government or agency thereof purporting to reduce, amend or otherwise affect any obligations of the Borrowers or any Guarantor. (g) Recovery of Payments. In the event that any or all of the amounts guaranteed by the Guarantor are or were paid by the Borrowers or any other Obligor or are or were paid or reduced by application of the proceeds of any Collateral, and all or any part of such payment is recovered from the Agent or any Lender under any applicable bankruptcy or insolvency law or otherwise, the liability of the Guarantor under this Guaranty shall continue and remain in full force and effect to the extent permitted by Applicable Law. (h) Waiver of Reimbursement, Subrogation. The Guarantor hereby waives, to the fullest extent permitted by Applicable Law, any and all rights of subrogation, indemnification, reimbursement, contribution or similar rights which the Guarantor may have against the Borrowers or any Obligor or any Collateral, other security or otherwise until all Secured Obligations have been paid in full. The provisions of this SUBSECTION (h) shall survive the termination of this Guaranty. 3 20 (i) Binding Nature of Certain Adjudications. Upon written notice of the institution by the Agent or any Lender of any action or proceedings, legal or otherwise, for the adjudication of any controversy with the Borrowers, the Guarantor will be conclusively bound by the adjudication in any such action or proceedings and by a judgment, award or decree entered therein. The Guarantor waives the right to assert in any action or proceeding brought by the Agent or any Lender, upon the Loan Agreement, the Note(s) or any Loan Document, any offsets or counterclaims which such Guarantor may have with respect thereto (other than (subject to SECTION 2(g)) payment of the Secured Obligations). (j) Validity and Enforceability of Guaranty. The Guarantor will take all action required so that the guaranty contained herein will at all times be a binding obligation of the Guarantor enforceable in accordance with its terms. Section 3. Representations and Warranties. The Guarantor represents and warrants to the Agent and the Lenders as follows: (a) Organization; Power; Qualification. The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) Authorization of Guaranty. The Guarantor has the right and power and has taken all necessary action to authorize it to guarantee the Guaranteed Obligations hereunder and to execute, deliver and perform this Guaranty in accordance with its terms. This Guaranty has been duly executed and delivered by the duly authorized officers of the Guarantor and is a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms. (c) Compliance of Guaranty With Laws, Etc. The execution, delivery and performance of this Guaranty in accordance with its terms and the guaranty of the Guaranteed Obligations hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to the Guarantor, (ii) conflict with, result in a breach of or constitute a default under (A) the articles of incorporation or by-laws of the Guarantor, (B) any material provisions of any indenture, agreement or other instrument to which the Guarantor is a party or by which it or any of its properties may be bound or (C) any Governmental Approval, or (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 the Guarantor, except Liens created pursuant to the Loan Documents. (d) Financial Interest. The Guarantor is a Wholly Owned Subsidiary of The J.H. Heafner Company and is engaged in a related and mutually interdependent business with the Borrowers and will derive indirect financial and business advantages and benefits from the Loans and other financial accommodations that the Lenders may make to the Borrowers 4 21 Section 4. Litigation. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE GUARANTOR ARISING OUT OF THIS GUARANTY OR OUT OF THE GUARANTOR'S SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AMONG OR BETWEEN THE GUARANTOR, ANY LENDER AND THE AGENT, OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE GUARANTOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY AGREE THAT THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND THE AGENT OR SUCH LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS GUARANTY OR THE LOAN DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. THE GUARANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE GUARANTOR AT THE ADDRESS OF THE GUARANTOR SET FORTH HEREIN. THE NONEXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY APPROPRIATE JURISDICTION. Section 5. Right of Setoff. Upon the occurrence and during the continuation of any Event of Default, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Guarantor against any and all of the Guaranteed Obligations now or hereafter existing, whether or not demand shall have been made under this Guaranty and although such Guaranteed Obligations may be contingent and unmatured. Each Lender agrees promptly to notify the Guarantor after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to any other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 6. Titles and Captions. Titles and captions of Sections and subsections in this Guaranty are for convenience only, and neither limit nor amplify the provisions of this Guaranty. 5 22 Section 7. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 8. Governing Law. This Guaranty shall be construed in accordance with and governed by the law of the State of New York, without regard to principles of conflicts of laws. Section 9. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns. Section 10. Miscellaneous. This Guaranty and the other agreements contemplated by this Guaranty supersede all prior negotiations, agreements and understandings, and constitute the entire agreement between the parties with respect to the subject matter thereof. All the provisions of this Guaranty shall be binding upon the Guarantor and its successors and assigns, and each Lender may assign or transfer any of its rights under this Guaranty in connection with the transfer of its interests under the Loan Agreement in accordance with the terms thereof. Any term, covenant, agreement or condition of this Guaranty may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by the Agent and the Required Lenders and, in the case of any amendment, also by the Guarantor. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the instance and for the specific purpose for which given and no waiver of any condition, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Guaranty, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, provision, warranty, representation, agreement or covenant contained in this Guaranty. The failure of the Agent or any Lender at any time or times to require performance of any provisions of this Guaranty shall in no manner affect the right to enforce the same. Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. Section 11. Notices. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 15.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of the Guarantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof, and the address of the Lenders shall be as provided from time to time pursuant to SECTION 15.1 of the Loan Agreement. The Guarantor agrees that if any notification of intended disposition of Collateral or other security for the Guaranteed Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such 6 23 notification given in accordance with the provisions of this SECTION 11, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. Section 12. Limitation on Guaranteed Obligations. The obligations of the Guarantor hereunder shall be limited to an aggregate amount that is equal to the largest amount that would not render the obligations of the Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code (Title 11 of the United States Code) or any comparable provision of Applicable Law. 7 24 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed by its duly authorized officer(s) as of the day and year first written above. [Corporate Seal] ITCO LOGISTICS CORPORATION By: /s/ WILLIAM H. GAITHER Name:________________________ Title:_______________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, North Carolina 27893 Attest: /s/ J. MICHAEL GAITHER Name: ____________________ Title:____________________ 8 25 GUARANTY (Subsidiary) Dated as of May 20, 1998 PHOENIX RACING, INC., a California corporation (the "Guarantor"), hereby agrees in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent for the financial institutions party from time to time to the Loan Agreement (as defined below), as follows: Section 1. Cross References and Definitions. (a) Reference is made to the Amended and Restated Loan and Security Agreement, dated on or about the date hereof (the same as it may hereafter be amended, modified, supplemented or restated from time to time being referred to as the "Loan Agreement"), by and among The J.H. Heafner Company, Inc., a California corporation, Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders parties thereto from time to time, the Co-Agents and the Agent. (b) For the purposes of this Guaranty: "Agent" and "Lender" each have the meaning ascribed to such term in the Loan Agreement and "Lender" also means and includes each subsequent holder of a Note. "Obligor" means any obligor, maker, endorser, acceptor, surety or guarantor (other than the Guarantor), from time to time, of any Secured Obligation. (c) Unless otherwise defined in this Guaranty, terms used herein which are defined in the Loan Agreement shall have the same meaning herein as therein ascribed to them. Section 2. Guaranty. (a) Guaranty. In consideration of the execution and delivery by the Lenders of the Loan Agreement and as a condition precedent to the making of loans and other financial accommodations to the Borrowers by the Lenders thereunder, the Guarantor, as primary obligor and not as surety merely, hereby guarantees absolutely and unconditionally to the Agent and the Lenders the due and punctual payment, when and as due (whether upon demand, at maturity, by reason of acceleration or otherwise), and performance of all Secured Obligations, whether now existing or hereafter arising (hereinafter referred to as the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, but not limited to, reasonable legal fees and disbursements) which may be incurred by the Agent or any Lender in enforcing their respective rights under this Guaranty. The liability of the Guarantor under this Guaranty is primary, unlimited and unconditional, and shall be enforceable before, concurrently or after any claim or demand is made or suit is filed against any Borrower or any other Obligor and before, 26 concurrently or after any proceeding by the Agent against any Collateral or other security for the Guaranteed Obligations and shall be effective regardless of the solvency or insolvency of any Borrower or any other Obligor at any time, the extension or modification of any of the Guaranteed Obligations by operation of law or the subsequent reorganization, merger or consolidation of any Borrower or any change in its composition, nature, ownership, personnel or location, and this Guaranty shall be a continuing guaranty of any and all notes given in extension or renewal of the Guaranteed Obligations. The Guarantor acknowledges, agrees and confirms that this is a guaranty of payment and not of collection only and that demand for payment may be made hereunder on any number of occasions in the amount of all or any portion of the Guaranteed Obligations then due and no single demand shall exhaust the rights of the Agent or the Lenders hereunder. Further, the Guarantor hereby agrees that all proceeds of Collateral owned by it shall be applied to the Secured Obligations on a daily basis as and when received by the Agent as provided in the Loan Agreement as fully as if such Collateral and proceeds were owned by the Borrowers. (b) Payment by Guarantor. If the Borrowers shall fail to pay, when due and payable, any Guaranteed Obligation, the Guarantor will, without demand or notice, immediately pay the same to the Agent for the account of the Lenders. If any Guaranteed Obligation would be subject to acceleration, but such acceleration is enjoined or stayed, the Guarantor will to the extent permitted by Applicable Law, purchase such Guaranteed Obligation for a price equal to the outstanding principal amount thereof, plus such accrued interest and other amounts as would have been payable had such Guaranteed Obligation been paid or prepaid at the time of such purchase. All payments by the Guarantor under this Guaranty shall be made without any setoff, counterclaim or deduction whatsoever, and in the same currency and funds as are required to be paid by the Borrowers. (c) Waiver. The Guarantor waives without any requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, (i) diligence, presentment, demand, protest and notice of any kind whatsoever, (ii) any requirement that the Agent or any Lender exhaust any right or take any action against any Obligor or other Person or any of the Collateral or other security for the Guaranteed Obligations, (iii) the benefit of all principles or provisions of Applicable Law which are or might be in conflict with the terms of this Guaranty, (iv) notice of acceptance hereof, (v) notice of Default or Event of Default, (vi) notice of any and all favorable and unfavorable information, financial or other, about the Borrowers, any Obligor or other Person, heretofore, now or hereafter learned or acquired by the Agent or any Lender, (vii) all other notice to which such Guarantor or Obligor might otherwise be entitled, (viii) all defenses, set-offs and counterclaims of any kind whatsoever (but not the right to bring an independent action), (ix) notice of the existence or creation of any Guaranteed Obligations, (x) notice of any alteration, amendment, increase, extension or exchange of any of the Guaranteed Obligations, (xi) notice of any amendments, modifications or supplements to the Loan Agreement or any Loan Document, (xii) notice of any release of Collateral or other security for the Guaranteed Obligations or any compromise or settlement with respect thereto, (xiii) all diligence in collection or protection of or realization upon the Collateral 2 27 or any of the Guaranteed Obligations, and (xiv) the right to require the Agent to proceed against any Obligor. (d) Consents. The Guarantor consents without the requirement of any notice to or further assent by the Guarantor, to the fullest extent permitted by Applicable Law, that (i) the time of payment of any Guaranteed Obligation may be extended, (ii) any provision of the Loan Agreement or any Loan Document may be amended, waived or modified, (iii) any Obligor may be released from its obligations or other obligors or Guarantor substituted therefor or added, (iv) any Collateral or other property now or hereafter securing the Guaranteed Obligations may be released, exchanged, substituted, compromised or subordinated in whole or in part or any security may be added, and (v) the Agent may proceed against the Guarantor or any Obligor without proceeding against any other Obligor. (e) Guarantor Bound. The Guarantor will remain bound under this Guaranty notwithstanding any changes, extensions, exchanges, substitutions, releases, compromises, subordinations, amendments, waivers or modifications or any other circumstances, whether or not referred to in CLAUSES (c) OR (d) above, which might otherwise constitute a legal or equitable discharge of a guaranty. (f) Absolute Obligation. The obligations of the Guarantor hereunder are irrespective of and shall not be dependent upon or affected by (i) the validity, legality or enforceability of the Loan Agreement, the Note(s) or any Loan Document, (ii) the existence, value or condition of any of the Collateral or other security for the Guaranteed Obligations, (iii) the validity, perfection or priority of the Security Interest in any of the Collateral or other security, (iv) any action or failure to take action by the Agent or any Lender under, or with respect to, the Loan Agreement, the Note(s), any Loan Document, any Guaranteed Obligation, any Obligor or any of the Collateral or other security, (v) any other dealings among the Agent, the Lenders, the Borrowers or any Obligor, or (vi) any present or future law or order of any government or agency thereof purporting to reduce, amend or otherwise affect any obligations of the Borrowers or any Guarantor. (g) Recovery of Payments. In the event that any or all of the amounts guaranteed by the Guarantor are or were paid by the Borrowers or any other Obligor or are or were paid or reduced by application of the proceeds of any Collateral, and all or any part of such payment is recovered from the Agent or any Lender under any applicable bankruptcy or insolvency law or otherwise, the liability of the Guarantor under this Guaranty shall continue and remain in full force and effect to the extent permitted by Applicable Law. (h) Waiver of Reimbursement, Subrogation. The Guarantor hereby waives, to the fullest extent permitted by Applicable Law, any and all rights of subrogation, indemnification, reimbursement, contribution or similar rights which the Guarantor may have against the Borrowers or any Obligor or any Collateral, other security or otherwise until all Secured Obligations have been paid in full. The provisions of this SUBSECTION (h) shall survive the termination of this Guaranty. 3 28 (i) Binding Nature of Certain Adjudications. Upon written notice of the institution by the Agent or any Lender of any action or proceedings, legal or otherwise, for the adjudication of any controversy with the Borrowers, the Guarantor will be conclusively bound by the adjudication in any such action or proceedings and by a judgment, award or decree entered therein. The Guarantor waives the right to assert in any action or proceeding brought by the Agent or any Lender, upon the Loan Agreement, the Note(s) or any Loan Document, any offsets or counterclaims which such Guarantor may have with respect thereto (other than (subject to SECTION 2(g)) payment of the Secured Obligations). (j) Validity and Enforceability of Guaranty. The Guarantor will take all action required so that the guaranty contained herein will at all times be a binding obligation of the Guarantor enforceable in accordance with its terms. Section 3. Representations and Warranties. The Guarantor represents and warrants to the Agent and the Lenders as follows: (a) Organization; Power; Qualification. The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) Authorization of Guaranty. The Guarantor has the right and power and has taken all necessary action to authorize it to guarantee the Guaranteed Obligations hereunder and to execute, deliver and perform this Guaranty in accordance with its terms. This Guaranty has been duly executed and delivered by the duly authorized officers of the Guarantor and is a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms. (c) Compliance of Guaranty With Laws, Etc. The execution, delivery and performance of this Guaranty in accordance with its terms and the guaranty of the Guaranteed Obligations hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to the Guarantor, (ii) conflict with, result in a breach of or constitute a default under (A) the articles of incorporation or by-laws of the Guarantor, (B) any material provisions of any indenture, agreement or other instrument to which the Guarantor is a party or by which it or any of its properties may be bound or (C) any Governmental Approval, or (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 the Guarantor, except Liens created pursuant to the Loan Documents. (d) Financial Interest. The Guarantor is a Wholly Owned Subsidiary of The J.H. Heafner Company and is engaged in a related and mutually interdependent business with the Borrowers and will derive indirect financial and business advantages and benefits from the Loans and other financial accommodations that the Lenders may make to the Borrowers 4 29 Section 4. Litigation. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE GUARANTOR ARISING OUT OF THIS GUARANTY OR OUT OF THE GUARANTOR'S SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AMONG OR BETWEEN THE GUARANTOR, ANY LENDER AND THE AGENT, OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE GUARANTOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. THE GUARANTOR, THE AGENT AND EACH LENDER HEREBY AGREE THAT THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND THE AGENT OR SUCH LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS GUARANTY OR THE LOAN DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. THE GUARANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE GUARANTOR AT THE ADDRESS OF THE GUARANTOR SET FORTH HEREIN. THE NONEXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY APPROPRIATE JURISDICTION. Section 5. Right of Setoff. Upon the occurrence and during the continuation of any Event of Default, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Guarantor against any and all of the Guaranteed Obligations now or hereafter existing, whether or not demand shall have been made under this Guaranty and although such Guaranteed Obligations may be contingent and unmatured. Each Lender agrees promptly to notify the Guarantor after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to any other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have. Section 6. Titles and Captions. Titles and captions of Sections and subsections in this Guaranty are for convenience only, and neither limit nor amplify the provisions of this Guaranty. 5 30 Section 7. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 8. Governing Law. This Guaranty shall be construed in accordance with and governed by the law of the State of New York, without regard to principles of conflicts of laws. Section 9. Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns. Section 10. Miscellaneous. This Guaranty and the other agreements contemplated by this Guaranty supersede all prior negotiations, agreements and understandings, and constitute the entire agreement between the parties with respect to the subject matter thereof. All the provisions of this Guaranty shall be binding upon the Guarantor and its successors and assigns, and each Lender may assign or transfer any of its rights under this Guaranty in connection with the transfer of its interests under the Loan Agreement in accordance with the terms thereof. Any term, covenant, agreement or condition of this Guaranty may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by the Agent and the Required Lenders and, in the case of any amendment, also by the Guarantor. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the instance and for the specific purpose for which given and no waiver of any condition, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Guaranty, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, provision, warranty, representation, agreement or covenant contained in this Guaranty. The failure of the Agent or any Lender at any time or times to require performance of any provisions of this Guaranty shall in no manner affect the right to enforce the same. Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. Section 11. Notices. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 15.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of the Guarantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof, and the address of the Lenders shall be as provided from time to time pursuant to SECTION 15.1 of the Loan Agreement. The Guarantor agrees that if any notification of intended disposition of Collateral or other security for the Guaranteed Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such 6 31 notification given in accordance with the provisions of this SECTION 11, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. Section 12. Limitation on Guaranteed Obligations. The obligations of the Guarantor hereunder shall be limited to an aggregate amount that is equal to the largest amount that would not render the obligations of the Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code (Title 11 of the United States Code) or any comparable provision of Applicable Law. 7 32 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed by its duly authorized officer(s) as of the day and year first written above. [Corporate Seal] PHOENIX RACING, INC. By: /s/ WILLIAM H. GAITHER Name:_________________________ Title:________________________ By: /s/ DONALD C. ROOF Name: Donald C. Roof Title: Treasurer Address: 1140 Campbell Avenue San Jose, California 95126 Attest: /s/ J. MICHAEL GAITHER Name: ____________________ Title:____________________ 8 EX-10.4 22 SUBSIDIARY SECURITY AGREEMENTS 1 EXHIBIT 10.4 SECURITY AGREEMENT (SUBSIDIARY) THIS SECURITY AGREEMENT, dated as of May 20, 1998, is made by ITCO TIRE COMPANY OF GEORGIA, a Virginia corporation (the "Grantor"), in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent (the "Agent") for the financial institutions (the "Lenders") party from time to time to the Amended and Restated Loan and Security Agreement dated on or about the date hereof (the same as it may be amended, modified or supplemented or restated, the "Loan Agreement") by and among The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders, the Co-Agents and the Agent (the Agent together with any successor agent under the Loan Agreement also referred to as the "Secured Party" herein). Unless otherwise defined herein, terms defined in the Loan Agreement are used herein as therein defined. Preliminary Statement As a condition precedent to the Lenders' making loans and other financial accommodations to the Borrowers under the Loan Agreement, the obligations of the Borrowers under which have been guaranteed by the Grantor pursuant to a Guaranty dated as of even date herewith (the principal, interest, fees, expenses and other indebtedness, obligations and liabilities of Grantor under said Guaranty, (including, without being limited to, the Guaranteed Obligations as defined therein) and this Agreement and all other indebtedness, obligations and liabilities of the Grantor to the Secured Party and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising under the Loan Documents (as defined in the Loan Agreement), being hereinafter referred to collectively as the "Secured Obligations"), the Agent and the Lenders have required that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to continue to make loans and other financial accommodations to the Borrowers, the Grantor hereby agrees as follows: SECTION 1. Grant of Security. As security for payment and performance of the Secured Obligations, the Grantor hereby conveys, mortgages, pledges, assigns, transfers, sets over, grants and delivers to the Secured Party a continuing security interest in all of the Grantor's right, title and interest in and to the following property, wherever located, whether now owned or existing or hereafter acquired or arising (hereinafter referred to as the "Collateral"): (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, 2 notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, EXCLUDING, HOWEVER, the equity securities of any Subsidiary, to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of the Grantor with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of the Grantor in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, 2 3 without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. SECTION 2. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 3. Representations and Warranties. The Grantor represents and warrants as follows: (a) The Grantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and as hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) The Grantor has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement in accordance with its terms. This Agreement has been duly executed and delivered by the duly authorized officers of the Grantor and is a legal, valid and binding obligation of the Grantor, enforceable in accordance with its terms. 3 4 (c) The execution, delivery and performance of this Agreement in accordance with its terms does 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 the Grantor, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or by-laws of the Grantor, any material provisions of any indenture, agreement or other instrument to which the Grantor is a party or by which it or any of its property may be bound or any Governmental Approval relating to the Grantor or (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 the Grantor other than the security interest contemplated by this Agreement. (d) There is no pending or threatened action or proceeding affecting the Grantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Grantor. (e) All of the Inventory is located at the address(es) set forth in PART I of EXHIBIT A hereto. (f) The address of the chief executive office of the Grantor is set forth in PART II of EXHIBIT A hereto. The address(es) of such chief executive office has not been changed during the year preceding the date hereof. (g) The office(s) where the Grantor keeps its records concerning the Receivables and originals of chattel paper, if any, which evidences Receivables is located at the address set forth in PART III of EXHIBIT A hereto and except as otherwise indicated in said PART III of EXHIBIT A, such office(s) has (have) been located at such address(es) continuously for the past year. None of the Receivables is evidenced by a promissory note or other instrument which has not been delivered to the Secured Party at its request. (h) If the business of the Grantor has been conducted under a different name or names during the last five years, such name(s) is (are) set forth in PART IV of EXHIBIT A hereto. (i) The Grantor owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement, Permitted Liens, and except as may be set forth in EXHIBIT B attached hereto and made a part hereof. Except as may be set forth on EXHIBIT B, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Secured Party relating to this Agreement. 4 5 (j) This Agreement creates a valid security interest in the Collateral, securing the payment of the Secured Obligations and upon completion of the filings and other actions set forth on EXHIBIT B, all actions necessary to perfect such security interest as a first priority security interest (subject to Permitted Liens) will have been duly taken. (k) Except for the filing of UCC financing statements in the appropriate jurisdictions, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Grantor or (ii) for the exercise by the Secured Party of its rights and remedies hereunder. SECTION 4. Further Assurances. (a) The Grantor agrees that from time to time, at the expense of the Grantor, the Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor shall take all actions contemplated by SECTION 7.2(b) of the Loan Agreement. (b) The Grantor hereby authorizes the Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law and agrees that a photographic or other reproduction of this Agreement of this may be used and filed as a financing statement. (c) The Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. SECTION 5. As to Inventory. The Grantor shall: (a) Keep the Inventory (other than Inventory in transit to any such location or sold in the ordinary course of business) at Permitted Inventory Locations or, with the prior consent of the Secured Party, at such other places in jurisdictions where all action required by SECTION 4 shall have been taken with respect to the Inventory. (b) Pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings. SECTION 6. Insurance. The Grantor shall take all actions contemplated by SECTION 8.8 of the Loan Agreement. 5 6 SECTION 7. As to Receivables. (a) the Grantor shall keep its chief place of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, at the location(s) therefor specified in EXHIBIT A or, upon 30 days' prior written notice to the Secured Party, at such other location(s) in a jurisdiction where all action required by SECTION 4 shall have been taken with respect to the Receivables. The Grantor will hold and preserve such records and chattel paper and will permit representatives of the Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Except as otherwise provided in this SUBSECTION (b) or SECTION 8.1 of the Loan Agreement, the Grantor shall continue to collect, at its own expense, all amounts due or to become due the Grantor under the Receivables. In connection with such collections, the Grantor may take (and, during the continuation of an Event of Default, at the Secured Party's direction, shall take) such action as the Grantor or the Secured Party may deem necessary or advisable to enforce collection of the Receivables; PROVIDED, HOWEVER, that the Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Secured Party and to direct such Account Debtors or obligors to make payment of all amounts due or to become due to the Grantor thereunder directly to the Secured Party and, upon such notification and at the expense of the Grantor, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantor might have done. After receipt by the Grantor of the notice from the Secured Party referred to in the PROVISO to the preceding sentence and during the continuation of an Event of Default, (i) all amounts and proceeds (including instruments) received by the Grantor in respect of the Receivables shall be received in trust for the benefit of the Secured Party hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Secured Party in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantor so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as provided by SECTION 13(b), and (ii) the Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 8. Transfers and Other Liens. The Grantor shall not without the prior written consent of the Secured Party: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral except Inventory in the ordinary course of business, subject to the limitations set forth in the Loan Agreement. (b) Create or suffer to exist any Lien upon or with respect to any of the Collateral to secure Indebtedness of any person or entity, except for the security interest created by this Agreement and Permitted Liens. SECTION 9. Secured Party Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Secured Party the Grantor's attorney-in-fact, with full authority in the 6 7 place and stead of the Grantor and in the name of the Grantor, the Secured Party or otherwise, during the continuation of an Event of Default, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantor under SECTION 7), including, without limitation: (i) to obtain and adjust insurance required to be paid to the Secured Party pursuant to SECTION 6, (ii) to ask demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with CLAUSE (i) or (ii) above, and (iv) to file any claims or take any action or institute any proceedings which the Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party with respect to any of the Collateral. SECTION 10. Secured Party May Perform. If the Grantor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Grantor under SECTION 14(b). SECTION 11. The Secured Party's Duties. The powers conferred on the Secured Party hereunder are solely to protect its interest (for the benefit of the Lenders), in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 12. Events of Default. The occurrence of any "Event of Default" as defined in the Loan Agreement shall constitute an Event of Default hereunder. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it under Applicable Law or in equity or otherwise, all the rights and remedies of a secured party on default under the applicable Uniform Commercial Code (the "Code") (whether or not the Code applies to the affected Collateral) and also may do any or all of the following: (i) Declare any or all of the Secured Obligations then existing to be immediately due and payable and they shall thereupon become forthwith due and payable, 7 8 without notice of any kind to the Grantor and without any other presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived; (ii) Terminate the Lenders' obligations, if any, to make or to permit the Borrowers to make further Loans or extensions of credit or other financial accommodations to the Grantor; (iii) In the name of the Secured Party or in the name of the Grantor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Secured Party shall be under no obligation so to do, and the Secured Party may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the Grantor; (iv) Enter upon the premises, or wherever the Collateral may be, and take possession thereof, and demand and receive such possession from any Person who has possession thereof; (v) Require the Grantor to, and the Grantor hereby agrees that it will at its expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties; (vi) Without notice except as specified below and with or without taking the possession thereof, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Secured Party, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (vii) In any action hereunder, the Secured Party shall be entitled to the appointment of a receiver, without notice, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon the receiver; and (viii) Apply, without notice, any cash or cash items constituting Collateral in the Secured Party's possession to payment of any of the Secured Obligations. 8 9 The undersigned waives, to the extent permitted by Applicable Law, all rights it has to prior notice (except as set forth in Section 13(a)(vi)) and hearing under the Constitution of the United States and the Uniform Commercial Codes and constitutions of the States of New York, California and under any other applicable statute or constitution. (b) All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Secured Party pursuant to SECTION 14) in whole or in part by the Secured Party against, all or any part of the Secured Obligations in accordance with the provisions of Section 12.3 of the Loan Agreement. Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Secured Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. The Grantor shall remain liable for any deficiency. SECTION 14. Amendments; Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 15. Notices. All notices and other communications hereunder shall be given in accordance with the provisions of Section 15.1 of the Loan Agreement, to the Grantor at its address set forth on the signature pages hereof (with a copy to the Borrowers), to the Secured Party at its address set forth on the signature pages hereof, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. SECTION 16. Continuing Security Interest; Transfer of Obligations. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Secured Obligations, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure to the benefit of the Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer the Secured Obligations to another Person in accordance with the provisions of the Loan Agreement and such Person shall thereupon become vested with all the benefits in respect thereof granted to the Secured Party herein or otherwise. Upon the payment in full of the Secured Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Secured Party will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 17. Governing Law; Terms. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, except as required by mandatory provisions of law and except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein, 9 10 terms used in Article 9 of the Uniform Commercial Code of the State of New York are used herein as therein defined. (b) The Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment and both parties hereto hereby irrevocably and unconditionally agree that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Both parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Grantor or its properties in the courts of any jurisdiction. SECTION 18. Conflict with Loan Agreement. To the extent any provision hereof shall be in conflict with or inconsistent with any provision of the Loan Agreement, the provision of the Loan Agreement shall control. SECTION 19. Grantor's Representative. Heafner shall act under this Agreement as the representative of the Grantor, and the Grantor hereby appoints Heafner as its representative hereunder for all purposes, including receiving notices and communications to the Grantor from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any report, information or any other notice or communication made or given by Heafner, whether in its own name or on behalf of the Grantor and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of the Grantor as to the binding effect on it of any such report, information, notice or communication. 10 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officer(s) as of the date first above written. GRANTOR: ITCO TIRE COMPANY OF GEORGIA By: /s/ WILLIAM H. GAITHER Name:____________________________ Title:___________________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, N.C. 27893 SECURED PARTY: BANKBOSTON, N.A., AS AGENT By: /s/ CHRISTIAN B. COLSON Name:____________________________ Title:___________________________ Address: 115 Perimeter Center Place Suite 500 Atlanta, Georgia 30346 Attention: Christopher R. Nairne 11 12 SECURITY AGREEMENT (SUBSIDIARY) THIS SECURITY AGREEMENT, dated as of May 20, 1998, is made by ITCO TIRE COMPANY, a North Carolina corporation (the "Grantor"), in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent (the "Agent") for the financial institutions (the "Lenders") party from time to time to the Amended and Restated Loan and Security Agreement dated on or about the date hereof (the same as it may be amended, modified or supplemented or restated, the "Loan Agreement") by and among The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders, the Co-Agents and the Agent (the Agent together with any successor agent under the Loan Agreement also referred to as the "Secured Party" herein). Unless otherwise defined herein, terms defined in the Loan Agreement are used herein as therein defined. Preliminary Statement As a condition precedent to the Lenders' making loans and other financial accommodations to the Borrowers under the Loan Agreement, the obligations of the Borrowers under which have been guaranteed by the Grantor pursuant to a Guaranty dated as of even date herewith (the principal, interest, fees, expenses and other indebtedness, obligations and liabilities of Grantor under said Guaranty, (including, without being limited to, the Guaranteed Obligations as defined therein) and this Agreement and all other indebtedness, obligations and liabilities of the Grantor to the Secured Party and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising under the Loan Documents (as defined in the Loan Agreement), being hereinafter referred to collectively as the "Secured Obligations"), the Agent and the Lenders have required that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to continue to make loans and other financial accommodations to the Borrowers, the Grantor hereby agrees as follows: SECTION 1. Grant of Security. As security for payment and performance of the Secured Obligations, the Grantor hereby conveys, mortgages, pledges, assigns, transfers, sets over, grants and delivers to the Secured Party a continuing security interest in all of the Grantor's right, title and interest in and to the following property, wherever located, whether now owned or existing or hereafter acquired or arising (hereinafter referred to as the "Collateral"): (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities 13 in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, EXCLUDING, HOWEVER, the equity securities of any Subsidiary, to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of the Grantor with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of the Grantor in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, 2 14 (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. SECTION 2. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 3. Representations and Warranties. The Grantor represents and warrants as follows: (a) The Grantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and as hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) The Grantor has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement in accordance with its terms. This Agreement has been duly executed and delivered by the duly authorized officers of the Grantor and is a legal, valid and binding obligation of the Grantor, enforceable in accordance with its terms. (c) The execution, delivery and performance of this Agreement in accordance with its terms does not and will not, by the passage of time, the giving of notice or otherwise, 3 15 (i) require any Governmental Approval or violate any Applicable Law relating to the Grantor, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or by-laws of the Grantor, any material provisions of any indenture, agreement or other instrument to which the Grantor is a party or by which it or any of its property may be bound or any Governmental Approval relating to the Grantor or (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 the Grantor other than the security interest contemplated by this Agreement. (d) There is no pending or threatened action or proceeding affecting the Grantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Grantor. (e) All of the Inventory is located at the address(es) set forth in PART I of EXHIBIT A hereto. (f) The address of the chief executive office of the Grantor is set forth in PART II of EXHIBIT A hereto. The address(es) of such chief executive office has not been changed during the year preceding the date hereof. (g) The office(s) where the Grantor keeps its records concerning the Receivables and originals of chattel paper, if any, which evidences Receivables is located at the address set forth in PART III of EXHIBIT A hereto and except as otherwise indicated in said PART III of EXHIBIT A, such office(s) has (have) been located at such address(es) continuously for the past year. None of the Receivables is evidenced by a promissory note or other instrument which has not been delivered to the Secured Party at its request. (h) If the business of the Grantor has been conducted under a different name or names during the last five years, such name(s) is (are) set forth in PART IV of EXHIBIT A hereto. (i) The Grantor owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement, Permitted Liens, and except as may be set forth in EXHIBIT B attached hereto and made a part hereof. Except as may be set forth on EXHIBIT B, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Secured Party relating to this Agreement. (j) This Agreement creates a valid security interest in the Collateral, securing the payment of the Secured Obligations and upon completion of the filings and other actions set 4 16 forth on EXHIBIT B, all actions necessary to perfect such security interest as a first priority security interest (subject to Permitted Liens) will have been duly taken. (k) Except for the filing of UCC financing statements in the appropriate jurisdictions, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Grantor or (ii) for the exercise by the Secured Party of its rights and remedies hereunder. SECTION 4. Further Assurances. (a) The Grantor agrees that from time to time, at the expense of the Grantor, the Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor shall take all actions contemplated by SECTION 7.2(b) of the Loan Agreement. (b) The Grantor hereby authorizes the Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law and agrees that a photographic or other reproduction of this Agreement of this may be used and filed as a financing statement. (c) The Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. SECTION 5. As to Inventory. The Grantor shall: (a) Keep the Inventory (other than Inventory in transit to any such location or sold in the ordinary course of business) at Permitted Inventory Locations or, with the prior consent of the Secured Party, at such other places in jurisdictions where all action required by SECTION 4 shall have been taken with respect to the Inventory. (b) Pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings. SECTION 6. Insurance. The Grantor shall take all actions contemplated by SECTION 8.8 of the Loan Agreement. SECTION 7. As to Receivables. (a) the Grantor shall keep its chief place of business and chief executive office and the office(s) where it keeps its records concerning the 5 17 Receivables, and all originals of all chattel paper which evidence Receivables, at the location(s) therefor specified in EXHIBIT A or, upon 30 days' prior written notice to the Secured Party, at such other location(s) in a jurisdiction where all action required by SECTION 4 shall have been taken with respect to the Receivables. The Grantor will hold and preserve such records and chattel paper and will permit representatives of the Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Except as otherwise provided in this SUBSECTION (b) or SECTION 8.1 of the Loan Agreement, the Grantor shall continue to collect, at its own expense, all amounts due or to become due the Grantor under the Receivables. In connection with such collections, the Grantor may take (and, during the continuation of an Event of Default, at the Secured Party's direction, shall take) such action as the Grantor or the Secured Party may deem necessary or advisable to enforce collection of the Receivables; PROVIDED, HOWEVER, that the Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Secured Party and to direct such Account Debtors or obligors to make payment of all amounts due or to become due to the Grantor thereunder directly to the Secured Party and, upon such notification and at the expense of the Grantor, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantor might have done. After receipt by the Grantor of the notice from the Secured Party referred to in the PROVISO to the preceding sentence and during the continuation of an Event of Default, (i) all amounts and proceeds (including instruments) received by the Grantor in respect of the Receivables shall be received in trust for the benefit of the Secured Party hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Secured Party in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantor so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as provided by SECTION 13(b), and (ii) the Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 8. Transfers and Other Liens. The Grantor shall not without the prior written consent of the Secured Party: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral except Inventory in the ordinary course of business, subject to the limitations set forth in the Loan Agreement. (b) Create or suffer to exist any Lien upon or with respect to any of the Collateral to secure Indebtedness of any person or entity, except for the security interest created by this Agreement and Permitted Liens. SECTION 9. Secured Party Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Secured Party the Grantor's attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor, the Secured Party or otherwise, during the continuation of an Event of Default, to take any action and to execute any instrument 6 18 which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantor under SECTION 7), including, without limitation: (i) to obtain and adjust insurance required to be paid to the Secured Party pursuant to SECTION 6, (ii) to ask demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with CLAUSE (i) or (ii) above, and (iv) to file any claims or take any action or institute any proceedings which the Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party with respect to any of the Collateral. SECTION 10. Secured Party May Perform. If the Grantor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Grantor under SECTION 14(b). SECTION 11. The Secured Party's Duties. The powers conferred on the Secured Party hereunder are solely to protect its interest (for the benefit of the Lenders), in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 12. Events of Default. The occurrence of any "Event of Default" as defined in the Loan Agreement shall constitute an Event of Default hereunder. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it under Applicable Law or in equity or otherwise, all the rights and remedies of a secured party on default under the applicable Uniform Commercial Code (the "Code") (whether or not the Code applies to the affected Collateral) and also may do any or all of the following: (i) Declare any or all of the Secured Obligations then existing to be immediately due and payable and they shall thereupon become forthwith due and payable, without notice of any kind to the Grantor and without any other presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived; 7 19 (ii) Terminate the Lenders' obligations, if any, to make or to permit the Borrowers to make further Loans or extensions of credit or other financial accommodations to the Grantor; (iii) In the name of the Secured Party or in the name of the Grantor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Secured Party shall be under no obligation so to do, and the Secured Party may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the Grantor; (iv) Enter upon the premises, or wherever the Collateral may be, and take possession thereof, and demand and receive such possession from any Person who has possession thereof; (v) Require the Grantor to, and the Grantor hereby agrees that it will at its expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties; (vi) Without notice except as specified below and with or without taking the possession thereof, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Secured Party, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (vii) In any action hereunder, the Secured Party shall be entitled to the appointment of a receiver, without notice, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon the receiver; and (viii) Apply, without notice, any cash or cash items constituting Collateral in the Secured Party's possession to payment of any of the Secured Obligations. The undersigned waives, to the extent permitted by Applicable Law, all rights it has to prior notice (except as set forth in Section 13(a)(vi)) and hearing under the Constitution of the 8 20 United States and the Uniform Commercial Codes and constitutions of the States of New York, California and under any other applicable statute or constitution. (b) All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Secured Party pursuant to SECTION 14) in whole or in part by the Secured Party against, all or any part of the Secured Obligations in accordance with the provisions of Section 12.3 of the Loan Agreement. Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Secured Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. The Grantor shall remain liable for any deficiency. SECTION 14. Amendments; Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 15. Notices. All notices and other communications hereunder shall be given in accordance with the provisions of Section 15.1 of the Loan Agreement, to the Grantor at its address set forth on the signature pages hereof (with a copy to the Borrowers), to the Secured Party at its address set forth on the signature pages hereof, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. SECTION 16. Continuing Security Interest; Transfer of Obligations. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Secured Obligations, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure to the benefit of the Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer the Secured Obligations to another Person in accordance with the provisions of the Loan Agreement and such Person shall thereupon become vested with all the benefits in respect thereof granted to the Secured Party herein or otherwise. Upon the payment in full of the Secured Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Secured Party will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 17. Governing Law; Terms. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, except as required by mandatory provisions of law and except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein, terms used in Article 9 of the Uniform Commercial Code of the State of New York are used herein as therein defined. 9 21 (b) The Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment and both parties hereto hereby irrevocably and unconditionally agree that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Both parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Grantor or its properties in the courts of any jurisdiction. SECTION 18. Conflict with Loan Agreement. To the extent any provision hereof shall be in conflict with or inconsistent with any provision of the Loan Agreement, the provision of the Loan Agreement shall control. SECTION 19. Grantor's Representative. Heafner shall act under this Agreement as the representative of the Grantor, and the Grantor hereby appoints Heafner as its representative hereunder for all purposes, including receiving notices and communications to the Grantor from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any report, information or any other notice or communication made or given by Heafner, whether in its own name or on behalf of the Grantor and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of the Grantor as to the binding effect on it of any such report, information, notice or communication. 10 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officer(s) as of the date first above written. GRANTOR: ITCO TIRE COMPANY By: /s/ WILLIAM H. GAITHER Name:____________________________ Title:___________________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, N.C. 27893 SECURED PARTY: BANKBOSTON, N.A., AS AGENT By: /s/ CHRISTIAN B. COLSON Name:____________________________ Title:___________________________ Address: 115 Perimeter Center Place Suite 500 Atlanta, Georgia 30346 Attention: Christopher R. Nairne 11 23 SECURITY AGREEMENT (SUBSIDIARY) THIS SECURITY AGREEMENT, dated as of May 20, 1998, is made by PHOENIX RACING, INC., a California corporation (the "Grantor"), in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent (the "Agent") for the financial institutions (the "Lenders") party from time to time to the Amended and Restated Loan and Security Agreement dated on or about the date hereof (the same as it may be amended, modified or supplemented or restated, the "Loan Agreement") by and among The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders, the Co-Agents and the Agent (the Agent together with any successor agent under the Loan Agreement also referred to as the "Secured Party" herein). Unless otherwise defined herein, terms defined in the Loan Agreement are used herein as therein defined. Preliminary Statement As a condition precedent to the Lenders' making loans and other financial accommodations to the Borrowers under the Loan Agreement, the obligations of the Borrowers under which have been guaranteed by the Grantor pursuant to a Guaranty dated as of even date herewith (the principal, interest, fees, expenses and other indebtedness, obligations and liabilities of Grantor under said Guaranty, (including, without being limited to, the Guaranteed Obligations as defined therein) and this Agreement and all other indebtedness, obligations and liabilities of the Grantor to the Secured Party and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising under the Loan Documents (as defined in the Loan Agreement), being hereinafter referred to collectively as the "Secured Obligations"), the Agent and the Lenders have required that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to continue to make loans and other financial accommodations to the Borrowers, the Grantor hereby agrees as follows: SECTION 1. Grant of Security. As security for payment and performance of the Secured Obligations, the Grantor hereby conveys, mortgages, pledges, assigns, transfers, sets over, grants and delivers to the Secured Party a continuing security interest in all of the Grantor's right, title and interest in and to the following property, wherever located, whether now owned or existing or hereafter acquired or arising (hereinafter referred to as the "Collateral"): (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, 24 notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, EXCLUDING, HOWEVER, the equity securities of any Subsidiary, to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of the Grantor with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of the Grantor in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, 2 25 without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. SECTION 2. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 3. Representations and Warranties. The Grantor represents and warrants as follows: (a) The Grantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and as hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) The Grantor has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement in accordance with its terms. This Agreement has been duly executed and delivered by the duly authorized officers of the Grantor and is a legal, valid and binding obligation of the Grantor, enforceable in accordance with its terms. 3 26 (c) The execution, delivery and performance of this Agreement in accordance with its terms does 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 the Grantor, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or by-laws of the Grantor, any material provisions of any indenture, agreement or other instrument to which the Grantor is a party or by which it or any of its property may be bound or any Governmental Approval relating to the Grantor or (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 the Grantor other than the security interest contemplated by this Agreement. (d) There is no pending or threatened action or proceeding affecting the Grantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Grantor. (e) All of the Inventory is located at the address(es) set forth in PART I of EXHIBIT A hereto. (f) The address of the chief executive office of the Grantor is set forth in PART II of EXHIBIT A hereto. The address(es) of such chief executive office has not been changed during the year preceding the date hereof. (g) The office(s) where the Grantor keeps its records concerning the Receivables and originals of chattel paper, if any, which evidences Receivables is located at the address set forth in PART III of EXHIBIT A hereto and except as otherwise indicated in said PART III of EXHIBIT A, such office(s) has (have) been located at such address(es) continuously for the past year. None of the Receivables is evidenced by a promissory note or other instrument which has not been delivered to the Secured Party at its request. (h) If the business of the Grantor has been conducted under a different name or names during the last five years, such name(s) is (are) set forth in PART IV of EXHIBIT A hereto. (i) The Grantor owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement, Permitted Liens, and except as may be set forth in EXHIBIT B attached hereto and made a part hereof. Except as may be set forth on EXHIBIT B, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Secured Party relating to this Agreement. 4 27 (j) This Agreement creates a valid security interest in the Collateral, securing the payment of the Secured Obligations and upon completion of the filings and other actions set forth on EXHIBIT B, all actions necessary to perfect such security interest as a first priority security interest (subject to Permitted Liens) will have been duly taken. (k) Except for the filing of UCC financing statements in the appropriate jurisdictions, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Grantor or (ii) for the exercise by the Secured Party of its rights and remedies hereunder. SECTION 4. Further Assurances. (a) The Grantor agrees that from time to time, at the expense of the Grantor, the Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor shall take all actions contemplated by SECTION 7.2(b) of the Loan Agreement. (b) The Grantor hereby authorizes the Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law and agrees that a photographic or other reproduction of this Agreement of this may be used and filed as a financing statement. (c) The Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. SECTION 5. As to Inventory. The Grantor shall: (a) Keep the Inventory (other than Inventory in transit to any such location or sold in the ordinary course of business) at Permitted Inventory Locations or, with the prior consent of the Secured Party, at such other places in jurisdictions where all action required by SECTION 4 shall have been taken with respect to the Inventory. (b) Pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings. SECTION 6. Insurance. The Grantor shall take all actions contemplated by SECTION 8.8 of the Loan Agreement. 5 28 SECTION 7. As to Receivables. (a) the Grantor shall keep its chief place of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, at the location(s) therefor specified in EXHIBIT A or, upon 30 days' prior written notice to the Secured Party, at such other location(s) in a jurisdiction where all action required by SECTION 4 shall have been taken with respect to the Receivables. The Grantor will hold and preserve such records and chattel paper and will permit representatives of the Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Except as otherwise provided in this SUBSECTION (b) or SECTION 8.1 of the Loan Agreement, the Grantor shall continue to collect, at its own expense, all amounts due or to become due the Grantor under the Receivables. In connection with such collections, the Grantor may take (and, during the continuation of an Event of Default, at the Secured Party's direction, shall take) such action as the Grantor or the Secured Party may deem necessary or advisable to enforce collection of the Receivables; PROVIDED, HOWEVER, that the Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Secured Party and to direct such Account Debtors or obligors to make payment of all amounts due or to become due to the Grantor thereunder directly to the Secured Party and, upon such notification and at the expense of the Grantor, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantor might have done. After receipt by the Grantor of the notice from the Secured Party referred to in the PROVISO to the preceding sentence and during the continuation of an Event of Default, (i) all amounts and proceeds (including instruments) received by the Grantor in respect of the Receivables shall be received in trust for the benefit of the Secured Party hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Secured Party in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantor so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as provided by SECTION 13(b), and (ii) the Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 8. Transfers and Other Liens. The Grantor shall not without the prior written consent of the Secured Party: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral except Inventory in the ordinary course of business, subject to the limitations set forth in the Loan Agreement. (b) Create or suffer to exist any Lien upon or with respect to any of the Collateral to secure Indebtedness of any person or entity, except for the security interest created by this Agreement and Permitted Liens. SECTION 9. Secured Party Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Secured Party the Grantor's attorney-in-fact, with full authority in the 6 29 place and stead of the Grantor and in the name of the Grantor, the Secured Party or otherwise, during the continuation of an Event of Default, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantor under SECTION 7), including, without limitation: (i) to obtain and adjust insurance required to be paid to the Secured Party pursuant to SECTION 6, (ii) to ask demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with CLAUSE (i) or (ii) above, and (iv) to file any claims or take any action or institute any proceedings which the Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party with respect to any of the Collateral. SECTION 10. Secured Party May Perform. If the Grantor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Grantor under SECTION 14(b). SECTION 11. The Secured Party's Duties. The powers conferred on the Secured Party hereunder are solely to protect its interest (for the benefit of the Lenders), in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 12. Events of Default. The occurrence of any "Event of Default" as defined in the Loan Agreement shall constitute an Event of Default hereunder. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it under Applicable Law or in equity or otherwise, all the rights and remedies of a secured party on default under the applicable Uniform Commercial Code (the "Code") (whether or not the Code applies to the affected Collateral) and also may do any or all of the following: (i) Declare any or all of the Secured Obligations then existing to be immediately due and payable and they shall thereupon become forthwith due and payable, 7 30 without notice of any kind to the Grantor and without any other presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived; (ii) Terminate the Lenders' obligations, if any, to make or to permit the Borrowers to make further Loans or extensions of credit or other financial accommodations to the Grantor; (iii) In the name of the Secured Party or in the name of the Grantor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Secured Party shall be under no obligation so to do, and the Secured Party may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the Grantor; (iv) Enter upon the premises, or wherever the Collateral may be, and take possession thereof, and demand and receive such possession from any Person who has possession thereof; (v) Require the Grantor to, and the Grantor hereby agrees that it will at its expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties; (vi) Without notice except as specified below and with or without taking the possession thereof, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Secured Party, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (vii) In any action hereunder, the Secured Party shall be entitled to the appointment of a receiver, without notice, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon the receiver; and (viii) Apply, without notice, any cash or cash items constituting Collateral in the Secured Party's possession to payment of any of the Secured Obligations. 8 31 The undersigned waives, to the extent permitted by Applicable Law, all rights it has to prior notice (except as set forth in Section 13(a)(vi)) and hearing under the Constitution of the United States and the Uniform Commercial Codes and constitutions of the States of New York, California and under any other applicable statute or constitution. (b) All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Secured Party pursuant to SECTION 14) in whole or in part by the Secured Party against, all or any part of the Secured Obligations in accordance with the provisions of Section 12.3 of the Loan Agreement. Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Secured Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. The Grantor shall remain liable for any deficiency. SECTION 14. Amendments; Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 15. Notices. All notices and other communications hereunder shall be given in accordance with the provisions of Section 15.1 of the Loan Agreement, to the Grantor at its address set forth on the signature pages hereof (with a copy to the Borrowers), to the Secured Party at its address set forth on the signature pages hereof, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. SECTION 16. Continuing Security Interest; Transfer of Obligations. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Secured Obligations, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure to the benefit of the Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer the Secured Obligations to another Person in accordance with the provisions of the Loan Agreement and such Person shall thereupon become vested with all the benefits in respect thereof granted to the Secured Party herein or otherwise. Upon the payment in full of the Secured Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Secured Party will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 17. Governing Law; Terms. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, except as required by mandatory provisions of law and except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein, 9 32 terms used in Article 9 of the Uniform Commercial Code of the State of New York are used herein as therein defined. (b) The Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment and both parties hereto hereby irrevocably and unconditionally agree that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Both parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Grantor or its properties in the courts of any jurisdiction. SECTION 18. Conflict with Loan Agreement. To the extent any provision hereof shall be in conflict with or inconsistent with any provision of the Loan Agreement, the provision of the Loan Agreement shall control. SECTION 19. Grantor's Representative. Heafner shall act under this Agreement as the representative of the Grantor, and the Grantor hereby appoints Heafner as its representative hereunder for all purposes, including receiving notices and communications to the Grantor from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any report, information or any other notice or communication made or given by Heafner, whether in its own name or on behalf of the Grantor and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of the Grantor as to the binding effect on it of any such report, information, notice or communication. 10 33 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officer(s) as of the date first above written. GRANTOR: PHOENIX RACING, INC. By: /s/ WILLIAM H. GAITHER Name:____________________________ Title:___________________________ By: /s/ J. MICHAEL GAITHER Name:____________________________ Title:___________________________ Address: 1140 Campbell Avenue San Jose, California 95126 SECURED PARTY: BANKBOSTON, N.A., AS AGENT By: /s/ CHRISTIAN B. COLSON Name:____________________________ Title:___________________________ Address: 115 Perimeter Center Place Suite 500 Atlanta, Georgia 30346 Attention: Christopher R. Nairne 11 34 SECURITY AGREEMENT (SUBSIDIARY) THIS SECURITY AGREEMENT, dated as of May 20, 1998, is made by ITCO LOGISTICS CORPORATION, a Delaware corporation (the "Grantor"), in favor of BANKBOSTON, N.A., a national banking association, in its capacity as administrative agent (the "Agent") for the financial institutions (the "Lenders") party from time to time to the Amended and Restated Loan and Security Agreement dated on or about the date hereof (the same as it may be amended, modified or supplemented or restated, the "Loan Agreement") by and among The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), Oliver & Winston, Inc., a North Carolina corporation, ITCO Holding Company, Inc., a North Carolina corporation, The Speed Merchant, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers"), the Lenders, the Co-Agents and the Agent (the Agent together with any successor agent under the Loan Agreement also referred to as the "Secured Party" herein). Unless otherwise defined herein, terms defined in the Loan Agreement are used herein as therein defined. Preliminary Statement As a condition precedent to the Lenders' making loans and other financial accommodations to the Borrowers under the Loan Agreement, the obligations of the Borrowers under which have been guaranteed by the Grantor pursuant to a Guaranty dated as of even date herewith (the principal, interest, fees, expenses and other indebtedness, obligations and liabilities of Grantor under said Guaranty, (including, without being limited to, the Guaranteed Obligations as defined therein) and this Agreement and all other indebtedness, obligations and liabilities of the Grantor to the Secured Party and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising under the Loan Documents (as defined in the Loan Agreement), being hereinafter referred to collectively as the "Secured Obligations"), the Agent and the Lenders have required that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to continue to make loans and other financial accommodations to the Borrowers, the Grantor hereby agrees as follows: SECTION 1. Grant of Security. As security for payment and performance of the Secured Obligations, the Grantor hereby conveys, mortgages, pledges, assigns, transfers, sets over, grants and delivers to the Secured Party a continuing security interest in all of the Grantor's right, title and interest in and to the following property, wherever located, whether now owned or existing or hereafter acquired or arising (hereinafter referred to as the "Collateral"): (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, 35 notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, EXCLUDING, HOWEVER, the equity securities of any Subsidiary, to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of the Grantor with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of the Grantor in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, 2 36 without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. SECTION 2. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 3. Representations and Warranties. The Grantor represents and warrants as follows: (a) The Grantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and as hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) The Grantor has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement in accordance with its terms. This Agreement has been duly executed and delivered by the duly authorized officers of the Grantor and is a legal, valid and binding obligation of the Grantor, enforceable in accordance with its terms. 3 37 (c) The execution, delivery and performance of this Agreement in accordance with its terms does 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 the Grantor, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or by-laws of the Grantor, any material provisions of any indenture, agreement or other instrument to which the Grantor is a party or by which it or any of its property may be bound or any Governmental Approval relating to the Grantor or (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 the Grantor other than the security interest contemplated by this Agreement. (d) There is no pending or threatened action or proceeding affecting the Grantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Grantor. (e) All of the Inventory is located at the address(es) set forth in PART I of EXHIBIT A hereto. (f) The address of the chief executive office of the Grantor is set forth in PART II of EXHIBIT A hereto. The address(es) of such chief executive office has not been changed during the year preceding the date hereof. (g) The office(s) where the Grantor keeps its records concerning the Receivables and originals of chattel paper, if any, which evidences Receivables is located at the address set forth in PART III of EXHIBIT A hereto and except as otherwise indicated in said PART III of EXHIBIT A, such office(s) has (have) been located at such address(es) continuously for the past year. None of the Receivables is evidenced by a promissory note or other instrument which has not been delivered to the Secured Party at its request. (h) If the business of the Grantor has been conducted under a different name or names during the last five years, such name(s) is (are) set forth in PART IV of EXHIBIT A hereto. (i) The Grantor owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement, Permitted Liens, and except as may be set forth in EXHIBIT B attached hereto and made a part hereof. Except as may be set forth on EXHIBIT B, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Secured Party relating to this Agreement. 4 38 (j) This Agreement creates a valid security interest in the Collateral, securing the payment of the Secured Obligations and upon completion of the filings and other actions set forth on EXHIBIT B, all actions necessary to perfect such security interest as a first priority security interest (subject to Permitted Liens) will have been duly taken. (k) Except for the filing of UCC financing statements in the appropriate jurisdictions, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Grantor or (ii) for the exercise by the Secured Party of its rights and remedies hereunder. SECTION 4. Further Assurances. (a) The Grantor agrees that from time to time, at the expense of the Grantor, the Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor shall take all actions contemplated by SECTION 7.2(b) of the Loan Agreement. (b) The Grantor hereby authorizes the Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law and agrees that a photographic or other reproduction of this Agreement of this may be used and filed as a financing statement. (c) The Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. SECTION 5. As to Inventory. The Grantor shall: (a) Keep the Inventory (other than Inventory in transit to any such location or sold in the ordinary course of business) at Permitted Inventory Locations or, with the prior consent of the Secured Party, at such other places in jurisdictions where all action required by SECTION 4 shall have been taken with respect to the Inventory. (b) Pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings. SECTION 6. Insurance. The Grantor shall take all actions contemplated by SECTION 8.8 of the Loan Agreement. 5 39 SECTION 7. As to Receivables. (a) the Grantor shall keep its chief place of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, at the location(s) therefor specified in EXHIBIT A or, upon 30 days' prior written notice to the Secured Party, at such other location(s) in a jurisdiction where all action required by SECTION 4 shall have been taken with respect to the Receivables. The Grantor will hold and preserve such records and chattel paper and will permit representatives of the Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Except as otherwise provided in this SUBSECTION (b) or SECTION 8.1 of the Loan Agreement, the Grantor shall continue to collect, at its own expense, all amounts due or to become due the Grantor under the Receivables. In connection with such collections, the Grantor may take (and, during the continuation of an Event of Default, at the Secured Party's direction, shall take) such action as the Grantor or the Secured Party may deem necessary or advisable to enforce collection of the Receivables; PROVIDED, HOWEVER, that the Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Secured Party and to direct such Account Debtors or obligors to make payment of all amounts due or to become due to the Grantor thereunder directly to the Secured Party and, upon such notification and at the expense of the Grantor, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantor might have done. After receipt by the Grantor of the notice from the Secured Party referred to in the PROVISO to the preceding sentence and during the continuation of an Event of Default, (i) all amounts and proceeds (including instruments) received by the Grantor in respect of the Receivables shall be received in trust for the benefit of the Secured Party hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Secured Party in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantor so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as provided by SECTION 13(b), and (ii) the Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 8. Transfers and Other Liens. The Grantor shall not without the prior written consent of the Secured Party: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral except Inventory in the ordinary course of business, subject to the limitations set forth in the Loan Agreement. (b) Create or suffer to exist any Lien upon or with respect to any of the Collateral to secure Indebtedness of any person or entity, except for the security interest created by this Agreement and Permitted Liens. SECTION 9. Secured Party Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Secured Party the Grantor's attorney-in-fact, with full authority in the 6 40 place and stead of the Grantor and in the name of the Grantor, the Secured Party or otherwise, during the continuation of an Event of Default, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Grantor under SECTION 7), including, without limitation: (i) to obtain and adjust insurance required to be paid to the Secured Party pursuant to SECTION 6, (ii) to ask demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with CLAUSE (i) or (ii) above, and (iv) to file any claims or take any action or institute any proceedings which the Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party with respect to any of the Collateral. SECTION 10. Secured Party May Perform. If the Grantor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Grantor under SECTION 14(b). SECTION 11. The Secured Party's Duties. The powers conferred on the Secured Party hereunder are solely to protect its interest (for the benefit of the Lenders), in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 12. Events of Default. The occurrence of any "Event of Default" as defined in the Loan Agreement shall constitute an Event of Default hereunder. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it under Applicable Law or in equity or otherwise, all the rights and remedies of a secured party on default under the applicable Uniform Commercial Code (the "Code") (whether or not the Code applies to the affected Collateral) and also may do any or all of the following: (i) Declare any or all of the Secured Obligations then existing to be immediately due and payable and they shall thereupon become forthwith due and payable, 7 41 without notice of any kind to the Grantor and without any other presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived; (ii) Terminate the Lenders' obligations, if any, to make or to permit the Borrowers to make further Loans or extensions of credit or other financial accommodations to the Grantor; (iii) In the name of the Secured Party or in the name of the Grantor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Secured Party shall be under no obligation so to do, and the Secured Party may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the Grantor; (iv) Enter upon the premises, or wherever the Collateral may be, and take possession thereof, and demand and receive such possession from any Person who has possession thereof; (v) Require the Grantor to, and the Grantor hereby agrees that it will at its expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties; (vi) Without notice except as specified below and with or without taking the possession thereof, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Secured Party, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (vii) In any action hereunder, the Secured Party shall be entitled to the appointment of a receiver, without notice, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon the receiver; and (viii) Apply, without notice, any cash or cash items constituting Collateral in the Secured Party's possession to payment of any of the Secured Obligations. 8 42 The undersigned waives, to the extent permitted by Applicable Law, all rights it has to prior notice (except as set forth in Section 13(a)(vi)) and hearing under the Constitution of the United States and the Uniform Commercial Codes and constitutions of the States of New York, California and under any other applicable statute or constitution. (b) All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Secured Party pursuant to SECTION 14) in whole or in part by the Secured Party against, all or any part of the Secured Obligations in accordance with the provisions of Section 12.3 of the Loan Agreement. Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Secured Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. The Grantor shall remain liable for any deficiency. SECTION 14. Amendments; Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 15. Notices. All notices and other communications hereunder shall be given in accordance with the provisions of Section 15.1 of the Loan Agreement, to the Grantor at its address set forth on the signature pages hereof (with a copy to the Borrowers), to the Secured Party at its address set forth on the signature pages hereof, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. SECTION 16. Continuing Security Interest; Transfer of Obligations. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Secured Obligations, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure to the benefit of the Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer the Secured Obligations to another Person in accordance with the provisions of the Loan Agreement and such Person shall thereupon become vested with all the benefits in respect thereof granted to the Secured Party herein or otherwise. Upon the payment in full of the Secured Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Secured Party will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 17. Governing Law; Terms. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, except as required by mandatory provisions of law and except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein, 9 43 terms used in Article 9 of the Uniform Commercial Code of the State of New York are used herein as therein defined. (b) The Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment and both parties hereto hereby irrevocably and unconditionally agree that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Both parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Grantor or its properties in the courts of any jurisdiction. SECTION 18. Conflict with Loan Agreement. To the extent any provision hereof shall be in conflict with or inconsistent with any provision of the Loan Agreement, the provision of the Loan Agreement shall control. SECTION 19. Grantor's Representative. Heafner shall act under this Agreement as the representative of the Grantor, and the Grantor hereby appoints Heafner as its representative hereunder for all purposes, including receiving notices and communications to the Grantor from the Agent or any Lender. The Agent and the Lenders may rely, and shall be fully protected in relying, on any report, information or any other notice or communication made or given by Heafner, whether in its own name or on behalf of the Grantor and neither the Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of the Grantor as to the binding effect on it of any such report, information, notice or communication. 10 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officer(s) as of the date first above written. GRANTOR: ITCO LOGISTICS CORPORATION By: /s/ WILLIAM H. GAITHER Name:____________________________ Title:___________________________ Address: 2708 Commerce Road P.O. Box 641 Wilson, N.C. 27893 SECURED PARTY: BANKBOSTON, N.A., AS AGENT By: /s/ CHRISTIAN B. COLSON Name:____________________________ Title:___________________________ Address: 115 Perimeter Center Place Suite 500 Atlanta, Georgia 30346 Attention: Christopher R. Nairne 11 EX-10.5 23 SENIOR SUBORDINATED NOTE AND WARRANT PURCHASE AGMT 1 Exhibit 10.5 SENIOR SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT By and Among THE J.H. HEAFNER COMPANY, INC. and THE 1818 MEZZANINE FUND, L.P. Dated May 7, 1997 2 Table of Contents Page ---- ARTICLE 1 DEFINITIONS.....................................................1 1.1 Definitions.....................................................1 1.2 Accounting Terms; Financial Covenants..........................15 ARTICLE 2 PURCHASE AND SALE..............................................16 2.1 Purchase and Sale of Senior Subordinated Note and Warrants.....16 2.2 Fees...........................................................16 2.3 Closing........................................................16 ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE ..................................17 3.1 Representations and Warranties True............................17 3.2 Compliance with this Agreement.................................17 3.3 Officer's Certificate..........................................17 3.4 Secretary's Certificate........................................17 3.5 Documents......................................................17 3.6 Purchase Permitted by Applicable Laws; Legal Investment........17 3.7 Filing of Amended and Restated Articles........................18 3.8 Opinion of Counsel.............................................18 3.9 Approval of Counsel to the Purchaser...........................18 3.10 Consents and Approvals.........................................18 3.11 No Material Adverse Change.....................................18 3.12 Due Diligence..................................................18 3.13 Employment Agreements..........................................18 3.14 Registration Rights Agreement..................................18 3.15 Articles of Incorporation and By-Laws of the Company and the Subsidiaries...................................19 3.16 Market Conditions..............................................19 3.17 No Litigation..................................................19 3.18 No Default or Breach...........................................19 3.19 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement......................................................19 3.20 Senior Financing...............................................20 3.21 Facilities Fee.................................................20 ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE ...................................20 4.1 Representations and Warranties True............................20 4.2 Compliance with this Agreement.................................20 4.4 Approval of Counsel to the Company.............................20 4.5 Consents and Approvals.........................................20 i 3 4.6 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement......................................................21 4.7 Senior Financing...............................................21 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................21 5.1 Corporate Existence and Power..................................21 5.2 Corporate Authorization; No Contravention......................22 5.3 Governmental Authorization; Third Party Consents...............22 5.4 Binding Effect.................................................23 5.5 No Legal Bar...................................................23 5.6 Litigation.....................................................23 5.7 No Default or Breach...........................................24 5.8 Title to Properties............................................24 5.9 Financial Condition; No Undisclosed Liabilities................24 5.10 No Material Adverse Change.....................................25 5.11 Investment Company.............................................25 5.12 Subsidiaries...................................................25 5.13 Capitalization.................................................25 5.14 Solvency.......................................................26 5.15 Private Offering...............................................26 5.16 Broker's, Finder's or Similar Fees.............................26 5.17 Full Disclosure................................................27 5.18 Anti-Dilution Protection.......................................27 5.19 Registration Rights Agreements.................................27 5.20 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement......................................................27 5.21 Labor Relations................................................27 5.22 ERISA and Employee Benefit Plans...............................28 5.23 Environmental Matters..........................................29 5.24 Taxes..........................................................30 5.25 Patents, Trademarks, Etc.......................................31 5.26 Potential Conflicts of Interest................................31 5.27 Trade Relations................................................32 5.28 Material Contracts.............................................32 5.29 Insurance. Schedule 5.29......................................33 5.30 Projections....................................................33 5.31 Compliance with Laws...........................................33 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..................................33 6.1 Existence and Power............................................34 6.2 Authorization; No Contravention................................34 6.3 Binding Effect.................................................34 ii 4 6.4 No Legal Bar...................................................34 6.5 Purchase for Own Account.......................................34 6.6 Investment Company.............................................35 6.7 Broker's, Finder's or Similar Fees.............................35 ARTICLE 7 INDEMNIFICATION................................................36 7.1 Indemnification by the Company.................................36 7.2 Notification...................................................37 7.3 Registration Rights Agreement..................................37 ARTICLE 8 PRE-CLOSING AFFIRMATIVE COVENANTS..............................38 8.1 Operation of Company...........................................38 8.2 Exclusivity....................................................38 8.3 Use of Proceeds................................................38 8.4 Taxes..........................................................38 ARTICLE 9 AFFIRMATIVE COVENANTS..........................................39 9.1 Financial Statements...........................................39 9.2 Certificates; Other Information................................40 9.3 Preservation of Corporate Existence............................40 9.4 Payment of Obligations.........................................40 9.5 Compliance with Laws...........................................41 9.6 Notices........................................................41 9.7 Issue Taxes....................................................41 9.8 Reservation of Shares..........................................42 9.9 Inspection.....................................................42 9.10 Board Representation; Visitation Rights........................43 9.11 Registration and Listing.......................................44 9.12 Use of Proceeds................................................45 9.13 Payment of Notes...............................................45 9.14 Dispositions by the Fund.......................................45 9.15 Right of First Offer...........................................45 9.16 Tag-Along Rights on the Principal Shareholders.................46 9.17 Anti-dilution Protection.......................................48 9.18 Sale of Company................................................49 9.19 Allocation for Tax Purposes....................................49 ARTICLE 10 NEGATIVE AND FINANCIAL COVENANTS...............................49 10.1 1997 Financial Covenants.......................................49 10.2 Financial Covenants ...........................................50 10.3 Capital Expenditures...........................................50 10.4 Consolidations and Mergers.....................................50 10.5 Transactions with Affiliates...................................51 10.6 No Inconsistent Agreements.....................................51 iii 5 10.7 Limitation on Debt.............................................52 10.8 Limitation on Liens............................................53 10.9 Investments....................................................53 10.10 Limitations on Restricted Payments.............................53 10.11 Dispositions of Assets.........................................53 10.12 Articles of Incorporation and By-Laws of the Company and the Subsidiaries...................................................54 ARTICLE 11 DEFAULTS AND REMEDIES..........................................54 11.1 Events of Default..............................................54 11.2 Acceleration...................................................55 ARTICLE 12 SUBORDINATION..................................................56 12.1 Definitions....................................................56 12.2 General........................................................57 12.3 Limitation on Payment and Remedies.............................57 12.4 Subordination Upon Certain Events..............................58 12.5 Payments and Distributions Received............................59 12.6 Subrogation....................................................59 12.7 Relative Rights................................................59 12.8 Subordination May Not Be Impaired by the Company...............60 12.9 Payments.......................................................60 12.10 Section Not to Prevent Events of Default.......................60 ARTICLE 13 PREPAYMENT.....................................................60 ARTICLE 14 MISCELLANEOUS..................................................60 14.1 Survival of Provisions.........................................60 14.2 Notices........................................................61 14.3 Successors and Assigns.........................................62 14.4 Assignments....................................................62 14.5 Amendment and Waiver...........................................63 14.6 Counterparts...................................................64 14.7 Headings.......................................................64 14.8 Determinations.................................................64 14.9 Governing Law..................................................64 14.10 Jurisdiction...................................................64 14.11 Severability...................................................64 14.12 Rules of Construction..........................................65 14.13 Remedies.......................................................65 14.14 Entire Agreement...............................................65 14.15 Attorneys' Fees................................................65 14.16 Publicity......................................................65 14.17 Expenses.......................................................66 iv 6 EXHIBITS Exhibit A Form of Senior Subordinated Note Exhibit B Form of Warrant Exhibit C Form of Amended and Restated Articles of Incorporation Exhibit D Form of Registration Rights Agreement Exhibit E O&W Purchase Agreement Exhibit F KSTC Preferred Stock Purchase Agreement v 7 SENIOR SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT, dated as of May 7, 1997 by and among THE J.H. HEAFNER COMPANY, INC., a corporation organized under the laws of North Carolina (the "Company"), and THE 1818 MEZZANINE FUND, L.P., a Delaware limited partnership (the "Purchaser"). WHEREAS, the Company proposes to acquire (the "Acquisition") all of the outstanding capital stock of Oliver & Winston, Inc., a California corporation ("O&W"), pursuant to the O&W Purchase Agreement; and WHEREAS, concurrently with the Acquisition, the Company proposes to issue and sell to the Purchaser (i) a Senior Subordinated Promissory Note with a final maturity of May 7, 2004 in the aggregate principal amount of $16,000,000 (the "Senior Subordinated Note" and together with all notes issued in connection with the substitution, replacement or transfer thereof, the "Notes") and (ii) 977,590 detachable warrants exercisable immediately to purchase initially 977,590 shares of the Company's common stock, par value $.01 per share (the "Common Stock") at an exercise price of $.01 per share (the "Warrants"), in each case upon the terms and subject to the conditions set forth in this Agreement. In consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Acquire" or "Acquisition," as applied to any Business Unit or Investment, means the acquisition of such Business Unit or Investment by purchase, exchange, issuance of stock or other securities, or by merger, reorganization or any other method. "Acquisition" has the meaning assigned to that term in the first Whereas clause. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 8 2 "Agreement" means this Agreement, as the same may be amended, supplemented or modified in accordance with the terms hereof. "Amended and Restated Articles" means the Company's Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit C. "BBH & Co." means Brown Brothers Harriman and Co., a New York limited partnership. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York or the City of Atlanta are authorized or required by law or executive order to close. "Business Unit" means assets constituting a business, whether all of the assets of any Person or the assets of a division or operating unit of any Person. "Capital Expenditures" means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (other than Inventory or assets that constitute a Business Unit) which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years. "Capital Lease Obligations" means, as to any Person, Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests in a Person not a corporation) whether now outstanding or hereafter issued, including, without limitation, all common stock and preferred stock and any rights, warrants or options to purchase such Person's capital stock. "Change of Control" of the Company shall mean such time as: (i) Any Person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) other than the Principal Shareholders, Family Members or the Purchaser 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 9 3 in accordance with Rule 13d-3, promulgated by the Commission under the Exchange Act); (ii) A majority of the Board of Directors of the Company shall consist of Persons other than Continuing Directors. The term "Continuing Director" shall mean any member of the Board of Directors of the Company on the Closing Date, any member of the Board of Directors elected by KSTC pursuant to Section 6.4(c) of the Amended and Restated Articles, any member of the Board of Directors of the Company designated by the Fund to be elected to the Board of Directors pursuant to Section 9.10 of this Agreement 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 of the Company; (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 or consolidation, beneficially own, directly or indirectly, will own 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 of 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. "Closing" has the meaning assigned to that term in Section 2.3. "Closing Date" means the date specified in Section 2.3. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" has the meaning assigned to that term in the second Whereas clause. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation (each a "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or 10 4 otherwise acquire any such primary obligation or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor in respect of any such primary obligation or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of such primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Contractual Obligations" means as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "Debt" means (a) Indebtedness for money borrowed, (b) Indebtedness, whether or not in any such case the same was for money borrowed, (i) represented by notes payable, drafts accepted and reimbursement obligations under letters of credit, including Reimbursement Obligations (as defined in the Credit Agreement), and similar instruments that represent extensions of credit, (ii) constituting obligations evidenced by bonds, debentures, notes or similar instruments, or (iii) upon which interest charges are customarily paid or that was issued or assumed as full or partial payment for property (other than trade credit that is incurred in the ordinary course of business), (c) Capital Lease Obligations, and (d) Indebtedness that is such by virtue of clause (c) of the definition thereof, but only to the extent that the obligations Guaranteed are Debt. 11 5 The shares of Series A Preferred Stock and Series B Preferred Stock issued to KSTC on the date hereof are not Debt for purposes of this Agreement. "EBIT" means Net Income of the Company on a consolidated basis before provision for net interest expense and income taxes. "EBITDA" means EBIT plus depreciation and amortization expense deducted in computing EBIT. All references contained herein to EBITDA of the Company shall be to the EBITDA of the Company and its Subsidiaries, determined on a consolidated basis. "Environment" means navigable waters, waters of the contiguous zone, ocean waters, natural resources, surface waters, ground water, drinking water supply, land surface, subsurface strata, ambient air, both inside and outside of buildings and structures, man-made buildings and structures, and plant and animal life on earth. "Environmental Claims" means any notification, whether direct or indirect, formal or informal, written or oral, pursuant to Safety and Environmental Laws or principles of common law relating to pollution, protection of the Environment or health and safety, that any of the current or past operations of the Company or any of the Subsidiaries, or any by-product thereof, or any of the property currently or formerly owned, leased or operated by the Company or any of the Subsidiaries, or the operations or property of any predecessor of the Company or any of the Subsidiaries, is or may be implicated in or subject to any Claim, Requirement of Law, hearing, notice, agreement or evaluation by any Governmental Authority or any other person. "Environmental Compliance Costs" means any expenditures, costs, assessments or expenses (including any expenditures, costs, assessments or expenses in connection with the conduct of any Remedial Action, as well as reasonable fees, disbursements and expenses of attorneys, experts, personnel and consultants), whether direct or indirect, necessary to cause the operations, real property, assets, equipment or facilities owned, leased, operated or used by the Company or any of its Subsidiaries to be in compliance with any and all requirements, as in effect at the Closing Date, of Safety and Environmental Laws, principles of common law concerning pollution, protection of the Environment or health and safety, or Permits issued pursuant to Safety and Environmental Laws; provided, however, that Environmental Compliance Costs do not include expenditures, costs, assessments or expenses necessary in connection with normal maintenance of such real property, assets, equipment or facilities or the replacement of equipment in the normal course of events due to ordinary wear and tear. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 12 6 "Event of Default" has the meaning assigned such term in Section 11.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission hereunder. "Family Member" means (x) a member of a Principal Shareholder's immediate family, which shall include her or his ancestors, spouse, siblings, descendants or spouses (or surviving spouses) of descendants, or (y) a trust, corporation, partnership or other entity, all of the beneficial interests in which shall be held by such Principal Shareholder or one or more persons described in clause (x); provided, however, that during the period any such trust, corporation, partnership or other entity holds any right, title or interest in any Common Stock, no Person other than such Principal Shareholder or one or more Family Members of such Principal Shareholder of the type listed in clause (x) may be or become beneficiaries, stockholders or limited or general partners or owners thereof. "Financials" has the meaning assigned to that term in Section 5.9. "Fiscal Quarter" means the three-month accounting period of the Company ending March 31, June 30, September 30 and December 31 of each Fiscal Year. "Fiscal Year" means the fiscal year of the Company commencing on January 1 of each year and ending on December 31 of the same year. "Fixed Charge Coverage Ratio" means, as the last day of any specified accounting period, the result obtained by dividing (i) EBITDA minus cash outlays for income taxes and actual Capital Expenditures (other than Financed Capex (as defined in the Credit Agreement)) for such accounting period minus Permitted Subchapter S Distributions (as defined in the Credit Agreement) of the Company and its Subsidiaries by (ii) the sum of interest expense plus scheduled principal payments of Debt (including scheduled payments of Capital Lease Obligations) of the Company and its Subsidiaries during such accounting period, all on a consolidated basis. "Fund" means the Purchaser, but shall not mean any assignee of the rights of the Purchaser under this Agreement or any transferee of any securities of the Company purchased by the Purchaser hereunder. "Funded Debt" means all Debt of the Company and its Subsidiaries on a consolidated basis (other than the Funded Debt Exclusions (as defined in the Credit Agreement)) that by their terms or by the terms of any instrument or agreement relating thereto matures more than one year after, or is renewable or extendable at the option of the obligor to a date more than one year after, the date of creation thereof (including an option of the obligor under a revolving credit or similar arrangement 13 7 obligating the lender or lenders to extend credit over a period of one year or more), and includes any current maturities of any such Debt. "Funded Debt to EBITDA" means for any specified accounting period, the ratio of Funded Debt as of the last day of such period (or, as to Revolving Credit Loans (as defined in the Credit Agreement) constituting Funded Debt, the average daily amount over the prior four consecutive Fiscal Quarters (or the period from the Effective Date (as defined in the Credit Agreement) to the last day of a Fiscal Quarter ending on or prior to the date of determination if shorter) of the outstanding principal amount of Revolving Credit Loans) to EBITDA for such period. "GAAP" means generally accepted United States accounting principles in effect from time to time. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty," "Guaranteed" or to "Guarantee" as applied to any obligation of another Person shall mean and include: (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation of such other Person, and (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation of such other Person whether by (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part of all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, 14 8 (iv) repayment of amounts drawn down by beneficiaries of letters of credit, or (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. "Hazardous Substance" means any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or waste, petroleum or petroleum-derived substance or waste, radioactive substance or waste, or any constituent of any such substance or waste, or any other substance regulated under or defined by any Safety and Environmental Law. "Holder" means the Purchaser and any subsequent direct or indirect transferee of Notes or Warrants or shares of Common Stock issuable upon exercise of Warrants other than a transferee who has acquired Notes or Warrants or shares of Common Stock issuable upon exercise of Warrants that have been the subject of a distribution pursuant to a registered public offering, or, in the case of Warrants or shares of Common Stock issuable upon exercise of Warrants, a transferee who has acquired such Warrants or shares of Common Stock issuable upon exercise of Warrants after such shares have been the subject of a distribution to the public pursuant to Rule 144 or otherwise distributed under circumstances not requiring a legend. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indebtedness" of any Person means, without duplication, all Liabilities of such Person, and to the extent not otherwise included in Liabilities, the following: (a) all obligations for money borrowed or for the deferred purchase price of property or services or in respect of drafts accepted or similar instruments or reimbursement obligations under letters of credit, (b) all obligations (including, during the noncancallable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (c) all obligations of other Persons which such Person has Guaranteed, including, but not limited to, all obligations of such Person consisting of recourse liability with respect to accounts receivable sold or otherwise disposed of by such Person, 15 9 (d) all obligations of such Person in respect of Interest Rate Protection Agreements, and (e) in the case of the Company and O&W (without duplication) all obligations under the Revolving Credit Loans (as defined in the Credit Agreement) and the Term Loan (as defined in the Credit Agreement) and Reimbursement Obligations (as defined in the Credit Agreement). "Initial Public Offering" shall mean the date when the initial public offering of the Company's Common Stock with gross proceeds of at least $25 million or representing at least 20% of the Common Stock on a fully diluted basis and such Common Stock is listed on the New York Stock Exchange, Inc. or quoted or listed on any other national securities exchange or Nasdaq. "Interest Coverage Ratio" means for any specified accounting period, the ratio of EBITDA for such period to total net interest expense of the Company and its Subsidiaries on a consolidated basis for such period. "Interest Rate Protection Agreement" shall mean an interest rate swap, cap or collar agreement or similar arrangement between any Person and a financial institution providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "Inventory" means, for the Company and its Subsidiaries, all inventory, all goods intended for sale or lease or for display or demonstration, all work in process, all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing, or furnishing of goods or services or otherwise used or consumed in the conduct of business, and all documents evidencing and general intangibles relating to any of the foregoing. "Investment" means, with respect to any Person: (a) the acquisition or ownership by such Person of any share of Capital Stock, evidence of Indebtedness or other security issued by any other Person, (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person, excluding advances to employees in the ordinary course of business for business expenses, (c) any Guaranty of the obligations of any other Person, (d) any other investment (other than the Acquisition of a Business Unit) in any other Person, and 16 10 (e) any commitment or option to make any of the investments listed in clauses (a) through (d) above if, in the case of an option, the consideration therefor exceeds $100. "KSTC" means The Kelly Springfield Tire Company, a division of The Goodyear Tire and Rubber Company, an Ohio corporation. "KSTC Preferred Stock Purchase Agreement" means the Securities Purchase Agreement, dated as of May 7, 1997, among the Company and KSTC in the form attached hereto as Exhibit F, pursuant to which the Company is issuing and selling 7,000 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock to KSTC for the aggregate amount of $11.5 million. "Liabilities" of any Person means all items (except for items of capital stock, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. "Lien" as applied to the property of any Person means: (a) any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capital Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, (c) any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, except to the extent being disputed or contested by the Company or its Subsidiaries by appropriate proceedings and in respect of which any reserve required by GAAP has been appropriately established and maintained, (d) the filing of, or any agreement to give, any financing statement under the UCC or its equivalent in any jurisdiction, excluding informational financial statements relating to property leased by the Company or its Subsidiaries, and 17 11 (e) in the case of Real Estate, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances. "Nasdaq" means the National Market System of Nasdaq Stock Market. "Net Income" or "Net Loss" means, as applied to any Person for any accounting period, the net income or net loss, as the case may be, of such Person for the period in question after giving effect to deduction of or provision for all operating expenses, all taxes and reserves (including reserves for deferred taxes) and all other proper deductions, all determined in accordance with GAAP, provided that there shall be excluded: (a) the net income or net loss of any Person accrued prior to the date it becomes a Subsidiary of, or is merged into or consolidated with, the Person whose Net Income is being determined or a Subsidiary of such Person, (b) the net income or net loss of any Person in which the Person whose Net Income is being determined or any Subsidiary of such Person has an ownership interest, except, in the case of net income, to the extent that any such income has actually been received by such Person or such Subsidiary in the form of cash dividends or similar distributions, (c) any restoration of any contingency reserve, except to the extent that provision for such reserve was made out of income during such period, (d) any net gains or losses on the sale or other disposition, not in the ordinary course of business, of Investments, Business Units and other capital assets, provided that there shall also be excluded any related charges for taxes thereon, (e) any net gain arising from the collection of the proceeds of any insurance policy, (f) any write-up of any asset, and (g) any other extraordinary item. All references contained herein to the Net Income of the Company shall be to the Net Income of the Company and its Subsidiaries, determined on a consolidated basis. "Net Worth" means, as of the date of determination with respect to any Person, such Person's total stockholders' equity (including capital stock, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear on a balance sheet of such Person prepared in accordance with GAAP. 18 12 "NYSE" means the New York Stock Exchange, Inc. "O&W" has the meaning assigned to that term in the first Whereas clause. "O&W Purchase Agreement" means the Stock Purchase Agreement, dated as of April 9, 1997, by and among all of the shareholders of O&W and the Company in the form attached hereto as Exhibit E. "Permit" means any license, permit, exemption, consent, waiver, authorization, right, order or approval of, and required registration with, any Governmental Authority. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of any such entity. "PORTAL" means the PORTAL market. "Principal Shareholders" means Ann Heafner Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones. "Purchase Price" has the meaning assigned to that term in Section 2.1. "Real Estate" means all of the Company's and its Subsidiaries' now or hereafter owned or leased estates in real property, including, without limitation, all fees, leaseholds and future interests, together with all of the Company's and its Subsidiaries' now or hereafter owned or leased interests in the improvements and emblements thereon, the fixtures attached thereto and the easements appurtenant thereto. "Receivables" means all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, letters of credit and the right to receive payment thereunder, chattel paper, tax refunds, insurance proceeds, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing. 19 13 "Registration Rights Agreement" means the Registration Rights Agreement substantially in the form attached hereto as Exhibit D, as the same may be amended or modified from time to time in accordance with its terms. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into or through the indoor or outdoor Environment or into, through or out of any property, including the movement of Hazardous Substances through or in the air, soil, surface water, ground water or property. "Remedial Action" means all actions, whether voluntary or involuntary, reasonably necessary to comply with, or discharge any obligation under, Safety and Environmental Laws to (i) clean up, remove, treat, cover or in any other way adjust Hazardous Substances in the indoor or outdoor Environment; (ii) prevent or control the Release of Hazardous Substances so that they do not migrate or endanger or threaten to endanger public health or welfare or the Environment; or (iii) perform remedial studies, investigations, restoration and post-remedial studies, investigations and monitoring on, about or in any real property. "Requirements of Law" means, as to any Person, any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Payment" means (a) any dividend or other distribution on any share of the Company's or any Subsidiary's capital stock (except dividends payable solely in shares of their capital stock) or (b) any payment by the Company or any of its Subsidiaries on account of the direct or indirect purchase, redemption, retirement or other acquisition of (i) any shares of the Company's or any such Subsidiary's capital stock (except shares acquired upon the conversion or exercise thereof into other shares of their capital stock), (ii) any option, warrant or other right to acquire shares of the Company's or any such Subsidiary's capital stock (except upon the conversion or exercise thereof into shares of capital stock) or (iii) any Debt of the Company or any such Subsidiary (other than indebtedness incurred pursuant to the Notes or the Credit Agreement) prior to any date set forth for mandatory repayment of principal or interest thereon. "Safety and Environmental Laws" means all Requirements of Law relating to pollution, protection of the Environment, public or worker health and safety, or the emission, discharge, release or threatened release of Hazardous Substances into the Environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sec. 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. Sec. 2601 20 14 et seq., the Federal Water Pollution Control Act, 33 U.S.C. Sec. 1251 et seq., the Clean Air Act, 42 U.S.C. Sec. 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sec. 121 et seq., the Occupational Safety and Health Act, 29 U.S.C. Sec. 651 et seq., the Asbestos Hazard Emergency Response Act, 15 U.S.C. Sec. 2601 et seq., the Safe Drinking Water Act, 42 U.S.C. Sec. 300f et seq., the Oil Pollution Act of 1990, 33 U.S.C. Sec. 2701 et seq., and analogous state acts. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Senior Financing, Preferred Investment and Acquisition Documents" means (i) the Loan and Security Agreement, dated as of May 7, 1997 between the Company, O&W, the financial institutions party thereto and BankBoston, N.A., as agent, and the notes and agreements entered into in connection therewith (each as amended or modified from time to time in accordance with its terms) (collectively, the "Credit Agreement") pursuant to which the Company will incur up to $65 million of senior debt, (ii) the KSTC Preferred Stock Purchase Agreement and the agreements entered into in connection therewith pursuant to which the Company will issue and sell to KSTC 7,000 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock for the aggregate amount of $11.5 million and (iii) the O&W Purchase Agreement and the agreements entered into in connection therewith. "Senior Subordinated Note" has the meaning assigned to that term in the second Whereas clause. "Series A Preferred Stock" means the Company's Series A Cumulative Redeemable Preferred Stock, $.01 par value per share. "Series B Preferred Stock" means the Company's Series B Cumulative Redeemable Preferred Stock, $.01 par value per share. "Solvent" means, as to any Person, that the fair saleable value on a going concern basis of the assets and property of such Person is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that is probable to become an actual or matured liability. "Subsidiary" means, with respect to any Person, a corporation or other entity of which 50% or more of the combined voting power of the then outstanding securities ordinarily (and apart from rights accruing under special circumstances) 21 15 having the right to vote in the election of directors is owned, directly or indirectly, by such Person. "Tax" or "Taxes" means all federal, state, county, local, foreign and other taxes (including, without limitation, income, profits, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll-related and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, and including expenses associated with any proposed adjustment relating to any of the foregoing (including advice in connection with contesting such adjustment). "Temporary Cash Investment" means (i) negotiable certificates of deposit and time deposits issued by BankBoston, N.A. or by any United States bank or trust company having capital, surplus and undivided profits in excess of $100,000,000 or (ii) any direct obligation of the United States of America or any agency or instrumentality thereof which has a remaining maturity at the time of purchase of not more than one year and repurchase agreements relating to the same. "Transaction Documents" has the meaning assigned to that term in Section 5.17. "UCC" means the Uniform Commercial Code as in effect from time to time in the applicable jurisdiction. "Warrants" has the meaning assigned to that term in the second Whereas clause. 1.2 Accounting Terms; Financial Covenants. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with sound accounting practice. The term "sound accounting practice" shall mean such accounting practice as, in the opinion of the independent accountants regularly retained by the Company, conforms at the time to GAAP applied on a consistent basis. If any changes in accounting principles are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found herein, then the parties hereto agree to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to reflect fairly and equitably such changes, with the desired result that 22 16 the criteria for evaluating the Company's financial condition and results of operations shall be the same after such changes as if such changes had not been made. ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale of Senior Subordinated Note and Warrants. Subject to the terms and conditions set forth herein, the Company agrees that it will issue to the Purchaser, and the Purchaser agrees that it will acquire from the Company, at the Closing, the principal amount of the Senior Subordinated Note, with such Senior Subordinated Note being substantially in the form attached hereto as Exhibit A, appropriately completed in conformity herewith, and 977,590 Warrants, with such Warrants being substantially in the form attached hereto as Exhibit B, for an aggregate purchase price of $16,000,000.00 (the "Purchase Price"), in cash, by wire transfer of immediately available funds to an account designated in a notice delivered to the Purchaser not later than two Business Days prior to the Closing Date. 2.2 Fees. The Company hereby agrees that it will pay to the Purchaser, at the Closing, a facility fee of 2.0% of the Purchase Price (less any portion thereof previously paid by the Company to the Purchaser), payable in cash by wire transfer of immediately available funds to an account designated in a notice delivered to the Company not later than two Business Days prior to the Closing Date. At the Company's option by notice to the Purchaser at least two Business Days prior to the Closing Date, such facility fee may be paid by the Purchaser by deducting such amount from the Purchase Price. 2.3 Closing. The purchase and issuance of the Senior Subordinated Note and the Warrants shall take place at the closing (the "Closing") to be held at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019 on May 7, 1997 (the "Closing Date"), at 10:00 a.m., New York City time, or on such other date and at such other time as the Purchaser and the Company may mutually agree. At the Closing, subject to the terms and conditions set forth herein, the Company shall sell the Senior Subordinated Note and the Warrants to the Purchaser by delivering to the Purchaser, the Senior Subordinated Note and the Warrants registered in the name of the Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of any Lien, and the Purchaser shall purchase the Senior Subordinated Note and the Warrants for the Purchase Price. 23 17 ARTICLE 3 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE The obligation of the Purchaser to purchase the Senior Subordinated Note and the Warrants, to pay the Purchase Price at the Closing, and to perform any of its obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: 3.1 Representations and Warranties True. The representations and warranties of the Company contained in Article 5 hereof shall be true and correct (a) at and as of the Closing Date and (b) after giving effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents, as if made at and as of such date. 3.2 Compliance with this Agreement. The Company shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Company on or before the Closing Date. 3.3 Officer's Certificate. The Purchaser shall have received a certificate, dated the Closing Date and signed by the President or a Vice-President of the Company, certifying that the conditions set forth in Sections 3.1 and 3.2 hereof have been satisfied on and as of such date. 3.4 Secretary's Certificate. The Purchaser shall have received a certificate, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, attaching a good standing certificate from the North Carolina Secretary of State with respect to the Company and certifying the truth and correctness of attached copies of the articles of incorporation and by-laws of the Company and resolutions of the Board of Directors of the Company approving this Agreement and the transactions contemplated hereby. 3.5 Documents. The Purchaser shall have received copies of such documents as it reasonably may request in connection with the sale of the Senior Subordinated Note and the Warrants and the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Purchaser. 3.6 Purchase Permitted by Applicable Laws; Legal Investment. The acquisition of and payment for the Senior Subordinated Note and Warrants and the consummation of the transactions contemplated hereby (a) shall not be prohibited by any applicable law or governmental regulation, (b) shall not subject the Purchaser to any penalty or, in its reasonable judgment, other onerous condition under or pursuant 24 18 to any applicable law or governmental regulation and (c) shall be permitted by the laws and regulations of the jurisdictions to which it is subject. 3.7 Filing of Amended and Restated Articles. The Amended and Restated Articles in the form attached hereto shall have been duly filed by the Company with the Secretary of State of the State of North Carolina. 3.8 Opinion of Counsel. The Purchaser shall have received the opinions of Howard, Darby & Levin and J. Michael Gaither, Esq., counsel to the Company, dated the Closing Date, each in form and substance reasonably acceptable to the Purchaser. 3.9 Approval of Counsel to the Purchaser. All actions and proceedings hereunder and all documents required to be delivered by the Company hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been reasonably acceptable to Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Purchaser, as to their form and substance. 3.10 Consents and Approvals. All consents, waivers, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons necessary or required in connection with the execution, delivery or performance by the Company or enforcement against the Company of this Agreement or any other Transaction Document shall have been obtained and be in full force and effect, and the Purchaser shall have been furnished with appropriate evidence thereof. 3.11 No Material Adverse Change. Since December 31, 1996, there shall have been no material adverse change, nor shall any such change be threatened, in the assets, business, properties, prospects, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole. 3.12 Due Diligence. The Purchaser shall have completed its due diligence review of the assets, business, properties, operations and financial and other condition of each of O&W and the Company, and shall be reasonably satisfied with the results of such review. 3.13 Employment Agreements. Each of William Gaither, J. Michael Gaither, Thomas J. Bonburg and Donald C. Roof shall have duly executed and delivered employment agreements with the Company, the terms and conditions of which are reasonably acceptable to the Purchaser. 3.14 Registration Rights Agreement. The Company shall have duly executed and delivered to the Purchaser the Registration Rights Agreement. 25 19 3.15 Articles of Incorporation and By-Laws of the Company and the Subsidiaries. Except for the Amended and Restated Articles, no amendments to the articles of incorporation or by-laws of the Company or any of its Subsidiaries as in effect on the date hereof shall have been effected. 3.16 Market Conditions. Prior to the Closing Date, (a) trading in securities generally on the NYSE shall not have been suspended or limited or minimum or maximum prices shall not have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall not have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other Governmental Authority, (b) a general banking moratorium shall not have been declared by either federal or New York State authorities or (c) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall not have occurred. 3.17 No Litigation. No action, suit, proceeding, claim or dispute shall have been brought or otherwise arisen at law, in equity, in arbitration or before any Governmental Authority against the Company or O&W which would, if adversely determined, in the reasonable judgment of the Purchaser, (a) after giving effect to the transactions contemplated hereby, have a material adverse effect on the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole, or (b) have a material adverse effect on the ability of the Company to perform its obligations under this Agreement or any other Transaction Document or the Senior Financing, Preferred Investment and Acquisition Documents. 3.18 No Default or Breach. The Company shall not have been in default under or with respect to any of the Transaction Documents or the Senior Financing, Preferred Investment and Acquisition Documents and, after giving effect to the transactions contemplated hereby and thereby, the Company will not be in default under any of the Transaction Documents or the Senior Financing, Preferred Investment and Acquisition Documents. 3.19 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement. The closing of the transactions contemplated by the O&W Purchase Agreement and the KSTC Preferred Stock Purchase Agreement shall simultaneously occur with the Closing hereof. All of the conditions set forth in Section 4.1 of the O&W Purchase Agreement and Article VII of the KSTC Preferred Stock Purchase Agreement shall have been satisfied or waived; provided, that any such waiver shall have been given only with the prior written consent of the Purchaser. 26 20 3.20 Senior Financing. The Company shall have obtained senior financing pursuant to the Credit Agreement in an amount not exceeding $65 million (including a revolving credit facility not in excess of $53 million) in connection with the Acquisition on terms reasonably satisfactory to the Purchaser. 3.21 Facilities Fee. The Company shall have paid to the Purchaser the fees provided for in Section 2.2 hereof or given notice under such Section that such amount should be subtracted from the Purchase Price to be paid on the Closing Date. ARTICLE 4 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligations of the Company to issue and sell the Senior Subordinated Note and Warrants and to perform any of its other obligations hereunder, shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: 4.1 Representations and Warranties True. The representations and warranties of the Purchaser contained in Article 6 hereof shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date. 4.2 Compliance with this Agreement. The Purchaser shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Purchaser on or before the Closing Date. 4.3 General Partner's Certificate. The Company shall have received a certificate, dated the Closing Date and signed by the general partner of the Purchaser, (i) certifying that the conditions set forth in Sections 4.1 and 4.2 hereof have been satisfied on and as of such date and (ii) attaching a good standing certificate from the Delaware Secretary of State with respect to the Purchaser. 4.4 Approval of Counsel to the Company. All actions and proceedings hereunder and all documents required to be delivered by the Purchaser hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been reasonably acceptable to Howard, Darby & Levin, counsel to the Company, as to their form and substance. 4.5 Consents and Approvals. All consents, exemptions, authorizations, waivers or other actions by, or notices to, or filings with, Governmental Authorities and other Persons necessary or required in connection with 27 21 the execution, delivery or performance by the Purchaser or enforcement against the Purchaser of this Agreement shall have been obtained and be in full force and effect, and the Company shall have been furnished with appropriate evidence thereof. 4.6 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement. The closing of the transactions contemplated by the O&W Purchase Agreement and the KSTC Preferred Stock Purchase Agreement shall simultaneously occur with the Closing hereof. 4.7 Senior Financing. The Company shall have obtained senior financing pursuant to the Credit Agreement in an amount not exceeding $65 million (including a revolving credit facility not in excess of $53 million) in connection with the Acquisition. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 5.1 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is, and after giving effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents, will be duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has, and after giving effect to the transactions contemplated hereby (including the Acquisition and the transactions contemplated by the KSTC Preferred Stock Purchase Agreement), will have (i) full corporate power and authority and (ii) all governmental licenses, authorizations, consents and approvals to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged; (c) is, and after giving effect to the transactions contemplated hereby (including the Acquisition and the transactions contemplated by the KSTC Preferred Stock Purchase Agreement), will be duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification; and 28 22 (d) is, and after giving effect to the transactions contemplated hereby, will be in compliance with (i) its articles or certificate of incorporation and by-laws or other organizational or governing documents and (ii) all Requirements of Law; except, in the case of (b)(ii), (c) or (d)(ii) of this Section 5.1, to the extent that the failure to do so could not reasonably be expected to have a material adverse effect on the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole. 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement, the Registration Rights Agreement, any other Transaction Document and the transactions contemplated hereby and thereby, including without limitation, the issuance of the Senior Subordinated Note and the Warrants: (a) is within the Company's corporate power and authority and has been duly authorized by all necessary corporate action; and (b) does not, and will not after giving effect to the transactions contemplated hereby, contravene the terms of the articles or certificate of incorporation or by-laws or other organizational or governing documents or any amendment thereof of the Company or any of its Subsidiaries; and (c) except as set forth on Schedule 5.2, does not, and will not after giving effect to the transactions contemplated hereby, violate, conflict with or result in any breach of, contravention of or the creation of any Lien (other than Liens permitted pursuant to Section 10.8) under, any Contractual Obligation of the Company or any of its Subsidiaries or any order or decree directly relating to the Company or any of its Subsidiaries, other than any such violations, conflicts, contraventions or Liens that, individually or in the aggregate, could not reasonably be expected to (1) have a material adverse effect on the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole, (2) impair the ability of the Company to perform its obligations under the Transaction Documents or (3) prevent or materially delay consummation of the transactions contemplated by the Transaction Documents. 5.3 Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person, is necessary or required in connection with the execution, delivery or performance by the Company or enforcement against the Company of this Agreement, the Senior Subordinated Note, the Warrants, the Registration Rights Agreement, any other Transaction Document or the transactions contemplated hereby or thereby, other than those that have been obtained or made on or prior to the Closing. 29 23 5.4 Binding Effect. This Agreement has been duly executed and delivered by the Company, and at the Closing the Senior Subordinated Note, the Registration Rights Agreement, the Warrants and each other Transaction Document to which the Company is a party will be duly executed and delivered by the Company, and this Agreement constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, and at the Closing the Registration Rights Agreement, the Senior Subordinated Note and the Warrants will constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. 5.5 No Legal Bar. Neither the execution, delivery and performance of this Agreement, the Registration Rights Agreement, or any other Transaction Document or the Senior Financing, Preferred Investment and Acquisition Documents nor the issuance of or performance of the terms of the Senior Subordinated Note or the Warrants will violate any Requirement of Law or any Contractual Obligation of the Company, other than any such violations that, individually or in the aggregate, could not reasonably be expected to (1) have a material adverse effect on the assets, business, properties, operations or financial or other condition for the Company and its Subsidiaries, taken as a whole, (2) impair the ability of the Company to perform its obligations under the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents or (3) prevent or materially delay consummation of the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents. 5.6 Litigation. Except as set forth on Schedule 5.6, there are no, and after giving effect to the transactions contemplated hereby there will not be, any actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company or the Subsidiaries: (a) with respect to any Transaction Document or any Senior Financing, Preferred Investment and Acquisition Documents or any of the transactions contemplated hereby or thereby; or (b) which could reasonably be expected to, after giving effect to the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents and the transactions contemplated hereby and thereby, if adversely determined, (i) have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole (after giving effect to the transactions contemplated hereby) or (ii) have a material adverse effect on the ability of the Company to perform its obligations under this Agreement, the Senior Subordinated Note, the Warrants, the Registration Rights Agreement or any other Transaction Document or any Senior Financing, Preferred Investment and Acquisition Documents. No injunction, writ, temporary restraining order, decree or any order of any nature has 30 24 been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance of this Agreement, the Senior Subordinated Note, the Warrants, the Registration Rights Agreement or any other Transaction Document or any Senior Financing, Preferred Investment and Acquisition Documents. 5.7 No Default or Breach. No event has occurred and is continuing or would result from the incurring of obligations by the Company under this Agreement, the Registration Rights Agreement or any other Transaction Document or any Senior Financing, Preferred Investment and Acquisition Documents which constitutes a default under or breach of any of the provisions hereof or of the Notes and no such event will occur or will be continuing after giving effect to the transactions contemplated hereby. Neither the Company or any of its Subsidiaries is, and after giving effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents will not be, in default under or with respect to any Contractual Obligation, Transaction Document or Senior Financing, Preferred Investment and Acquisition Documents in any respect, other than any such violations that, individually or in the aggregate, could not reasonably be expected to (1) have a material adverse effect on the assets, business, properties, operations or financial or other condition for the Company and its Subsidiaries, taken as a whole, (2) impair the ability of the Company to perform its obligations under the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents or (3) prevent or materially delay consummation of the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents. 5.8 Title to Properties. The Company and each of its Subsidiaries has, and after giving effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents will have, good record and marketable title to, or hold leases in full force and effect in all their real property, except for such defects in title as could not, individually or in the aggregate, have a materially adverse effect on the assets, business, properties, operations or financial or other conditions of the Company and its Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under this Agreement, the Senior Subordinated Note, the Warrants or the Registration Rights Agreement or any other Transaction Document or any Senior Financing, Preferred Investment and Acquisition Documents. 5.9 Financial Condition; No Undisclosed Liabilities. The Company heretofore has delivered to the Purchaser true and correct copies of (i) financial statements of the Company for the fiscal year ended December 31, 1995 (audited) and December 31, 1996 (unaudited) (the "Financials") and (ii) the unaudited balance sheet of the Company as of March 31, 1997 and the related statements of operations for the three month period then ended (the "Interim Financials"), certified by the President or a Vice President of the Company. The Financials have been prepared in accordance 31 25 with GAAP applied consistently throughout the periods covered thereby, and present fairly in all material respects the financial condition of the Company as of the dates thereof, and the results of operations of the Company for the period then ended. The Interim Financials present fairly in all material respects the financial condition of the Company as of the date thereof and the results of operations of the Company for the period then ended, all in conformity with GAAP applied in a consistent basis, subject to the normal year-end audit adjustments and the absence of footnotes required by GAAP and subject to the adjustments described in Schedule 5.9 hereto. Except as set forth on Schedule 5.9, the Company and its Subsidiaries, after giving effect to the transactions contemplated hereby, will not have any material direct or indirect indebtedness, liability or obligation, whether known or unknown, fixed or unfixed, contingent or otherwise, and whether or not of a kind required by GAAP to be set forth on a financial statement, other than (i) those fully and adequately reflected on the Financials and the Interim Financials, (ii) those fully and adequately reflected on the audited balance sheet of O&W as of September 30, 1996 and the unaudited balance sheet of O&W as of December 31, 1996, true and correct copies of which have heretofore been delivered by the Company to the Purchaser (collectively, the "O&W Balance Sheets"), (iii) those incurred since the date of the Financials and the O&W Balance Sheets in the ordinary course of business and (iv) those incurred pursuant to the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents. 5.10 No Material Adverse Change. Since December 31, 1996, there has not been any material adverse change, nor to the knowledge of the Company is any such change threatened, in the assets, business, properties, operations or financial or other condition of (a) the Company and its Subsidiaries, taken as a whole, or (b) the business being acquired by the Company under the O&W Purchase Agreement. 5.11 Investment Company. Neither the Company nor any Person controlling the Company is, and no such Person after giving effect to the transactions contemplated hereby will be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.12 Subsidiaries. Prior to the consummation of the Acquisition, the Company had no Subsidiaries. Upon consummation of the Acquisition, O&W will be the only Subsidiary of the Company. 5.13 Capitalization. As of the Closing Date, after giving effect to the transactions contemplated hereby and by the KSTC Preferred Stock Purchase Agreement (i) the authorized capital stock of the Company will consist of 10,011,500 shares, consisting of 10,000,000 shares of Common Stock, 7,000 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock, (ii) 3,466,000 of such shares of Common Stock, 7,000 of such shares of Series A Preferred Stock and 4,500 of such shares of Series B Preferred Stock will be issued and outstanding and 32 26 (iii) 6,534,000 shares of Common Stock, no shares of Series A Preferred Stock and no shares of Series B Preferred Stock will be authorized but not issued. All such shares of capital stock of the Company have been duly authorized and all of the issued and outstanding shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock are fully paid and non-assessable. The Warrants to be issued at the Closing are exercisable into 22.0% of the Common Stock of the Company on a fully diluted basis as of the Closing Date and after taking into account the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents. Except as set forth in Schedule 5.13, there are no shares of capital stock of the Company reserved for issuance. The Common Stock when issued upon exercise of the Warrants are duly authorized, and, when so issued, will be fully paid and non-assessable. Except for the Warrants and as set forth in Schedule 5.13, there are no options, warrants or other rights to purchase shares of capital stock or other securities of the Company, nor is the Company obligated in any manner to issue shares of its capital stock or other securities. Except as contemplated hereby and for relevant state and federal securities laws, there are no restrictions on the Company's ability to transfer shares of capital stock of the Company other than certain provisions of the agreements set forth in Schedule 5.13. 5.14 Solvency. On and as of the Closing Date, after giving effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents, the Company will be Solvent. 5.15 Private Offering. No form of general solicitation or general advertising was used by the Company or, to its knowledge, its representatives in connection with the offer or sale of the Senior Subordinated Note, the Warrants, the Common Stock issuable upon exercise of the Warrants or the Preferred Stock issued on the Closing Date. No registration of the Senior Subordinated Note, the Warrants, the Common Stock issuable upon exercise of the Warrants or the Preferred Stock issued on the Closing Date pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws will be required by the offer, sale or issuance of any such securities pursuant to the transactions contemplated hereby. The Company agrees that neither it, nor anyone acting on its behalf, will offer or sell the Senior Subordinated Note, the Warrants or any other security so as to require the registration of the Senior Subordinated Note or the Warrants or any other security pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws, unless such securities are so registered. 5.16 Broker's, Finder's or Similar Fees. Except as set forth on Schedule 5.16, there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the offer or sale of the Senior Subordinated Note or Warrants contemplated hereby based on any agreement, arrangement or understanding with the Company, or any action taken by any such entity. 33 27 5.17 Full Disclosure. No statement by the Company contained in (i) the Senior Financing, Preferred Investment and Acquisition Agreements and (ii) this Agreement, the Senior Subordinated Note, the Warrants, the Registration Rights Agreement, or any other document, certificate, notice or consent related to any of the foregoing (collectively, "Transaction Documents") delivered to the Purchaser in connection with the purchase and sale of the Senior Subordinated Note and the Warrants at or prior to the Closing contains (or will contain) an untrue statement of a material fact or omits (or will omit) to state a material fact required to be stated therein or necessary to make the statements made, in light of the circumstances in which made, not materially false or misleading. 5.18 Anti-Dilution Protection. Other than pursuant to the agreements listed on Schedule 5.18, no holder of shares of Common Stock (or securities convertible into or exchangeable or exercisable for any of the foregoing) has any rights to purchase or receive additional or other securities upon the occurrence of an event that might dilute such holder's percentage interest in the Company. 5.19 Registration Rights Agreements. As of the Closing Date, the Company will not be a party to any agreement granting any registration rights to any Person except as set forth on Schedule 5.19. The registration rights set forth on Schedule 5.19 are not inconsistent with the rights granted to the Purchaser in the Registration Rights Agreement. 5.20 O&W Purchase Agreement/KSTC Preferred Stock Purchase Agreement. (a) The O&W Purchase Agreement in the form attached hereto as Exhibit E (a) is a true and correct copy thereof, (b) has not been amended or modified since it was executed and delivered and (c) is in full force and effect and will be in full force and effect as of the Closing Date. On the Closing Date, each of the representations and warranties made by the Company and, to the best knowledge of the Company, the shareholders (individually or as a group) of O&W in the O&W Purchase Agreement is true and correct in all material respects. (b) The KSTC Stock Purchase Agreement in the form attached hereto as Exhibit F (a) is a true and correct copy thereof, (b) has not been amended or modified since it was executed and delivered and (c) is in full force and effect as of the Closing Date. On the Closing Date, each of the representations and warranties made by the Company, and, to the best knowledge of the Company, KSTC in the KSTC Preferred Stock Purchase Agreement is true and correct in all material respects. 5.21 Labor Relations. Neither the Company nor any of its Subsidiaries is engaged in any unfair labor practice. There is (a) no unfair labor practice complaint pending or, to the best knowledge of the Company, threatened 34 28 against the Company or any of its Subsidiaries before the National Labor Relations Board and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending or, to the best knowledge of the Company, threatened, (b) no strike, labor dispute, slowdown or stoppage pending or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries, and (c) no union representation question existing with respect to the employees of the Company or any of its Subsidiaries and, to the knowledge of the Company, no union organizing activities are taking place. 5.22 ERISA and Employee Benefit Plans. (a) There are no employee benefit plans, arrangements, policies or commitments of any type (including, but not limited to, plans described in section 3(3) of ERISA) maintained by the Company or any of its Subsidiaries, or with respect to which the Company or any of its Subsidiaries has or could have any direct or indirect liability, other than those described in Schedule 5.22 ("Benefit Plans"). (b) Accurate and complete copies of all plan text and agreements, the most recent annual report, the most recent annual and periodic accounting of plan assets, and the most recent actuarial valuation with respect to each Benefit Plan have been made available to the Purchaser. (c) No Benefit Plan is subject to Title IV of ERISA or section 412 of the Code. No Benefit Plan is a "multiple employer plan" within the meaning of the Code or ERISA. (d) With respect to each Benefit Plan, except as set forth in Schedule 5.22: (i) if it is intended to qualify under section 401(a) or 403(a) of the Code, such plan so qualifies; (ii) such Benefit Plan has been maintained and administered at all times in compliance in all material respects with its terms and applicable laws and regulations; (iii) no event has occurred and there exists no circumstances under which the Company or any of its Subsidiaries could incur material liability under ERISA, the Code or otherwise (other than routine claims for benefits) with respect to such plan or with respect to any other entity's employee benefit plan; and (iv) all material contributions and premiums due with respect to such plan have been made on a timely basis. (e) With respect each Benefit Plan that is a "welfare plan" (as defined in ERISA section 3(1)): (i) no such plan provides medical or death benefits with respect to current or former employees of the Company or any of its Subsidiaries beyond their termination of employment (other than as required to avoid an excise tax under Code section 4980B); and (ii) except as set forth on Schedule 5.22, the Company and each of its Subsidiaries has complied with the requirements of Code section 4980B. 35 29 (f) Except as set forth on Schedule 5.22, the consummation of the transactions contemplated by this Agreement will not: (i) entitle any individual to severance or termination pay; (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any individual; or (iii) result in a payment or other benefit that will constitute an "excess parachute payment" under Code section 280G(b)(1). 5.23 Environmental Matters. Except as set forth on Schedule 5.23: (a) Neither the Company nor any of its Subsidiaries is in violation in any material respect of any applicable Safety and Environmental Law, other than any such violations or obligations that, individually could not reasonably be expected to result in a liability to the Company or its Subsidiaries in excess of $50,000 or in the aggregate, could not reasonably be expected to result in liabilities to the Company or its Subsidiaries in excess of $1,500,000. (b) The Company and the Subsidiaries have all Permits required pursuant to Safety and Environmental Laws that are material to the conduct of the business of the Company or any of the Subsidiaries, all such Permits are in full force and effect, no action, cause of action, suit, claim, complaint, demand, litigation or legal, administrative or arbitral proceeding or investigation (collectively, "Claims") to revoke, limit or modify any of such Permits is pending and the Company and each of the Subsidiaries is in compliance in all material respects with all terms and conditions thereof except for instances of non-compliance that individually could not reasonably be expected to result in a liability to the Company or its Subsidiaries in excess of $50,000 or in the aggregate could not reasonably be expected to result in liabilities to the Company or its Subsidiaries in excess of $1,500,000. (c) The Company and the Subsidiaries have filed all notices required under Safety and Environmental Laws indicating the past or present Release, generation, treatment, storage or disposal of Hazardous Substances, except for instances of non-compliance that individually could not reasonably be expected to result in a liability to the Company or its Subsidiaries in excess of $50,000 or in the aggregate could not reasonably be expected to result in liabilities to the Company or its Subsidiaries in excess of $1,500,000. (d) Except in cases which could not reasonably be expected to give rise to any liability to the Company or its Subsidiaries under any Safety and Environmental Law in excess of $50,000 individually or $1,500,000 in the aggregate, there is not now and has not been at any time in the past at, on or in any of the real properties owned, leased or operated by the Company or any of its Subsidiaries, and, to the knowledge of the Company, there was not at, on or in any real property previously owned, leased or operated by the Company or any of its Subsidiaries or 36 30 any predecessor: (i) any UST, surface impoundment, lagoon, landfill, solid waste disposal area, or other containment facility (past or present) for the temporary or permanent storage, treatment or disposal of Hazardous Substances; or (ii) any Release or threatened Release, or any visible signs of Releases or threatened Releases, of a Hazardous Substance to the Environment in form or quantity requiring Remedial Action under Safety and Environmental Laws. (e) No Environmental Claim is pending, and, to the knowledge of the Company, there is no basis for any Environmental Claim or Environmental Compliance Costs in circumstances where the liability to the Company or its Subsidiaries individually could reasonably be expected to exceed $50,000, and in the aggregate could reasonably be expected to exceed $1,500,000. (f) Neither the Company nor any of its Subsidiaries has transported, stored, treated or disposed, nor, to the knowledge of the Company, has it allowed or arranged for any third persons to transport, store, treat or dispose, any Hazardous Substance to or at: (i) any location other than a site lawfully permitted to receive such substances for such purposes, or (ii) any location designated for Remedial Action pursuant to Safety and Environmental Laws; nor has it performed, arranged for or, to its knowledge, allowed by any method or procedure such transportation or disposal in contravention of any Safety and Environmental Laws which may result in Environmental Compliance Costs or in an Environmental Claim to or against the Company or its Subsidiaries which could reasonably be expected to exceed $50,000 individually or $1,500,000 in the aggregate. 5.24 Taxes. (a) The Company and each of its Subsidiaries have timely filed all returns with respect to Taxes required to be filed through the date hereof in a manner consistent with prior years and applicable laws and regulations and all such Tax returns are true and complete in all material respects. The Company and each of its Subsidiaries have timely paid all Taxes shown on the Tax Returns to be due and payable through the date hereof, or that are claimed or asserted by any taxing authority to be due through the date hereof, except for those Taxes that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. With respect to any period for which Tax returns have not yet been filed, or for which Taxes are not yet due or owing, the Company and each of its Subsidiaries have no liability for Taxes in each case other than Taxes incurred in the ordinary course of business or for which accruals are reflected in the December 31, 1996 Financials. (b) No audit or other proceeding by any court, taxing authority, or similar person is pending or, to the knowledge of the Company or any of its Subsidiaries, threatened with respect to any Taxes due from or with respect to the operations of the Company or any of its Subsidiaries, or any Tax return filed by 37 31 or with respect to the operations of the Company or any of any its Subsidiaries. To the best knowledge of the Company, no assessment of Taxes is proposed against the Company, any of its Subsidiaries or their assets. (g) For all taxable periods ending on or before the Closing Date, the Company has had a valid election in effect to be treated as an "S corporation," within the meaning of Section 1361(a) (1) of the Code, and has had similar elections in effect under comparable provisions of state and local laws in each jurisdiction in which it does business. 5.25 Patents, Trademarks, Etc. (a) The Company and each of its Subsidiaries owns or has licensed or otherwise has the right to use all patents, trademarks, service marks, trade names, copyrights, licenses, franchises, computer software (including the source codes thereto) and other intellectual property rights that are material to the operation of their businesses as presently conducted or proposed to be conducted. (b) The Company uses and has used its best efforts to secure and maintain its intellectual property rights in any and all computer software it owns. Duplicates of all such computer software, including the source codes thereto, are at a secure off-site location. (c) To the best knowledge of the Company, no product, process, method, substance or other material presently owned, sold, licensed or employed by the Company or any of its Subsidiaries, or which the Company or any of its Subsidiaries contemplates owning, selling, licensing or employing, (i) infringes upon the patents, trademarks, service marks, copyrights or licenses that are owned by others or (ii) is being infringed upon by any other Person. No litigation is pending and no claim has been made against the Company or any of its Subsidiaries or, to the best knowledge of the Company, is threatened, contesting the right of the Company or any of its Subsidiaries to own, sell, license or use any product, process, method, substance or other material presently owned, sold, licensed or employed by the Company or any of its Subsidiaries or which the Company or any of its Subsidiaries intends to acquire an ownership interest in, sell, license or employ. 5.26 Potential Conflicts of Interest. To the best knowledge of the Company, except as set forth on Schedule 5.26, no executive officer, director or Affiliate of the Company or any of its Subsidiaries, and no relative or spouse of any such officer, director or Affiliate: (a) owns, directly or indirectly, any interest in (excepting less than 1% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, the Company or any of its Subsidiaries; (b) owns, directly or indirectly, in whole or in 38 32 part, any tangible or intangible property that the Company or any of its Subsidiaries uses in the conduct of its business; or (c) has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any of its Subsidiaries, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements arising in the ordinary course of business. 5.27 Trade Relations. Except as set forth in Schedule 5.27, to the best knowledge of the Company, there exists no actual or threatened termination, cancellation or material limitation of, or any material adverse modification or change in, the business relationship or business of the Company and its Subsidiaries taken as a whole, or their business with, any customer or any group of customers whose use of their services are individually or in the aggregate material to the business of the Company and its Subsidiaries taken as a whole, or with any material supplier, and there exists no condition or state of facts or circumstances with respect thereto that would materially and adversely affect the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole, or prevent the Company or its Subsidiaries from conducting their business after the consummation of the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents in substantially the same manner in which it heretofore has been conducted. 5.28 Material Contracts. Other than the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents, Schedule 5.28 lists as of the date of this Agreement each contract (other than purchase orders and standard sales contracts in the ordinary course of business), agreement, arrangement, commitment and lease of the Company and any Subsidiary currently in effect which by its terms (i) is not terminable at will within six months and requires future expenditures or receipts or other performance with respect to goods or services having a value per annum in excess of $175,000, (ii) was not entered into in the ordinary course of business, or (iii) is material to the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole. Copies of all such documents have previously been made available to the Purchaser. All of such contracts, agreements, arrangements, commitments and leases are in full force and effect and binding upon the parties thereto in accordance with their terms. Neither the Company nor any of its Subsidiaries, nor to the knowledge of the Company, any other party to such contracts, agreements, arrangements, commitments and leases is in default of any material obligation thereunder or has given notice of default to any other party thereunder and, to the knowledge of the Company, no condition exists that with notice or lapse of time would constitute a material default thereunder. Neither the Company nor any of its Subsidiaries has any knowledge of any proposed, pending, or likely cancellation or termination of any such contract, agreement, arrangement, commitment or lease (other than any expiration pursuant to the terms thereof). 39 33 5.29 Insurance. Schedule 5.29 sets forth all policies of fire, liability, workman's compensation, vehicular, life or other insurance held by or on behalf of the Company and its Subsidiaries (specifying the insurer, the coverage amounts and describing each pending claim thereunder of more than $100,000). Such policies and binders are in full force and effect. Neither the Company nor any of its Subsidiaries is in default in any material respect with respect to any provision contained in any such policy or binder and, to the best knowledge of the Company, has not failed to give any notice or present any claim under such policy or binder in due and timely fashion. 5.30 Projections. Prior to the date hereof, the Company delivered to the Purchaser financial projections, copies of which are attached hereto as Schedule 5.30 (the "Projections"). The assumptions used in preparation of the Projections were reasonable when made and continue to be reasonable as of the Closing Date. The Projections have been prepared in good faith and the Projections give effect to the transactions contemplated by the Transaction Documents and the Senior Financing, Preferred Investment and Acquisition Documents. The Purchaser acknowledges that the Company is not warranting its actual performance, and that the Projections contain assumptions about future events and that actual results during the period or periods covered may differ from the data and results contained in such Projections. 5.31 Compliance with Laws. Except as disclosed on Schedule 5.31 or on other Schedules to this Agreement, neither the Company nor its Subsidiaries' operations, nor any of the assets owned, leased, occupied or used by Company or its Subsidiaries in the operation of the businesses thereof materially violates or fails to comply in any material respect with applicable health, fire, environmental, safety, zoning or building codes, laws or ordinances, rules or regulations, other than any such violations or failures to comply that, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the assets, business, properties, operations or financial or other condition of the Company and its Subsidiaries, taken as a whole. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to, and covenants and agrees with, the Company as follows: 40 34 6.1 Existence and Power. The Purchaser: (a) is duly organized and validly existing under the laws of the jurisdiction of its organization; and (b) has the power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged. 6.2 Authorization; No Contravention. The execution, delivery and performance by the Purchaser of this Agreement and the Registration Rights Agreement: (a) is within the Purchaser's power and authority and has been duly authorized by all necessary action; (b) does not contravene the terms of the Purchaser's Agreement of Limited Partnership, or any amendment thereof; (c) will not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Contractual Obligation of the Purchaser, or any order or decree directly relating to the Purchaser; and (d) does not require approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, other than those that have been obtained or made on or prior to the Closing. 6.3 Binding Effect. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by the Purchaser, and constitutes the legal, valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.4 No Legal Bar. The execution, delivery and performance of this Agreement and the Registration Rights Agreement will not violate any Requirement of Law. 6.5 Purchase for Own Account. The Senior Subordinated Note and the Warrants (including, for purposes of this Section 6.5, the Common Stock issuable upon exercise of the Warrants) to be acquired by the Purchaser pursuant to this Agreement are being acquired for its own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any 41 35 state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of the Senior Subordinated Note and the Warrants under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of the Purchaser's property being at all times within its control. If the Purchaser should in the future decide to dispose of any of the Senior Subordinated Note or Warrants, the Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If the Purchaser should decide to dispose of such securities (other than pursuant to its registration rights under the Registration Rights Agreement), the Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at the Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law, in connection with such disposition to the effect that the proposed disposition of such securities would not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. The Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Warrants to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES." 6.6 Investment Company. Neither the Purchaser nor any Person controlling the Purchaser is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.7 Broker's, Finder's or Similar Fees. Except as otherwise set forth in this Agreement, there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the offer or sale of the Senior Subordinated Note and the Warrants contemplated hereby based on any agreement, arrangement or understanding with the Purchaser or any action taken by the Purchaser. 42 36 ARTICLE 7 INDEMNIFICATION 7.1 Indemnification by the Company. In addition to all other sums due hereunder or provided for in this Agreement, the Company agrees to indemnify and hold harmless the Purchaser and its Affiliates (including, without limitation, BBH & Co.) and their respective officers, directors, agents, employees and partners (each, an "indemnified party") to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including reasonable fees, disbursements and other charges of counsel), damages or other liabilities ("Losses") resulting from any breach of any representation or warranty, covenant or agreement of the Company in the Transaction Documents or any legal, administrative or other actions (including actions brought by any equity holders of the Company or derivative actions brought by any Person claiming through the Company or in the Company's name), proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of this Agreement, the Senior Subordinated Note, the Warrants, the Registration Rights Agreement, any other Transaction Document, the transactions contemplated hereby, or any indemnified person's role therein or in the transactions contemplated hereby; provided, however, that the Company shall not be liable under this Section 7.1: (a) for any amount paid in settlement of claims without the Company's consent (which consent shall not be unreasonably withheld), (b) with respect to Losses arising solely out of actions brought by the partners of the Fund against an indemnified party or by one indemnified party against another, (c) to the extent that it is finally judicially determined that such Losses resulted primarily from the willful misconduct, bad faith or gross negligence of such indemnified party or a breach of the Purchaser's representations in Article 6 or of the Purchaser's obligations under this Agreement, the Warrants or the Registration Rights Agreement, or (d) for any Losses arising solely from the transfer of the Senior Subordinated Note, the Warrants or the Common Stock issued upon exercise of the Warrants by the Purchaser to any Person other than the Company; provided, further, that if and to the extent that such indemnification is unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. In connection with the obligation of the Company to indemnify for expenses as set forth above, the Company further agrees to reimburse each indemnified party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are reasonably incurred by such indemnified party; provided, however, that if an indemnified party is reimbursed here under for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Losses in question resulted primarily from the willful misconduct, bad faith or gross negligence of such indemnified party. 43 37 7.2 Notification. Each indemnified party under this Article 7 will, promptly after the receipt of notice of the commencement of any action or other proceeding against such indemnified party in respect of which indemnity may be sought from the Company under this Article 7, notify the Company in writing of the commencement thereof. The omission of any indemnified party so to notify the Company of any such action shall not relieve the Company from any liability which it may have to such indemnified party other than pursuant to this Article 7 or, unless, and only to the extent that, such omission results in the Company's forfeiture of substantive rights or defenses. In case any such action or other proceeding shall be brought against any indemnified party and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Section 7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. The Company shall not, without the consent of the indemnified party (which consent shall not be unreasonably withheld), consent to the entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the Company. The rights accorded to indemnified parties hereunder shall be in addition to any rights that any indemnified party may have at common law, by separate agreement or otherwise. 7.3 Registration Rights Agreement. Notwithstanding anything to the contrary in this Article 7, the indemnification and contribution provisions of the Regis tration Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. 44 38 ARTICLE 8 PRE-CLOSING AFFIRMATIVE COVENANTS 8.1 Operation of Company. From and after the date hereof through the Closing Date, the Company and its Subsidiaries shall not enter into any transaction or take any action other than in the ordinary course of business, except that the Company and its Subsidiaries may enter into such transactions and take such other actions outside of the ordinary course of business, in each case as may be specifically approved in writing by the Purchaser. 8.2 Exclusivity. From the date hereof through the earlier of the Closing Date and May 31, 1997, the Company shall not enter into discussions or negotiations with any Persons other than the Purchaser in respect of any transaction similar in nature to any transaction contemplated by this Agreement. 8.3 Use of Proceeds. The Company shall use the proceeds of the sale of the Senior Subordinated Note and Warrants hereunder only (a) to finance the acquisition of O&W pursuant to the O&W Purchase Agreement, (b) to repurchase from Albert Gaither, Susan Jones, Comer Gaither, Lawson Gaither and Ann Gaither on the Closing Date an aggregate amount of 3,360,970 shares of Common Stock for an aggregate consideration of not more than $2,714,600, (c) to repay existing senior indebtedness of the Company and O&W owing to BankBoston, N.A., SouthTrust Bank of Alabama, N.A. and Fleet Capital Corporation, respectively, in an aggregate amount of approximately $26 million and (d) for the payment of fees and expenses in connection with the transactions contemplated in the Transaction Agreements. 8.4 Taxes. The Company and its Subsidiaries shall prepare and timely file, in a manner consistent with prior years and applicable laws and regulations, all Tax returns required to be filed on or before the Closing Date, and all such Tax returns will be true and complete in all material respects. The Company and its Subsidiaries shall timely pay all Taxes required to be paid by them on or before the Closing Date, or that are claimed or asserted by any taxing authority to be due on or before the Closing Date, except for those Taxes that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. 45 39 ARTICLE 9 AFFIRMATIVE COVENANTS The Company hereby covenants and agrees (a) with the Fund, with respect to all of this Article 9, and (b) with any other Holder, with respect to all of this Article 9 except Sections 9.1(c), 9.9 and 9.10, that, unless the Purchaser or any other Holder, as the case may be, waives compliance in writing: 9.1 Financial Statements. The Company shall deliver to the Purchaser and any other Holder: (a) as soon as available, but not later than one hundred twenty (120) days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as of the end of such year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year, all in reasonable detail and accompanied by a management summary and analysis of the operations of the Company and its Subsidiaries for such fiscal year and by the opinion of Arthur Andersen LLP (or any successor thereto) or another nationally recognized independent public accounting firm which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent, except as otherwise stated therein, with prior years; (b) as soon as available and, in any event, within 45 days of each of the first three fiscal quarters of each year (including, however, for the fiscal quarter ended December 31, 1997, if statements were not provided for the fiscal quarter ended September 30, 1997) the unaudited consolidated balance sheet of the Company and its Subsidiaries, and the related consolidated statements of income and cash flow for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company; (c) to the extent prepared by the Company, budgets, documentation of material financial transactions, projections, operating reports, acquisition analyses, presentations to banks, financial institutions or potential investors, consultants' reports and such other financial and operating data of the Company and its Subsidiaries as the Fund reasonably may request (any such information to be subject to the provisions of Section 9.9(b)); (d) at any time when it is not subject to Section 13 or 15(d) of the Exchange Act, upon request, to the Purchaser and prospective purchaser of Notes or Warrants, information of the type that would satisfy the requirement of 46 40 subsection (d)(4)(i) of Rule 144A (or any similar successor provision) under the Securities Act; and (e) if and when the Company becomes subject to the Securities Act or the Exchange Act, promptly after the same are filed, copies of all reports, statements and other documents filed with the Commission, at which point Sections 9.1(a) and (b) shall expire and no longer be binding upon the Company. 9.2 Certificates; Other Information. The Company shall furnish to the Purchaser and to any other holder of the Notes: (a) concurrently with the delivery of the financial statements referred to in Section 9.1(a) and (b) above, a certificate of the Company's Chief Financial Officer stating that, to the best of such officer's knowledge, there exists no default under or breach of Articles 9 and 10, except as specified in such certificates; and (b) concurrently with the delivery of the financial statements referred to in Sections 9.1(a) and (b) above, a certificate of an officer of the Company including calculations set forth in reasonable detail showing the Company's compliance with the financial covenants contained in Sections 10.1, 10.2 and 10.3. 9.3 Preservation of Corporate Existence. The Company shall, and shall cause each of its Subsidiaries to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its jurisdiction of incorporation or organization; and (b) preserve and maintain in full force and effect all material rights, privileges, qualifications, licenses and franchises necessary in the normal conduct of its business. 9.4 Payment of Obligations. The Company shall, and shall cause its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including without limitation: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; (b) all lawful claims which the Company and each of its Subsidiaries are obligated to pay, which are due and which, if unpaid, might by law become a Lien upon its property, unless the same are being contested in good faith by 47 41 appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; and (c) all payments of principal and interest when due (giving effect to any grace periods relating thereto) on Indebtedness. 9.5 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, in all material respects with its articles or certificate of incorporation and by-laws or other organizational or governing documents and all Requirements of Law and with the directions of any Governmental Authority having jurisdiction over it or its business, except (i) such as to which such failure to comply could not reasonably be expected to have a material adverse effect on the assets, business, operations, properties or financial or other condition of the Company or its Subsidiaries, taken as a whole or (ii) to the extent being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary. 9.6 Notices. Upon actual knowledge of the Chief Executive Officer, the President or the Chief Financial Officer of the Company of the events described below, the Company shall give prompt written notice (but in any event within 10 days) to each holder of Notes: (a) of the occurrence of any default under, or breach of, any of the provisions of Articles 9 or 10 accompanied by a certificate specifying the nature of such default or breach, the period of existence thereof and the action that the Company has taken or proposes to take with respect thereto; (b) of any (i) material default or event of default under the Senior Indebtedness (as defined in Section 12.1) of the Company or any other material Contractual Obligation of the Company or any of its Subsidiaries, or (ii) material dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority; and (c) Each notice pursuant to this Section 9.6 shall be accompanied by a statement by the Chief Executive Officer, President or Chief Financial Officer of the Company setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 9.7 Issue Taxes. The Company shall pay, or cause to be paid, all documentary and similar taxes levied under the laws of any applicable jurisdiction in connection with the issuance of the Senior Subordinated Note and the Warrants, the Common Stock to be issued upon exercise of the Warrants and the execution and delivery of the other agreements and documents contemplated hereby and any modification of the Senior Subordinated Note and the Warrants or such other 48 42 agreements and documents and will hold the Purchaser harmless, without limitation as to time, against any and all liabilities with respect to all such taxes. 9.8 Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon exercise of all outstanding Warrants as provided therein, such number of shares of Common Stock as shall then be issuable or deliverable upon the exercise of all outstanding Warrants. Such shares of Common Stock shall, when issued or delivered in accordance with the terms of the Warrants, be duly and validly issued and fully paid and non-assessable. The Company shall issue the Common Stock into which the Warrants are convertible upon the proper surrender of the Warrants in accordance with the provisions therein and shall otherwise comply with the terms thereof. 9.9 Inspection. (a) The Company will permit, and will cause each of its Subsidiaries to permit, representatives of the Fund to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with their respective directors, officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice to the Company. (b) The Purchaser will (subject to the Company's sole discretion to waive compliance) utilize best efforts to maintain as confidential any confidential or proprietary information obtained from the Company pursuant to Sections 9.9(a) or 9.1 (other than information which (i) at the time of disclosure or thereafter is generally available to and known by the public (other than as a result of a disclosure directly or indirectly by the Purchaser or any of its representatives), (ii) is available to the Purchaser on a non-confidential basis from a source other than the Company or its Subsidiaries, provided that such source was not known by the Purchaser to be bound by a confidentiality agreement (or other duty not to disclose) with the Company or any of its Subsidiaries or (iii) has been independently developed by the Purchaser), and shall not disclose any information obtained from the Company pursuant to Section 9.9(a) or 9.1 and required to be maintained as confidential pursuant hereto, except (a) to BBH & Co. and its advisors, representatives, agents, partners and employees who need to know such information (provided that the Purchaser shall be responsible for any breach of this Section 9.9(b) by any such Person), (b) to its advisors, representatives, agents, partners (and their representatives and advisors) and employees (provided that the Purchaser shall be responsible for any breach of this Section 9.9(b) by any such Person), (c) to any prospective transferee of the Senior Subordinated Note, the Warrants or the shares of Common Stock issued upon the exercise of the Warrants or of an interest in the Purchaser (provided that (x) the Purchaser shall not disclose to any such Person that is a potential transferee 49 43 the information (other than budgets) referred to in Section 9.1(c) without the prior written consent of the Board of Directors of the Company, such consent not to be unreasonably withheld, and (y) such prospective transferee enters into a confidentiality agreement with respect to any confidential information on substantially the same terms as agreed to by the Purchaser in this Section 9.9(b)) or in a successor fund sponsored by BBH & Co., (d) as may be required by law (including a court order, subpoena or other administrative order or process) or applicable regulations to which the Purchaser is or becomes subject, (e) in connection with any litigation arising out of or related to this Agreement, (f) to the executive officers of the Company or any of its Subsidiaries, or (g) with the prior written consent of the Company. 9.10 Board Representation; Visitation Rights. (a) The Company shall at or prior to the Closing Date cause one vacancy to be created on its Board of Directors (by increasing the number of members of the Board of Directors or otherwise) and at the Closing Date shall cause the person designated by the Fund to be elected to its Board of Directors. Such designee shall serve until the annual meeting of stockholders of the Company immediately following the election of such person to the Board of Directors. (b) Commencing with the annual meeting of stockholders of the Company immediately following the election of such persons to the Board of Directors, and at each annual meeting of stockholders of the Company thereafter, the Fund shall be entitled to nominate (in addition to any rights granted to the holders of Common Stock as set forth in the Company's articles or certificate of incorporation), from time to time, one director to the Company's Board of Directors; provided, that if the Fund at any time holds less than (i) 50% of the aggregate principal amount of the Notes outstanding and (ii) 33% of the total number of shares of the Common Stock into which the Warrants are exercisable (assuming exercise of any unexercised Warrants), the Fund shall no longer be entitled to elect a member of the Board of Directors. The Company shall cause such nominee of the Fund to be included in the slate of nominees recommended by the Board to the Company's stockholders for election as directors, and the Company shall use its best efforts to cause the election of such nominee or nominees, including voting all shares for which the Company holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such person. (c) In the event any such nominee of the Fund shall cease to serve as a director for any reason, other than by reason of the Fund not being entitled to nominate a nominee as provided in Section 9.10(b), the Company shall use its best efforts to cause the vacancy resulting thereby to be filled by a nominee of the Fund acceptable to a majority of the Board of Directors of the Company, acting reasonably. 50 44 (d) In the event that the Board of Directors of the Company establishes committees from time to time, the nominee of the Fund shall have the right, upon the Fund's request, to serve on each such committee. (e) So long as the Fund owns more than (i) 50% of the aggregate outstanding principal amount of the Notes and (ii) 33% of the total number of shares of the Common Stock into which the Warrants are exercisable (assuming exercise of any unexercised Warrants), in addition to the rights granted pursuant to Sections 9.1(a) and (b) above, the Fund shall have the right to have a representative attend all regular and special meetings of the Board of Directors of the Company and any committees thereof. The visitation rights set forth above shall include the right to receive the same notice and materials provided to Board and Committee members. (f) So long as the Fund owns more than (i) 50% of the aggregate outstanding principal amount of the Notes or (ii) 33% of the total number of shares of the Common Stock into which the Warrants are exercisable (assuming exercise of any unexercised Warrants), the Fund shall have the right to approve the nomination of any director to the Board of Directors of the Company that is not a full-time employee of the Company, which approval shall not be unreasonably withheld; provided, however, that the Fund shall not have the right to approve the nomination of any director to the Board of Directors of the Company that is appointed by KSTC pursuant to Section 6.4 of the Amended and Restated Articles. 9.11 Registration and Listing. If any shares of Common Stock required to be reserved for purposes of exercise of the Warrants as provided in the Warrants, require registration with or approval of any Governmental Authority under any federal or state or other applicable law before such Common Stock may be issued or delivered upon exercise of the Warrants, the Company will in good faith and as expeditiously as possible endeavor to cause such Common Stock to be duly registered or approved, as the case may be, unless such registration or approval is required solely because of a breach of the Purchaser's representation contained in Section 6.5. In the event that, and so long as, the Common Stock is listed on the NYSE or quoted or listed on any other national securities exchange or Nasdaq, the Company will, if permitted by the rules of such system or exchange, quote or list and keep quoted or listed on such exchange or Nasdaq, upon official notice of issuance, all Common Stock issuable or deliverable upon exercise of the Warrants. In addition, the Company will in good faith and as expeditiously as possible endeavor (i) to obtain private placement numbers for the Warrants and the Common Stock issued pursuant to the exercise thereof, assigned by the CUSIP Service Bureau of Standard & Poor's Corporation and (ii) at the request of the Purchaser, to cause the Warrants and the Common Stock issued pursuant to the exercise thereof to be eligible for the PORTAL trading system (it being understood that the Company shall not be required to amend this Agreement in any material way so as to cause the Common Stock to be eligible to trade on the PORTAL system). 51 45 9.12 Use of Proceeds. The proceeds of the Senior Subordinated Note and the Warrants shall be used by the Company as specified in Section 8.3. 9.13 Payment of Notes. The Company shall pay the principal of, interest on and other amounts due in respect of, the Notes on the dates and in the manner provided herein and in the Notes. 9.14 Dispositions by the Fund. At any time prior to the earlier to occur of (x) the Fund ceasing to own at least 25% of the shares of Common Stock of the Company issuable upon exercise of the Warrants (assuming exercise of any unexercised Warrants), (y) a Change of Control of the Company or (z) the occurrence of an Event of Default, the Fund covenants and agrees that it will not sell or otherwise dispose of the Warrants or the Common Stock issuable upon exercise of the Warrants except (a) pursuant to the exercise of its rights under the Registration Rights Agreement, (b) in a sale or other distribution pursuant to Rule 144 or Rule 144A (or any successor provisions) under the Securities Act, (c) in compliance with Section 9.15 of this Agreement or (d) to its partners in pro rata distribution so long as such partners agree to be bound by the terms and conditions of this Agreement to the same extent as the Fund. 9.15 Right of First Offer. (a) If, at any time the Fund wishes to transfer, directly or indirectly, shares of the Common Stock (assuming exercise of unexercised Warrants) issued to it pursuant to this Agreement (the "Offered Shares"), to a third party that is not an Affiliate of the Fund (a "Third Party Buyer"), the Fund shall first offer (the "First Offer") to sell the Offered Shares to the Company. (b) The Fund shall send written notice of the First Offer (the "First Offer Notice") to the Company, which First Offer Notice shall state that the Fund proposes to effect a transfer of shares of Warrants or Common Stock, as the case may be, and the number and type of the Offered Shares and (ii) contain a copy of the terms and conditions of the First Offer. Upon receipt of a First Offer Notice, the Company shall be entitled to purchase all, but not less than all, of the Offered Shares upon the terms and conditions set forth in the First Offer Notice. (c) The right of First Offer shall be exercisable by delivery of written notice of exercise (an "Exercise Notice") to the Fund within 10 days after receipt of the First Offer Notice (the "Option Period"). If the Company shall fail to respond to the Fund within the Option Period, such failure shall be regarded as a rejection of the First Offer by the Company. (d) The closing of any purchase of Offered Shares by the Company under this Section 9.15 shall be held at the principal office of the Company on or before the 30th day following delivery of the Exercise Notice (or such later 52 46 time as may be necessary to comply with the HSR Act, and other applicable laws) or at such other time and place as the parties to the transaction may agree. At such closing, the Fund shall deliver certificates representing the Offered Shares being purchased by the Company, duly endorsed for transfer and accompanied by all requisite stock transfer taxes, and such shares shall be free and clear of any Liens and the Fund shall so represent and warrant, and further represent and warrant that it is the record and beneficial owner of all such shares, with full authority and power to transfer such shares. The Fund shall not be required to make any other representations or warranties. The Company shall deliver at the closing payment in full for such shares. At such closing, all of the parties to the transaction shall execute and/or deliver such additional documents as are otherwise necessary or appropriate to effectuate the transfer of the Offered Shares. (e) Notwithstanding anything to the contrary contained in this Section 9.15, if the Company does not purchase all of the Offered Shares within the period specified in Section 9.15(d), the Fund may transfer to any Third Party Buyer, all, but not less than all, of the Offered Shares (i) for a purchase price that is no lower than 100% of that stated in the First Offer Notice and (ii) upon terms and conditions otherwise no more favorable to any Third Party Buyer than those stated in the First Offer Notice; provided, however, that such transfer is bona fide and made before the later of 90 days from the later of (i) the date of the rejection of the First Offer, if it is rejected or the failure to consummate and purchase, if the First Offer is not rejected and (ii) the date which is ten days after the expiration or waiver of any applicable waiting period to such proposed transfer pursuant to the HSR Act. If such sale is not consummated within the period described in the proviso in the preceding sentence, the restrictions provided for in this Section 9.15 shall again become effective, and no transfer of shares otherwise subject to this Section 9.15 may be made thereafter without again offering the same to the Company in accordance with the terms and conditions of this Agreement. (f) The provisions of this Section 9.15 shall expire and be of no further force and effect upon the earlier to occur of (i) an Initial Public Offering by the Company or (ii) a Change of Control of the Company; provided, that the provisions of this Section 9.15 shall not be applicable in the event of any transfer by the Fund to its partners in pro rata distribution so long as such partners agree to be bound by the terms and conditions of this Agreement to the same extent as the Fund. Compliance by the Fund with its obligations under this Section 9.15 may only be waived at the sole discretion of the Company. 9.16 Tag-Along Rights on the Principal Shareholders. (a) (i) If, at any time, any of the Principal Shareholders, acting alone or in concert with others (including other Principal Shareholders), desires to transfer to any person (other than a Family Member thereof), directly or indirectly, in one or a series of related transfers, 20% or more of the aggregate shares of 53 47 Common Stock owned collectively by them (each such transferring Principal Shareholder is referred to herein as a "Transferor"), such Principal Shareholders shall comply with the requirements of this Section 9.16. (ii) Each Transferor shall, prior to making any transfer, first notify the Fund of such transfer and otherwise comply with this Section 9.16 and such notice (the "Transferor's Notice") shall (x) specify the proposed transferee thereof (if known), the number of shares of Common Stock proposed to be transferred, and the amount of consideration proposed to be received therefor, and (y) contain the Tag-Along Offer. (b) The Transferor shall offer (the "Tag-Along Offer") to include in the proposed transfer a number of shares of Common Stock and Warrants designated by the Fund, provided that the sum of the number of shares and the number of shares into which such Warrants are exercisable do not exceed the product of (x) the number of shares of Common Stock to be sold by the Transferor and (y) a fraction, the numerator of which is the number of shares of Common Stock (assuming full exercise of the Warrants) held by the Fund and the denominator of which is the number of shares of Common Stock outstanding on a fully diluted basis. The Tag-Along Offer shall be conditioned upon the Transferor consummating a transfer on substantially the terms described in the Transferor's Notice to the transferee named in the Transferor's Notice; provided that the Transferor shall not be obligated to consummate any such transfer. (c) The rights set forth in this Section 9.16 shall be exercisable by the Fund by delivery of written notice of exercise (an "Acceptance Notice") to the Transferor within 10 business days after receipt of the Transferors Notice (the "Tag-Along Period"). If the Fund fails to respond to the Transferor within the Tag-Along Period, such failure shall be regarded as a rejection of the Tag-Along Offer by such Person. (d) If the Fund did not indicate its desire to exercise its Tag-Along Rights in the Acceptance Notice provided for in Section 9.16(c) or it failed to provide such an Acceptance Notice in a timely manner, its rights under this Section 9.16 shall be deemed to have been waived (for purposes only of the particular transfer described in the Transferor's Notice). The Transferor and the Fund, if it indicated its desire to exercise its Tag Along Rights in an Acceptance Notice, shall be deemed to have accepted the Tag-Along Offer by virtue of such Acceptance Notice. The Transferor may and, if the Transferor transfers its shares and the Fund accepted the Tag-Along Offer (the Transferor and the Fund if it accepts being hereinafter sometimes called "Sellers") shall transfer the shares and warrants described in the Transferor's Notice and the shares and warrants included by the Fund pursuant to the Tag-Along Offer to the proposed transferee, in accordance with substantially the terms of such transfer set forth in the Transferor's Notice, so long as such transfer occurs on or before the later of 120 days after the date the Transferor's Notice 54 48 provided in Section 9.16(a) was received by the Fund or the date which is five days after the expiration or waiver of any waiting period applicable to such proposed transfer pursuant to the HSR Act; provided, that if such transfer does not occur within such period, the provisions of this Section shall be effective anew. The price per share and form of consideration if the Fund accepts the Tag-Along Offer, for sales of Warrants or Common Stock shall be the same as the Transferor's consideration received for Common Stock (except in the case of Warrants, less the exercise price thereof) and shall be subject, on a several and not joint basis, to the same representations and warranties, covenants, indemnities, holdbacks and escrow provisions, if any, and any similar components of the Tag-Along Offer to which the Transferor is subject; provided, that to the extent the Sellers are required to provide indemnities in connection with the transfer of their shares, no Seller shall be required to provide indemnification that would result in an aggregate liability to such Seller in excess of such Seller's proceeds from the sale of its securities pursuant to this Section 9.16 and such indemnities shall be made by the Sellers severally and not jointly. All fees and expenses incurred by the Sellers (including, without limitation, with respect to financial advisors, accountants and counsel to the Sellers) in connection with a transfer pursuant to this Section 9.16 shall be borne by the party incurring such fees and expenses. (e) The provisions of this Section 9.16 shall not apply to transfers (i) to Family Members or (ii) from one Principal Shareholder to another Principal Shareholder. Any securities transferred in accordance with this Section 9.16 shall not thereafter be subject to the provisions of this Section 9.16. (f) The provisions of this Section 9.16 shall expire and be of no further force and effect once the Fund owns less than 10% of the shares of Common Stock issuable upon exercise of the Warrants (assuming exercise of any unexercised Warrants). 9.17 Anti-dilution Protection. Immediately preceding the earliest to occur of (i) an Initial Public Offering, (ii) the Redemption Date (as defined in the Warrants) and (iii) the sale by the Fund of all of its Common Stock of the Company (the earliest to occur being referred to herein as the "Adjustment Event"), to the extent that the Fund has previously exercised all or a portion of the Warrants (such Warrants so exercised being, "Exercised Warrants"), the Company hereby covenants and agrees to sell to the Fund that number of additional shares of Common Stock of the Company, each at a price per share equal to the par value of the Common Stock, equal to the difference of (x) the number of shares that would have been issued to the Fund had the Fund exercised the Exercised Warrants concurrently with the Adjustment Event less (y) the number of shares of Common Stock previously issued to the Fund upon the exercise of those Exercised Warrants. To the extent that the foregoing computation would result in the issuance by the Company of a fractional share of Common Stock, in lieu thereof the Company shall pay therefore an amount 55 49 in cash equal to such fraction multiplied by the Current Market Price (as defined in the Warrants) of a share of Common Stock on the date of such Adjustment Event. 9.18 Sale of Company. In the event of a contemplated sale of all of the capital stock of the Company (by way of merger or otherwise), the Company shall, if requested by the Purchaser, use its reasonable best efforts to cause such sale transaction to be structured in a manner that requires the purchaser(s) to purchase the Warrants from the Purchaser at a price equal to the consideration the Purchaser would have received had it exercised the Warrants immediately prior to the consummation of such sale transaction less the exercise price of such Warrants. 9.19 Allocation for Tax Purposes. The Company hereby covenants and agrees that it shall allocate $1,137,400 of the Purchase Price to the purchase by the Purchaser of the Warrants. ARTICLE 10 NEGATIVE AND FINANCIAL COVENANTS Until the payment of all principal of and interest on the Notes and all other amounts due at the time of payment of such principal and interest under this Agreement, including, without limitation, all expenses and amounts due at such time in respect of indemnity obligations under Article 7 (except with respect to Sections 10.5, 10.10 and 10.12, which shall be binding upon the Company until the earlier of (x) the consummation of an Initial Public Offering, (y) the expiration of the Warrants without exercise or (z) the sale or distribution by the Fund of more than 66% of its shares of Common Stock (assuming exercise of any unexercised Warrants)), the Company covenants and agrees as follows: 10.1 1997 Financial Covenants. (a) The Company shall not permit the Net Worth of the Company and O&W on a consolidated basis as of (1) September 30, 1997 to be less than $16,000,000 or (2) December 31, 1997 to be less than $16,000,000, as adjusted in each case by adding to (or subtracting from) such amount, the excess (or deficit) of the consolidated Net Worth of the Company and O&W reflected in the opening balance sheet of the Company and its Subsidiaries, including purchase accounting adjustments thereto, through September 30, 1997, over (or as compared to) $21,709,000; or (b) The Company shall not permit EBITDA (but computed on a basis approximating a consolidated basis in accordance with GAAP that is satisfactory to the Fund) for the Fiscal Quarter ending (1) June 30, 1997 to be less 56 50 than $2,000,000, (2) September 30, 1997 to be less than $3,150,000 or (3) December 31, 1997, to be less than $100,000. 10.2 Financial Covenants After 1997. (a) The Company shall not permit the Interest Coverage Ratio for the period of four consecutive Fiscal Quarters ending (1) March 31, 1998 to be less than 1.0 to 1.0, (2) June 30, 1998 to be less than 1.2 to 1.0, (3) September 30, 1998 to be less than 1.3 to 1.0, (4) December 31, 1998 to be less than 1.4 to 1.0 or (5) March 31, 1999 or thereafter, to be less than 1.6 to 1.0. (b) The Company shall not permit the Fixed Charge Coverage Ratio for the period of four consecutive Fiscal Quarters ending (1) March 31, 1998 to be less than .45 to 1.0, (2) June 30, 1998 to be less than .60 to 1.0, (3) September 30, 1998 or December 31, 1998 to be less than .75 to 1.0, or (4) March 31, 1999 or thereafter, to be less than 1.0 to 1.0. (c) The Company shall not permit Funded Debt to EBITDA as of (1) March 31, 1998 to be greater than 8.75 to 1.0, (2) June 30, 1998 to be greater than 7.8 to 1.0, (3) September 30, 1998 to be greater than 6.8 to 1.0, (4) December 31, 1998 to be greater than 6.6 to 1.0, or (5) the last day of any Fiscal Quarter ending March 31, 1999 or thereafter, to be greater than 6.25 to 1.0. 10.3 Capital Expenditures. The Company shall not make or incur any Capital Expenditures in the aggregate in excess of the amount set forth below for the Fiscal Year (or portion thereof) set forth opposite such amount: Fiscal Year Amount ----------- ------ 1997 (Closing Date through $3,000,000 December 31, 1997) 1998 $4,250,000 1999 and thereafter $4,500,000 10.4 Consolidations and Mergers. The Company shall not merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whenever acquired), and the Company shall not allow any of its Subsidiaries to merge or consolidate with or into any other Person except another Subsidiary of the Company, except the Company may consolidate or merge with or into, or sell all or substantially all of its assets to, any Person if: (a) The corporation or partnership formed by such consolidation or surviving such merger or the Person which acquires all or substantially all of the assets of the Corporation shall be (after giving effect to such 57 51 transaction) a Solvent corporation or partnership organized or formed, as the case may be, and existing under, the laws of the United States, any state thereof, or the District of Columbia and shall expressly assume in writing all of the obligations of the Company under this Agreement, the Senior Subordinated Note, the Warrants and the Registration Rights Agreement; (b) immediately after giving effect to such transaction, no default under, or breach of, any material Contractual Obligation of the Company or of the provisions of Articles 9 and 10 exists; (c) the corporation or partnership formed by or surviving any such transaction or the Person that acquires all or substantially all of the assets of the Company shall have a Net Worth on a consolidated basis at least equal to the Net Worth on a consolidated basis of the Company and its Subsidiaries immediately prior to such transaction; and (d) the Company shall have furnished to the Holders (i) an opinion of counsel reasonably satisfactory to the holders of a majority in interest of the Notes, addressing the matters (other than solvency) set forth in clause (a) above and (ii) the certificate of the Chief Financial Officer of the Company to the effect that such transaction has been consummated in compliance with the foregoing requirements; provided that nothing in this Section 10.4 shall affect the rights of any holder of the Notes or the Warrants under this Agreement, the Notes, the Warrants or the Registration Rights Agreement. 10.5 Transactions with Affiliates. Except as set forth in Schedule 10.5 or as otherwise permitted by this Agreement, the Company shall not, and shall not permit any of its Subsidiaries to, enter into any transaction with any Affiliate of the Company or of any such Subsidiary, except (i) in the ordinary course of business and pursuant to the reasonable requirements of the business of the Company or such Subsidiary, (ii) on terms no less favorable to the Company or such Subsidiary than those the Company or such Subsidiary would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary, (iii) transactions between the Company and its Subsidiaries or between Subsidiaries and (iv) following the prior approval of a majority of the members of the Board of Directors of the Company (excluding Principal Shareholders and Family Members). 10.6 No Inconsistent Agreements. Except as permitted by Section 10.7 hereof, neither the Company nor any of its Subsidiaries shall (a) enter into any loan or other agreement after the date hereof or (b) amend or modify the Credit Agreement or any other currently existing loan or other agreement, which new loan or other agreement or amendment or modification by its terms restricts or prohibits the ability of the Company to pay the principal of or interest on the Notes or to issue Common Stock upon exercise of the Warrants; provided, however, that the foregoing 58 52 shall not prevent the Company from entering into loan or other agreements that contain, or any amendment or other modification to any currently existing credit agreement to provide, restrictions on the ability of the Company to optionally redeem or prepay the Notes, following the occurrence of a default or event of default under such agreements. 10.7 Limitation on Debt. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, issue, assume or otherwise incur any Debt, other than: (a) Debt under this Agreement and the Notes; (b) Debt under the Revolving Credit Facility (as defined in the Credit Agreement) portion of the Credit Agreement in a principal amount not exceeding $53 million; (c) Debt under the Term Loan (as defined in the Credit Agreement) portion of the Credit Agreement in the original principal amount of $12 million, as the principal balance thereof is reduced from time to time in accordance with its terms; (d) Debt secured by a Lien permitted under Section 10.8(v) hereof; (e) additional unsecured Debt at any one time outstanding in a principal amount not exceeding $4,000,000; (f) the Debt reflected in Schedule 10.7; and (g) refinancings, refundings and extensions of the foregoing, provided that such refinancing, refunding or extension shall not: (a) be in a principal amount greater than (x) the amount permitted above or (y) as to any refinancing of the Revolving Credit Facility (as defined in the Credit Agreement) portion of the Credit Agreement, an amount equal to $53 million plus the amount (the "Cushion Amount") by which the unsecured Debt of the Company and it Subsidiaries outstanding under subsection (e) of this Section 10.7 is less than $4,000,000 at the time of any such refinancing; provided, that the amount of additional unsecured Debt thereafter permitted under subsection (e) of this Section 10.7 shall be equal to $4,000,000 less the Cushion Amount; or (b) be pursuant to any agreement that provides for a final maturity of such Debt that occurs after May 6, 2004; or (c) be pursuant to any agreement that purports to restrict the Company's ability to pay, without conflict with the terms of such agreement, principal of, or interest (or premium, if any) on, the Debt outstanding under this Agreement and the Notes in accordance with the terms thereof, other than by reason of the existence of an event of default that would permit the holder of such Debt to accelerate the maturity thereof or of an event which, with the giving of notice or lapse of time, or both, would constitute such an event of default; or (d) be pursuant to any agreement that purports otherwise to alter the rights and obligations of any Holder of Notes under Article 12 of this Agreement or any subordination provisions applicable immediately prior to the effectiveness of such refinancing, refunding or extension, to the Debt so refinanced, refunded or extended. 59 53 10.8 Limitation on Liens. Neither the Company nor any of its Subsidiaries shall create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, other than: (i) Liens existing on the date of this Agreement and disclosed on Schedule 10.8; (ii) Liens for taxes, statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen, in each case only to the extent the obligations thereto are not yet due or are being contested in good faith by appropriate proceedings diligently pursued; (iii) Liens to secure performance of tenders, bids, statutory obligations or government contracts, and similar Liens not securing Indebtedness and arising in the ordinary course of business; (iv) Liens to secure Debt permitted under Section 10.7(b); and (v) any Lien on inventory, equipment or real property securing Debt up to $3,000,000 in any 12-month period incurred or assumed for the sole purpose of financing all or part of the cost of acquiring such inventory, equipment or real property, provided that, in the case of clause (v) above, such Lien attaches to such asset concurrently with or within 10 days after the acquisition thereof. 10.9 Investments. Neither the Company nor any of its Subsidiaries shall make any Investment, except for (i) Investments in Temporary Cash Investments, (ii) loans and advances to employees for reasonable travel and business expenses in the ordinary course of business, (iii) prepaid expenses incurred in the ordinary course of business, (iv) trade accounts receivable created in the ordinary course of business, (v) Investments which are listed on Schedule 10.9, (vi) Investments by the Company in its Subsidiaries (whether or not existing on the date hereof), (vii) additional Investments not to exceed $500,000 individually or $1,000,000 in the aggregate in any Fiscal Year and (viii) shares of capital stock, evidence of Indebtedness or other security acquired by the Company or O&W in consideration for or as evidence of past-due or restructured Receivables in an aggregate face amount of such Receivables at any time not to exceed $1,000,000 as to the Company and O&W. 10.10 Limitations on Restricted Payments. Except as set forth on Schedule 10.10 or as otherwise permitted under this Agreement (including, without limitation, pursuant to Section 10.7 hereof), neither the Company nor any of its Subsidiaries will declare or make any Restricted Payment except that the Company may (i) declare and pay dividends on the Series A Preferred Stock and Series B Preferred Stock, or redeem in accordance with Section 6.5(a) of the Amended and Restated Articles the Series A Preferred Stock and (ii) make supplemental discretionary payments in an amount up to an aggregate of $300,000 in any calendar year to Ann Heafner Gaither, William H. Gaither and Susan Gaither Jones, in each case so long as, both immediately preceding and immediately following the making of such Restricted Payment, there is no default or Event of Default under this Agreement or the Notes. 10.11 Dispositions of Assets. Neither the Company nor any of its Subsidiaries shall sell, transfer, lease or otherwise dispose of (in one transaction or in 60 54 a series of transactions) all or any part of the assets or properties of the Company or any of its Subsidiaries other than (i) assets or properties sold in the ordinary course of business or (ii) assets or properties, sales of which do not exceed in the aggregate $2,000,000 any 12-month period. 10.12 Articles of Incorporation and By-Laws of the Company and the Subsidiaries. The Company shall not amend in any material respect or in any respect that may be adverse to the interests of the Fund, the articles or certificate of incorporation or by-laws of the Company or any of its Subsidiaries. ARTICLE 11 DEFAULTS AND REMEDIES 11.1 Events of Default. An "Event of Default" shall occur if: (i) the Company shall default in the payment of any installment of principal of any Note, when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; or (ii) the Company shall default in the payment of any installment of interest on any Note according to the terms thereof, when and as the same shall become due and payable and such default shall continue for a period of five days; or (iii) the Company or any of its Subsidiaries shall default in the due observance or performance of any covenant to be observed or performed pursuant to Sections 9.1(a), 9.1(b), 9.8, 9.10 or Article 10 hereof; or (iv) the Company or any of its Subsidiaries, as the case may be, shall default in the due observance or performance of any other covenant, condition or agreement on the part of the Company or any of its Subsidiaries to be observed or performed pursuant to the terms of this Agreement, and such default shall continue for 30 days after the date written notice thereof shall have been given to the Company by the holder of any of the Notes; or (v) any representation, warranty, certification or statement made by or on behalf of the Company in this Agreement or in any certificate or other document delivered pursuant hereto shall have been incorrect in any material respect when made; or (vi) any (A) default in any payment when due of principal of or interest on any Debt of the Company or any of its Subsidiaries other than the 61 55 Notes, in an aggregate amount outstanding at any one time equal to or exceeding $250,000, and such default shall continue for a period of ten days or (B) default in the observance or performance of any other agreement or condition relating to any such Debt or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition results in the acceleration of such Indebtedness prior to its stated maturity; or (vii) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (a) relief in respect of the Company or any of its Subsidiaries, or of a substantial part of their property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any of its Subsidiaries, or for a substantial part of their property or assets, or (c) the winding up or liquidation of the Company or any of its Subsidiaries; and such proceeding or petition shall continue undismissed or unstayed for 60 days, or an order or decree approving or ordering any of the foregoing shall be entered; or (viii) the Company or any Subsidiary thereof shall (a) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) consent to the institution of or the entry of an order for relief against it, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (vii) of this Section 11.1, (c) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any of its Subsidiaries, or for a substantial part of their property or assets, (d) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (e) make a general assignment for the benefit of creditors, (f) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (g) take any action for the purpose of effecting any of the foregoing; or (ix) one or more judgments for the payment of money in an aggregate amount in excess of $250,000 (to the extent not covered by insurance) shall be rendered against the Company or any of its Subsidiaries and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Company or any of its Subsidiaries to enforce any such judgment. 11.2 Acceleration. If an Event of Default occurs under clauses (vii) or (viii) of Section 11.1, then the outstanding principal of and all accrued interest on the Notes and all other amounts owing under this Agreement and the Note shall 62 56 automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived. If any other Event of Default occurs and is continuing, the holders of 51% of the aggregate principal amount of the Notes outstanding, by written notice to the Company, may declare the principal of and accrued interest on the Notes and all other amounts owing under this Agreement to be due and payable immediately. Upon such declaration, such principal and interest and other amounts shall become immediately due and payable. The holders of 51% of the aggregate principal amount of the Notes outstanding may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, except nonpayment of principal or interest or other amounts that has become due solely because of the acceleration, and if the rescission would not conflict with any judgment or decree. Any notice or rescission shall be given in the manner specified in Section 14.2 hereof. ARTICLE 12 SUBORDINATION Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness (as defined below) shall at all times be wholly subordinate and junior in right of payment to all Senior Indebtedness (as defined below) to the extent and in the manner provided in this Article 12. 12.1 Definitions. As used in this Article 12, the following terms shall have the following meanings: "Junior Securities" means any debt or equity securities distributed to the holders of the Notes issued pursuant to this Agreement, but only if they are subordinated to at least the same extent as the Subordinated Indebtedness is subordinated to the Senior Indebtedness and any securities issued in exchange for Senior Indebtedness. "Senior Default" shall mean a Senior Payment Default or a Senior Event of Default. "Senior Event of Default" shall mean any default, other than a Senior Payment Default, that occurs and is continuing with respect to Senior Indebtedness that permits the holders thereof to accelerate the maturity of such Senior Indebtedness. "Senior Indebtedness" shall mean (i) the principal of and interest on (including without limitation any interest that accrues after the commencement of any case, proceeding or other legal action relating to the bankruptcy, insolvency or reorganization of the Company to the extent such interest constitutes an allowed 63 57 claim) the Debt permitted under Section 10.7(b) (including permitted refinancings, refundings or extensions thereof) and (ii) any other monetary obligations of the Company arising out of or in connection with any Senior Indebtedness. "Senior Payment Default" shall mean any default in the payment of any Senior Indebtedness that occurs and is continuing beyond any applicable period of grace. "Subordinated Indebtedness" shall mean (i) the principal of and interest on the Notes; and (ii) any other monetary obligations of the Company or any of its Subsidiaries arising out of or in connection with this Agreement or the Notes. 12.2 General. Subject to the rights of the holders of the Subordinated Indebtedness to receive Junior Securities and any distributions provided in this Article 12, upon the maturity of any Senior Indebtedness by lapse of time, acceleration, required prepayment or otherwise, all Senior Indebtedness then so due and payable shall first be paid or provided for in full, before any payment is made or provided for on account of the Subordinated Indebtedness then so due and payable or any Notes issued pursuant to this Agreement are redeemed. 12.3 Limitation on Payment and Remedies. (a) Upon receipt by the Company and the holders of the Notes of a Blockage Notice (as defined below), then unless and until (1) all Senior Defaults that gave rise to the Blockage Notice shall have been remedied or effectively waived or shall have ceased to exist or (2) the Senior Indebtedness in respect of which such Senior Defaults shall have occurred shall have been paid or provided for in full, no direct or indirect payment (in cash, property, securities or by set-off or otherwise) of or on account of the principal of or interest on the Notes or as a sinking fund for the Notes or in respect of any redemption, retirement, purchase or other acquisition of the Notes, with the exception of Junior Securities, shall be made during any period prior to the expiration of the Blockage Period (as defined below). (b) For purposes of this Article 12, a "Blockage Notice" is a notice of a Senior Default that in fact has occurred and is continuing, given to the Company and the holders of the Notes by the holders of a majority in principal amount of the Senior Indebtedness then outstanding (or their authorized agent); provided, however, that no such notice shall be effective as a Blockage Notice if an effective Blockage Notice shall have been given within 360 days prior thereto. (c) For purposes of this Article 12, a "Blockage Period" with respect to a Blockage Notice is the period commencing upon the Company's receipt of such Blockage Notice and having a duration of 180 days therefrom. Upon the expiration or termination of any Blockage Period, the holders of the Notes shall be entitled to be paid accrued but unpaid interest then due on the Notes. 64 58 (d) As long as any Senior Indebtedness remains outstanding, upon the occurrence of an Event of Default under this Agreement or the Notes, the holders of the Subordinated Indebtedness shall not declare or join in any declaration of the Notes to be due and payable by reason of such Event of Default or otherwise take any action against the Company prior to the expiration of (x) 20 days in the case of any default in payment when due (after expiration of any applicable grace period) of any amount payable hereunder or (y) 60 days in the case of any other Event of Default (a "Remedy Standstill Period") after the written notice of intention to accelerate on account of the occurrence of such Event of Default, specifying same (the "Remedy Notice") shall have been given by the holders of the principal amount of the Subordinated Indebtedness necessary to cause acceleration thereof to the Company and the holders of the Senior Indebtedness (or their authorized agent) unless the holders of any Senior Indebtedness shall have caused such Senior Indebtedness to become due prior to its stated maturity or any case or proceeding of the type referred to in Section 11.1(viii) or 11.1(ix) shall have commenced; provided, however, that such Remedy Standstill Period shall be extended (to up to 200 or 240 days, as applicable) to coincide with any Blockage Period commenced pursuant to an effective Blockage Notice given during the first 20 or 60 days, as the case may be, of such Remedy Standstill Period. Upon the expiration or termination of any Remedy Standstill Period, the holders of the Notes shall be entitled to exercise any of their rights with respect to the Notes other than any right to accelerate the maturity date of the Notes based upon the occurrence of any Event of Default which has been cured or otherwise remedied or waived by the requisite holders during the Remedy Standstill Period. (e) Notwithstanding the foregoing, any Blockage Period or Remedy Standstill Period shall be inapplicable or cease to be effective if an Event of Default pursuant to Section 11.1(vii) or 11.1(viii) shall have occurred. In addition, any Blockage Period or Remedy Standstill Period shall cease to be effective if at any time during such period: (i) substantial assets of the Company are sold or otherwise disposed of outside of the ordinary course of business for less than fair value or (ii) payment or any distribution of any character, whether in cash, securities or other property of the Company shall be made to or received by any creditor on any Indebtedness which is on the same level of priority with or junior and subordinate in right of payment to the Notes. 12.4 Subordination Upon Certain Events. Upon the occurrence of any Event of Default under Sections 11.1(vii) or (viii) of this Agreement: (i) Upon any payment or distribution of assets of the Company to creditors of the Company, holders of Senior Indebtedness shall be entitled to receive payment in full before the holders of Subordinated Indebtedness shall be entitled to receive any payment in respect of the Subordinated Indebtedness, except that the holders of Subordinated Indebtedness may receive Junior Securities. 65 59 (ii) Until all Senior Indebtedness is paid in full, any distribution to which the holders of Subordinated Indebtedness would be entitled but for this Article 12 shall be made to holders of Senior Indebtedness, as their interests may appear, except that the holders of Subordinated Indebtedness may receive Junior Securities. (iii) Notwithstanding the foregoing provisions of this Section 12.4, if payment or delivery by the Company of Junior Securities to the holders of Subordinated Indebtedness is authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Subordinated Indebtedness to the Senior Indebtedness, and made by a court of competent jurisdiction in a proceeding under any applicable bankruptcy or reorganization law, payment or delivery by the Company of such Junior Securities shall be made to the holders of the Subordinated Indebtedness in accordance with such order or decree. 12.5 Payments and Distributions Received. If the holders of the Subordinated Indebtedness shall have received any payment from or distribution of assets of the Company in respect of the Subordinated Indebtedness in contravention of the terms of this Article 12 before all Senior Indebtedness is paid in full, then and in such event such payment or distribution shall be received and held in trust for and shall be paid over or delivered to the holders of Senior Indebtedness (or their authorized agent) to the extent necessary to pay all such Senior Indebtedness in full. 12.6 Subrogation. After all amounts payable under or in respect of Senior Indebtedness are paid in full, the holders of the Subordinated Indebtedness shall be subrogated to the rights of holders of Senior Indebtedness to receive payments or distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the holders of the Subordinated Indebtedness have been applied to the payment of Senior Indebtedness. A distribution made under this Article 12 to a holder of Senior Indebtedness which otherwise would have been made to the holders of the Subordinated Indebtedness is not, as between the Company and the holders of the Subordinated Indebtedness, a payment by the Company on Senior Indebtedness. 12.7 Relative Rights. This Article defines the relative rights of the holders of the Subordinated Indebtedness and the holders of Senior Indebtedness. Nothing in this Section shall: (i) impair, as between the Company and the holders of the Subordinated Indebtedness, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest (including default interest) on Subordinated Indebtedness in accordance with its terms; (ii) effect the relative rights of holders of Subordinated Indebtedness and creditors of the Company other than holders of Senior Indebtedness; or (iii) prevent the holders of Subordinated Indebtedness from exercising their available remedies upon a default or Event of Default, subject to the rights, if any, under this Article 12 of holders of Senior 66 60 Indebtedness to receive distributions otherwise payable to the holders of Subordinated Indebtedness. 12.8 Subordination May Not Be Impaired by the Company. No right of any holder of any Senior Indebtedness to enforce the subordination of the Subordinated Indebtedness shall be impaired by any failure by the Company to comply with this Agreement. 12.9 Payments. A payment with respect to principal of or interest on the Subordinated Indebtedness shall include, without limitation, payment of principal of, and interest on the Subordinated Indebtedness, any depositing of funds for the defeasance of the Subordinated Indebtedness and any payment on account of mandatory prepayment or optional prepayment provisions. 12.10 Section Not to Prevent Events of Default. The failure to make a payment on account of principal of or interest on or other amounts constituting Subordinated Indebtedness by reason of any provision of this Article 12 shall not be construed as preventing the occurrence of an Event of Default under Article 11. ARTICLE 13 PREPAYMENT The Company shall prepay outstanding principal (together with accrued interest) on the Notes in accordance with the "Mandatory Prepayment" provisions set forth in Section 3 of the Notes. The Company may prepay outstanding principal (together with accrued interest) on the Notes only if the Notes are prepaid in accordance with the "Optional Prepayment" provisions set forth in Section 4 of the Notes. ARTICLE 14 MISCELLANEOUS 14.1 Survival of Provisions. All of the representations and warranties made herein shall survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchaser or any Affiliate, acceptance of the Senior Subordinated Note, Warrants and shares of Common Stock issued pursuant to the exercise of the Warrants and payment therefor, payment of the Senior Subordinated Note upon redemption or otherwise, exercise of the Warrants or termination of this Agreement. 67 61 14.2 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 14.2: (a) if to the Purchaser: The 1818 Mezzanine Fund, L.P. c/o Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attention: Joseph P. Donlan Telecopier No.: (212) 493-8429 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Marilyn Sobel, Esq. Telecopier No.: (212) 757-3990 (b) if to the Company: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolntown, North Carolina 28093-0837 Attention: William Gaither Telecopier No.: (704) 732-6480 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a 68 62 courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 14.3 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns and permitted transferees of the parties hereto. Except as provided in Articles 7 and 12, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement, the Notes and the Warrants. 14.4 Assignments. (a) The Company may not assign any of its rights or obligations under this Agreement without the written consent of the Purchaser (prior to Closing) or the holders of a majority (x) in aggregate principal amount of the Notes (following Closing) and (y) of the shares of Common Stock issuable upon conversion of the Warrants. (b) The Purchaser and any subsequent holder of Notes or Warrants may, at any time or from time to time sell, agree to sell or assign to one or more other Persons who agree to be bound by all of the terms of this Agreement, all or any portion of the Notes; provided, however, that any sale or assignment of a portion of the Notes shall be in denominations of no less than $250,000 (except in the case of a distribution by the Fund to its partners); provided further, however, that without the prior written consent of the Company, the Purchaser shall not sell or assign all or any portion of the Notes to any Person that is in the good faith judgment of the Board of Directors of the Company a supplier to, or direct or indirect competitor of, the Company. Notwithstanding anything to the contrary contained herein, the provisos contained in the foregoing sentence shall cease to be effective in the event of an Event of Default under this Agreement or the Notes. Any transfer in violation of this paragraph 14.4(b) shall be void. In the event of any such sale or assignment of a Note, upon surrender for exchange of any Note at the office of the Company designated for notices in accordance with Section 14.2, the Company shall execute and deliver in exchange therefor, without expense to the holder, one or more new Notes in the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered as such holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered (or, if no interest has been paid, the date of such surrendered Note), in the name of such Person or Persons as may be designated by such holder in writing, and otherwise of the same form and tenor as the Note so surrendered for exchange. Every Note surrendered for transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such Note or its attorney duly authorized in writing. 69 63 14.5 Amendment and Waiver. (a) No failure or delay on the part of any Holder, in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any holder of a Note at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement or the Notes, any waiver of any provision of this Agreement or the Notes, and any consent to any departure by the Company from the terms of any provision of this Agreement or the Notes, shall be effective (i) only if it is made or given in writing and signed by the Company and the holders of 51% of the aggregate principal amount of the Notes outstanding and holders of at least 51% of the shares of Common Stock issued or issuable upon conversion of the Warrants, and (ii) only in the specific instance and for the specific purpose for which made or given. However, without the consent of each holder of a Note affected, an amendment may not: (1) reduce the rate of or extend the time for payment of interest on any Note; (2) reduce the principal of or extend the maturity of any Note; (3) change the time at which any Note shall or may be prepaid in accordance with Sections 3 and 4 of the Notes; (4) make any Note payable in money other than that stated in the Notes; (5) make any change in Article 12 that adversely affects the rights of any holder of a Note under Article 12; or (6) make any change in the first or second sentence of this Section 14.5(b). Except where notice is specifically required by this Agreement, no notice to 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. 70 64 14.6 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 14.7 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 14.8 Determinations. All determinations to be made by the Company, the Purchaser or any Holder hereunder in its opinion or judgment or with its approval or otherwise shall be made by it in its sole discretion. 14.9 Governing Law. This Agreement has been negotiated, executed and delivered in the State of New York and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. 14.10 Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby may be brought in the courts of the State of New York located in New York City or of the United States of America for the Southern District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts pursuant to a contractual provision in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth in Section 14.2, such service to become effective 10 days after such mailing. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. 14.11 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, 71 65 illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 14.12 Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 14.13 Remedies. If a breach of this Agreement, the Notes or the Warrants by the Company occurs and is continuing, the Purchaser or any holder of Notes or Warrants may pursue any available remedy by proceeding at law or in equity to enforce the performance (including, without limitation, the specific performance) of any provision of the Notes, the Warrants or this Agreement. The Purchaser or any holder of Notes or Warrants may maintain a proceeding even if it does not possess any of the Notes or Warrants or does not produce any of them in the proceeding. Except as otherwise provided by law, a delay or omission by the Purchaser or any holder of Notes or Warrants in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy is exclusive of any other remedy. All available remedies are cumulative. 14.14 Entire Agreement. This Agreement, together with the exhibits and schedules hereto, the Senior Subordinated Note, the Warrants and the Registration Rights Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, the Senior Subordinated Note, the Warrants and the Registration Rights Agreement supersede all prior agreements and understandings among the parties with respect to such subject matter. 14.15 Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the Notes, the Warrants and the Registration Rights Agreement or any other document or instrument contemplated hereby or thereby, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees, charges and disbursements in addition to any other available remedy. 14.16 Publicity. Except as may be required by applicable law, no party hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto. If any announcement is required by law to be made by a party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon. 72 66 14.17 Expenses. The Company acknowledges and agrees that whether or not the transactions contemplated hereby are consummated, the Company shall reimburse the Purchaser for all out-of-pocket expenses, all legal fees and expenses of the Purchaser incurred in connection with the negotiation, execution and delivery of this Agreement and the other Transaction Documents. 73 67 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers or partners hereunto duly authorized as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------------- Name: William Gaither Title: President and Chief Executive Officer THE 1818 MEZZANINE FUND, L.P. Per Pro Brown Brothers Harriman & Co., General Partner By: /s/ JOSEPH P. DONLAN ------------------------------------------- Name: IN WITNESS WHEREOF, William Gaither, Ann Heafner Gaither, Susan Gaither Jones and Thomas R. Jones have duly executed this Agreement as of the date first above written solely for purposes of covenanting and agreeing to be bound by Section 9.16 of this Agreement. /s/ WILLIAM H. GAITHER ----------------------------- William Gaither /s/ ANN HEAFNER GAITHER ----------------------------- Ann Heafner Gaither /s/ SUSAN GAITHER JONES ----------------------------- Susan Gaither Jones /s/ THOMAS R. JONES ----------------------------- Thomas R. Jones EX-10.6 24 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.6 REGISTRATION RIGHTS AGREEMENT between THE J.H. HEAFNER COMPANY, INC. and THE 1818 MEZZANINE FUND, L.P. --------------------------------------- Dated May 7, 1997 --------------------------------------- 2 TABLE OF CONTENTS Page 1. Background.......................................................1 2. Registration Under Securities Act, etc...........................1 2.1 Registration on Request....................................1 2.2 Incidental Registration....................................3 2.3 Registration Procedures....................................5 2.4 Underwritten Offerings.....................................8 2.5 Preparation; Reasonable Investigation......................9 2.6 Limitations, Conditions and Qualifications to Obligations under Registration Covenants ..................9 2.7 Indemnification...........................................10 3. Definitions.....................................................13 4. Rule 144 and Rule 144A..........................................15 5. Amendments and Waivers..........................................15 6. Nominees for Beneficial Owners..................................15 7. Notices.........................................................15 8. Assignment......................................................16 9. Calculation of Percentage Interests in Registrable Securities...16 10. No Inconsistent Agreements......................................16 11. Remedies........................................................17 12. Certain Distributions...........................................17 13. Severability....................................................17 14. Entire Agreement................................................17 15. Headings........................................................17 16. GOVERNING LAW...................................................17 17. Counterparts....................................................18 i 3 REGISTRATION RIGHTS AGREEMENT, dated May 7, 1997, between THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and THE 1818 MEZZANINE FUND, L.P., a Delaware limited partnership (the "Purchaser"). 1. Background. Pursuant to a Senior Subordinated Note and Warrant Purchase Agreement, dated May 7, 1997, between the Company and the Purchaser (the "Purchase Agreement"), the Purchaser has agreed to purchase from the Company, and the Company has agreed to issue to the Purchaser, $16 million of the Company's Senior Subordinated Promissory Notes due May 7, 2004 (the "Notes") and 977,590 detachable warrants exercisable immediately to purchase initially 977,590 shares of the Company's common stock, par value $.01 per share, at an exercise price of $.01 per share (the "Warrants"). Capitalized terms used herein but not otherwise defined shall have the meanings given them in the Purchase Agreement or in Section 3. 2. Registration Under Securities Act, etc. 2.1 Registration on Request. (a) Request. At any time, or from time to time following an Initial Public Offering, one or more holders (the "Initiating Holders") of 33% or more of the shares of Common Stock issued upon exercise of the Warrants (assuming exercise of any unexercised Warrants), may, upon written request, require the Company to effect the registration under the Securities Act of any Registrable Securities held by such Initiating Holders. The Company promptly will give written notice of such requested registration to all other holders of Registrable Securities who may join in such registration, and thereupon the Company will use its reasonable best efforts to effect, at the earliest possible date, the registration under the Securities Act, including by means of an "evergreen" shelf registration on Form S-3 (or any successor form) pursuant to Rule 415 under the Securities Act if so requested in such request (but only if the Company is then eligible to use such a shelf registration and if Form S-3 (or such successor form) is then available to the Company), of (i) the Registrable Securities that the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities that the Company has been requested to register by the holders thereof (such holders together with the Initiating Holders hereinafter are referred to as the "Selling Holders") by written request given to the Company within 20 days after the giving of such written notice by the Company, all to the extent requisite to permit the disposition of the Registrable Securities so to be registered. 4 2 (b) Registration of Other Securities. Whenever the Company shall effect a registration pursuant to this Section 2.1, no securities other than Registrable Securities or securities to be offered and sold by the Company for its own account shall be included among the securities covered by such registration unless the Selling Holders of not less than 51% of all Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of such other securities. (c) Registration Statement Form. Registrations under this Section 2.1 shall be on such appropriate registration form of the Commission as shall be reasonably selected by the Company. (d) Effective Registration Statement. A registration requested pursuant to this Section 2.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (x) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (y) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act, in which case the Company shall use its best efforts to keep such registration statement effective until such time as all of the Registrable Securities cease to be Registrable Securities, (ii) if after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and has not thereafter become effective, or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Selling Holders. (e) Selection of Underwriters. The underwriter or underwriters of each underwritten offering of the Registrable Securities so to be registered shall be selected by the Company and shall be reasonably acceptable to the Selling Holders of more than 50% of each class of Registrable Securities to be included in such registration. (f) Priority in Requested Registration. If the managing underwriter of any underwritten offering shall advise the Company in writing (and the Company shall so advise each Selling Holder of Registrable Securities requesting registration of such advice) that, in its opinion, the number of securities requested to be included in such registration exceeds the number that can be sold in such offering within a price range acceptable to the Selling Holders of 66-2/3% of the Registrable Securities requested to be included in such registration, the Company, except as provided in the following sentence, will include in such registration, to the extent of the number and type that the Company is so advised can 5 3 be sold in such offering, prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included in such registration, pro rata among the Selling Holders requesting such registration on the basis of the estimated gross proceeds from the sale thereof. If the total number of Registrable Securities requested to be included in such registration cannot be included as provided in the preceding sentence, holders of Registrable Securities requesting registration thereof pursuant to Section 2.1, representing not less than 33-1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66-2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 15 days after receipt of such notice by the Company and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 2.1 hereof. (g) Limitations on Registration on Request. Notwithstanding anything in this Section 2.1 to the contrary, in no event will the Company be required to (i) effect, in the aggregate, more than two registrations pursuant to this Section 2.1 or (ii) effect more than one registration pursuant to this Section 2.1 within the twelve-month period occurring immediately subsequent to the effectiveness (within the meaning of Section 2.1(d)) of a registration statement filed pursuant to this Section 2.1. (h) Listing. The Company shall list the Registrable Securities subject to Section 2.1(a) on the National Market System of the Nasdaq Stock Market or another of the national securities exchanges or automated quotation systems. (i) Expenses. The Company will pay all Registration Expenses (except for any underwriting commissions or discounts) in connection with any registration requested pursuant to this Section 2.1. 2.2 Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time, other than in connection with an Initial Public Offering, proposes to register any shares of Common Stock or any securities convertible into Common Stock under the Securities Act by registration on any form other than Forms S-4 or S-8, whether or not for sale for its own account, it will each such time give prompt written notice to all registered holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 2.2. Upon the written request of any such holder (a "Requesting Holder") made as promptly as practicable and in any event within 20 days after the receipt of any such notice, the Company will use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Requesting Holders thereof; provided, however, that prior to the effective date of the 6 4 registration statement filed in connection with such registration, immediately upon notification to the Company from the managing underwriter of the price at which such securities are to be sold, if such price is below the price that any Requesting Holder shall have indicated to be acceptable to such Requesting Holder, the Company shall so advise such Requesting Holder of such price, and such Requesting Holder shall then have the right to withdraw its request to have its Registrable Securities included in such registration statement; provided further, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Requesting Holder of Registrable Securities and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to cause such registration to be effected as a registration under Section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. Notwithstanding anything contained in this Section 2.2(a), the Company shall not, if any Requesting Holder shall have requested the registration of shares of Common Stock issuable upon exercise of any Warrant in the registration, consummate the sale of the securities included in the registration until such time as any applicable waiting period under the Hart-Scott-Rodino Act shall have expired or early termination thereunder shall have been granted if such Requesting Holder notifies the Company that it is required to make a filing under the Hart-Scott-Rodino Act before it may exercise its Warrants. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration upon request under Section 2.1. (b) Priority in Incidental Registrations. If the managing underwriter of any underwritten offering shall inform the Company in writing of its opinion that the number or type of Registrable Securities requested to be included in such registration would materially adversely affect such offering, and the Company has so advised the Requesting Holders in writing, then the Company will include in such registration, to the extent of the number and type that the Company is so advised can be sold in (or during the time of) such offering, first, all securities proposed by the Company to be sold for its own account, second, if such offering has been requested by a Person pursuant to any registration rights agreement between the Company and such Person and by the terms of such registration rights agreement the securities subject to such registration rights agreement must be included in such registration prior to those held by the Requesting Holders, the securities requested to be included in such offering by such Person, third, Registrable Securities requested to be included in such registration pursuant to this Agreement and such other securities proposed to be registered by the Company for the accounts of each other Person that by the terms of any applicable registration rights agreement in effect as of the date 7 5 hereof between the Company and such Person must be included in the same proportion as the Registrable Securities of any Requesting Holder under this Agreement, pro rata among such Requesting Holders and such other Persons on the basis of the estimated proceeds from the sale thereof and fourth, all other securities proposed to be registered. (c) Expenses. The Company will pay all Registration Expenses in connection with any registration effected pursuant to this Section 2.2. 2.3 Registration Procedures. If and when-ever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 2.1 and 2.2, the Company will, as expeditiously as possible: (i) prepare and (within 90 days after the end of the period within which requests for registration may be given to the Company or in any event as soon thereafter as practicable) file with the Commission the requisite registration statement to effect such registration and thereafter use its reasonable best efforts to cause such registration statement to become effective; provided, however, that the Company may discontinue any registration of its securities that are not Registrable Securities (and, under the circumstances specified in Section 2.2(a), its securities that are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (a) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (b) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act if the Company is eligible to file a registration statement on Form S-3, in which case the Company shall use its reasonable best efforts to keep the registration statement effective and updated, from the date such registration statement is declared effective until such time as all of the Registrable Securities cease to be Registerable Securities; (iii) furnish to each seller of Registrable Securities covered by such registration statement, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary 8 6 prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (iv) use its reasonable best efforts (x) to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the sellers of Registrable Securities covered by such registration statement shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect and (z) to take any other action that may be reasonably necessary or advisable to enable such sellers to consummate the disposition in such jurisdictions of the securities to be sold by such sellers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of Registrable Securities to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) in the case of an underwritten or "best efforts" offering, furnish, if reasonably available, at the effective date of such registration statement to each seller of Registrable Securities, and each such seller's underwriters, if any, a signed counterpart of: (x) an opinion of counsel for the Company, dated the effective date of such registration statement and, if applicable, the date of the closing under the underwriting agreement, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in 9 7 underwritten public offerings of securities and, in the case of the accountants' comfort letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as the underwriters may reasonably request; (vii) cause representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any underwriter of an underwritten or "best efforts" offering of any Registrable Securities; (viii) notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (ix) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of Registrable Securities a copy of any amendment or supplement to such registration statement or prospectus; (x) provide and cause to be maintained a transfer agent and registrar (which, in each case, may be the Company) for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration; and (xi) use its reasonable best efforts to list all Registrable Securities covered by such registration statement on the National Market System of the Nasdaq Stock Market or any national securities exchange on which Registrable Securities of the same class covered by such registration statement are then listed and, if no such Registrable Securities are so listed, on 10 8 the National Market System of the Nasdaq Stock Market or any national securities exchange on which the Common Stock is then listed. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company in a reasonably prompt manner such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subdivision (viii) of this Section 2.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of this Section 2.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 2.4 Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Section 2.1, the Company will use its reasonable best efforts to enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnities to the effect and to the extent provided in Section 2.7. The holders of the Registrable Securities proposed to be sold by such underwriters will reasonably cooperate with the Company in the negotiation of the underwriting agreement. Such holders of Registrable Securities to be sold by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. No holder of Registrable Securities shall be required to make any representations or warranties to, or agreements with, the Company other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution or any other representations required by applicable law. 11 9 (b) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Requesting Holder of Registrable Securities, use its reasonable best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such Requesting Holder among the securities of the Company to be distributed by such underwriters, subject to the provisions of Section 2.2(b). The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such Requesting Holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such Requesting Holder, such Requesting Holder's Registrable Securities and such Requesting Holder's intended method of distribution or any other representations required by applicable law. (c) Underwriting Discounts and Commission. The holders of Registrable securities sold in any offering pursuant to Section 2.4(a) or Section 2.4(b) shall pay all underwriting discounts and commissions of the underwriter or underwriters with respect to the Registrable Securities sold thereby. 2.5 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such reasonable access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6 Limitations, Conditions and Qualifications to Obligations under Registration Covenants. The Company shall be entitled to postpone for a reasonable period of time (but not exceeding 90 days) the filing of any registration statement otherwise required to be prepared and filed by it pursuant to Section 2.1 if the Company determines, in its good faith judgment, that such registration and offering would interfere with any material financing, acquisition, corporate 12 10 reorganization or other material transaction involving the Company or any of its affiliates and promptly gives the holders of Registrable Securities requesting registration thereof pursuant to Section 2.1 written notice of such determination, containing a general statement of the reasons for such postponement and an approximation of the anticipated delay. If the Company shall so postpone the filing of a registration statement, holders of Registrable Securities requesting registration thereof pursuant to Section 2.1, representing not less than 33-1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66-2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 30 days after receipt of the notice of postponement and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 2.1 hereof. 2.7 Indemnification. (a) Indemnification by the Company. The Company will, and hereby does, indemnify and hold harmless, in the case of any registration statement filed pursuant to Section 2.1 or 2.2, each seller of any Registrable Securities covered by such registration statement and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, and their respective directors, officers, partners, members, agents and affiliates against any losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or any such director, officer, partner, member, agent, affiliate or controlling person may become subject under the Securities Act or otherwise, including, without limitation, the reasonable fees and expenses of legal counsel (including those incurred in connection with any claim for indemnity hereunder), insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such seller or underwriter and each such director, officer, partner, member, agent, affiliate and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information 13 11 furnished to the Company by or on behalf of such seller or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof; and provided further, that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, partner, member, agent or controlling person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. As a condition to including any Registrable Securities in any registration statement, the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 2.7(a)) the Company, and each director of the Company, each officer of the Company and each other Person, if any, who participates as an underwriter in the offering or sale of such securities and each other Person who controls the Company or any such underwriter within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of such indemnifying party under this Section 2.7(b) shall be limited to the amount of the net proceeds received by such indemnifying party in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 2.7(a) or (b), such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 2.7, except to the extent that the indemnifying party is actually prejudiced by 14 12 such failure to give notice. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Section 2.7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. (d) Contribution. If the indemnification provided for in this Section 2.7 shall for any reason be held by a court to be unavailable to an indemnified party under Section 2.7(a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 2.7(a) or (b), the indemnified party and the indemnifying party under Section 2.7(a) or (b) shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same, including those incurred in connection with any claim for indemnity hereunder), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement; provided, however, that for purposes of this clause (ii), the relative benefits received by the prospective sellers shall be deemed not to exceed the amount of proceeds received by such prospective sellers. No Person guilty of 15 13 fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this Section 2.7(d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 2.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. (f) Indemnification Payments. The indemnification and contribution required by this Section 2.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 3. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean and include the common stock, par value $.01 per share, of the Company and each other class of capital stock of the Company that does not have a preference over any other class of capital stock of the Company as to dividends or upon liquidation, dissolution or winding up of the Company and, in each case, shall include any other class of capital stock of the Company into which such stock is reclassified or reconstituted. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. 16 14 "Initial Public Offering" means the initial public offering of the Common Stock and such Common Stock is listed on the New York Stock Exchange, Inc. or quoted or listed on the National Market System of the Nasdaq Stock Market. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Registrable Securities" means any shares of Common Stock issuable upon exercise of the Warrants and any Related Registrable Securities and any shares of Common Stock owned by the Purchaser. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been sold as permitted by Rule 144 (or any successor provision) under the Securities Act and the purchaser thereof does not receive "restricted securities" as defined in Rule 144, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not, in the opinion of counsel for the holders, require registration of them under the Securities Act or (d) they shall have ceased to be outstanding. All references to percentages of Registrable Securities shall be calculated pursuant to Section 9. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with Section 2, including, without limitation, all registration and filing fees, all fees of the New York Stock Exchange, Inc., other national securities exchanges or the National Association of Securities Dealers, Inc., all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and compliance, any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions with respect to the Registrable Securities) and the reasonable fees and expenses of one counsel to the Selling Holders (selected by Selling Holders representing at least 50% of the Registrable Securities covered by such registration). Notwithstanding the foregoing, in the event the Company shall determine, in accordance with Section 2.2(a) or Section 2.6, not to register any securities with respect to which it had given written notice of its intention to so register to holders of Registrable Securities, all of the costs of the type (and subject to any limitation to the extent) set forth in this definition and incurred by Requesting Holders in connection with such registration on or prior to the date the Company notifies the Requesting Holders of such determination shall be deemed Registration Expenses. 17 15 "Related Registrable Securities" means with respect to shares of Common Stock issuable upon exercise of the Warrants, any securities of the Company issued or issuable with respect to such shares of Common Stock by way of a dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act of 1933, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. 4. Rule 144 and Rule 144A. Following an Initial Public Offering, the Company shall take all actions reasonably necessary to enable holders of Registrable Securities to sell such securities without registration under the Securities Act within the limitation of the provisions of (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, (b) Rule 144A under the Securities Act, as such Rule may be amended from time to time, or (c) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 5. Amendments and Waivers. This Agreement may be amended with the consent of the Company and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of at least 50% of the Registrable Securities affected by such amendment, action or omission to act. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by 18 16 registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: (a) if to the Purchaser, addressed to it in the manner set forth in the Purchase Agreement, or at such other address as it shall have furnished to the Company in writing in the manner set forth herein; (b) if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing in the manner set forth herein, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or (c) if to the Company, addressed to it in the manner set forth in the Purchase Agreement, or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding in the manner set forth herein. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier, if delivered by overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and, with respect to the Company, its respective successors and permitted assigns and, with respect to the Purchaser, any holder of any Registrable Securities, subject to the provisions respecting the minimum numbers of percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. Except by operation of law, this Agreement may not be assigned by the Company without the prior written consent of the holders of a majority in interest of the Registrable Securities outstanding at the time such consent is requested. 9. Calculation of Percentage Interests in Registrable Securities. For purposes of this Agreement, all references to a percentage of the Registrable Securities shall be calculated based upon the number of shares of Registrable Securities outstanding at the time such calculation is made, assuming the conversion of all Warrants into shares of Common Stock. 10. No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement. Without limiting the generality of the foregoing, the Company will not hereafter enter into any agreement with respect to its securities that grants, or modify any existing agreement with respect to its securities to grant, to the holder of its securities in connection with 19 17 an incidental registration of such securities higher priority to the rights granted to the Purchasers under Section 2.2(b). 11. Remedies. Each holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 12. Certain Distributions. The Company shall not at any time make a distribution on or with respect to the Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the resulting or surviving corporation and such Registrable Securities are not changed or exchanged) of securities of another issuer if holders of Registrable Securities are entitled to receive such securities in such distribution as holders of Registrable Securities and any of the securities so distributed are registered under the Securities Act, unless the securities to be distributed to the holders of Registrable Securities are also registered under the Securities Act. 13. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, 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 contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Purchaser shall be enforceable to the fullest extent permitted by law. 14. Entire Agreement. This Agreement, together with the Purchase Agreement (including the exhibits and schedules thereto) and the Notes and the Warrants, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Purchase Agreement (including the exhibits and schedules thereto) and the Notes and the Warrants supersede all prior agreements and understandings between the parties with respect to such subject matter. 15. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF 20 18 THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 17. Counterparts. This Agreement may be executed in multiple counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER --------------------------- Name: William Gaither Title: President and Chief Executive Officer THE 1818 MEZZANINE FUND, L.P. Per Pro Brown Brothers Harriman & Co., General Partner By: /s/ JOSEPH P. DONLAN ---------------------- Name: Joseph P. Donlan EX-10.7 25 WARRANT #2 CLASS A COMMON STOCK RE 1818 MEZZANINE 1 Exhibit 10.7 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. WARRANT NO. 2 WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE J.H. HEAFNER COMPANY, INC. THIS IS TO CERTIFY THAT THE 1818 MEZZANINE FUND, L.P. or its registered assigns (the "Purchaser"), is the owner of one million thirty-four thousand (1,034,000) Warrants (the "Warrants"), each of which entitles the registered holder thereof to purchase from THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), one fully paid, duly authorized and nonassessable share of Class A Common Stock, par value $.01 per share, of the Company (the "Common Stock"), at any time or from time to time on or before 5:00 p.m., New York City time, on May 7, 2007 (subject to earlier expiration in certain events), at an exercise price of $.01 per share (the "Exercise Price"), all on the terms and subject to the conditions hereinafter set forth. The number of shares of Common Stock issuable upon exercise of each such Warrant (the "Number Issuable"), which is initially one (1) share, is subject to adjustment from time to time pursuant to the provisions of Section 2 of this Warrant Certificate. 2 2 Capitalized terms used herein but not otherwise defined shall have the meanings given them in Section 12 hereof or, if not therein defined, in the Note and Warrant Purchase Agreement. Section 1. Exercise of Warrant. Subject to the last paragraph of this Section 1, the Warrants evidenced hereby may be exercised, in whole or in part, by the registered holder hereof at any time or from time to time on or before 5:00 p.m., New York City time, on May 7, 2007, but in any event no later than the date of the consummation of the earlier to occur of an IPO or a Sale Transaction upon delivery to the Company at the principal executive office of the Company in the United States of America, of (a) this Warrant Certificate, (b) a written notice stating that such holder elects to exercise the Warrants evidenced hereby in accordance with the provisions of this Section 1 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued and (c) payment of the Exercise Price for the shares of Common Stock issuable upon exercise of such Warrants, which shall be payable (i) in cash, (ii) by a certified or official bank check payable to the order of the Company or (iii) by surrender of the Notes in a principal amount at least equal to the Exercise Price (collectively, the "Warrant Exercise Documentation"). As promptly as practicable, and in any event within five Business Days after receipt of the Warrant Exercise Documentation, the Company shall deliver or cause to be delivered (a) certificates representing the number of validly issued, fully paid and nonassessable shares of Common Stock specified in the Warrant Exercise Documentation, (b) if applicable, cash in lieu of any fraction of a share, as hereinafter provided, and (c) if less than the full number of Warrants evidenced hereby are being exercised, a new Warrant Certificate or Certificates, of like tenor, for the number of Warrants evidenced by this Warrant Certificate, less the number of Warrants then being exercised. Such exercise shall be deemed to have been made at the close of business on the date of delivery of the Warrant Exercise Documentation so that the Person entitled to receive shares of Common Stock upon such exercise shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. No such surrender shall be effective to constitute the person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant Certificate for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant Certificate was surrendered and for the Number Issuable of Common Stock specified in the Warrant Exercise Documentation and at the Exercise Price. The Company shall pay all expenses in connection with, and all taxes and other governmental charges (other than income taxes of the holder) that may be imposed in respect of, the issue or delivery of any shares of Common Stock issuable upon the exercise of the Warrants evidenced hereby. The Company shall not be required, however, to pay any tax or 3 3 other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrants evidenced hereby. In case of the redemption of any Warrants pursuant to Section 3(b), the right of exercise shall cease and terminate, as to the Warrants to be redeemed, at the close of business on the date fixed for redemption, unless the Company shall default in the payment of the applicable redemption price for the Warrants to be redeemed. In connection with the exercise of any Warrants evidenced hereby, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price per share of Common Stock on the Business Day which next precedes the day of exercise. If more than one such Warrant shall be exercised by the holder thereof at the same time, the number of full shares of Common Stock issuable on such exercise shall be computed on the basis of the total number of Warrants so exercised. Section 2. Adjustments. (a) Adjustment of Number Issuable. The Number Issuable shall be subject to adjustment from time to time as follows: (i) In case the Company shall at any time or from time to time after the Issue Date: (A) pay a dividend or make a distribution on the outstanding shares of Common Stock in capital stock of the Company; (B) subdivide the outstanding shares of Common Stock into a larger number of shares; (C) combine the outstanding shares of Common Stock into a smaller number of shares; or (D) issue any shares of its capital stock in a reclassification of the Common Stock; then, and in each such case, the Number Issuable in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Company) so that the holder of any Warrant evidenced hereby thereafter exercised shall be entitled to receive the number of shares of Common Stock or other securities of the Company which such holder would have owned or had been entitled to receive upon or by reason of any of the events described above, had such Warrant been exercised 4 4 immediately prior to the happening of such event. An adjustment made pursuant to this clause (i) shall become effective retroactively (x) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of any such subdivision, combination or reclassification, to the close of business on the date upon which such corporate action becomes effective. (ii) If after the Issue Date, the Company shall at any time or from time to time issue or sell (x) shares of Common Stock or (y) securities convertible into or exchangeable for shares of Common Stock, or any options, warrants or other rights to acquire shares of Common Stock (other than (A) shares of Common Stock issued upon exercise of the Warrants outstanding on the Issue Date, (B) up to 300,000 shares of Common Stock issued pursuant to an employee stock option plan, stock bonus plan, or other incentive compensation plan or award, each as approved by the Company's Board of Directors on or prior to the Issue Date, but not to the extent issued to Thomas J. Bonburg or any Family Member, (C) shares of Common Stock repurchased by the Company from stockholders following the Issue Date and which are subsequently reissued to Family Members within 360 days following such repurchase, at a price equal to or greater than the price at which such shares of Common Stock were repurchased and (D) shares issued as a result of adjustments made under agreements related to shares described in clauses (A), (B) and (C)) at a price per share that is less than the Current Market Price per share of Common Stock then in effect as of the record date or issue date, as the case may be, referred to in the following sentence (the "Relevant Date") (treating the price per share of Common Stock, in the case of the issuance of any security convertible or exchangeable or exercisable into Common Stock as equal to (x) 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 (y) the number of shares of Common Stock initially underlying such convertible, exchangeable or exercisable security), in each case, other than issuances or sales for which an adjustment is made pursuant to another paragraph of this Section 2, then, and in each such case, the Number Issuable then in effect shall be adjusted by multiplying the Number Issuable in effect on the day immediately prior to the Relevant Date by a fraction, (1) the numerator of which shall be the sum of the number of shares of Common Stock, on a fully diluted basis, outstanding on the Relevant 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 (2) the denominator of which 5 5 shall be the sum of the number of shares of Common Stock, on a fully diluted basis, outstanding on the Relevant 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 Current Market Price per share of Common Stock on the Relevant 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 (x) in the case of an issuance to the stockholders of the Company, as such, on the record date for the determination of stockholders entitled to receive such shares, securities, options, warrants or other rights and (y) in all other cases, on the date (the "issue date") of such issuance; provided, 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 2(a)(ii) shall have expired or terminated without the exercise thereof, then the Number Issuable hereunder shall be readjusted (but to no greater extent than originally adjusted) on the basis of 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. Solely for purposes of this clause (ii), (I) Common Stock shall include the Common Stock, par value $.01 per share, of the Company and each other class of capital stock of the Company that does not have a preference over any other class of capital stock of the Company as to dividends or upon liquidation, dissolution or winding up of the Company and, in each case, shall include any other class of capital stock of the Company into which such stock is reclassified or reconstituted and (II) if the provisions of any securities convertible into or exchangeable for shares of Common Stock or options, warrants or other rights to acquire shares of Common Stock are amended after the date of issuance so as to reduce the applicable conversion price, exchange price or exercise price such amendment shall be deemed to be a new issuance of such securities. (iii) In case the Company shall at any time or from time to time after the Issue Date distribute to any holder of shares of its Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the resulting or surviving corporation and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Company or another issuer, securities of the Company or another issuer or other assets (excluding dividends or other distributions of shares of Common Stock or other capital stock for which adjustment is made under Section 2(a)(i) or dividends or other distributions received by or set aside for the benefit of the holders of Common Stock pursuant to Section 2(c) below) or rights or warrants to subscribe for or purchase securities of the Company (excluding those in respect of which adjustments in the Number Issuable is made 6 6 pursuant to Section 2(a)(i) or Section 2(a)(ii)), then, and in each such case, the Number Issuable then in effect shall be adjusted by multiplying the Number Issuable in effect immediately prior to the date of such distribution by a fraction (x) the numerator of which shall be the Current Market Price per share of Common Stock on the record date referred to below and (y) the denominator of which shall be such Current Market Price per share of Common Stock less the then Fair Market Value (as determined in good faith by the Board of Directors of the Company, a certified resolution with respect to which shall be mailed to the holder of the Warrants evidenced hereby) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or of such subscription rights or warrants applicable to one share of Common Stock (but such denominator shall in no event be zero). Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. (iv) In case the Company at any time or from time to time shall take any action which could have a dilutive effect on the number of shares of Common Stock that may be issued upon exercise of the Warrants, other than an action described in any of Section 2(a)(i) through 2(a)(iii), inclusive, or Section 2(b), then, the Number Issuable shall be adjusted in such manner and at such time as the Board of Directors of the Company reasonably determines to be equitable under the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holder of the Warrants evidenced hereby). (v) Notwithstanding anything herein to the contrary, no adjustment under this Section 2(a) need be made to the Number Issuable unless such adjustment would require an increase or decrease of at least 2% of the Number Issuable 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 2% of such Number Issuable. Any adjustment to the Number Issuable carried forward and not theretofore made shall be made immediately prior to the exercise of any Warrants pursuant hereto. (vi) The Company promptly shall deliver to each registered holder of Warrants at least five Business Days prior to effecting any transaction which would result in an increase or decrease in the Number Issuable pursuant to this Section 2 a notice thereof, together with a certificate, signed by the Chief Executive Officer or an Executive Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, 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 Number Issuable then in effect following such adjustment. 7 7 (vii) Notwithstanding anything contrary contained in this Section 2(a), the Company shall be entitled to make such upward adjustments in the Number Issuable, in addition to those otherwise required by this Section 2(a), as the Board of Directors of the Company in their discretion shall determine to be advisable in order that any stock dividend, subdivision or combination of shares, distribution of rights or warrants to purchase stock or securities, or distribution of securities convertible into or exchangeable for Common Stock, hereafter made by the Company to its shareholders shall not be taxable; provided, however, that any such adjustment shall be made, as nearly as practicable, in a manner which treats all holders of Warrants with similar protections on an equal basis. (b) Reorganization, Reclassification, Consolidation, Merger or Sale of Assets. In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another Person (other than a consolidation or merger in which the Company is the resulting or surviving person and which does not result in any reclassification or change of outstanding Common Stock) (any of the foregoing, a "Transaction"), the Company, or such successor or purchasing Person, as the case may be, shall execute and deliver to each holder of the Warrants evidenced hereby, at least five Business Days prior to effecting any of the foregoing Transactions, a certificate that the holder of each such Warrant then outstanding shall have the right thereafter to exercise such Warrant into the kind and amount of shares of stock or other securities (of the Company or another issuer) or property or cash receivable upon such Transaction by a holder of the number of shares of Common Stock into which such Warrant could have been exercised immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2 and shall contain other terms identical to the terms hereof. If, in the case of any such Transaction, the stock, other securities, cash or property receivable thereupon by a holder of Common Stock includes shares of stock or other securities of a Person other than the successor or purchasing Persons and other than the Company, which controls or is controlled by the successor or purchasing Person or which, in connection with such Transaction, issues stock, securities, other property or cash to holders of Common Stock, then such certificate also shall be executed by such Person, and such Person shall, in such certificate, specifically assume the obligations of such successor or purchasing Person and acknowledge its obligations to issue such stock, securities, other property or cash to holders of the Warrants upon exercise thereof as provided above. The provisions of this Section 2(b) similarly shall apply to successive Transactions. 8 8 (c) Special Distributions. If the holder so elects by sending a Special Notice to the Company, in the event that the Company 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 or other rights to acquire capital stock) of the Company, whether or not pursuant to a shareholder rights plan, "poison pill" or similar arrangement) in other property or assets, to holders of Common Stock (a "Special Distribution"), then the Board of Directors shall set aside the amount of such dividend or distribution that any holder of Warrants would have been entitled to receive had it exercised such Warrants prior to the record date for such dividend or distribution; provided, however, that the provisions of this Section 2(c) shall not be applicable to distributions (whether or not on a pro rata basis) of up to an aggregate of $300,000 in any calendar year so long as the Company, at the time of any such distribution, is in compliance with the covenants contained in Articles 9 and 10 of the Note and Warrant Purchase Agreement. Upon the exercise of a Warrant evidenced hereby, the holder shall be entitled to receive, such dividend or distribution that such holder would have received had such Warrant been exercised immediately prior to the record date for such dividend or distribution. Prior to any Special Distribution described in this section 2(c), the Company shall as provided in Section 4 hereof notify each holder (not less than ten Business Days prior to the occurrence of each Special Distribution) of its intent to make such Special Distribution and the holder, if it elects to have such distribution set aside the amount thereof rather than have an adjustment to the Number Issuable as provided in Section 2(a)(iii), shall notify the Company by sending a Special Notice prior to the date of any such Special Distribution. Section 3. Redemption. (a) Company's Right to Require Redemption. The Company shall not have any right to redeem any of the Warrants evidenced hereby. (b) Holder's Right to Require Redemption. At the request of the holders of a majority in interest of the Warrants issued on the Issue Date pursuant to the Note and Warrant Purchase Agreement, made (i) upon a Change of Control (unless pursuant to such Change of Control all of the Capital Stock of the Company is being sold and the Purchaser is to receive in connection therewith (x) cash or (y) securities listed on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq for its shares of the Common Stock of the Company (assuming exercise of any unexercised Warrants)), (ii) after the fifth anniversary of the Issue Date (provided that, until the Senior Notes of the Company, due 2008, to be offered and sold on or about May 20, 1998 have been repaid in full, this clause (ii) shall not be operative and no such request shall be made) or (iii) after the seventh anniversary of the Issue Date, the Company shall redeem (unless otherwise prevented by law), at a redemption price equal to the Equity Value, all of the then outstanding Warrants; provided, however, that the right of the holders of the Warrants to require redemption pursuant to this Section 3(b) shall expire and be of no further force or effect upon the consummation of an IPO. Notice of a request for redemption pursuant to this Section 3(b) shall be sent in 9 9 accordance with Section 13 of this Warrant and the Company shall redeem the Warrants no later than the 180th day after the Company receives such notice (the "Redemption Date"). At any time on or after the Redemption Date, each holder of Warrants shall be entitled to receive its pro rata share of the Equity Value upon actual delivery to the Company or its transfer agent of such holder's Warrant Certificate or Certificates. Section 4. Notice of Certain Events. In case at any time or from time to time the Company shall declare any dividend or any other distribution to the holders of its Common Stock, or shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any additional shares of stock of any class or any other right, or shall authorize the issuance or sale of any other shares or rights which would result in an adjustment to the Number Issuable pursuant to Section 2(a)(i) or (ii) or would result in a Special Distribution pursuant to Section 2(c) hereof, or there shall be any capital reorganization or reclassification of the Common Stock of the Company or consolidation or merger of the Company with or into another Person, or any sale or other disposition of all or substantially all the assets of the Company, or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then, in any one or more of such cases the Company shall mail to each holder of the Warrants evidenced hereby at such holder's address as it appears on the transfer books of the Company, as promptly as practicable but in any event at least 20 days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such dividend, distribution, 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, rights or warrants are to be determined, (b) the issue date (as defined in Section 2(a)(ii) hereof) or (c) the date on which such reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up is expected to become effective; provided that in the case of any event to which Section 2(b) applies, the Company shall give at least ten Business Days' prior written notice as aforesaid. Such notice also shall specify the date as of which it is expected that the 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 reorganization, reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up. Section 5. Certain Covenants. The Company covenants and agrees that all shares of capital stock of the Company which may be issued upon the exercise of the Warrants evidenced hereby will be duly authorized, validly issued and fully paid and nonassessable. The Company shall at all times reserve and keep available for issuance upon the exercise of the Warrants, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the exercise of all outstanding Warrants, 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 10 10 reservation or to permit the exercise of all outstanding Warrants. The Company shall prepare and file, and cooperate with the holder of this Warrant so that it may prepare and file, in each case within five Business Days of a request by such holder, notification and report forms in compliance with the HSR Act, and shall otherwise fully comply with the requirements of the HSR Act, to the extent required in connection with the exercise of the Warrant. The Company shall bear all of its own expenses and all of its own out-of-pocket expenses (including reasonable attorneys' fees, charges and expenses) and filing fees of such holder in connection with any such preparation and filing. Section 6. Registered Holder. The person in whose name this Warrant Certificate is registered shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Warrant Certificate, in its capacity as such, shall not be entitled to any rights whatsoever as a stockholder of the Company, except as herein provided. Section 7. Transfer of Warrants. Any transfer of the rights represented by this Warrant Certificate shall be subject to compliance with Sections 9.14 and 9.15 of the Note and the Warrant Purchase Agreement and shall be effected by the surrender of this Warrant Certificate, along with the form of assignment attached hereto, properly completed and executed by the registered holder hereof, at the principal executive office of the Company in the United States of America, together with an appropriate investment letter, if deemed reasonably necessary by counsel to the Company to assure compliance with applicable securities laws. Thereupon, the Company shall issue in the name or names specified by the registered holder hereof and, in the event of a partial transfer, in the name of the registered holder hereof, a new Warrant Certificate or Certificates evidencing the right to purchase such number of shares of Common Stock as shall be equal to the number of shares of Common Stock then purchasable hereunder. Section 8. Denominations. The Company covenants that it will, at its expense, promptly upon surrender of this Warrant Certificate at the principal executive office of the Company in the United States of America, execute and deliver to the registered holder hereof a new Warrant Certificate or Certificates in denominations specified by such holder for an aggregate number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. Section 9. Replacement of Warrants. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, upon delivery of an indemnity reasonably satisfactory to the Company (in the case of an insurance company or other institutional investor, its own unsecured indemnity agreement shall be deemed to be reasonably satisfactory), or, in the case of mutilation, upon surrender and cancellation thereof, the Company will issue a new Warrant Certificate of like tenor for a number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. 11 11 Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. Section 11. Rights Inure to Registered Holder. The Warrants evidenced by this Warrant Certificate will inure to the benefit of and be binding upon the registered holder thereof and the Company and their respective successors and permitted assigns. Nothing in this Warrant Certificate shall be construed to give to any Person other than the Company and the registered holder thereof any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and such registered holder. Nothing in this Warrant Certificate shall be construed to give the registered holder hereof any rights as a holder of shares of Common Stock until such time, if any, as the Warrants evidenced by this Warrant Certificate are exercised in accordance with the provisions hereof. Section 12. Definitions. For the purposes of this Warrant Certificate, the following terms shall have the meanings indicated below: "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York or the City of Atlanta, are authorized or required by law or executive order to close. "Business Value" shall mean the product of 6 times the EBITDA of the Company for the Calculation Period. "Calculation Period" shall mean the twelve month period ending on the last day of the most recently completed month preceding the date of notice of a request for redemption pursuant to Section 3(b). "Capital Lease Obligations" means, as to any Person, any obligation of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligation is required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for the purposes of the Notes, the amount of any such obligation at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP consistently applied. 12 12 "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests in a Person not a corporation) whether now outstanding or hereafter issued, including, without limitation, all common stock and preferred stock and any rights, warrants or options to purchase such Person's capital stock. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation (each a "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire any such primary obligation or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor in respect of any such primary obligation or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of such primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 15 days, ending on such date, on which the national securities exchanges were open for trading, and (b) if the Common Stock is not then listed or quoted in the over-counter market, the Market Price on such date. "EBITDA" shall mean, with respect to any Person for any period, the sum of (a) Net Income for such period (excluding therefrom, to the extent included in determining Net Income, any items of extraordinary gain or loss, including net gains or losses on sale of assets other than asset sales in the ordinary course of business), (b) Interest Expense deducted from revenue in determining such Net Income, (c) Federal, state and local income and franchise taxes deducted from revenue in determining such Net Income, (d) depreciation and amortization and all non-cash charges to the extent deducted from revenue in determining such Net Income, (e) the sum of all supplemental discretionary payments made to Ann Heafner Gaither, William H. Gaither and Susan Gaither Jones pursuant to Section 10.10(ii) of the Note and Warrant Purchase Agreement deducted from revenue in determining such Net Income, less (f) interest income and all non-cash items which increase such Net Income. For purposes of 13 13 calculating (d) and (e) above, all items that would not be considered operating items in the ordinary course of business or would result in changes in long-term asset or liability accounts shall be excluded. All references contained herein to EBITDA of the Company shall be to the EBITDA of the Company and its Subsidiaries, determined on a consolidated basis. "Equity Value" shall mean the percentage of Common Stock of the Company on a fully diluted basis into which the unexercised Warrants are exercisable multiplied by the Redemption Value. "Exercise Price" shall have the meaning given it in the first paragraph hereof. "Fair Market Value" shall mean the amount which a willing buyer, under no compulsion to buy, would pay a willing seller, under no compulsion to sell, in an arm's-length transaction. "Funded Debt" means all Indebtedness for borrowed money of the Company and its Subsidiaries on a consolidated basis that by its terms or by the terms of any instrument or agreement relating thereto matures more than one year from, or is renewable or extendable at the option of the debtor to a date more than on year from, the date of creation thereof (including an option of the debtor under a revolving credit or similar arrangement obligating the lender or lenders to extend credit over a period of one year or more), and includes any current maturities of any such Indebtedness. "GAAP" means generally accepted United States accounting principles in effect from time to time. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Indebtedness" means as to any Person, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable and accrued liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps and similar agreements under which payments are obligated to be made, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), 14 14 (f) all obligations under Capital Lease Obligations, (g) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) any Contingent Obligation. "Interest Expense" shall mean, with respect to any Person for any period, the sum of (a) gross interest expense of such Person for such period in accordance with GAAP consistently applied, including (i) the amortization of debt discounts, (ii) the amortization of all fees payable in connection with the incurrence of Indebtedness to the extent included in interest expense and (iii) the portion of any payments or accruals with respect to Capital Lease Obligations allocable to interest expense, and (b) any other capitalized interest of such Person determined in accordance with GAAP. All references contained herein to the Interest Expense of the Company shall be to the Interest Expense of the Company and its Subsidiaries, determined on a consolidated basis. "HSR Act" shall mean the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended and the rules and regulations of the Federal Trade Commission promulgated thereunder. "Investment" means (i) the acquisition (whether for cash, property, services, securities or otherwise) of Capital Stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition; and (ii) the making of any advance, loan or other extension of credit to, any Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person, but excluding any accounts receivable created in the ordinary course of business). "IPO" shall mean the initial public offering of the Company's Common Stock with gross proceeds of at least $25 million or representing at least 20% of the Common Stock on a fully diluted basis and such Common Stock is listed on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq. "Issue Date" shall mean May 7, 1997. "Market Price" shall mean, per share of Common Stock, on any date specified herein: (a) if the Common Stock is then listed or admitted to trading on any national securities exchange, the closing price of the Common Stock on such date; (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security, the last sale price of the Common Stock on such date; or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked price of the Common Stock, on such date as shown by Nasdaq and reported by any member firm of the NYSE selected by the Company; or (d) if neither (a), (b) nor (c) is applicable, the Fair Market Value per share 15 15 determined in good faith by the Board of Directors of the Company which shall be deemed to be Fair Market Value unless holders of at least 33% of Common Stock issued or issuable upon exercise of the Warrants request that the Company obtain an opinion of a nationally recognized investment banking firm chosen by the Company (who shall bear the expense) and reasonably acceptable to such requesting holders of the Warrants, in which event the Fair Market Value shall be as determined by such investment banking firm. "Nasdaq" shall mean the National Market System of the Nasdaq Stock Market. "Net Income" shall mean for any period, the net income (loss) of any Person, determined in accordance with GAAP, after deducting all operating expenses, provisions for taxes and reserves and all other proper deductions in accordance with GAAP. All references contained herein to the Net Income of the Company shall be to the Net Income of the Company and its Subsidiaries, determined on a consolidated basis. "Notes" shall mean the Senior Subordinated Promissory Notes issued by the Company pursuant to the Note and Warrant Purchase Agreement. "Note and Warrant Purchase Agreement" shall mean that certain Subordinated Note and Warrant Purchase Agreement, dated as of May 7, 1997, between the Company and The 1818 Mezzanine Fund, L.P., as the same may be amended or modified from time to time in accordance with its terms. "Number Issuable" shall have the meaning given it in the second paragraph hereof. "NYSE" shall mean the New York Stock Exchange, Inc. "Person" shall mean any individual, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Redemption Value" shall mean the Business Value plus the cash and Temporary Cash Investments of the Company and its Subsidiaries as of the last day of the Calculation Period minus the sum of the Funded Debt and Capital Lease Obligations of the Company and its Subsidiaries as of the last day of the Calculation Period. "Sale Transaction" means the merger or consolidation with or into another entity by the Company or the conveyance, transfer, lease or other disposition of (whether in one transaction or in a series of transactions) all or substantially all of the Company's assets (whenever acquired). 16 16 "Special Notice" shall mean the notice sent by a holder to the Company indicating its preference to have any special distribution set aside for its benefit upon exercise of the Warrant. "Temporary Cash Investment" means any Investment in (i) United States Government Obligations, (ii) commercial paper rated at least A or the equivalent thereof by Moody's Investors Services, Inc. or a similar nationally recognized credit rating agency or (iii) time deposits (including certificates of deposit) with any bank or trust company which is organized, licensed or otherwise regulated under the laws of the United States or any state thereof, the long-term debt securities of which are rated at least A or the equivalent thereof by Moody's Investors Service, Inc. or a similar nationally recognized credit rating agency; provided, in each case, that such Investment matures within one (1) year from the date of acquisition thereof by the Company, or any of its Subsidiaries. "United States Government Obligations" means direct non-callable obligations of, or non-callable obligations guaranteed by the United States for the payment of which obligation the full faith and credit of the United States is pledged. "Warrant Exercise Documentation" shall have the meaning given it in Section 1 hereof. Section 13. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier services or personal delivery, (a) if to the holder of a Warrant, at such holder's last known address appearing on the books of the Company; and (b) if to the Company, at its principal executive office in the United States located at the address designated for notices in the Note and Warrant Purchase Agreement, or such other address as shall have been furnished to the party given or making such notice, demand or other communication. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier if delivered by commercial overnight courier service; and five Business Days after being deposited in the mail, postage prepaid, if mailed. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of May 14, 1998. THE J.H. HEAFNER COMPANY, INC. By: /s/ William H. Gaither ------------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer 17 17 [Form of Assignment Form] [To be executed upon assignment of Warrants] The undersigned hereby assigns and transfers this Warrant Certificate to ____________________ whose Social Security Number or Tax ID Number is _________________ and whose record address is ________________, and irrevocably appoints ________________ as agent to transfer this security on the books of the Company. Such agent may substitute another to act for such agent. Signature: ____________________________________ Signature Guarantee: ____________________________________ Date: __________________________ EX-10.8 26 SECURITIES PURCHASE AGREEMENT OF MAY 7, 1997 1 Exhibit 10.8 SECURITIES PURCHASE AGREEMENT BETWEEN THE J.H. HEAFNER COMPANY, INC. AND THE KELLY-SPRINGFIELD TIRE COMPANY A DIVISION OF THE GOODYEAR TIRE AND RUBBER COMPANY Dated: May 7, 1997 2 TABLE OF CONTENTS
Page ---- Introduction...................................................................................... 1 ARTICLE I Purchase and Sale................................................................................. 1 SECTION 1.1. Purchase and Sale of Kelly Preferred Stock.......................................... 1 SECTION 1.2 Closing.............................................................................. 2 ARTICLE II Representations and Warranties of the Company..................................................... 2 SECTION 2.1. Organization and Standing........................................................... 2 SECTION 2.2. Authority; Binding Agreements....................................................... 2 SECTION 2.3. Conflicts; Consents................................................................. 2 SECTION 2.4. Capitalization...................................................................... 3 SECTION 2.5. Financial Condition; No Undisclosed Liabilities..................................... 3 ARTICLE III Representations and Warranties of the Purchaser................................................... 4 SECTION 3.1. Organization and Standing........................................................... 4 SECTION 3.2. Authority; Binding Agreements....................................................... 4 SECTION 3.3. Conflicts; Consents................................................................. 4 SECTION 3.4. Purchase for Own Account............................................................ 4 SECTION 3.5. Investment Company.................................................................. 5 SECTION 3.6. Broker's, Finder's or Similar Fees.................................................. 5 SECTION 3.7. Nature of Purchaser................................................................. 5 ARTICLE IV Covenants of the Company.......................................................................... 5 SECTION 4.1. Winston Tires....................................................................... 5 SECTION 4.2. Change of Control Notice............................................................ 6 SECTION 4.3. Issue Taxes......................................................................... 6 SECTION 4.4. Financial Statements................................................................ 6 SECTION 4.5. Notices............................................................................. 6
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Page ---- ARTICLE V Covenants of the Purchaser........................................................................ 7 SECTION 5.1. Confidentiality..................................................................... 7 SECTION 5.2. Stock Transfer Restrictions......................................................... 7 ARTICLE VI Conditions to the Obligation of the Purchaser..................................................... 8 SECTION 6.1. Representations and Warranties...................................................... 8 SECTION 6.2. Compliance with this Agreement...................................................... 9 SECTION 6.3. Officer's Certificate............................................................... 9 SECTION 6.4. Secretary's Certificate............................................................. 9 SECTION 6.5. Filing of Amended and Restated Articles............................................. 9 SECTION 6.6. Opinions of Counsel................................................................. 9 SECTION 6.7. Pro Forma Balance Sheet............................................................. 9 SECTION 6.8. No Litigation....................................................................... 9 SECTION 6.9. Stock Purchase Agreement............................................................ 9 SECTION 6.10. Financing.......................................................................... 10 SECTION 6.11. Tire Supply Agreement.............................................................. 10 SECTION 6.12. Documents.......................................................................... 10 ARTICLE VII Conditions to the Obligation of the Company....................................................... 10 SECTION 7.1. Representations and Warranties...................................................... 10 SECTION 7.2. Compliance with this Agreement...................................................... 10 SECTION 7.3. Purchaser's Certificate............................................................. 10 SECTION 7.4. Stock Purchase Agreement............................................................ 10 SECTION 7.5. Financing........................................................................... 10 SECTION 7.6. Tire Supply Agreement............................................................... 10 ARTICLE VIII Miscellaneous..................................................................................... 11 SECTION 8.1. Survival of Provisions.............................................................. 11 SECTION 8.2. Notices............................................................................. 11 SECTION 8.3. Successors and Assigns.............................................................. 12 SECTION 8.4. Amendment and Waiver................................................................ 12 SECTION 8.5. Counterparts........................................................................ 12 SECTION 8.6. Headings............................................................................ 12
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Page ---- SECTION 8.7. GOVERNING LAW....................................................................... 12 SECTION 8.8. JURISDICTION........................................................................ 12 SECTION 8.9. Severability........................................................................ 13 SECTION 8.10. Entire Agreement................................................................... 13 SECTION 8.11. Publicity.......................................................................... 13 SECTION 8.12. Expenses........................................................................... 13 SECTION 8.13. Certain Definitions and Rules of Interpretation.................................... 13 SECTION 8.14. Legends............................................................................ 14 SCHEDULES Schedule 2.4. Capitalization Schedule 2.5. Liabilities EXHIBITS Exhibit A Tire Supply Agreement Exhibit B Amended and Restated Articles Exhibit C Opinion of Company Counsel
-iii- 5 SECURITIES PURCHASE AGREEMENT, dated as of May 7, 1997, between THE J. H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and THE KELLY-SPRINGFIELD TIRE COMPANY (the "Purchaser"), a division of The Goodyear Tire and Rubber Company, an Ohio corporation ("Goodyear"). Introduction In order to provide equity financing for the proposed acquisition (the "Acquisition") by the Company of all of the outstanding shares of capital stock of Oliver & Winston, Inc., a California corporation ("Winston"), pursuant to the Stock Purchase Agreement, dated as of April 9, 1997, between the Company and the shareholders of Winston (the "Stock Purchase Agreement"), the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, 7,000 shares of the Company's Series A Cumulative Redeemable Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), and (ii) 4,500 shares of the Company's Series B Cumulative Redeemable Preferred Stock, par value $.01 per share (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Kelly Preferred Stock"), upon the terms and subject to the conditions set forth in this Agreement. In connection with the issuance, sale and purchase of the shares of Kelly Preferred Stock, the Company and the Purchaser are entering into a Purchase Agreement, substantially in the form of Exhibit A to this Agreement (the "Tire Supply Agreement"), pursuant to which the Purchaser will supply to the Company, and the Company will purchase from the Purchaser, tires manufactured by the Purchaser. The parties agree as follows: ARTICLE I Purchase and Sale SECTION 1.1. Purchase and Sale of Kelly Preferred Stock. Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser shall acquire from the Company, at the Closing (as defined below in Section 1.2), 7,000 shares (the "Series A Preferred Shares") of Series A Preferred Stock and 4,500 shares (the "Series B Preferred Shares" and, together with the Series A Preferred Shares, the "Kelly Preferred Shares") of Series B Preferred Stock, for an aggregate purchase price of $11,500,000.00 (the "Purchase Price"), in cash, by wire transfer of immediately available funds to an account designated in a notice delivered to the Purchaser not later than two business days prior to the Closing Date (as defined below in Section 1.2). The Series A Preferred Shares and the Series B Preferred Shares shall have the respective rights and preferences set forth in the Company's Amended and Restated Articles of Incorporation, a copy of which is attached to this Agreement 6 as Exhibit B (as may be amended from time to time, the "Amended and Restated Articles"). If, subsequent to the date of this Agreement, any shares or other securities are issued with respect to, or in exchange for, any of the Kelly Preferred Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company or otherwise, such shares or securities shall be deemed to be Kelly Preferred Shares for all purposes of this Agreement. SECTION 1.2. Closing. The issuance, sale and purchase of the Kelly Preferred Shares shall take place at the closing (the "Closing") to be held at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019 or such other place or places as the Company and the Purchaser shall agree, at 10:00 a.m., New York City time, on May 7, 1997 or on such other date and at such other time as the Purchaser and the Company may mutually agree (such date, the "Closing Date"). At the Closing, subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell the Series A Preferred Shares and the Series B Preferred Shares to the Purchaser by delivering to the Purchaser duly executed certificates representing the Series A Preferred Shares and the Series B Preferred Shares registered in the name of the Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money ("Claims"), and the Purchaser shall purchase the Series A Preferred Shares and the Series B Preferred Shares for the Purchase Price. ARTICLE II Representations and Warranties of the Company The Company represents and warrants to the Purchaser as follows: SECTION 2.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. SECTION 2.2. Authority; Binding Agreements. The Company has all requisite corporate power and authority to enter into this Agreement and the Tire Supply Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Tire Supply Agreement by the Company and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company, and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Tire Supply Agreement, when executed and delivered by the Company, will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. SECTION 2.3. Conflicts; Consents. The execution and delivery by the Company of this Agreement and the Tire Supply Agreement and the consummation of the transactions -2- 7 contemplated hereby and thereby and compliance by the Company with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company is a party, or by which the Company or any of the Company's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been, or before the Closing will be, obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of the Company's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Company's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Company of this Agreement and the Tire Supply Agreement and the consummation of the transactions contemplated hereby and thereby. SECTION 2.4. Capitalization. As of the Closing Date, after giving effect to the transactions contemplated by this Agreement, the authorized capital stock of the Company will consist of 10,000,000 shares of common stock, par value $.01 per share ("Common Stock"), 7,000 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock, and as of the Closing Date, all of such securities will be issued and outstanding except for 6,534,000 shares of Common Stock authorized but not issued. All issued and outstanding shares of Common Stock have been duly authorized and are fully paid and non-assessable. The Kelly Preferred Shares are duly authorized and, when issued upon payment of the Purchase Price, will be fully paid and non-assessable. Except as set forth on Schedule 2.4, there are no shares of capital stock of the Company reserved for issuance. Except as set forth on Schedule 2.4, there are no options, warrants or other rights to purchase shares of capital stock or other securities of the Company, nor is the Company obligated in any manner to issue shares of its capital stock or other securities. Schedule 2.4 sets forth a list of all of the stockholders of the Company as of the Closing Date. SECTION 2.5. Financial Condition; No Undisclosed Liabilities. The Company has delivered to the Purchaser true and correct copies of audited financial statements of the Company for the fiscal year ended December 31, 1996 (the "Company Financials") and audited financial statements of Winston for the fiscal year ended September 30, 1996 (the "Winston Financials"). The Company Financials and the Winston Financials have been prepared in accordance with generally accepted accounting principles ("GAAP") applied consistently throughout the periods covered thereby, and present fairly in all material respects the financial condition of the Company and Winston, respectively, as of the dates thereof, and the results of operations of the Company and Winston, respectively, for the period then ended. Except as set forth on Schedule 2.5, the Company and Winston, after giving effect to the Acquisition, the financing of the acquisition and related transactions, will not have any material direct or indirect indebtedness, liability or obligation, whether known or unknown, fixed or unfixed, contingent or otherwise, and whether or not of a kind required by GAAP to be set forth on a financial statement (collectively, "Liabilities"), other than (i) Liabilities fully and adequately reflected on the Company Financials or the Winston Financials, (ii) those incurred since the date of the Company Financials and the Winston Financials in the ordinary course of business and (iii) Liabilities incurred pursuant to the Debt Documents (as defined in the Amended and Restated Articles). -3- 8 ARTICLE III Representations and Warranties of the Purchaser The Purchaser represents and warrants to the Company as follows: SECTION 3.1. Organization and Standing. The Purchaser is an unincorporated division of Goodyear. Goodyear is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio. SECTION 3.2. Authority; Binding Agreements. The Purchaser has all requisite power and authority to enter into this Agreement and the Tire Supply Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Tire Supply Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Purchaser and Goodyear. This Agreement has been duly executed and delivered by the Purchaser as an unincorporated division of Goodyear, and constitutes the valid and binding obligation of the Purchaser and Goodyear, enforceable against the Purchaser and Goodyear in accordance with its terms. The Tire Supply Agreement, when executed and delivered by the Purchaser, will constitute the valid and binding obligation of the Purchaser and Goodyear, enforceable against the Purchaser and Goodyear in accordance with its respective terms. SECTION 3.3. Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement and the Tire Supply Agreement, the consummation of the transactions contemplated hereby and thereby and compliance by the Purchaser with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Purchaser or Goodyear, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser or Goodyear is a party, or by which the Purchaser or Goodyear or any of the Purchaser's or Goodyear's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been, or before the Closing will be, obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or Goodyear or any of the Purchaser's or Goodyear's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Purchaser's or Goodyear's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Purchaser of this Agreement and the Tire Supply Agreement and the consummation of the transactions contemplated hereby and thereby. SECTION 3.4. Purchase for Own Account. The Kelly Preferred Shares to be acquired by the Purchaser pursuant to this Agreement are being acquired for its own account and the Purchaser has no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or -4- 9 any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any number of the Kelly Preferred Shares under an effective registration statement under the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission thereunder (the "Securities Act"), or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of the Purchaser's property being at all times within its control. If the Purchaser should in the future decide to dispose of any of the Kelly Preferred Shares, the Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If the Purchaser should decide to dispose of such securities, the Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at the Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law, in connection with such disposition to the effect that the proposed disposition of such securities would not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. The Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Kelly Preferred Shares to the effect set forth in Section 8.14. SECTION 3.5. Investment Company. Neither the Purchaser nor any person controlling the Purchaser is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.6. Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the offer or sale of the Kelly Preferred Shares contemplated hereby based on any agreement, arrangement or understanding with the Purchaser or any action taken by the Purchaser. SECTION 3.7. Nature of Purchaser. The Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. ARTICLE IV Covenants of the Company SECTION 4.1. Winston Tires. (a) If as of December 31, 1997 (i) the Company and its subsidiaries are not ordering all of their respective requirements of "Winston" brand tires (the "Winston Brand Products") from the Purchaser, and (ii) the Purchaser is otherwise ready, willing and able to supply the Company and its subsidiaries with such Winston Brand Products in accordance with the terms set forth in the Tire Supply Agreement, then, beginning thereafter and continuing until such time as the earlier of (1) the Company and its subsidiaries are ordering all of such Winston Brand Products from the Purchaser and (2) the Kelly Preferred Shares have been redeemed in full, the Company shall (a) commence the sale of "Winston" brand tires manufactured by the Purchaser in the Eastern Region of the United States where the Company currently operates its wholesale distribution business, (b) cause Winston to convert Winston's "Delta" -5- 10 brand tire business to a "house" brand that is manufactured and sold by the Purchaser in an amount equal to at least 100,000 units or two-thirds of Winston's "Delta" tire business, whichever is greater, (c) order from the Purchaser the maximum number of "Winston" brand tires, if any, that the Company and its affiliates can order from the Purchaser without violating any of the Company's or its subsidiaries' existing supply contracts, (d) purchase from the Purchaser an additional 250,000 units per year of premium tires (the makeup of which to be agreed upon by the Company and the Purchaser) and (e) meet with the Purchaser to discuss such other additional business opportunities as may be available. (b) If, in any year that Kelly Preferred Shares are outstanding, (i) the Purchaser is unable or unwilling to sell to the Company and its subsidiaries, in accordance with the Tire Supply Agreement, such number of tires that the Company and its subsidiaries would have otherwise purchased from the Purchaser and (ii) as a result of such circumstances, (1) the Company is required to pay a greater amount of Series A Additional Dividends or Series B Dividends (each as defined in the Amended and Restated Articles) than it would otherwise have paid or (2) the Tire Purchase Credit (as defined in the Amended and Restated Articles) is less than it otherwise would have been, the Company and the Purchaser agree to negotiate in good faith an appropriate equitable adjustment, if any, of the amount of such dividends or credit, as the case may be. SECTION 4.2. Change of Control Notice. So long as the Purchaser holds all of the outstanding Kelly Preferred Shares, at least 15 days prior to the occurrence of any Change of Control (as defined in the Amended and Restated Articles), the Company shall notify the Purchaser of such pending Change of Control. SECTION 4.3. Issue Taxes. The Company shall pay, or cause to be paid, all documentary and similar taxes levied under the laws of any applicable jurisdiction in connection with the issuance of the Kelly Preferred Shares and any modification of the Kelly Preferred Shares and will hold the Purchaser harmless, without limitation as to time, against any and all liabilities with respect to all such taxes. SECTION 4.4. Financial Statements. So long as the Purchaser holds all of the outstanding Kelly Preferred Shares, the Company shall deliver to the Purchaser: (a) as soon as available, but not later than 120 days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company and its subsidiaries as of the end of such year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year, accompanied by the opinion of Arthur Andersen LLP (or any successor thereto) or another nationally recognized independent public accounting firm which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent, except as otherwise stated therein, with prior years; (b) as soon as available and, in any event, within 45 days of each of the first three fiscal quarters of each year (including, however, for the fiscal quarter ended December 31, 1997, if statements were not provided for the fiscal quarter ended September 30, 1997) the unaudited -6- 11 consolidated balance sheet of the Company and its subsidiaries, and the related consolidated statements of income and cash flow for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company; and (c) if and when the Company becomes subject to the Securities Act or the Securities Exchange Act of 1934, promptly after the same are filed, copies of all reports, statements and other documents filed with the Commission, at which point Section 4.4(a) and (b) shall expire and no longer be binding upon the Company. SECTION 4.5. Notices. So long as the Purchaser holds all of the outstanding Kelly Preferred Shares, upon actual knowledge of the Chief Executive Officer, the President or the Chief Financial Officer of the Company of the events described in this Section 4.5, the Company shall give prompt written notice (but in any event within 15 days) to the Purchaser of the occurrence of any material default or event of default under any of the Debt Documents specifying the nature of such default or event of default, the period of existence thereof and the action that the Company had taken or proposes to take with respect thereto. ARTICLE V Covenants of the Purchaser SECTION 5.1. Confidentiality. The Purchaser shall not disclose any Confidential Information (as defined below) to anyone, other than those of its employees, agents or consultants (i) who need to know the Confidential Information in order to assist the Purchaser in evaluating whether to purchase the Kelly Preferred Shares or in connection with the Purchaser's performance under the Tire Supply Agreement and (ii) who agreed not to disclose the Confidential Information to anyone and not to make use of the Confidential Information for any purpose other than as described in clause (i) above, except to the extent such information has become publicly available or the disclosure is required by law or judicial decree. The Purchaser shall not make use of the Confidential Information for any purpose other than to evaluate and monitor its holdings of the Kelly Preferred Shares and in connection with its performance under the Tire Supply Agreement. "Confidential Information" means, as the following items relate to the Company and its businesses or proposed businesses, trade secrets, research and development activities, books and records, actual or projected financial condition and results of operations, nature and location of businesses, customer lists, vendor lists, pricing information, private processes, agreements, data, licenses, permits, approvals, offering memoranda, business plans and any other confidential or proprietary technical or business information. SECTION 5.2. Stock Transfer Restrictions. The Purchaser shall not sell, pledge or otherwise transfer (each a "Transfer") any Kelly Preferred Shares except in accordance with the following procedures: (a) Except as otherwise set forth in subsection (c) below, in the event the Purchaser desires to Transfer the Kelly Preferred Shares, the following procedures apply: -7- 12 (i) The Purchaser shall deliver to the Company a written notice, which shall be irrevocable for a period of 45 days after delivery, offering all of the Kelly Preferred Shares owned by the Purchaser at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase the Kelly Preferred Shares so offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within such 30-day period. (ii) If the Company does not elect to purchase in the aggregate all of the offered Kelly Preferred Shares, then the Purchaser may sell all (but not less than all) of the Kelly Preferred Shares then held by the Purchaser to one purchaser at a price per share not less than the price, and on terms not more favorable to the purchaser than the terms, stated in the original written notice of intention to sell, at any time within 30 days after the expiration of the period in which the Company could elect to purchase any Kelly Preferred Shares. In the event all such Kelly Preferred Shares are not sold by the Purchaser in such manner during such 30-day period, the right of the Purchaser to sell such Kelly Preferred Shares shall expire and the obligations of this Section 5.2(a) shall be reinstated. (b) Any proposed Transfer of Kelly Preferred Shares by a holder of the Kelly Preferred Shares (including the Purchaser) shall be void unless (i) the Purchaser complies with the provisions of Section 3.4 and this Section 5.2, (ii) any purchaser of the Kelly Preferred Shares (other than the Company) shall agree in writing to be bound by and comply with the provisions of this Agreement (including Section 3.4 and this Section 5.2), and (iii) the Company's Board of Directors has concluded that any purchaser of the Kelly Preferred Shares pursuant to this Section 5.2 is not a competitor of the Company or the Purchaser and that such purchaser's holding of the Kelly Preferred Shares would not have an adverse effect on the Company. Notwithstanding anything to the contrary set forth herein, so long as the Tire Supply Agreement (or any successor agreement or arrangement) has not been terminated by the Company, the Purchaser shall not Transfer any Kelly Preferred Shares (other than to the Company or, pursuant to subsection (c) below, to a wholly-owned subsidiary or another division of Goodyear). (c) Subject only to compliance with Section 5.2(b)(ii), the Purchaser may, in its sole discretion any time after the date of this Agreement, Transfer all (but not less than all) of the Kelly Preferred Shares to a wholly-owned subsidiary or another division of Goodyear. ARTICLE VI Conditions to the Obligation of the Purchaser The obligation of the Purchaser to purchase the Kelly Preferred Shares, to pay the Purchase Price at the Closing, and to perform any of its obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: SECTION 6.1. Representations and Warranties. The representations and warranties of the Company contained in Article II of this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date. -8- 13 SECTION 6.2. Compliance with this Agreement. The Company shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Company on or before the Closing Date. SECTION 6.3. Officer's Certificate. The Purchaser shall have received a certificate, dated the Closing Date and signed by the President or a Vice-President of the Company, certifying that the conditions set forth in Sections 6.1 and 6.2 hereof have been satisfied on and as of such date. SECTION 6.4. Secretary's Certificate. The Purchaser shall have received a certificate, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, attaching a good standing certificate from the Secretary of State of the State of North Carolina with respect to the Company and certifying the truth and correctness of attached copies of the Amended and Restated Articles and By-laws of the Company and resolutions of the Board of Directors of the Company approving this Agreement and the Tire Supply Agreement and the transactions contemplated hereby and thereby. SECTION 6.5. Filing of Amended and Restated Articles. The Amended and Restated Articles in the form attached to this Agreement as Exhibit B shall have been duly filed by the Company with the Secretary of State of the State of North Carolina. SECTION 6.6. Opinion of Counsel. The Purchaser shall have received the opinion of counsel to the Company, dated the Closing Date, in substantially the form of Exhibit C to this Agreement. SECTION 6.7. Pro Forma Balance Sheet. The Purchaser shall have received from the Company a pro forma opening consolidated balance sheet of the Company and Winston, as of a date on or about the Closing Date, giving effect to the Acquisition and the related financings and transactions (including the borrowing under the senior credit facility and the issuance of the subordinated debt and the Kelly Preferred Shares). SECTION 6.8. No Litigation. No action, suit, proceeding, claim or dispute shall have been brought or otherwise arisen at law, in equity, in arbitration or before any governmental authority against the Company or Winston which could, in the reasonable judgment of the management of the Company, (a) after giving effect to the transactions contemplated hereby, have a material adverse effect on the assets, business, properties or financial or other condition of the Company and Winston, taken as a whole, or (b) have a material adverse effect on the ability of the Company to perform its obligations under this Agreement, the Kelly Preferred Shares or the Tire Supply Agreement. SECTION 6.9. Stock Purchase Agreement. The closing of the transactions contemplated by the Stock Purchase Agreement shall simultaneously occur with the Closing and all of the conditions precedent set forth in the Stock Purchase Agreement shall have been satisfied or waived. -9- 14 SECTION 6.10. Financing. The Company shall have obtained, or is simultaneously obtaining, senior financing in an amount not exceeding $65,000,000 and subordinated debt financing in an amount not exceeding $16,000,000 in connection with the Acquisition, in each case, on terms reasonably satisfactory to the Company. SECTION 6.11. Tire Supply Agreement. The Company shall have duly executed and delivered to the Purchaser the Tire Supply Agreement. SECTION 6.12. Documents. The Purchaser shall have received copies of such documents as it reasonably may request in connection with the sale of the Kelly Preferred Shares and the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Purchaser. ARTICLE VII Conditions to the Obligation of the Company The obligations of the Company to issue and sell the Kelly Preferred Shares and to perform any of its other obligations under this Agreement shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: SECTION 7.1. Representations and Warranties. The representations and warranties of the Purchaser contained in Article III of this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date. SECTION 7.2. Compliance with this Agreement. The Purchaser shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Purchaser on or before the Closing Date. SECTION 7.3. Purchaser's Certificate. The Company shall have received a certificate, dated the Closing Date and signed by the Purchaser, certifying that the conditions set forth in Sections 7.1 and 7.2 hereof have been satisfied on and as of such date. SECTION 7.4. Stock Purchase Agreement. The closing of the transactions contemplated by the Stock Purchase Agreement shall simultaneously occur with the Closing hereof. SECTION 7.5. Financing. The Company shall have obtained, or is simultaneously obtaining, senior financing in an amount not exceeding $65,000,000 and subordinated debt financing in an amount not exceeding $16,000,000 in connection with the Acquisition. SECTION 7.6. Tire Supply Agreement. The Purchaser shall have duly executed and delivered to the Company the Tire Supply Agreement. -10- 15 ARTICLE VIII Miscellaneous SECTION 8.1. Survival of Provisions. All of the representations, warranties and covenants made in this Agreement and each of the provisions of this Agreement shall survive the Closing. SECTION 8.2. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 8.2: (a) if to the Purchaser: The Kelly-Springfield Tire Company A Division of The Goodyear Tire and Rubber Company 12501 Willow Brook Road, S.E. Cumberland, Maryland 21502-2599 Attention: Dane E. Taylor Secretary/Attorney Telecopier No.: (301) 777-6493 (b) if to the Company: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, North Carolina 28093-0837 Attention: President Telecopier No.: (704) 732-6480 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if -11- 16 delivered by commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 8.3. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Except as otherwise expressly set forth in this Agreement, this Agreement and the rights and obligations under this Agreement shall not be assignable or transferable by any party without the prior written consent of the other party. SECTION 8.4. Amendment and Waiver. No failure or delay on the part of the Company or the Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof; provided that notice of any such waiver shall be given to each party as set forth below. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and the Purchaser. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchaser from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchaser in any case shall entitle the Company or the Purchaser to any other or further notice or demand in similar or other circumstances. SECTION 8.5. Counterparts. This Agreement may be executed in any number of counterparts and by the parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 8.6. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 8.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 8.8. JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH SUCH -12- 17 PARTY AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF THE PARTIES TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. SECTION 8.9. 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 8.10. Entire Agreement. This Agreement, together with the exhibits and schedules hereto, the Series A Preferred Shares, the Series B Preferred Shares and the Tire Supply Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, the Series A Preferred Shares, the Series B Preferred Shares and the Tire Supply Agreement supersede all prior agreements and understandings among the parties with respect to such subject matter. SECTION 8.11. Publicity. Except as may be required by applicable law, no party hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto. If any announcement is required by law to be made by a party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon. SECTION 8.12. Expenses. Each party to this Agreement shall each bear its own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of its lawyers, financial advisors and accountants. SECTION 8.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article, Section, Annex, Exhibit or Schedule of this Agreement. For purposes of this Agreement, a "person" means an individual, corporation, -13- 18 partnership, joint venture, association, trust, unincorporated organization or other entity (governmental or private). SECTION 8.14. Legends. The Purchaser agrees to the imprinting, so long as required by the terms of this Agreement, of a legend on certificates representing all of the Kelly Preferred Shares, as applicable, owned by it to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A SECURITIES PURCHASE AGREEMENT ON FILE AT THE OFFICE OF THE COMPANY." -14- 19 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be executed and delivered by their respective duly authorized officers as of the date first above written. THE J. H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER -------------------------------------------- Name: Title: THE KELLY-SPRINGFIELD TIRE COMPANY, a division of The Goodyear Tire and Rubber Company By: /s/ LEE R. FEIDLER -------------------------------------------- Name: Title: -15- EX-10.9 27 AGREEMENT AND PLAN OF MERGER OF MAY 10, 1998 1 Exhibit 10.9 ================================================================================ AGREEMENT AND PLAN OF MERGER AMONG THE J.H. HEAFNER COMPANY, INC. ITCO MERGER CORPORATION ITCO LOGISTICS CORPORATION AND THE STOCKHOLDERS OF ITCO LOGISTICS CORPORATION DATED: MARCH 10, 1998 ================================================================================ 2 TABLE OF CONTENTS INTRODUCTION.................................................................1 ARTICLE I THE MERGER SECTION 1.1. The Merger......................................................1 SECTION 1.2. Effective Time..................................................2 SECTION 1.3. Closing.........................................................2 SECTION 1.4. Effects of the Merger...........................................2 SECTION 1.5. Certificate of Incorporation and By-laws........................2 SECTION 1.6. Directors and Officers of Surviving Corporation.................2 SECTION 1.7. Conversion of Capital Stock.....................................2 (a) Acquisition Common Stock............................................2 (b) Cancellation of Treasury Stock and Company-Owned Stock..............2 (c) Exchange of Shares; Payment of Cash Consideration...................3 (d) Effect on Company Stock.............................................3 (e) Escrow Amount.......................................................3 SECTION 1.8. Tax Treatment...................................................3 ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Company and the Company Stockholders as a Group.........................................4 (a) Organization, Standing and Power....................................4 (b) Authority; Binding Agreements.......................................4 (c) Capitalization; Subsidiaries........................................5 (d) Conflicts; Consents.................................................6 (e) Financial Information...............................................6 (f) Absence of Changes..................................................7 (g) Assets, Property and Related Matters; Real Property.................9 (h) Intellectual Property..............................................11 (i) Insurance..........................................................12 (j) Agreements.........................................................12 (k) Litigation.........................................................13 (l) Compliance; Governmental Authorizations............................13 (m) Labor Relations; Employees.........................................14 (n) Related Party Transactions.........................................17 (o) Taxes..............................................................17 (p) Disclosure.........................................................19 (q) Bank Accounts; Powers-of-Attorney..................................19 (r) Inventory..........................................................19 (s) Brokers............................................................19 (t) Investment Company.................................................19 i 3 SECTION 2.2. Representations and Warranties of the Company Stockholders Individually..............................................19 (a) Authority; Binding Agreements; Title to Shares.....................19 (b) Conflicts; Consents................................................20 (c) Brokers............................................................21 (d) Pending Challenges.................................................21 (e) Investment Company.................................................21 SECTION 2.3. Representations and Warranties of Heafner.....................21 (a) Organization, Standing and Power...................................21 (b) Authority; Binding Agreements......................................21 (c) Capitalization; Subsidiaries.......................................22 (d) Conflicts; Consents................................................23 (e) Financial Information..............................................24 (f) Absence of Changes.................................................25 (g) Litigation.........................................................26 (h) No Default or Breach...............................................26 (i) Title to Properties................................................27 (j) Investment Company.................................................27 (k) Full Disclosure....................................................27 (l) Compliance; Governmental Authorizations............................27 (m) Labor Relations; Employees.........................................28 (n) Taxes..............................................................30 (o) Patents, Trademarks, Etc...........................................32 (p) Potential Conflicts of Interest....................................32 (q) Trade Relations....................................................32 (r) Material Contracts.................................................33 (s) Insurance..........................................................33 (t) Inventory..........................................................33 (u) Brokers............................................................33 (v) Financing..........................................................34 ARTICLE III ADDITIONAL AGREEMENTS SECTION 3.1. Transaction Costs..............................................34 SECTION 3.2. Conduct of Business............................................34 SECTION 3.3. HSR Act Filings; Reasonable Efforts; Further Assurances........35 SECTION 3.4. No Shopping....................................................37 SECTION 3.5. Access and Information.........................................37 SECTION 3.6. Releases; Prior Compensation...................................38 SECTION 3.7. Public Announcements...........................................39 SECTION 3.8. Tax Matters....................................................39 (a) Transfer Taxes.....................................................39 (b) Responsibility for Company Taxes...................................39 (c) Tax Treatment......................................................40 (d) Filing of Returns..................................................40 (e) Cooperation in Tax Matters.........................................40 ii 4 (f) Tax Audits and Assessments.........................................41 (g) Activities between Signing and Closing.............................41 SECTION 3.9. Other Documents...............................................41 SECTION 3.10. Officers and Directors........................................41 SECTION 3.11. Pending Heafner Acquisitions..................................41 SECTION 3.12. Company Confidential Information; Non-Competition.............42 (a) Confidential Information...........................................42 (b) Covenant Not To Compete............................................42 (c) Enforceability.....................................................44 (d) Remedies...........................................................44 (e) Acknowledgment.....................................................44 SECTION 3.13. Indemnification...............................................45 SECTION 3.14. Financing Arrangement.........................................45 SECTION 3.15. Confidentiality...............................................46 SECTION 3.16. Disclosure Supplements........................................49 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of Heafner and Acquisition...........50 (a) Representations, Warranties and Covenants..........................50 (b) Certificates.......................................................50 (c) Opinion of Counsel.................................................51 (d) HSR Act............................................................51 (e) No Legal Bar.......................................................51 (f) Consents, Amendments and Terminations..............................51 (g) Due Diligence......................................................51 (h) Escrow, Stockholder and Registration Rights Agreements; Investment Letter..................................................51 (i) Share Certificates and Corporate Records...........................51 (j) Financial Statements...............................................52 (k) Financing..........................................................52 (l) Additional Documents...............................................52 SECTION 4.2. Conditions of Obligations of the Company Stockholders..........52 (a) Representations, Warranties and Covenants..........................52 (b) Certificate........................................................53 (c) Opinion of Counsel.................................................53 (d) HSR Act............................................................53 (e) No Legal Bar.......................................................53 (f) Consents...........................................................53 (g) Escrow, Stockholder and Registration Rights Agreements.............53 (h) Filing of Amended and Restated Articles............................53 (i) Financing..........................................................53 (j) Due Diligence......................................................54 (k) Financial Statements...............................................54 (l) Additional Documents...............................................54 iii 5 ARTICLE V INDEMNITY SECTION 5.1. Indemnification................................................54 (a) Indemnification by Company Stockholders as a Group.................54 (b) Indemnification by Company Stockholders Individually...............55 (c) Indemnification by Heafner.........................................55 (d) Indemnification Procedures.........................................55 (e) Treatment of Payments..............................................56 SECTION 5.2. Limitations....................................................56 (a) Expiration Date....................................................56 (b) Cap................................................................56 (c) Deductible.........................................................57 (d) Form of Payment....................................................57 (e) Tax Benefits.......................................................58 (f) Insurance Proceeds.................................................58 (g) Sole Remedy........................................................58 SECTION 5.3. No Election....................................................59 SECTION 5.4. Company Stockholders' Representative...........................59 ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement...............................................59 SECTION 6.2. Termination....................................................59 SECTION 6.3. Descriptive Headings; Certain Interpretations..................60 SECTION 6.4. Notices........................................................61 SECTION 6.5. Counterparts...................................................62 SECTION 6.6. Survival.......................................................62 SECTION 6.7. Benefits of Agreement..........................................62 SECTION 6.8. Amendments and Waivers.........................................62 SECTION 6.9. Assignment.....................................................63 SECTION 6.10. Enforceability.................................................63 SECTION 6.11. Governing Law..................................................63 SECTION 6.12. Dispute Resolution; Consent To Jurisdiction....................63 SCHEDULES Company Disclosure Schedule Heafner Disclosure Schedule ANNEXES A Company Stockholders; Ownership of Shares B Dispute Resolution Procedure iv 6 EXHIBITS A Form of Class B Stockholder Agreement B Form of Class B Registration Rights Agreement C Form of Investment Letter D Form of Second Amended and Restated Articles v 7 AGREEMENT AND PLAN OF MERGER, dated as of March 10, 1998 (the "Agreement"), among The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), ITCO Merger Corporation, a Delaware corporation ("Acquisition"), ITCO Logistics Corporation, a Delaware corporation (the "Company"), and each of the stockholders of the Company (each, a "Company Stockholder" and, collectively, the "Company Stockholders") -------------------------------------------------------------------- INTRODUCTION The Company, together with its Subsidiaries (as defined below in Section 2.1(c)), owns and operates a wholesale tire business with its principal executive offices located in Wilson, North Carolina. The Company Stockholders and the Boards of Directors of each of Heafner, Acquisition and the Company have unanimously approved the merger of Acquisition with and into the Company (the "Merger") on the terms and subject to the conditions set forth in this Agreement. As a result of the Merger, each issued and outstanding share of common stock, $0.01 par value, of the Company (the "Company Common Stock") and each issued and outstanding share of preferred stock, $0.01 par value, of the Company (the "Company Preferred Stock" and, together with the Company Common Stock, the "Company Capital Stock") not owned directly or indirectly by Heafner or the Company will be converted into the right to receive the consideration provided in this Agreement. The parties to this Agreement desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. As further inducement for the parties to enter into this Agreement, Heafner and the Company Stockholders desire to enter into an Escrow Agreement in the form described in Section 4.1(h)) (the "Escrow Agreement"), a Class B Stockholder Agreement in the form attached hereto as Exhibit A (the "Class B Stockholder Agreement") and a Class B Registration Rights Agreement in the form attached hereto as Exhibit B (the "Class B Registration Rights Agreement"). The parties agree as follows: ARTICLE I THE MERGER SECTION 1.1. The Merger. Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the Delaware General Corporation Law (the "DGCL"), at the Effective Time (as defined below), Acquisition shall be merged with and into the Company. 8 Following the Merger, the separate corporate existence of Acquisition shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Acquisition in accordance with the DGCL. SECTION 1.2. Effective Time. At the Closing (as defined below), upon the satisfaction of all conditions and taking of all actions set forth in Article IV, the parties hereto shall cause a copy of a certificate of merger (executed in accordance with the relevant provisions of the DGCL) in customary form and other appropriate documents to be filed in the office of the Delaware Secretary of State (the "Certificate of Merger"), and the parties shall make all other filings or recordings required under the DGCL. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Delaware Secretary of State (the time the Merger becomes effective, the "Effective Time"). SECTION 1.3. Closing. The closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall take place at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019, or such other place or places as the Company Stockholders and Heafner shall agree, at 10:00 a.m. (New York time) on the later of April 29, 1998 and two business days following the date on which all conditions set forth in Article IV shall have been satisfied or waived, or such other date and time agreed to by the Company Stockholders and Heafner (such date, the "Closing Date"). SECTION 1.4. Effects of the Merger. The Merger shall have the effects set forth in the DGCL. SECTION 1.5. Certificate of Incorporation and By-laws. The Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until amended. The By-laws of the Company as in effect immediately prior to the Effective Time shall be the By-laws of the Surviving Corporation until amended. SECTION 1.6. Directors and Officers of Surviving Corporation. The directors and officers of Acquisition at the Effective Time shall be the directors and officers, respectively, of the Surviving Corporation, until the earlier of their resignation or removal or until their successors are duly elected and qualified. SECTION 1.7. Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Capital Stock or any shares of common stock, $.01 par value ("Acquisition Common Stock"), of Acquisition: (a) Acquisition Common Stock. Each issued and outstanding share of Acquisition Common Stock shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (b) Cancellation of Treasury Stock and Company-Owned Stock. Each share of Company Capital Stock that is held by the Company as treasury stock or owned by the Company 2 9 or any subsidiary of the Company, in each case immediately prior to the Effective Time, shall be canceled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) Exchange of Shares; Payment of Cash Consideration. All of the issued and outstanding shares of Company Capital Stock (all of which are and, immediately prior to the Effective Time, will be owned by the Company Stockholders) shall be converted into and become the right to receive (i) $18,000,000 (the "Cash Consideration"), to be allocated to holders of shares of Company Preferred Stock and holders of shares of Company Common Stock in accordance with a schedule to be delivered by the Company at the Closing, and (ii) 1,400,667 shares of Class B Common Stock, $.01 par value, of Heafner (which shares shall represent, at the Closing, 22% of the outstanding shares of Heafner common stock on a fully diluted basis) (the "Class B Stock Consideration" and, together with the Cash Consideration, the "Merger Consideration"). Each Company Stockholder shall be entitled to receive that portion of the aggregate Merger Consideration set forth opposite such Company Stockholder's name on Annex A to this Agreement in exchange for such Company Stockholder's shares of Company Capital Stock. At the Closing, Heafner shall make, or shall cause Acquisition to make, payment of the Cash Consideration by wire transfer of immediately available funds to accounts designated by the Company Stockholders no later than two business days prior to the Closing Date. (d) Effect on Company Stock. Upon receipt by the Company Stockholders of the Merger Consideration (other than the Escrow Amount (as defined below) which shall be delivered to the Escrow Agent (as defined below) at Closing), the Company Stockholders shall deliver to Heafner the certificates formerly representing all of the issued and outstanding shares of Company Capital Stock. From and after the Effective Time, (i) all shares of Company Capital Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, (ii) each holder of a certificate representing any shares of Company Capital Stock shall cease to have any rights with respect thereto (except the right to receive the Merger Consideration allocable to the shares of Company Capital Stock formerly represented by such certificate) and (iii) the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of the shares of Company Capital Stock. (e) Escrow Amount. At the Closing, Heafner shall deliver, or shall cause Acquisition to deliver, all of the Class B Stock Consideration to the Escrow Agent (the "Escrow Agent") named in the Escrow Agreement (such Class B Stock Consideration being delivered to the Escrow Agent at the Closing are together referred to in this Agreement as the "Escrow Amount"). The Escrow Amount consists of a portion of the Merger Consideration that, subject to the terms of Article V and the Escrow Agreement, would otherwise be payable to the holders of Company Capital Stock in accordance with Section 1.7(c). Prior to the Closing, Heafner shall select a bank or trust company to act as the Escrow Agent, which bank or trust company shall be reasonably acceptable to the Company Stockholders. SECTION 1.8. Tax Treatment. The parties to this Agreement agree and acknowledge that the Merger will be treated as a taxable purchase of the outstanding shares of Company Capital Stock (and not as a "reorganization" within the meaning of Section 368 of the 3 10 Internal Revenue Code of 1986, as amended (the "Code")), for United States federal, state and local tax purposes. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Company and the Company Stockholders as a Group. Each of the Company and the Company Stockholders, severally and not jointly, represent and warrant to Heafner as follows: (a) Organization, Standing and Power. Each of the Company and each of its Subsidiaries (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of the Company and each of its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary because of the property owned, leased or operated by it or because of the nature of its business as now being conducted, other than in such jurisdictions where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a material adverse effect on the business, assets, condition (financial or otherwise), liabilities or operations of the Company and its Subsidiaries taken as a whole or on the Company's ability to consummate the Merger or perform its obligations under this Agreement (a "Company Material Adverse Effect"). Each such jurisdiction in which the Company or any of its Subsidiaries is so qualified is listed in Section 2.1(a) of the disclosure schedule being delivered by the Company simultaneously with the execution of this Agreement (the "Company Disclosure Schedule"). The Company has delivered to Heafner complete and correct copies of its articles of incorporation and by-laws and the certificate of incorporation and by-laws of each of its Subsidiaries, in each case as amended to the date of this Agreement, and has made available to Heafner its and each of its Subsidiaries' minute books and stock records. Section 2.1(a) of the Company Disclosure Schedule contains a true and correct list of the directors and officers of the Company and each of its Subsidiaries as of the date of this Agreement and at all times since the last action of the board of directors and the stockholders of the Company and of each of its Subsidiaries, as the case may be. (b) Authority; Binding Agreements. The Company has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company has been duly authorized by all necessary action on the part of the Company and the Company Stockholders. This Agreement has been duly executed and delivered by the Company, and, assuming the due execution and delivery of this Agreement by Heafner and Acquisition, constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. 4 11 (c) Capitalization; Subsidiaries. (i) The authorized capital stock of the Company consists of 250,000 shares of Company Common Stock and 50,000 shares of Company Preferred Stock. At the time of execution of this Agreement, 93,000 shares of Company Common Stock were issued and outstanding and 8,100 shares of Company Preferred Stock were issued and outstanding. The Company Stockholders own of record and beneficially all of the outstanding capital stock of the Company. Except as set forth above, at the time of execution of this Agreement, no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding. Except as set forth in Section 2.1(c) of the Company Disclosure Schedule, all outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. 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. There are no securities, options, warrants, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company is a party or by which the Company is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company or obligating the Company to issue, grant, extend or enter into any such security, option, warrant, right, commitment, agreement, arrangement or undertaking. There are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating the Company to repurchase, redeem or otherwise acquire any shares of capital stock or other voting securities of the Company or any securities of the type described in the two immediately preceding sentences. The Company is not subject to any liability for any claim that the Company violated any applicable Federal or state securities laws in connection with the issuance of capital stock. For purposes of this Agreement, a "Subsidiary" of any person means another person under the control of such person (where "control" means the direct or indirect possession of the power to elect at least a majority of the Board of Directors or other governing body of a person through the ownership of voting securities, ownership or partnership interests, by contract or otherwise, or if no such governing body exists, the direct or indirect ownership of 50% or more of the equity interests of a person); and a "person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity (governmental or private). (ii) Section 2.1(c) of the Company Disclosure Schedule sets forth a complete list of all of the Company's Subsidiaries as of the date of this Agreement, together with their respective jurisdictions of incorporation, authorized capital stock, number of shares issued and outstanding and record ownership of such shares. Except as set forth in Section 2.1(c) of the Company Disclosure Schedule, the Company does not have any Subsidiaries or own or hold any equity or other security interest in any other entity. All issued and outstanding shares of capital stock 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, except as set forth in Section 2.1(c) of the Company Disclosure Schedule, are directly or indirectly owned beneficially and of record by the Company, free and clear of all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, "Claims"), 5 12 and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). None of the Company's Subsidiaries is subject to any liability for any claim that it violated any applicable Federal or state securities laws in connection with the issuance of capital stock. (d) Conflicts; Consents. The execution and delivery by the Company of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Company with any of the provisions hereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company or any of its Subsidiaries, (ii) except as set forth in Section 2.1(d) of the Company Disclosure Schedule, conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is a party, or by which any properties or assets of the Company or any of its Subsidiaries may be bound or affected, except for (1) such conflicts, breaches or defaults that are, individually and in the aggregate, immaterial and (2) such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained or will be obtained before the Closing at no material cost to the Company and without giving to any person any material additional rights, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of its Subsidiaries or any of their respective properties or assets (except for such violations that are, individually and in the aggregate, immaterial) or (iv) result in the creation or imposition of any Claim upon any shares of Company Capital Stock or capital stock of any of the Company's Subsidiaries or any property or assets used or held by the Company or any of its Subsidiaries. No consent or approval by, or notification of or filing with, any governmental authority or agency is required in connection with the execution, delivery and performance by the Company of this Agreement, or the consummation of the transactions contemplated hereby except for (x) the filing of a premerger notification and report form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act"), and the expiration or early termination of the applicable waiting period under the HSR Act, (y) the filing of the Certificate of Merger with the Delaware Secretary of State and (z) such other consents, approvals or notifications that are, individually and in the aggregate, immaterial. (e) Financial Information. (i) The following financial statements are contained in Section 2.1(e) of the Company Disclosure Schedule: (A) the consolidated balance sheets of the Company at September 30, 1996 and 1997 and the related consolidated statements of income and retained earnings and cash flows for the fiscal years then ended together with the opinion of Ernst & Young LLP thereon; (B) the consolidated balance sheets of the Company at September 30, 1995 and the related consolidated statements of income and retained earnings and cash flows for the fiscal years then ended together with the opinion of Deloitte & Touche, L.L.P. thereon; and 6 13 (C) the unaudited, internally prepared monthly consolidated balance sheets of the Company as of the end of each calendar month commencing October 31, 1997 through the most recent month end that is at least 20 days prior to the date of this Agreement and the related consolidated statements of income and retained earnings and cash flows for each such calendar month. Except as set forth in Section 2.1(e) of the Company Disclosure Schedule, all such financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a basis consistent with prior periods and fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Company and its Subsidiaries (except, in the case of unaudited financial statements, subject to normal, recurring year-end audit adjustments). The consolidated balance sheets of the Company as at the dates set forth fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as at the dates thereof, and the related consolidated statements of income and retained earnings and cash flows of the Company for each of the respective specified periods then ended fairly present in all material respects the consolidated results of operations of the Company and its Subsidiaries for each of the respective periods then ended (except, in the case of unaudited financial statements, subject to normal, recurring year-end audit adjustments). For the purposes of this Agreement, all financial statements referred to in this paragraph shall include any notes and schedules to such financial statements. (ii) Except as set forth in Section 2.1(e)(ii) of the Company Disclosure Schedule, each of the Company and each of its Subsidiaries does not have, and as a result of the transactions contemplated herein, will not have, any liabilities or obligations (whether absolute, accrued, contingent or otherwise, and whether due or to become due), except for liabilities and obligations (A) reflected on the balance sheets of the Company referred to in Section 2.1(e)(i) or (B) incurred in the ordinary course of business consistent with past practice since February 20, 1998, and which, individually, do not exceed $250,000. All reserves established by the Company are reflected on the balance sheets of the Company or in the footnotes to the financial statements of the Company and are reasonable based upon facts and circumstances known by the Company on the date hereof and there are no loss contingencies that are required to be accrued by Statement of Financial Accounting Standard No. 5 of the Financial Accounting Standards Board which are not provided for on such balance sheets. (f) Absence of Changes. Except as set forth in Section 2.1(f) of the Company Disclosure Schedule, since September 30, 1997, the Company and its Subsidiaries have been operated in the ordinary course consistent with past practice and there has not been: (i) any event, violation or other matter that could, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect; (ii) any obligation or liability (whether absolute, accrued, contingent or otherwise, and whether due or to become due) incurred by the Company or any of its Subsidiaries, other than obligations under customer contracts, current obligations and liabilities incurred in the ordinary course of business and consistent with past practice; 7 14 (iii) any payment, discharge, satisfaction or settlement of any claim or obligation of the Company or any of its Subsidiaries, except in the ordinary course of business and consistent with past practice; (iv) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or any of its Subsidiaries or any direct or indirect redemption, purchase or other acquisition of any such shares; (v) any issuance or sale, or any contract entered into for the issuance or sale, of any shares of capital stock or securities convertible into or exercisable for shares of capital stock of the Company or any of its Subsidiaries; (vi) any sale, assignment, pledge, encumbrance, transfer or other disposition of any tangible asset of the Company or any of its Subsidiaries (other than sales of inventory to customers in the ordinary course of business consistent with past practice), or any sale, assignment, transfer or other disposition of any patents, trademarks, service marks, trade names, copyrights, licenses, franchises, know-how or any other intangible assets of the Company or any of its Subsidiaries; (vii) any creation of any Claim on any property of the Company or any of its Subsidiaries, except in the ordinary course of business consistent with past practice or such Claims which, individually or in the aggregate, could not reasonably be expected to have a Company Material Adverse Effect; (viii) any write-down of the value of any asset of the Company or any of its Subsidiaries or any write-off as uncollectible of any accounts or notes receivable or any portion thereof, other than write-downs or write-offs which, in the aggregate, equal approximately $112,000 as of the date of this Agreement and which, individually, do not exceed $10,000; (ix) any cancellation of any debts or claims or any amendment, termination or waiver of any rights of value to the Company or any of its Subsidiaries; (x) any capital expenditure or commitment or addition to property, plant or equipment of the Company or any of its Subsidiaries, other than capital expenditures or commitments or additions to property, plant or equipment of the Company or any of its Subsidiaries which, in the aggregate, equal approximately $383,000 as of the date of this Agreement and which, individually, do not exceed $10,000; (xi) any general increase in the compensation of employees of the Company or any of its Subsidiaries (including any increase pursuant to any written bonus, pension, profit-sharing or other benefit or compensation plan, policy or arrangement or commitment), or any increase in any such compensation or bonus payable to any officer, stockholder, director, consultant or agent of the Company or any of its Subsidiaries having an annual salary or remuneration in excess of $75,000; 8 15 (xii) any damage, destruction or loss (whether or not covered by insurance) affecting any asset or property of the Company or any of its Subsidiaries resulting in liability or loss in excess of $50,000; (xiii) any change in the independent public accountants of the Company and its Subsidiaries or any material change in the accounting methods or accounting practices followed by the Company or any material change in depreciation or amortization policies or rates; or (xiv) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing items (i) through (xiii), subject to any dollar thresholds set forth in items (i) through (xiii) above. (g) Assets, Property and Related Matters; Real Property. (i) The Company and its Subsidiaries have good title to, or a valid leasehold interest in, as applicable, all of the assets reflected on the financial statements contained in Section 2.1(e) of the Company Disclosure Schedule, free and clear of all Claims, except as set forth in Section 2.1(g)(i) of the Company Disclosure Schedule. Such assets (A) are in good operating condition and repair, subject to ordinary wear and tear, and (B) constitute all of the properties, interests, assets and rights held for use or used in connection with the business and operations of the Company and its Subsidiaries and constitute all those necessary to continue to operate the business of the Company and its Subsidiaries consistent with current and historical practice. All items of personal property owned by the Company and its Subsidiaries with current value or book value in excess of $5,000 are listed in Section 2.1(g)(i) of the Company Disclosure Schedule. (ii) Section 2.1(g)(ii) of the Company Disclosure Schedule sets forth a list of all real property owned or leased by the Company or its Subsidiaries (each a "Company Property"). The Company or one of its Subsidiaries, as the case may be, is the sole owner or holder of, and has, good and marketable fee title to, or a good, valid and existing leasehold estate in, each Company Property, free and clear of all liens, encumbrances, restrictions and other matters affecting title to, or the use and occupancy of, such Company Property, except as disclosed in Section 2.1(g)(ii) of the Company Disclosure Schedule (such items, together with the related items set forth in Section 2.1(g)(i) of the Company Disclosure Schedule, being collectively referred to herein as the "Permitted Encumbrances"). No Company Property violates in any material respect the terms or conditions of any Permitted Encumbrance. (iii) With respect to each Company Property leased by the Company or one of its Subsidiaries, (A) the Company or one of its Subsidiaries, as the case may be, is the owner and holder of all the leasehold interests and estates purported to be granted by such leases, (B) all leases to which the Company or one of its Subsidiaries is a party are in writing and in full force and effect and constitute valid and binding obligations of the Company or such Subsidiary and, to the knowledge of the Company or any Company Stockholder, of the other parties thereto, enforceable in accordance with their terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought, and (C) the 9 16 Company has delivered to Heafner true and complete copies of all such leases. There exists no default, or any event which upon notice or the passage of time, or both, would give rise to any default, in the performance by the Company or one of its Subsidiaries, as the case may be, or by any lessor under any lease (except for such defaults that are, individually and in the aggregate, immaterial). Except as set forth in Section 2.1(g)(ii) of the Company Disclosure Schedule, the Company has not, and to the knowledge of the Company or any Company Stockholder, no other person has, granted any oral or written right to anyone other than the Company and its Subsidiaries to lease, sublease or otherwise occupy any of the properties described in Section 2.1(g)(ii) of the Company Disclosure Schedule through the end of the applicable lease periods. (iv) Each Company Property and all appurtenances and improvements, as used, constructed or maintained by the Company or any of its Subsidiaries at any time, conform in all material respects to applicable Federal, state, local and foreign laws, rules, regulations and orders ("Legal Requirements"), and, except as otherwise disclosed on Section 2.1(g)(iv) of the Company Disclosure Schedule, no notices of violation of any Legal Requirements have been received by the Company or any of its Subsidiaries or, to the knowledge of the Company and the Company Stockholders, issued by any governmental authority, in each case with respect to any Company Property, including all building, fire, health, zoning, setback, subdivision and environmental laws, regulations or ordinances (except for notices with respect to possible violations that are, individually and in the aggregate, immaterial). Without limiting the foregoing, each Company Property is in good operating condition and repair, ordinary wear and tear excepted, and no condition exists which would interfere in any material respect with the Company's and its Subsidiaries' customary use and operation thereof. The use of the buildings and structures located on each Company Property or any appurtenances or equipment does not violate in any material respect any restrictive covenants or encroach on any property owned by others. No condemnation proceeding is pending or, to the knowledge of the Company or any Company Stockholder, threatened which would preclude or impair in any material respect the use of any Company Property by the Company or any of its Subsidiaries for the uses for which they are intended. (v) Section 2.1(g)(v) of the Company Disclosure Schedule lists each permit necessary or appropriate for the Company and its Subsidiaries to own, lease or use any Company Property (except for permits that are, individually or in the aggregate, immaterial). Each such permit was duly issued and obtained, currently is in full force and effect, and has the term set forth therefor on Section 2.1(g)(v) of the Company Disclosure Schedule. No default or violation, or event which with the passage of time or giving of notice or both would become a default or violation, has occurred in the due observance of any permit (except for such defaults or violations that are, individually or in the aggregate, immaterial). The Company has delivered to Heafner true and complete copies of all such permits. (vi) Except as set forth in Section 2.1(g)(vi) of the Company Disclosure Schedule, no part of any Company Property is subject to any building or use restrictions that would restrict in any material respect or prevent the present use and operation of such Company Property, and each Company Property is properly and duly zoned for its current use, and such current use is in all material respects a conforming use. Neither the Company nor any of its Subsidiaries has received a notice or order from a governmental authority having jurisdiction over 10 17 any Company Property that adversely affects in any material respect the use or operation of any Company Property, or requires, as of the date hereof or a specified date in the future, any repairs, alterations, additions or improvements thereto, or the payment or dedication of any money, fee, exaction or property and, to the knowledge of the Company and the Company Stockholders no such governmental authority has issued, or threatened to issue, any such notice or order. The Company Stockholders have no knowledge of any actual or pending imposition of any assessments for public improvements with respect to any Company Property and, to the knowledge of the Company or any Company Stockholder, no such improvements have been constructed or planned that would be paid for by means of assessments upon any Company Property. (vii) Each Company Property is located on public roads and streets with adequate ingress and egress available between such streets and the Company Property, and, to the knowledge of the Company or any Company Stockholder, all utility systems required in connection with the use, occupancy and operation of each Company Property are sufficient for their present purposes, are fully operational and in working order, and are benefited by customary utility easements providing for the continued use and maintenance of such systems. Each Company Property consists of sufficient land, parking areas, sidewalks, driveways and other improvements to permit the continued use of such Company Property in the manner and for the purposes to which it is presently devoted. (viii) Except as set forth in Section 2.1(g)(viii) of the Company Disclosure Schedule, no portion of any Company Property is located in any flood zone area designated as Zone A or Zone Z (or any Zone having the prefix A or Z) (or any successor designation) pursuant to applicable regulations of the Federal Emergency Management Agency, or any successor thereto. (ix) None of the Company Stockholders is a "foreign person" as defined in Section 1445 of the Code. (x) Except as set forth in Section 2.1(d) of the Company Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any lease of real property held by the Company or any of its Subsidiaries. No consent from the lessor or any other person under any such lease is required in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for those obtained prior to the Closing and listed in Section 2.1(d) of the Company Disclosure Schedule. (h) Intellectual Property. The Company and its Subsidiaries own or validly license all patents, trademarks, service marks, trade names and copyrights, in each case registered or unregistered, inventions, software (including documentation and object and source code listings), know-how, trade secrets and other intellectual property rights (collectively, the "Intellectual Property") used in their respective businesses as presently conducted. Section 2.1(h) of the Company Disclosure Schedule contains a list of all patents, registered trademarks and registered copyrights and applications therefor owned and used by the Company and its Subsidiaries and any 11 18 Intellectual Property which is expressly licensed for use by others. As used in the business of the Company and its Subsidiaries, to the knowledge of the Company and the Company Stockholders, no Intellectual Property infringes any rights owned or held by any other person. There is no pending or, to the knowledge of the Company and the Company Stockholders, threatened claim or litigation against the Company or any of its Subsidiaries contesting its right to use any Intellectual Property. To the knowledge of the Company and the Company Stockholders, no person is infringing the rights of the Company or any of its Subsidiaries in any Intellectual Property. To the knowledge of the Company and the Company Stockholders, no product or service sold by the Company or any of its Subsidiaries violates or infringes any intellectual property right owned or held by any other person. In the case of commercially available "shrink-wrap" software programs, to the knowledge of the Company and the Company Stockholders, neither the Company nor any of its Subsidiaries nor any of their respective employees has made or is using any unauthorized copies of any such software programs. (i) Insurance. Section 2.1(i) of the Company Disclosure Schedule contains a true and complete list of all policies of casualty, liability, theft, fidelity, life and other forms of insurance currently held by the Company or any of its Subsidiaries. True and complete copies of such policies have been delivered to Heafner. All insurance policies currently outstanding are in the name of the Company and its Subsidiaries and are in full force and effect, all premiums with respect to such policies are currently paid and such policies will not be affected by, or terminated or lapse by reason of, the transactions contemplated by this Agreement. None of the Company or any of its Subsidiaries has received notice of cancellation or termination of any such policy, nor has any such person been denied or had revoked or rescinded any policy of insurance, nor borrowed against any such policies. No significant claim under any such policy is pending. (j) Agreements. Section 2.1(j) of the Company Disclosure Schedule contains a true and complete list of all contracts, agreements and other instruments to which the Company or any of its Subsidiaries is a party (A) relating to indebtedness for money borrowed or capital leases, (B) of duration of six months or more from the date hereof, not cancelable without penalty on 30 days or less notice and relating to commitments, individually, in excess of $100,000, (C) relating to commitments, individually, in excess of $200,000 (other than purchases of inventory in the ordinary course of business consistent with past practice), (D) relating to the employment or compensation of any stockholder, director, officer, employee, consultant or other agent of the Company or any of its Subsidiaries, (E) relating to the sale or other disposition of any assets, properties or rights (other than in the ordinary course of business consistent with past practice), (F) relating to the lease of (or similar arrangement with respect to) any machinery, equipment, motor vehicles, furniture, fixture or similar property and with an annual commitment, individually, in excess of $50,000, (G) between the Company and any Company Stockholder or affiliate of any Company Stockholder, (H) that restricts (other than in immaterial respects) the operation of the Company or any of its Subsidiaries anywhere in the world or (I) that is otherwise material to the Company and its Subsidiaries (taken as a whole). None of the Company or any of its Subsidiaries is in default under any such agreement or instrument where such default, singly or in the aggregate with defaults under other agreements or instruments, could reasonably be expected to have a Company Material Adverse Effect and, to the knowledge of the Company or any Company Stockholder, all such agreements or instruments are in full force and effect. Except as set forth in Section 2.1(j) of the Company Disclosure Schedule, neither the execution and delivery of this 12 19 Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any agreement required to be listed in Section 2.1(j) of the Company Disclosure Schedule (except for such breaches that are, individually or in the aggregate, immaterial). The Company has delivered to Heafner true and complete copies of all documents described in Section 2.1(j) of the Company Disclosure Schedule. (k) Litigation. Except as set forth in Section 2.1(k) of the Company Disclosure Schedule, there have not been for the past two years (other than routine matters occurring in the ordinary course of business of the Company and its Subsidiaries), nor are there, any suits, actions, claims, investigations or legal or administrative or arbitration proceedings in respect of the Company or any of its Subsidiaries, pending or, to the knowledge of the Company or any Company Stockholder, threatened, whether at law or in equity, or before or by any Federal, foreign, state or municipal or other governmental department, commission, board, bureau, agency or instrumentality. Except as set forth in Section 2.1(k) of the Company Disclosure Schedule, there have not been for the past two years (other than routine matters occurring in the ordinary course of business of the Company and its Subsidiaries), nor are there, any judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Company or any of its Subsidiaries or any of their respective assets or properties. (l) Compliance; Governmental Authorizations. (i) Each of the Company and each of its Subsidiaries has complied and is in compliance in all material respects with all Federal, state, local and foreign laws, ordinances, rules, regulations and orders (including those relating to disposal of materials, environmental protection and occupational safety and health) applicable to the Company, any of its Subsidiaries or their respective businesses, and there are no present or past conditions relating to the Company or any of its Subsidiaries, or relating to any Company Property or any appurtenances thereto or improvements thereon, that could reasonably be expected to lead to any material liability against the Company or any of its Subsidiaries, or reasonably be expected to have a Company Material Adverse Effect, for violation of any health or safety laws. Each of the Company and each of its Subsidiaries has all Federal, state, local and foreign governmental licenses and permits that are material to the conduct of their respective businesses as presently being conducted, which licenses and permits (and any exceptions thereto) are set forth in Section 2.1(l) of the Company Disclosure Schedule. Such licenses and permits are in full force and effect, no material violations are or have been recorded in respect of any thereof, no proceeding is pending or, to the knowledge of the Company or any Company Stockholder, threatened, to revoke or limit any thereof, and the Company Stockholders do not know of any basis for any such proceeding and the consummation of the transactions contemplated in this Agreement will not result in the non-renewal, revocation or termination of any such license or permit. (ii) The Company and each of its Subsidiaries validly hold all permits required under all applicable Federal, state, county or local laws, ordinances, regulations and orders relating to disposal of materials or the discharge of chemicals, gases or other substances or Hazardous Materials (defined below) into the environment or to the safety or protection of the environment (the "Environmental Laws") that are material to the conduct of their respective businesses as presently being conducted. None of the Company or any of its Subsidiaries has 13 20 violated, nor is the Company or any of its Subsidiaries in violation of, in any material respect, any requirements of any Environmental Laws in connection with the conduct of its business or in connection with the use, maintenance or operation of any Company Property. There are no present or past conditions relating to the Company or any of its Subsidiaries or relating to any Company Property, or, to the knowledge of the Company and the Company Stockholders, relating to any real property previously owned, leased or operated by the Company or any of its Subsidiaries or any of their respective present or past affiliates, that in any such case could reasonably be expected to lead to any material liability of the Company or any of its Subsidiaries under any Environmental Law. Except as set forth on Section 2.1(l)(ii) of the Company Disclosure Schedule, each of the Company and each of its Subsidiaries has operated each Company Property and has received, handled, used, stored, treated, shipped and disposed of all hazardous or toxic materials, substances and wastes (whether or not on its properties or properties owned or operated by others) in compliance in all material respects with all applicable Environmental Laws. None of the Company or any of its Subsidiaries has engaged in or permitted the sale or dispensation (to customers, employees or other persons), handling, transportation, discharge, emission, treatment, storage or disposal of gasoline or other motor vehicle fuels at or under any Company Property or, to the knowledge of the Company and the Company Stockholders, any property or facility previously owned, leased or operated by the Company or any of its Subsidiaries or one of their respective past or present affiliates. "Hazardous Materials" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; (B) any "hazardous waste" or "petroleum," as defined by the Resource Conservation and Recovery Act, as amended; (C) any petroleum product; (D) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law, as amended or hereafter amended; or (E) any radioactive material, including any source, special nuclear or by-product material as defined at 42 U.S.C. ss. 2011 et seq., as amended or hereafter amended. (m) Labor Relations; Employees. (i) (A) There is no labor strike, dispute, slowdown, stoppage or lockout pending, affecting, or, to the knowledge of the Company or any Company Stockholder, threatened against the Company or any of its Subsidiaries, and during the last five years there has not been any such action; (B) there are no union claims to represent the employees of the Company or any of its Subsidiaries nor have there been any such claims within the last five years; (C) there is no written or oral contract, commitment, agreement, understanding or other arrangement with any labor organization, nor work rules or practices agreed to with any labor organization or employee association, applicable to employees of the Company or any of its Subsidiaries, nor is the Company or any of its Subsidiaries a party to or bound by any collective bargaining or similar agreement; (D) there is, and within the last two years there has been, no representation of the employees of the Company or any of its Subsidiaries by any labor organization and, to the knowledge of the Company or any Company Stockholder, there are no union organizing activities among the employees of the Company or any of its Subsidiaries, nor does any question concerning representation exist concerning such employees; (E) Section 2.1(m)(i) of the Company Disclosure Schedule sets forth all personnel policies, rules or procedures (whether written or oral) applicable to employees of the Company or any of its Subsidiaries, and the Company has delivered to Heafner complete and accurate copies of all such 14 21 written policies, rules or procedures plus summaries of all oral policies, rules or procedures; (F) none of the Company or any of its Subsidiaries has engaged in any act or practice which could reasonably be expected to constitute an unfair labor practice as defined in the National Labor Relations Act or other applicable law, ordinance, regulation, interpretation or order and each of the Company and each of its Subsidiaries is, and has for the past five years been, in compliance in all material respects with all applicable laws, ordinances, regulations, interpretations or orders respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; (G) there is no unfair labor practice charge or complaint against the Company or any of its Subsidiaries (or against any Company Stockholder with respect to the Company or any of its Subsidiaries) pending or, to the knowledge of the Company or any Company Stockholder, threatened before the National Labor Relations Board or any similar state or foreign agency and, to the knowledge of the Company or any Company Stockholder, there are no existing or prior facts, circumstances or conditions that could reasonably be expected to form the basis therefor; (H) there is no grievance pending or, to the knowledge of the Company or any Company Stockholder, threatened against the Company or any of its Subsidiaries arising out of any collective bargaining agreement or other grievance procedure; (I) except as set forth in Section 2.1(m)(i)(I) of the Company Disclosure Schedule, there are no charges with respect to or relating to the Company or any of its Subsidiaries pending or, to the knowledge of the Company or any Company Stockholder, threatened before the Equal Employment Opportunity Commission or any other governmental entity responsible for the prevention of unlawful employment practices; (J) neither the Company nor any of its Subsidiaries nor any Company Stockholder has received notice of the intent of any governmental entity responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or any of its Subsidiaries and no such investigation is in progress; and (K) no complaints, lawsuits or other proceedings are pending or, to the knowledge of the Company or any Company Stockholder, threatened in any forum by or on behalf of any present or former employee of the Company or any of its Subsidiaries, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract, commitment, agreement, understanding or other arrangement for employment, any law governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with any employment relationship. (ii) Section 2.1(m)(ii) of the Company Disclosure Schedule contains a list of each pension, retirement, savings, deferred compensation, and profit-sharing plan and each stock option, stock appreciation, stock purchase, performance share, bonus or other incentive plan, severance plan, health, group insurance or other welfare plan, or other similar plan and any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), under which the Company or any of its Subsidiaries has any current or future obligation or liability (including any potential, contingent or secondary liability under Title IV of ERISA) or under which any employee or former employee (or beneficiary of any employee or former employee) of the Company or any of its Subsidiaries has or may have any current or future right to benefits (the term "plan" shall include any contract, agreement, policy or understanding, each such plan being hereinafter referred to individually as a "Plan"). The Company has delivered to Heafner true and complete copies of (A) each Plan, (B) the summary plan description for each Plan, (C) the latest annual report, if any, which has been filed with the 15 22 IRS for each Plan, (D) the most recent IRS determination letter for each Plan that is a pension plan (as defined in ERISA) intended to be qualified under Code Section 401(a) and (E) copies of any existing reports for the three most recent Plan years showing compliance with discrimination rules under those of Code Sections 401(a), 401(k), 401(m), 419, 419A, 505. 501(c)(9), 105(h), 125 or 129 applicable to such Plan. Except as set forth in Section 2.1(m)(ii) of the Company Disclosure Schedule, each Plan intended to be tax qualified under Sections 401(a) and 501(a) of the Code is and has been determined by the IRS to be tax qualified under Sections 401(a) and 501(a) of the Code and, since such determination, no amendment to or failure to amend any such Plan and, to the knowledge of the Company and the Company Stockholders, no other event or circumstance has occurred that could reasonably be expected to adversely affect its tax qualified status. There has been no prohibited transaction within the meaning of Section 4975 of the Code and Section 406 of Title I of ERISA with respect to any Plan. (iii) Except as set forth in Section 2.1(m)(iii) of the Company Disclosure Schedule, no Plan is subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA. Except as set forth in Section 2.1(m)(iii) of the Company Disclosure Schedule, no Plan is subject to Title IV of ERISA. Except as set forth in Section 2.1(m)(iii) of the Company Disclosure Schedule, during the past five years, neither the Company or any of its Subsidiaries nor any business or entity then controlling, controlled by, or under common control with the Company or any of its Subsidiaries contributed to or was obliged to contribute to an employee pension plan that was subject to Title IV of ERISA. (iv) Except as set forth in Section 2.1(m)(iv) of the Company Disclosure Schedule, there are no actions, claims, lawsuits or arbitrations (other than routine claims for benefits) pending, or, to the knowledge of the Company or any Company Stockholder, threatened, with respect to any Plan or the assets of any Plan, and no Company Stockholder has knowledge of any facts which could give rise to any such actions, claims, lawsuits or arbitrations (other than routine claims for benefits). Each Plan has been administered in all material respects in accordance with its terms and with all applicable laws (including, without limitation, ERISA). The Company and each of its Subsidiaries have satisfied all funding, compliance and reporting requirements for all Plans. With respect to each Plan, the Company and each of its Subsidiaries have paid all contributions (including employee salary reduction contributions) and all insurance premiums that have become due and any such expense accrued but not yet due has been properly reflected in the financial information in Section 2.1(e) of the Company Disclosure Schedule. (v) Except as set forth in Section 2.1(m)(v) of the Company Disclosure Schedule, no Plan provides or is required to provide, now or in the future, health, medical, dental, accident, disability, death or survivor benefits to or in respect of any person beyond termination of employment, except to the extent required under any state insurance law or under Part 6 of Subtitle B of Title I of ERISA and under Section 4980(B) of the Code. Except as set forth in Section 2.1(m)(v) of the Company Disclosure Schedule, no Plan covers any individual other than employees of the Company or any of its Subsidiaries, other than spouses and dependents of employees under health and child care policies listed in Section 2.1(m)(ii) of the Company Disclosure Schedule, true and complete copies of which have been delivered to Heafner. 16 23 (vi) Except as set forth in Section 2.1(m)(vi) of the Company Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (A) entitle any employee of the Company or any of its Subsidiaries to severance pay or termination benefits, (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (C) obligate Heafner or the Company or any of its Subsidiaries or any of their respective affiliates, to pay or otherwise be liable for any compensation, vacation days, pension contribution or other benefits to any employee, consultant or agent of the Company or any of its Subsidiaries for periods before the Closing Date or for personnel whom Heafner does not employ. (n) Related Party Transactions. Except as set forth in Section 2.1(n) of the Company Disclosure Schedule, no current or former partner, director, officer or stockholder of the Company or any of its Subsidiaries or any associate or affiliate (as defined in the rules promulgated under the Securities Exchange Act of 1934) thereof, or any relative with a relationship of not more remote than first cousin of any of the foregoing, is presently, or during the 12-month period ending on the date hereof has been, (i) a party to any transaction with the Company or any of its Subsidiaries (including any contract, agreement or other arrangement providing for the furnishing of services by, or rental of real or personal property from, or otherwise requiring payments to, any such director, officer or stockholder or such associate) or (ii) to the knowledge of the Company or any Company Stockholder, the direct or indirect owner of an interest in any corporation, firm, association or business organization which is a competitor, supplier or customer of the Company or any of its Subsidiaries, nor does any such person receive income from any source other than the Company or any of its Subsidiaries which relates to the Company' or such Subsidiaries' businesses or should properly accrue to the Company or its Subsidiaries. (o) Taxes. (i) All Federal, state, local and foreign tax returns and tax reports required to be filed on or prior to the Closing Date by the Company or any of its Subsidiaries have been or will be filed or a valid request for extension has been or will be filed with respect thereto, on a timely basis (including any extensions) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed. All such returns and reports were or will be prepared in the manner required by applicable law, and reflect or will reflect the liability for taxes of the Company and its Subsidiaries in all material respects. All Federal, state, local and foreign income, profits, franchise, sales, use, occupation, property, excise, employment and other taxes (including interest, penalties and withholdings of tax) due from and payable by the Company or any of its Subsidiaries on or prior to the Closing Date have been or will be fully paid on a timely basis or will be adequately reserved for on the Closing Date Financial Statement (as defined in Section 4.1(k)). Except as set forth in Section 2.1(o) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any tax return. There are no liens for taxes upon the assets of the Company or any of its Subsidiaries except for statutory liens for current taxes not yet due. (ii) No claim has ever been made by an authority in a jurisdiction where the Company or any Subsidiary of the Company does not file tax returns that it is or may be subject 17 24 to taxation by that jurisdiction, and neither the Company or any such Subsidiary has received any notice, or request for information from any such authority. (iii) No issues have been raised with the Company or any of its Subsidiaries by the Internal Revenue Service (the "IRS") or any other taxing authority in connection with any tax return or report filed by the Company or any of its Subsidiaries where such issue is unresolved and there are no issues that have been raised by a taxing authority which, either individually or in the aggregate, could result in any liability for tax obligations of the Company or any of its Subsidiaries relating to periods ending on or before September 30, 1997 in excess of the accrued liability for taxes shown on the combined financial statements contained in Section 2.1(e)(i) of the Company Disclosure Schedule. No waivers of statutes of limitations have been given or requested with respect to the Company or any of its Subsidiaries. (iv) No material differences exist between the amounts of the book basis and the tax basis of assets that are not accounted for by an accrual on the books of the Company or any of its Subsidiaries for Federal income tax purposes. Except as set forth in Section 2.1(o)(iv) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is required to include in income any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary change in accounting method initiated by the Company or any of its Subsidiaries, and the IRS has proposed no adjustment or change in accounting method. (v) All transactions or methods of accounting that could give rise to an understatement of Federal income tax (within the meaning of Section 6661 of the Code for tax returns filed on or before December 31, 1990, and within the meaning of Section 6662 of the Code for tax returns filed after December 31, 1990) have been adequately disclosed on the tax returns in accordance with Section 6661(b)(2)(B) of the Code for tax returns filed on or prior to December 31, 1990, and in accordance with Section 6662(d)(2)(B) of the Code for tax returns filed after December 31, 1990. (vi) Neither the Company nor any of its Subsidiaries is or has been a United States real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(ii) of the Code. (vii) The Company and each of its Subsidiaries has complied (and until the Closing will comply) in all material respects with all applicable laws relating to the payment and withholding of taxes (including withholding and reporting requirements under Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and similar provisions under any other laws) and, within the time and in the manner prescribed by law, has withheld from wages, fees and other payments and paid over to the proper governmental or regulatory authorities all amounts required. (viii) Neither the Company nor any of its Subsidiaries is a party to any tax-sharing or tax indemnity agreement or any other agreement of a similar nature that remains in effect. 18 25 (p) Disclosure. No representation or warranty of the Company Stockholders contained in this Agreement, and (except for forward-looking projections or information relating to future performance) no statement contained in any certificate, schedule, annex, list or other writing furnished to Heafner, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained herein or therein, in light of the circumstances under which they were made, not misleading. None of the written information supplied or to be supplied by the Company specifically for inclusion or incorporation by reference in the preliminary or the final confidential offering memorandum to be prepared and distributed to potential purchasers and purchasers of the High Yield Notes (as defined below in Section 3.14) will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (q) Bank Accounts; Powers-of-Attorney. Section 2.1(q) of the Company Disclosure Schedule contains a true and complete list of (A) all bank accounts and safe deposit boxes of the Company and its Subsidiaries and all persons who are signatories thereunder or who have access thereto and (B) the names of all persons holding general or special powers-of-attorney from the Company or any of its Subsidiaries and a summary of the terms thereof. (r) Inventory. The inventory included in the financial statements contained in Section 2.1(e) of the Company Disclosure Schedule is the only inventory used or held for use in the Company's and its Subsidiaries' business, is valued for financial statement purposes at the lower of cost or market value, and is useable and salable in the ordinary course of business, except for obsolete items and items of below standard quality, all of which have been written off, written down or reserved on the accounting records of the Company as of the date hereof. (s) Brokers. No agent, broker, investment banker, person or firm acting on behalf of the Company or any of its Subsidiaries or under the authority of the Company or any of its Subsidiaries 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. (t) Investment Company. Neither the Company nor any person controlling the Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 2.2. Representations and Warranties of the Company Stockholders Individually. Each Company Stockholder, severally and not jointly, represents and warrants to Heafner as follows: (a) Authority; Binding Agreements; Title to Shares. (i) Such Company Stockholder has the requisite power, capacity and authority to enter into this Agreement, the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement by such Company Stockholder have been duly authorized 19 26 by all necessary action on the part of such Company Stockholder. This Agreement has been duly executed and delivered by such Company Stockholder, and, assuming the due execution and delivery of this Agreement by Heafner and Acquisition, constitutes the valid and binding obligation of such Company Stockholder, enforceable against such Company Stockholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. Each of the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement, when executed and delivered by such Company Stockholder at the Closing, will, assuming the due authorization, execution and delivery of such agreements by Heafner, constitute the valid and binding obligation of such Company Stockholder, enforceable against such Company Stockholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. (ii) Such Company Stockholder is the lawful owner of record and beneficially of the number of shares of Company Capital Stock set forth opposite such Company Stockholder's name on Annex A, and such Company Stockholder has, and will transfer to Acquisition at the Closing, good title to such number of shares, free and clear of all Claims, and with no restriction on the voting rights or other incidents of record and beneficial ownership attaching to such shares. (b) Conflicts; Consents. The execution and delivery by such Company Stockholder of this Agreement, the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement, the consummation of the transactions contemplated hereby or thereby and compliance by such Company Stockholder with any of the provisions hereof or thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents, if any, of the Company, any of its Subsidiaries or such Company Stockholder, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company, any of its Subsidiaries or such Company Stockholder is a party, or by which any properties or assets of the Company, any of its Subsidiaries or such Company Stockholder may be bound or affected, except for (1) such conflicts, breaches or defaults that are, individually and in the aggregate, immaterial and (2) such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained or will be obtained before the Closing at no cost to the Company and without giving to any person any additional rights (which waivers or consents are set forth in Section 2.2(b) of the Company Disclosure Schedule), (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company, any of its Subsidiaries or such Company Stockholder or any of their respective properties or assets (except for such violations that are, individually and in the aggregate, immaterial) or (iv) result in the creation or imposition of any Claim upon any shares of Company Capital Stock or capital stock of any of the Company's Subsidiaries or any property or assets used or held by the Company or any of its Subsidiaries. No consent or approval by, or notification of or filing with, any governmental authority or agency is required in connection with the execution, delivery and 20 27 performance by such Company Stockholder of this Agreement, the Escrow Agreement, the Class B Stockholder Agreement or the Class B Registration Rights Agreement or the consummation of the transactions contemplated hereby or thereby except for (x) the filing of a premerger notification and report form under the HSR Act, and the expiration or early termination of the applicable waiting period under the HSR Act, (y) the filing of the Certificate of Merger with the Delaware Secretary of State and (z) such other consents, approvals or notifications that are, individually and in the aggregate, immaterial. (c) Brokers. No agent, broker, investment banker, person or firm acting on behalf of such Company Stockholder or under the authority of such Company Stockholder is or will be entitled to a 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 thereby. (d) Pending Challenges. There is no legal or regulatory proceeding pending or, to the knowledge of such Company Stockholder, threatened that could reasonably be expected to have a material adverse effect on such Company Stockholder's ability to consummate the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement or the Class B Registration Rights Agreement. (e) Investment Company. Neither such Company Stockholder nor any person controlling such Company Stockholder is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 2.3. Representations and Warranties of Heafner. Heafner represents and warrants to the Company Stockholders as follows: (a) Organization, Standing and Power. Each of Heafner and each of its Subsidiaries (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of Heafner and each of its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary because of the property owned, leased or operated by it or because of the nature of its business as now being conducted, other than in such jurisdictions where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a material adverse effect on the business, assets, condition (financial or otherwise), liabilities or operations of Heafner and its Subsidiaries taken as a whole or on Heafner's or Acquisition's ability to consummate the Merger or perform their respective obligations under this Agreement (a "Heafner Material Adverse Effect"). Each such jurisdiction in which Heafner or any of its Subsidiaries is so qualified is listed in Section 2.3(a) of the disclosure schedule being delivered by Heafner simultaneously with the execution of this Agreement (the "Heafner Disclosure Schedule"). Heafner has delivered to the Company complete and correct copies of its articles of incorporation and by-laws and the certificate of incorporation and by-laws of each of its Subsidiaries, in each case as amended to the date of this Agreement, and has made available to the Company its and each of its Subsidiaries' minute books and stock records. Section 2.3(a) of the Heafner Disclosure Schedule contains a true and correct list of the directors and officers of Heafner and each of its Subsidiaries as of the date of this 21 28 Agreement and at all times since the last action of the board of directors and the stockholders of Heafner and of each of its Subsidiaries, as the case may be. (b) Authority; Binding Agreements. Each of Heafner and Acquisition (to the extent Acquisition is a party) has the requisite corporate power and authority to enter into this Agreement, the Escrow Agreement, the Class B Registration Rights Agreement and the Class B Stockholder Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Escrow Agreement, the Class B Registration Rights Agreement and the Class B Stockholder Agreement by Heafner and Acquisition (to the extent Acquisition is a party) have been duly authorized by all necessary action on the part of Heafner and Acquisition (to the extent Acquisition is a party). This Agreement has been duly executed and delivered by Heafner and Acquisition, and, assuming the due execution and delivery of this Agreement by the Company and the Company Stockholders, constitutes the valid and binding obligation of Heafner and Acquisition, enforceable against Heafner and Acquisition in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. At the Closing, each of the Escrow Agreement, the Class B Registration Rights Agreement and the Class B Stockholder Agreement will be duly executed and delivered by Heafner and Acquisition, and, assuming the due execution and delivery thereof by the Company Stockholders, will constitute the valid and binding obligation of Heafner, enforceable against Heafner in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. (c) Capitalization; Subsidiaries. (i) The authorized capital stock of Heafner consists of 10,000,000 shares of common stock, par value $.01, 7,000 shares of Series A Cumulative Redeemable Preferred Stock, $.01 par value (the "Series A Preferred Stock"), and 4,500 shares of Series B Cumulative Redeemable Preferred Stock, $.01 par value (the "Series B Preferred Stock"), and all of such securities are issued and outstanding except for 6,319,000 shares of Heafner common stock. After giving effect to the filing of the Second Amended and Restated Articles (as defined in Section 4.1(h)) and to the Merger, the authorized capital stock of Heafner will consist of 10,000,000 shares of Class A Common Stock, $.01 par value ("Class A Common Stock"), 20,000,000 shares of Class B Common Stock, $.01 par value ("Class B Common Stock"), 7,000 shares of Series A Preferred Stock and 4,500 shares of Series B Preferred Stock, and all of such securities will be issued and outstanding except for 6,319,000 shares of Class A Common Stock and 18,599,333 shares of Class B Common Stock. The authorized capital stock of Acquisition consists of 1,000 shares of common stock, $.01 par value, all of which are issued and outstanding. Except as set forth above and in Section 2.3(c) of the Heafner Disclosure Schedule, at the time of execution of this Agreement, no shares of capital stock or other voting securities of Heafner are issued, reserved for issuance or outstanding. Except as set forth in Section 2.3(c) of Heafner Disclosure Schedule, all outstanding shares of capital stock of Heafner are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. At and upon the Closing, the shares of Class B Common Stock to be issued to the 22 29 Company Stockholders will be validly issued, fully paid, non-assessable and not subject to preemptive rights. Except as set forth in Section 2.3(c) of the Heafner Disclosure Schedule, there are no bonds, debentures, notes or other indebtedness or securities of Heafner having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of Heafner may vote. Except as set forth in Section 2.3(c) of the Heafner Disclosure Schedule, there are no securities, options, warrants, rights, commitments, agreements, arrangements or undertakings of any kind to which Heafner is a party or by which Heafner is bound obligating Heafner to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of Heafner or obligating Heafner to issue, grant, extend or enter into any such security, option, warrant, right, commitment, agreement, arrangement or undertaking. Except as set forth in Section 2.3(c) of the Heafner Disclosure Schedule, there are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating Heafner to repurchase, redeem or otherwise acquire any shares of capital stock or other voting securities of Heafner or any securities of the type described in the two immediately preceding sentences. Heafner is not subject to any liability for any claim that Heafner violated any applicable Federal or state securities laws in connection with the issuance of capital stock. (ii) Section 2.3(c) of the Heafner Disclosure Schedule sets forth a complete list of all of Heafner's Subsidiaries as of the date of this Agreement, together with their respective jurisdictions of incorporation, authorized capital stock, number of shares issued and outstanding and record ownership of such shares. Except as set forth on Section 2.3(c) of the Heafner Disclosure Schedule, Heafner does not have any Subsidiaries or own or hold any equity or other security interest in any other entity. All issued and outstanding shares of capital stock of Heafner'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 Heafner, free and clear of all Claims, and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). None of Heafner's Subsidiaries is subject to any liability for any claim that it violated any applicable Federal or state securities laws in connection with the issuance of capital stock. (d) Conflicts; Consents. The execution and delivery by Heafner and Acquisition (to the extent Acquisition is a party) of this Agreement, the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement, the consummation of the transactions contemplated hereby and thereby and compliance by Heafner and Acquisition (to the extent Acquisition is a party) with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of Heafner or any of its Subsidiaries, (ii) except as set forth in Section 2.3(d) of the Heafner Disclosure Schedule, conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which Heafner or any of its Subsidiaries is a party, or by which any properties or assets of Heafner or any of its Subsidiaries may be bound or affected, except for (1) such conflicts, breaches or defaults that are, individually and in the aggregate, immaterial and (2) such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained or will be obtained before the Closing at no material cost to Heafner and without giving to any person any 23 30 material additional rights, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to Heafner or any of its Subsidiaries or any of their respective properties or assets (except for such violations that are, individually and in the aggregate, immaterial) or (iv) result in the creation or imposition of any Claim upon any shares of capital stock of Heafner or capital stock of any of Heafner's Subsidiaries or any property or assets used or held by Heafner or any of its Subsidiaries. No consent or approval by, or notification of or filing with, any governmental authority or agency is required in connection with the execution, delivery and performance by Heafner and Acquisition of this Agreement or the consummation of the transactions contemplated hereby except for (x) the filing of a premerger notification and report form under the HSR Act, and the expiration or early termination of the applicable waiting period under the HSR Act, (y) the filing of the Certificate of Merger with the Delaware Secretary of State and (z) such other consents, approvals or notifications that are, individually and in the aggregate, immaterial. (e) Financial Information. (i) The following financial statements are contained in Section 2.3(e) of the Heafner Disclosure Schedule: (A) the unaudited, internally prepared consolidated balance sheet of Heafner at December 31, 1997 and the related consolidated statement of income and retained earnings and cash flows for the fiscal year then ended; and (B) the balance sheets of Heafner at December 31, 1996 and 1995 and the related consolidated statements of income and retained earnings and cash flows for the fiscal years then ended together with the opinion of Arthur Andersen LLP thereon. Except as set forth in Section 2.3(e) of the Heafner Disclosure Schedule, all such financial statements have been prepared in conformity with GAAP applied on a basis consistent with prior periods and fairly present in all material respects the consolidated financial condition, results of operations and cash flows of Heafner and its Subsidiaries (except, in the case of unaudited financial statements, subject to normal, recurring year-end audit adjustments). The consolidated balance sheets of Heafner as at the dates set forth fairly present in all material respects the consolidated financial position of Heafner and its Subsidiaries as at the dates thereof, and the related consolidated statements of income and retained earnings and cash flows of Heafner for each of the respective specified periods then ended fairly present in all material respects the consolidated results of operations of Heafner and its Subsidiaries for each of the respective periods then ended (except, in the case of unaudited financial statements, subject to normal, recurring year-end audit adjustments). For the purposes of this Agreement, all financial statements referred to in this paragraph shall include any notes and schedules to such financial statements. (ii) Except as set forth in Section 2.3(e)(ii) of the Heafner Disclosure Schedule, each of Heafner and each of its Subsidiaries does not have, and as a result of the transactions contemplated herein, will not have, any liabilities or obligations (whether absolute, accrued, contingent or otherwise, and whether due or to become due), except for liabilities and obligations (A) reflected on the balance sheets of Heafner referred to in Section 2.3(e)(i) or (B) incurred in the ordinary course of business consistent with past practice since December 31, 1997, and which, 24 31 individually, do not exceed $250,000. All reserves established by Heafner are reflected on the balance sheets of Heafner or in the footnotes to the financial statements of Heafner and are reasonable based upon facts and circumstances known by Heafner on the date hereof and there are no loss contingencies that are required to be accrued by Statement of Financial Accounting Standard No. 5 of the Financial Accounting Standards Board which are not provided for on such balance sheets. (f) Absence of Changes. Except as set forth in Section 2.3(f) of the Heafner Disclosure Schedule, since December 31, 1997, Heafner and its Subsidiaries have been operated in the ordinary course consistent with past practice and there has not been: (i) any event, violation or other matter that could, individually or in the aggregate, reasonably be expected to have a Heafner Material Adverse Effect; (ii) any obligation or liability (whether absolute, accrued, contingent or otherwise, and whether due or to become due) incurred by Heafner or any of its Subsidiaries, other than obligations under customer contracts, current obligations and liabilities incurred in the ordinary course of business and consistent with past practice; (iii) any payment, discharge, satisfaction or settlement of any claim or obligation of Heafner or any of its Subsidiaries, except in the ordinary course of business and consistent with past practice; (iv) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of Heafner or any of its Subsidiaries or any direct or indirect redemption, purchase or other acquisition of any such shares; (v) any issuance or sale, or any contract entered into for the issuance or sale, of any shares of capital stock or securities convertible into or exercisable for shares of capital stock of Heafner or any of its Subsidiaries; (vi) any sale, assignment, pledge, encumbrance, transfer or other disposition of any tangible asset of Heafner or any of its Subsidiaries (other than sales of inventory to customers in the ordinary course of business consistent with past practice), or any sale, assignment, transfer or other disposition of any patents, trademarks, service marks, trade names, copyrights, licenses, franchises, know-how or any other intangible assets of Heafner or any of its Subsidiaries; (vii) any creation of any Claim on any property of Heafner or any of its Subsidiaries, except in the ordinary course of business consistent with past practice or such Claims which, individually or in the aggregate, could not reasonably be expected to have a Heafner Material Adverse Effect; (viii) any write-down of the value of any asset of Heafner or any of its Subsidiaries or any write-off as uncollectible of any accounts or notes receivable or any portion thereof, other than write-downs or write-offs which, in the aggregate, equal 25 32 approximately $56,913.20 as of the date of this Agreement and which, individually, do not exceed $10,000; (ix) any cancellation of any debts or claims or any amendment, termination or waiver of any rights of value to Heafner or any of its Subsidiaries; (x) any capital expenditure or commitment or addition to property, plant or equipment of Heafner or any of its Subsidiaries, other than capital expenditures or commitments or additions to property, plant or equipment of Heafner or any of its Subsidiaries which, in the aggregate, equal approximately $55,564.80 as of the date of this Agreement and which, individually, do not exceed $10,000; (xi) any general increase in the compensation of employees of Heafner or any of its Subsidiaries (including any increase pursuant to any written bonus, pension, profit-sharing or other benefit or compensation plan, policy or arrangement or commitment), or any increase in any such compensation or bonus payable to any officer, stockholder, director, consultant or agent of Heafner or any of its Subsidiaries having an annual salary or remuneration in excess of $75,000; (xii) any damage, destruction or loss (whether or not covered by insurance) affecting any asset or property of Heafner or any of its Subsidiaries resulting in liability or loss in excess of $50,000; (xiii) any change in the independent public accountants of Heafner and its Subsidiaries or any material change in the accounting methods or accounting practices followed by Heafner or any material change in depreciation or amortization policies or rates; or (xiv) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing items (i) through (xiv), subject to any dollar thresholds set forth in items (i) through (xiii) above. (g) Litigation. Except as set forth in Section 2.3(g) of the Heafner Disclosure Schedule, there are no actions, suits, proceedings, claims or disputes pending, or to the knowledge of Heafner threatened, at law, in equity, in arbitration or before any governmental entity against Heafner or any of its Subsidiaries (i) with respect to this Agreement, the Escrow Agreement, the Class B Stockholder Agreement or the Class B Registration Rights Agreement or any of the transactions contemplated hereby or thereby; or (ii) which could reasonably be expected to, if adversely determined, have a Heafner Material Adverse Effect. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or other governmental authority purporting to enjoin or restrain the execution, delivery and performance by Heafner or Acquisition (to the extent Acquisition is a party) of this Agreement, the Escrow Agreement, the Class B Stockholder Agreement or the Class B Registration Rights Agreement. 26 33 (h) No Default or Breach. Neither Heafner nor any of its Subsidiaries is in default under or with respect to any of such person's Contractual Obligations in any respect, other than any such defaults that, individually or in the aggregate, could not reasonably be expected to have a Heafner Material Adverse Effect. "Contractual Obligations" means as to any person, any provision of any security issued by such person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such person is a party or by which it or any of its property is bound. (i) Title to Properties. Heafner and each of its Subsidiaries has good record and marketable title to, or hold leases in full force and effect in, all their real property, except for such defects in title as could not, individually or in the aggregate, have a Heafner Material Adverse Effect. (j) Investment Company. Neither Heafner nor any person controlling Heafner is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (k) Full Disclosure. No representation or warranty of Heafner contained in this Agreement, and (except for forward-looking projections or information relating to future performance) no statement contained in any other certificate, schedule, annex, list or other writing furnished by Heafner to the Company or the Company Stockholders, contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in light of the circumstances in which made, not misleading. None of the information supplied or to be supplied by Heafner for inclusion or incorporation by reference in the preliminary or final confidential offering memorandum to be prepared and distributed to potential purchasers and purchasers of the High Yield Notes (as defined below in Section 3.14) will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (l) Compliance; Governmental Authorizations. (i) Each of Heafner and each of its Subsidiaries has complied and is in compliance in all material respects with all Federal, state, local and foreign laws, ordinances, rules, regulations and orders (including those relating to disposal of materials, environmental protection and occupational safety and health) applicable to Heafner, any of its Subsidiaries or their respective businesses, and there are no present or past conditions relating to Heafner or any of its Subsidiaries, or relating to any real property owned or leased by Heafner or its Subsidiaries (each, a "Heafner Property") or any appurtenances thereto or improvements thereon, that could reasonably be expected to lead to any material liability against Heafner or any of its Subsidiaries, or reasonably be expected to have a Heafner Material Adverse Effect, for violation of any health or safety laws. Each of Heafner and each of its Subsidiaries has all Federal, state, local and foreign governmental licenses and permits that are material to the conduct of their respective businesses as presently being conducted, which licenses and permits (and any exceptions thereto) are set forth in Section 2.3(l) of the Heafner Disclosure Schedule. Such licenses and permits are in full force and effect, no material violations are or have been recorded in respect of any thereof, no proceeding is pending or, to the knowledge of Heafner, threatened, to revoke or limit any thereof, and Heafner does not know of any basis for any such 27 34 proceeding and the consummation of the transactions contemplated in this Agreement will not result in the non-renewal, revocation or termination of any such license or permit. (ii) Heafner and each of its Subsidiaries validly hold all permits required under all applicable Environmental Laws that are material to the conduct of their respective businesses as presently being conducted. None of Heafner or any of its Subsidiaries has violated, nor is Heafner or any of its Subsidiaries in violation of, in any material respect, any requirements of any Environmental Laws in connection with the conduct of its business or in connection with the use, maintenance or operation of any Heafner Property. There are no present or past conditions relating to Heafner or any of its Subsidiaries or relating to any Heafner Property, or, to the knowledge of Heafner, relating to any real property previously owned, leased or operated by Heafner or any of its Subsidiaries or any of their respective present or past affiliates, that in any such case could reasonably be expected to lead to any material liability of Heafner or any of its Subsidiaries under any Environmental Law. Except as set forth on Section 2.3(l)(ii) of the Heafner Disclosure Schedule, each of Heafner and each of its Subsidiaries has operated each Heafner Property and has received, handled, used, stored, treated, shipped and disposed of all hazardous or toxic materials, substances and wastes (whether or not on its properties or properties owned or operated by others) in compliance in all material respects with all applicable Environmental Laws. Except as set forth in Section 2.3(l)(ii) of the Heafner Disclosure Schedule, none of Heafner or any of its Subsidiaries has engaged in or permitted the sale or dispensation (to customers, employees or other persons), handling, transportation, discharge, emission, treatment, storage or disposal of gasoline or other motor vehicle fuels at or under any Heafner Property or, to the knowledge of Heafner, any property or facility previously owned, leased or operated by Heafner or any of its Subsidiaries or one of their respective past or present affiliates. (m) Labor Relations; Employees. (i) (A) There is no labor strike, dispute, slowdown, stoppage or lockout pending, affecting, or, to the knowledge of Heafner, threatened against Heafner or any of its Subsidiaries, and during the last five years there has not been any such action; (B) there are no union claims to represent the employees of Heafner or any of its Subsidiaries nor have there been any such claims within the last five years; (C) there is no written or oral contract, commitment, agreement, understanding or other arrangement with any labor organization, nor work rules or practices agreed to with any labor organization or employee association, applicable to employees of Heafner or any of its Subsidiaries, nor is Heafner or any of its Subsidiaries a party to or bound by any collective bargaining or similar agreement; (D) there is, and within the last two years there has been, no representation of the employees of Heafner or any of its Subsidiaries by any labor organization and, to the knowledge of Heafner, there are no union organizing activities among the employees of Heafner or any of its Subsidiaries, nor does any question concerning representation exist concerning such employees; (E) Section 2.3(m)(i) of the Heafner Disclosure Schedule sets forth all personnel policies, rules or procedures (whether written or oral) applicable to employees of Heafner or any of its Subsidiaries, and Heafner has delivered to the Company complete and accurate copies of all such written policies, rules or procedures plus summaries of all oral policies, rules or procedures; (F) none of Heafner or any of its Subsidiaries has engaged in any act or practice which could reasonably be expected to constitute an unfair labor practice as defined in the National Labor Relations Act or other applicable law, ordinance, regulation, interpretation or order and each of Heafner and each of its Subsidiaries is, and has for the past five years been, in compliance in all material respects with all 28 35 applicable laws, ordinances, regulations, interpretations or orders respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; (G) there is no unfair labor practice charge or complaint against Heafner or any of its Subsidiaries pending or, to the knowledge of Heafner, threatened before the National Labor Relations Board or any similar state or foreign agency and, to the knowledge of Heafner, there are no existing or prior facts, circumstances or conditions that could reasonably be expected to form the basis therefor; (H) there is no grievance pending or, to the knowledge of Heafner, threatened against Heafner or any of its Subsidiaries arising out of any collective bargaining agreement or other grievance procedure; (I) there are no charges with respect to or relating to Heafner or any of its Subsidiaries pending or, to the knowledge of Heafner, threatened before the Equal Employment Opportunity Commission or any other governmental entity responsible for the prevention of unlawful employment practices; (J) neither Heafner nor any of its Subsidiaries has received notice of the intent of any governmental entity responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to Heafner or any of its Subsidiaries and no such investigation is in progress; and (K) no complaints, lawsuits or other proceedings are pending or, to the knowledge of Heafner, threatened in any forum by or on behalf of any present or former employee of Heafner or any of its Subsidiaries, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract, commitment, agreement, understanding or other arrangement for employment, any law governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with any employment relationship. (ii) Section 2.3(m)(ii) of the Heafner Disclosure Schedule contains a list of each pension, retirement, savings, deferred compensation, and profit-sharing plan and each stock option, stock appreciation, stock purchase, performance share, bonus or other incentive plan, severance plan, health, group insurance or other welfare plan, or other similar plan and any "employee benefit plan" within the meaning of Section 3(3) of ERISA, under which Heafner or any of its Subsidiaries has any current or future obligation or liability (including any potential, contingent or secondary liability under Title IV of ERISA) or under which any employee or former employee (or beneficiary of any employee or former employee) of Heafner or any of its Subsidiaries has or may have any current or future right to benefits (the term "plan" shall include any contract, agreement, policy or understanding, each such plan being hereinafter referred to in this Section 2.3(m) individually as a "Plan"). Heafner has delivered to the Company true and complete copies of (A) each Plan, (B) the summary plan description for each Plan, (C) the latest annual report, if any, which has been filed with the IRS for each Plan, (D) the most recent IRS determination letter for each Plan that is a pension plan (as defined in ERISA) intended to be qualified under Code Section 401(a) and (E) copies of any existing reports for the three most recent Plan years showing compliance with discrimination rules under those of Code Sections 401(a), 401(k), 401(m), 419, 419A, 505. 501(c)(9), 105(h), 125 or 129 applicable to such Plan. Except as set forth in Section 2.3(m)(ii) of the Heafner Disclosure Schedule, each Plan intended to be tax qualified under Sections 401(a) and 501(a) of the Code is and has been determined by the IRS to be tax qualified under Sections 401(a) and 501(a) of the Code and, since such determination, no amendment to or failure to amend any such Plan and, to the knowledge of Heafner, no other event or circumstance has occurred that could reasonably be expected to adversely affect its tax qualified status. There has been no prohibited transaction within the 29 36 meaning of Section 4975 of the Code and Section 406 of Title I of ERISA with respect to any Plan. (iii) Except as set forth in Section 2.3(m)(iii) of the Heafner Disclosure Schedule, no Plan is subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA. Except as set forth in Section 2.3(m)(iii) of the Heafner Disclosure Schedule, no Plan is subject to Title IV of ERISA. Except as set forth in Section 2.3(m)(iii) of the Heafner Disclosure Schedule, during the past five years, neither Heafner or any of its Subsidiaries nor any business or entity then controlling, controlled by, or under common control with Heafner or any of its Subsidiaries contributed to or was obliged to contribute to an employee pension plan that was subject to Title IV of ERISA. (iv) There are no actions, claims, lawsuits or arbitrations (other than routine claims for benefits) pending, or, to the knowledge of Heafner, threatened, with respect to any Plan or the assets of any Plan, and Heafner has no knowledge of any facts which could give rise to any such actions, claims, lawsuits or arbitrations (other than routine claims for benefits). Each Plan has been administered in all material respects in accordance with its terms and with all applicable laws (including, without limitation, ERISA). Heafner and each of its Subsidiaries have satisfied all funding, compliance and reporting requirements for all Plans. With respect to each Plan, Heafner and each of its Subsidiaries have paid all contributions (including employee salary reduction contributions) and all insurance premiums that have become due and any such expense accrued but not yet due has been properly reflected in the financial information in Section 2.3(e) of the Heafner Disclosure Schedule. (v) Except as set forth in Section 2.3(m)(v) of the Heafner Disclosure Schedule, no Plan provides or is required to provide, now or in the future, health, medical, dental, accident, disability, death or survivor benefits to or in respect of any person beyond termination of employment, except to the extent required under any state insurance law or under Part 6 of Subtitle B of Title I of ERISA and under Section 4980(B) of the Code. Except as set forth in Section 2.3(m)(v) of the Heafner Disclosure Schedule, no Plan covers any individual other than employees of Heafner or any of its Subsidiaries, other than spouses and dependents of employees under health and child care policies listed in Section 2.3(m)(ii) of the Heafner Disclosure Schedule, true and complete copies of which have been delivered to the Company. (vi) Except as set forth in Section 2.3(m)(vi) of the Heafner Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (A) entitle any employee of Heafner or any of its Subsidiaries to severance pay or termination benefits, (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (C) obligate Heafner or Heafner or any of its Subsidiaries or any of their respective affiliates, to pay or otherwise be liable for any compensation, vacation days, pension contribution or other benefits to any employee, consultant or agent of Heafner or any of its Subsidiaries for periods before the Closing Date or for personnel whom Heafner does not employ. (n) Taxes. (i) All Federal, state, local and foreign tax returns and tax reports required to be filed on or prior to the Closing Date by Heafner or any of its Subsidiaries have been 30 37 or will be filed or a valid request for extension has been or will be filed with respect thereto, on a timely basis (including any extensions) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed. All such returns and reports were or will be prepared in the manner required by applicable law, and reflect or will reflect the liability for taxes of Heafner and its Subsidiaries in all material respects. All Federal, state, local and foreign income, profits, franchise, sales, use, occupation, property, excise, employment and other taxes (including interest, penalties and withholdings of tax) due from and payable by Heafner or any of its Subsidiaries on or prior to the Closing Date have been or will be fully paid on a timely basis or will be adequately reserved for on Heafner's financial statements. Except as set forth in Section 2.3(n) of the Heafner Disclosure Schedule, neither Heafner nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any tax return. There are no liens for taxes upon the assets of Heafner or any of its Subsidiaries except for statutory liens for current taxes not yet due. (ii) No claim has ever been made by an authority in a jurisdiction where Heafner or any Subsidiary of Heafner does not file tax returns that it is or may be subject to taxation by that jurisdiction, and neither Heafner or any such Subsidiary has received any notice, or request for information from any such authority. (iii) No issues have been raised with Heafner or any of its Subsidiaries by the IRS or any other taxing authority in connection with any tax return or report filed by Heafner or any of its Subsidiaries where such issue is unresolved and there are no issues that have been raised by a taxing authority which, either individually or in the aggregate, could result in any liability for tax obligations of Heafner or any of its Subsidiaries relating to periods ending on or before December 31, 1997 in excess of the accrued liability for taxes shown on the combined financial statements contained in Section 2.3(e)(i) of the Heafner Disclosure Schedule. No waivers of statutes of limitations have been given or requested with respect to Heafner or any of its Subsidiaries. (iv) No material differences exist between the amounts of the book basis and the tax basis of assets that are not accounted for by an accrual on the books of Heafner or any of its Subsidiaries for Federal income tax purposes. Neither Heafner nor any of its Subsidiaries is required to include in income any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary change in accounting method initiated by Heafner or any of its Subsidiaries, and the IRS has proposed no adjustment or change in accounting method. (v) All transactions or methods of accounting that could give rise to an understatement of Federal income tax (within the meaning of Section 6661 of the Code for tax returns filed on or before December 31, 1990, and within the meaning of Section 6662 of the Code for tax returns filed after December 31, 1990) have been adequately disclosed on the tax returns in accordance with Section 6661(b)(2)(B) of the Code for tax returns filed on or prior to December 31, 1990, and in accordance with Section 6662(d)(2)(B) of the Code for tax returns filed after December 31, 1990. 31 38 (vi) Neither Heafner nor any of its Subsidiaries is or has been a United States real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(ii) of the Code. (vii) Heafner and each of its Subsidiaries has complied (and until the Closing will comply) in all material respects with all applicable laws relating to the payment and withholding of taxes (including withholding and reporting requirements under Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and similar provisions under any other laws) and, within the time and in the manner prescribed by law, has withheld from wages, fees and other payments and paid over to the proper governmental or regulatory authorities all amounts required. (viii) Neither Heafner nor any of its Subsidiaries is a party to any tax-sharing or tax indemnity agreement or any other agreement of a similar nature that remains in effect. (o) Patents, Trademarks, Etc. (i) Heafner and each of its Subsidiaries owns or has licensed or otherwise has the right to use all patents, trademarks, service marks, trade names, copyrights, licenses, franchises, computer software (including the source codes thereto) and other intellectual property rights that are material to the operation of their businesses as presently conducted or proposed to be conducted. (ii) Heafner uses and has used its best efforts to secure and maintain its intellectual property rights in any and all computer software it owns. Duplicates of all such computer software, including the source codes thereto, are at a secure off-site location. (iii) To the best knowledge of Heafner, no product, process, method, substance or other material presently owned, sold, licensed or employed by Heafner or any of its Subsidiaries, or which Heafner or any of its Subsidiaries contemplates owning, selling, licensing or employing, (1) infringes upon the patents, trademarks, service marks, copyrights or licenses that are owned by others or (2) is being infringed upon by any other person. No litigation is pending and no claim has been made against Heafner or any of its Subsidiaries or, to the best knowledge of Heafner, is threatened, contesting the right of Heafner or any of its Subsidiaries to own, sell, license or use any product, process, method, substance or other material presently owned, sold, licensed or employed by Heafner or any of its Subsidiaries or which Heafner or any of its Subsidiaries intends to acquire an ownership interest in, sell, license or employ. (p) Potential Conflicts of Interest. To the best knowledge of Heafner, except as set forth in Section 2.3(p) of the Heafner Disclosure Schedule, no executive officer, director or affiliate of Heafner or any of its Subsidiaries, and no relative or spouse of any such officer, director or affiliate: (i) owns, directly or indirectly, any interest in (excepting less than 1% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, Heafner or any of its Subsidiaries; (ii) owns, directly or indirectly, in whole or in 32 39 part, any tangible or intangible property that Heafner or any of its Subsidiaries uses in the conduct of its business; or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, Heafner or any of its Subsidiaries, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements arising in the ordinary course of business. (q) Trade Relations. Except as set forth in Section 2.3(q) of the Heafner Disclosure Schedule, to the knowledge of Heafner, there exists no actual or threatened termination, cancellation or material limitation of, or any material adverse modification or change in, the business relationship or business of Heafner and its Subsidiaries taken as a whole, or their business with, any customer or any group of customers whose use of their services are individually or in the aggregate material to the business of Heafner and its Subsidiaries taken as a whole, or with any material supplier, and to the knowledge of Heafner there exists no condition or state of facts or circumstances with respect thereto that could reasonably be expected to result in a Heafner Material Adverse Effect. (r) Material Contracts. Section 2.3(r) of the Heafner Disclosure Schedule lists as of the date of this Agreement each contract (other than purchase orders and standard sales contracts in the ordinary course of business), agreement, arrangement, commitment and lease of Heafner and its Subsidiaries currently in effect which by its terms (1) is not terminable at will within six months and requires future expenditures or receipts or other performance with respect to goods or services having a value per annum in excess of $200,000, (2) was not entered into in the ordinary course of business, or (3) is material to the assets, business, properties, operations or financial or other condition of Heafner and its Subsidiaries, taken as a whole. Copies of all such documents have previously been made available to the Company. All of such contracts, agreements, arrangements, commitments and leases are in full force and effect and binding upon the parties thereto in accordance with their terms. Neither Heafner nor any of its Subsidiaries, nor to the knowledge of Heafner, any other party to such contracts, agreements, arrangements, commitments and leases is in default of any material obligation thereunder or has given notice of default to any other party thereunder and, to the knowledge of Heafner, no condition exists that with notice or lapse of time would constitute a material default thereunder. Heafner has no knowledge of any proposed, pending, or likely cancellation or termination of any such contract, agreement, arrangement, commitment or lease (other than any expiration pursuant to the terms thereof). (s) Insurance. Section 2.3(s) of the Heafner Disclosure Schedule sets forth all policies of fire, liability, workman's compensation, vehicular, life or other insurance held by or on behalf of Heafner and its Subsidiaries (specifying the insurer, the coverage amounts and describing each pending claim thereunder of more than $100,000). Such policies and binders are in full force and effect. Neither Heafner nor any of its Subsidiaries is in default in any material respect with respect to any provision contained in any such policy or binder and, to the knowledge of Heafner, has not failed to give any notice or present any claim under such policy or binder in due and timely fashion. (t) Inventory. The inventory included in the financial statements contained in Section 2.3(e)(i) of the Heafner Disclosure Schedule is the only inventory used or held for use in 33 40 Heafner's and its Subsidiaries' business, is valued for financial statement purposes at the lower of cost or market value, and is useable and salable in the ordinary course of business, except for obsolete items and items of below standard quality, all of which have been written off, written down or reserved on the accounting records of Heafner as of the date hereof. (u) Brokers. Except for T & Co., no agent, broker, investment banker, person or firm acting on behalf of Heafner or any of its Subsidiaries or under the authority of Heafner or any of its Subsidiaries 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. (v) Financing. As of the date hereof, Heafner is highly confident that it can obtain the financing contemplated by Section 3.14, regardless of whether or not the Pending Acquisition (as defined below in Section 3.11) is consummated. ARTICLE III Additional Agreements SECTION 3.1. Transaction Costs. Any fees, costs and expenses in connection with the transactions contemplated by this Agreement and the negotiation and preparation of the Escrow Agreement, Class B Stockholder Agreement, Class B Registration Rights Agreement, Certificate of Merger and Second Amended and Restated Articles, including fees and expenses of counsel, financial advisors and accountants and filing fees in connection with compliance with the HSR Act (collectively, "Transaction Costs"), that are incurred by Heafner and Acquisition shall be paid or reimbursed by Heafner. Any Transaction Costs that are incurred by the Company, any of its Subsidiaries or any Company Stockholder (collectively, "Company Transaction Costs") shall be paid or reimbursed by the Company; provided that if the aggregate amount of such Company Transaction Costs exceeds $500,000, the amount of such excess shall be paid or reimbursed by the Company Stockholders. For purposes of this Section 3.1, "Company Transaction Costs" shall not include any severance payments under any existing employment agreements with employees of the Company or any of its Subsidiaries, which agreements are listed in Section 3.1 of the Company Disclosure Schedule, or up to $1,500,000 in the aggregate payable at Closing under any and all stock appreciation rights agreements with employees of the Company or any of its Subsidiaries, which agreements are listed in Section 3.1 of the Company Disclosure Schedule; provided that any amounts paid in excess of $1,500,000 at Closing under such stock appreciation rights agreements shall be deemed to be Company Transaction Costs. SECTION 3.2. Conduct of Business. From the date of this Agreement until the Closing Date, except as otherwise consented to by Heafner in writing, the Company shall, and shall cause its Subsidiaries to, operate their respective businesses only in the ordinary course of business consistent with past practice and, to the extent consistent therewith, use all commercially reasonable efforts to (i) preserve intact the present organization of the Company and its Subsidiaries; (ii) keep available the services of the present officers and employees of the Company and its Subsidiaries; (iii) preserve the Company's goodwill and relationships with customers, suppliers, licensors, licensees, contractors, distributors, lenders and other persons having 34 41 significant business dealings with the Company and its Subsidiaries; (iv) continue all current sales, marketing and other promotional policies, programs and activities; (v) maintain the assets of the Company and its Subsidiaries in good repair, order and condition; and (vi) maintain the insurance policies and risk management programs of the Company and each of its Subsidiaries and in the event of casualty, loss or damage to any assets of the Company and its Subsidiaries, repair or replace such assets with assets of reasonably comparable quality, as the case may be. Without limiting the generality of the foregoing, the Company shall not, without the prior written consent of Heafner, directly or indirectly (i) causing or permitting any state of affairs, action or omission described in clauses (i) through (xiv) of Section 2.1(f) or (ii) taking, or agreeing in writing or otherwise to take, any action which would make any representation or warranty of the Company or any Company Stockholder contained in this Agreement untrue or incorrect in any material respect as of the date when made or as of any future date or which could reasonably be expected to prevent the satisfaction of any condition to Closing set forth in Article IV. SECTION 3.3. HSR Act Filings; Reasonable Efforts; Further Assurances. (a) Each of Heafner and the Company shall (i) promptly make or cause to be made the filings required of such party (including the ultimate parent entity of such party) or any of its subsidiaries under the HSR Act with respect to the transactions contemplated by this Agreement, (ii) comply at the earliest practicable date with any request under the HSR Act for additional information, documents, or other material received by such party (including the ultimate parent entity of such party) or any of its subsidiaries from the Federal Trade Commission or the Department of Justice or any other governmental entity in respect of such filings or such transactions, and (iii) cooperate with the other party in connection with any such filing and in connection with resolving any investigation or other inquiry of any such agency or other governmental entity under any Antitrust Laws (as defined below) with respect to any such filing or any such transaction. Each party shall promptly inform the other party of any communication with, and any proposed understanding, undertaking, or agreement with, any governmental entity regarding any such filings or any such transaction. Neither party shall participate in any meeting with any governmental entity in respect of any such filings, investigation, or other inquiry without giving the other party notice of the meeting and, to the extent permitted by such governmental entity, the opportunity to attend and participate. (b) Each of Heafner and the Company shall use all commercially reasonable efforts to resolve such objections, if any, as may be asserted by any governmental entity with respect to the transactions contemplated by this Agreement under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other federal, state or foreign statutes, rules, regulations, orders or decrees that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (collectively, "Antitrust Laws"). In connection therewith, if any administrative or judicial action or proceeding is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Antitrust Law, and if by mutual agreement Heafner and the Company decide that litigation is in their best interests, each of Heafner and the Company shall cooperate and use all commercially reasonable efforts vigorously to contest and resist any such action or proceeding and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent (each an "Order"), that is in effect and that prohibits, prevents, or restricts consummation of any such 35 42 transaction. Each of Heafner and the Company shall use all commercially reasonable efforts to take such action as may be required to cause the expiration of the notice periods under the HSR Act or other Antitrust Laws with respect to such transactions as promptly as possible after the execution of this Agreement. (c) Heafner, the Company and the Company Stockholders each agree to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by this Agreement as expeditiously as practicable and to ensure that the conditions set forth in Article IV are satisfied, insofar as such matters are within the control of any of them. In case at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties to this Agreement shall take or cause to be taken all such necessary action, including the execution and delivery of such further instruments and documents, as may be reasonably requested by any party for such purposes or otherwise to complete or perfect the transactions contemplated by this Agreement. (d) Notwithstanding anything to the contrary in Section 3.3(a), (b) or (c), (i) neither Heafner nor any of its Subsidiaries shall be required to divest any of their respective businesses, product lines or assets, (ii) neither Heafner nor any of its Subsidiaries shall be required to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a material adverse effect on the business, assets, financial condition, results of operations or prospects of Heafner and its Subsidiaries or of Heafner combined with the Surviving Corporation after the Effective Time, (iii) neither the Company nor its Subsidiaries shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a Company Material Adverse Effect, (iv) no party shall be required to agree to the imposition of, or to comply with, any condition, obligation or restriction on Heafner or any of its Subsidiaries or on the Surviving Corporation or any of its Subsidiaries restraining or prohibiting Heafner's or Acquisition's ownership or operation (or that of their respective Subsidiaries or affiliates) of all or any portion of the business or assets of the Company and its Subsidiaries, taken as a whole, or of Heafner and its Subsidiaries or compelling Heafner or any of its Subsidiaries or affiliates to hold separate all or any portion of the business or assets of the Company and its Subsidiaries, taken as a whole, or of Heafner and its Subsidiaries, taken as a whole, and (v) neither Heafner nor Acquisition shall be required to waive any of the conditions set forth in Article IV. (e) Each party shall give prompt notice to the other parties upon learning of (i) any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate in any respect or (ii) the failure by it to comply with or satisfy in any respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. (f) The Company and the Company Stockholders shall give prompt notice to Heafner, and Heafner shall give prompt notice to the Company, of: 36 43 (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by this Agreement; (ii) any notice or other communication from any governmental entity in connection with the transactions contemplated by this Agreement; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to the best of their knowledge, threatened against, relating to or involving or otherwise affecting any such person or any of its Subsidiaries (x) which if pending on the date of this Agreement would have been required to have been disclosed pursuant to Section 2.1 or Section 2.2 with respect to the Company and the Company Stockholders and Section 2.3 with respect to Heafner or (y) which relate to the consummation of the transactions contemplated by this Agreement. SECTION 3.4. No Shopping. From the date of this Agreement until the earlier of (i) the Closing Date and (ii) the date this Agreement is terminated in accordance with Section 6.2, the Company and each Company Stockholder shall not, and shall not permit any partner, director, officer or agent of the Company or any of its Subsidiaries to, directly or indirectly, solicit or initiate, enter into or conduct, discussions concerning, or exchange information (including by way of furnishing information concerning the Company, any of its Subsidiaries or any of their respective businesses) or enter into any negotiations concerning, or favorably respond to any inquiries or solicit, entertain or agree to any proposals for, the acquisition of the assets of, or any substantial part thereof, or a merger involving, the Company or any of its Subsidiaries or the transfer of all or a substantial part of the capital stock of the Company or any of its Subsidiaries to any person other than Heafner or one of its affiliates or the formation of any joint venture or strategic alliance involving the Company or any of its Subsidiaries. In addition, during such time period, neither the Company nor any Company Stockholder shall authorize, direct or knowingly permit any employee or agent of the Company or any of its Subsidiaries to do any of the foregoing and the Company Stockholders shall notify Heafner of the identity of any person who approaches any Company Stockholder or the Company with respect to any of the foregoing. SECTION 3.5. Access and Information. (a) From the date of this Agreement until the first to occur (i) of the Closing Date and (ii) the termination of this Agreement in accordance with Section 6.2, the Company and its Subsidiaries shall permit Heafner, its financing parties and their respective representatives to make such investigation of the business, operations and properties of the Company and its Subsidiaries as Heafner or such financing parties deem reasonably necessary in connection with the transactions contemplated by this Agreement and the financing thereof. Such investigation shall include reasonable access to the respective directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of the Company and its Subsidiaries and the properties, books, records and commitments of the Company and its Subsidiaries. The Company shall furnish Heafner and its representatives with such financial, operating and other data and information, and copies of documents with respect to the Company and its Subsidiaries or any of the transactions contemplated by this Agreement, as Heafner or such financing parties shall from time to time reasonably request. Such access and investigation shall be made upon reasonable notice and at reasonable places and times, and shall not unreasonably disrupt the personnel and operations of 37 44 the Company and its Subsidiaries. All requests for such access shall be made only to such representatives of the Company as are listed in Section 3.5 of the Company Disclosure Schedule, which representatives shall be solely responsible for coordinating all such requests and all such access. Such access and information shall not in any way affect or diminish any of the representations or warranties hereunder. Without limiting the foregoing, during such period, the Company shall keep Heafner reasonably informed as to the business and operations of the Company and its Subsidiaries and shall consult with Heafner as appropriate. Heafner and the Company each agree to consult and coordinate with each other in good faith with respect to the timing and substance of any discussions prior to the Closing with suppliers, vendors and employees of the Company and its Subsidiaries regarding the transactions contemplated by this Agreement; provided that no such discussions may take place without the prior written consent of the Company, which consent shall not be unreasonably withheld. (b) From the date of this Agreement until the first to occur (i) of the Closing Date and (ii) the termination of this Agreement in accordance with Section 6.2, Heafner shall permit the Company and its representatives to make such investigation of the business, operations and properties of the Heafner and its Subsidiaries as the Company deems reasonably necessary in connection with the transactions contemplated by this Agreement. Such investigation shall include reasonable access to the respective directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of Heafner and its Subsidiaries and the properties, books, records and commitments of Heafner and its Subsidiaries. Heafner shall furnish the Company and its representatives with such financial, operating and other data and information, and copies of documents with respect to Heafner and its Subsidiaries or any of the transactions contemplated by this Agreement, as the Company shall from time to time reasonably request. Such access and investigation shall be made upon reasonable notice and at reasonable places and times and shall not unreasonably disrupt the personnel and operations of Heafner and its Subsidiaries. All requests for such access shall be made only to such representatives of Heafner as are listed in Section 3.5 of the Heafner Disclosure Schedule, which representatives shall be solely responsible for coordinating all such requests and all such access. Such access and information shall not in any way affect or diminish any of the representations or warranties hereunder. Without limiting the foregoing, during such period, Heafner shall keep the Company reasonably informed as to the business and operations of Heafner and its Subsidiaries and shall consult with the Company as appropriate. Heafner and the Company each agree to consult and coordinate with each other in good faith with respect to the timing and substance of any discussions prior to the Closing with suppliers, vendors and employees of Heafner and its Subsidiaries regarding the transactions contemplated by this Agreement; provided that no such discussions may take place without the prior written consent of Heafner, which consent shall not be unreasonably withheld. SECTION 3.6. Releases; Prior Compensation. Except as set forth in Section 3.6 of the Company Disclosure Schedule, each Company Stockholder agrees and acknowledges that such Company Stockholder has been paid in full for all services rendered to the Company or any of its Subsidiaries and has no outstanding claims against the Company, any of its Subsidiaries or Heafner for any amounts arising because of such employment or otherwise. Except as set forth in Section 3.6 of the Company Disclosure Schedule, each Company Stockholder hereby releases effective as of the Closing Date the Company and each of its Subsidiaries and their respective 38 45 successors and affiliates from all rights such Company Stockholder may have to acquire any securities of the Company or any of its Subsidiaries and all actions, suits, debts, promises, agreements, damages, demands or claims of any kind whatsoever arising from any event or action prior to the Closing Date that any Company Stockholder had, has or may in the future have against the Company or any of its Subsidiaries, except for the matters arising under this Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles or related to the transactions contemplated hereby and thereby. SECTION 3.7. Public Announcements. Heafner and Acquisition, on the one hand, and the Company and the Company Stockholders, on the other hand, will mutually agree in writing with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation. SECTION 3.8. Tax Matters. (a) Transfer Taxes. The Company Stockholders shall be responsible for all transfer, excise, stamp, sales, use, recording or similar taxes or fees arising out of the sale, transfer, conveyance or assignment of the shares of Company Capital Stock by the Company Stockholders pursuant to this transaction and the transactions contemplated hereby. (b) Responsibility for Company Taxes. (i) Notwithstanding any other provision of this Agreement or the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles, but subject to all of the limitations and other provisions set forth in Section 5.2, in the event that the Closing occurs, the Company Stockholders shall be liable for and shall indemnify Heafner and the Surviving Corporation for taxes of the Company or any of its Subsidiaries for any taxable years or periods that end on or before the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of such taxable years ending on and including the Closing Date but only to the extent such taxes exceed the aggregate amount accrued (to the extent such accruals are consistent with past practice) for taxes on the Closing Date Financial Statement. (ii) Notwithstanding any other provision of this Agreement or the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles, but subject to all of the limitations and other provisions set forth in Section 5.2, in the event that the Closing occurs, Heafner and the Surviving Corporation shall be liable for and shall indemnify the Company Stockholders for taxes of the Surviving Corporation or any Subsidiaries of the Company for any taxable years or periods that begins after the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of the taxable years beginning on the day after the Closing Date. 39 46 (iii) For purposes of subparagraphs (b)(i) and (b)(ii) above, whenever it is necessary to determine the liability for taxes of the Surviving Corporation for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of such taxes for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date, shall be determined by assuming that the Surviving Corporation had a taxable year or period which ended at the close of business on the Closing Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned based on the number of days in the year elapsed to and including the Closing Date. (c) Tax Treatment. Any payment by Heafner or any Company Stockholder under this Section 3.8 will be treated for tax purposes as an adjustment (an increase or a reduction) to the Merger Consideration. (d) Filing of Returns. All tax returns with respect to the Company (i) shall, to the extent required to be filed on or before the Closing Date (taking into account any valid extensions), be caused by the Company Stockholders to be filed by the Company and its Subsidiaries when due in accordance with all applicable laws and (ii) shall, as of the time of filing, correctly reflect in all material respects the facts regarding the income, business, assets, operations, activities and status of the Company and any other information required to be shown therein. (e) Cooperation in Tax Matters. After the Closing Date, Heafner and each Company Stockholder shall: (i) assist in all reasonable respects (and cause their respective affiliates to assist) the other party in preparing any tax returns or reports which such other party is responsible for preparing and filing in accordance with this Section 3.8; (ii) cooperate in all reasonable respects in preparing for any audits of, or disputes with taxing authorities regarding, and tax returns of the Company or any of its Subsidiaries and the Surviving Corporation; (iii) make available to the other and to any taxing authority as reasonably requested all information, records and documents relating to taxes of the Company or any of its Subsidiaries and the Surviving Corporation; (iv) provide timely notice to the other in writing of any pending or threatened tax audit or assessments of the Company or any of its Subsidiaries and the Surviving Corporation for taxable periods for which the other may have a liability under this Section 3.8; and (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any tax audit or information request with respect to any such taxable period. 40 47 (f) Tax Audits and Assessments. (i) Heafner shall notify the Company Stockholders in writing upon receipt by Heafner or the Surviving Corporation of notice of any pending or threatened Federal, state, local or foreign tax audits or assessments which may affect the tax liabilities of the Surviving Corporation for which the Company Stockholders would be required to indemnify Heafner and the Surviving Corporation. The Company Stockholders shall have the right to full and active participation in all aspects of, and consent (which consent shall not be unreasonably withheld taking into consideration all facts and circumstances that affect any party with respect to such tax matter or any other tax matter) to, the resolution of any such tax audit or assessment. (ii) The Company Stockholders shall notify Heafner in writing upon receipt by any of the Company Stockholders of notice of any pending or threatened federal, state, local or foreign tax audits or assessments which may affect the tax liabilities of the Company or any of its Subsidiaries for which Heafner and the Surviving Corporation would be required to indemnify the Company Stockholders. Heafner shall have the right to full and active participation in all aspects of, and consent (which consent shall not be unreasonably withheld taking into consideration all facts and circumstances that affect any party with respect to such tax matter or any other tax matter) to, the resolution of any such tax audit or assessment. (g) Activities between Signing and Closing. From the date hereof until the Closing, without the prior written consent of Heafner, the Company Stockholders shall cause the Company and each of its Subsidiaries not to make or change any tax election, change any annual tax accounting period, adopt or change any method of tax accounting, file any amended tax return, enter into any closing agreement, settle any tax claim or assessment, surrender any right to claim a tax refund, consent to any extension or waiver of the limitations period applicable to any tax claim or assessment or take or omit to take any other action, if any such other action or omission would have the effect of materially increasing the tax liability of the Company or any of its Subsidiaries. SECTION 3.9. Other Documents. At the Closing, Heafner and the Company Stockholders will execute and deliver the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement. SECTION 3.10. Officers and Directors. The Company Stockholders will cause all of the directors and corporate officers of the Company and its Subsidiaries to relinquish (effective no later than immediately prior to the Effective Time) such titles but such actions shall not affect their employment contracts or their employment capacities as employees of the Company. SECTION 3.11. Pending Heafner Acquisition. Within two days after the date of this Agreement, Heafner will make available to the Company Stockholders documents and financial information concerning a pending acquisition by Heafner of another business (the "Pending Acquisition Company") (with respect to which there is a letter of intent dated December 5, 1997 (the "Pending Acquisition")) that Heafner deems relevant to, or that the Company Stockholders may reasonably request in connection with, the determination referred to in Section 6.2(a)(v). Following the execution of this Agreement but prior to the Closing, the Company shall have the right to inquire of Heafner as to the status of the Pending Acquisition and, upon any such inquiry, 41 48 Heafner shall promptly disclose on a confidential basis such status to the Company and shall provide any details with respect to any anticipated delays in the consummation of the Pending Acquisition that would affect the transactions contemplated hereby or the financing contemplated by Section 3.14. SECTION 3.12. Company Confidential Information; Non-Competition. (a) Confidential Information. Each Company Stockholder recognizes and hereby acknowledges that, as a stockholder and/or senior executive of the Company, such Company Stockholder knows of, and has been exposed to, confidential business information concerning the Company's and its Subsidiaries' information, ideas, know how, trade secrets, processes, computer software, methods, practices, techniques, technical plans, customer lists, pricing techniques and information, marketing plans, financial information, and all other compilations of information that relate to the Company's and its Subsidiaries' businesses and their current and prospective customers ("Company Confidential Information"). Each Company Stockholder recognizes and hereby acknowledges that such Company Confidential Information is a valuable asset of the Company and its Subsidiaries. Each Company Stockholder agrees to safeguard such Company Confidential Information for the exclusive benefit of the Company and its affiliates and agrees that, after the Closing, such Company Stockholder will not disclose, distribute or publish such Company Confidential Information to any person, company, business or corporation (other than to the Company and its affiliates); provided that the term "Company Confidential Information" does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by such Company Stockholder in violation of this Agreement, (ii) was within the possession of such Company Stockholder prior to its being furnished to such Company Stockholder by or on behalf of the Company, provided that the source of such information was not known by such Company Stockholder to be bound by an agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information, or (iii) becomes available to such Company Stockholder on a non-confidential basis from a source other than the Company, provided that such source was not known by such Company Stockholder, after reasonable inquiry, to be bound by an agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information. (b) Covenant Not To Compete. (i) Each Company Stockholder (other than the Management Stockholders (as defined below in Section 3.12(b)(ii)) acknowledges and recognizes such Company Stockholder's possession of Confidential Information and acknowledges and recognizes the highly competitive nature of the business of the Company, its Subsidiaries, Heafner and their respective affiliates. Accordingly, in consideration of Heafner entering into this Agreement, the transactions contemplated by this Agreement and the premises contained herein, such Company Stockholder agrees that, during the four-year period commencing on the Closing Date and ending on the fourth anniversary of the Closing Date, such Company Stockholder will not, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal or another business or firm, and will cause such Company Stockholder's directors, officers, stockholders, partners, employees, agents and representatives not to, directly or indirectly (1) engage in any manner in the United States in the businesses of wholesale distribution of tires, custom wheels or tire dealer supplies or in the retail businesses of tire sales, 42 49 tire installations or automotive services, (2) divert, take away or solicit, or attempt to divert, take away or solicit any businesses or individuals that were customers of the Company, the Surviving Corporation, Heafner or their respective affiliates, (3) contact or communicate with any employee of the Company, the Surviving Corporation, Heafner or their respective affiliates for the purpose of inducing or otherwise encouraging such employee to terminate his or her employment with such person, or (4) assist others in engaging in any of the foregoing actions described in clauses (1), (2) or (3) above. (ii) Each Management Stockholder agrees, for so long as such Management Stockholder is employed by the Company and during the Non-Competition Period (as defined below) applicable to such Management Stockholder, in consideration of the transactions contemplated by this Agreement, not to: (A) directly or indirectly, engage or invest in, own, manage, operate, control or participate in the ownership, management, operation or control of, be employed by, associated or in any manner connected with, or render services or advice to, any Competing Business (as defined below); provided, however, that such Management Stockholder may invest in the securities of any enterprise (but without otherwise participating in the activities of such enterprise) if (x) such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, and (y) such Management Stockholder does not beneficially own (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) in excess of 1% of the outstanding capital stock of such enterprise; (B) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor (whether paid or unpaid), stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity, solicit, divert or take away any suppliers or customers of the Company or any of its Subsidiaries; or (C) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor (whether paid or unpaid), stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity, either (i) hire, attempt to hire, contact or solicit with respect to hiring, any employee of the Company or any of its Subsidiaries, (ii) induce or otherwise counsel, advise or encourage any employee of the Company or any of its Subsidiaries to leave the employment of the Company or any of its Subsidiaries, or (iii) induce any representative or agent of the Company or any of its Subsidiaries to terminate or modify its relationship with the Company or any such Subsidiary; unless, in the case of clause (A), (B) or (C) above, prior written approval has been granted by Heafner's Board of Directors. For purposes of this Section 3.12(b)(ii), "Non-Competition Period" shall mean, with respect to a Management Stockholder, (i) if such Management Stockholder is terminated for Cause (as 43 50 defined in such Management Stockholder's employment agreement as of the date hereof with the Company) or voluntarily terminates his employment under the employment agreement between such Management Stockholder and the Company, a period of two years immediately following the date of termination of employment (unless such period is extended, as provided elsewhere in such employment agreement), and (ii) if such Management Stockholder is terminated without Cause, a period of one year immediately following the date of termination employment (unless such period is extended, as provided elsewhere in such employment agreement). For purposes of this Section 3.12(b)(ii), "Management Stockholder" shall mean each of Armistead Burwell, Jr., William E. Berry, Leon R. Ellin and Richard P. Johnson. For purposes of this Section 3.12(b)(ii), "Competing Business" with respect to any Management Stockholder shall mean any individual, business, firm, company, partnership, joint venture, organization, or other entity engaged in the wholesale distribution of name brand or private label automobile tires, custom automobile wheels, or tire dealer supplies in the states of Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Alabama, and Virginia, or in any other market (domestic or international) in which the Company or any of its Subsidiaries does business at any time during such Management Stockholder's employment with the Company. (c) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Section 3.12 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 Company Stockholders and Heafner consider the restrictions contained in this Section 3.12 to be reasonable for the purposes of preserving the Company's goodwill and proprietary rights, if any particular provision of this Section 3.12 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 Company Stockholders and Heafner consider the restrictions contained in Section 3.12 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 Section 3.12 is unenforceable against any Company Stockholder, the provisions of this 3.12 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. (d) Remedies. The parties acknowledge that Heafner's damages at law would be an inadequate remedy for the breach by any Company Stockholder of any provision of this Section 3.12, and agree in the event of such breach that Heafner may obtain temporary and permanent injunctive relief restraining such Company Stockholder from such breach, and, to the extent permissible under applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained in this Agreement shall be construed as prohibiting Heafner from pursuing other remedies available at law or equity for such breach or threatened breach of this Section 3.12 of this Agreement. (e) Acknowledgment. Each Company Stockholder acknowledges that such Company Stockholder is entering into the covenants contained in this Section 3.12, inter alia, due to such Company Stockholder's position, prior to the Closing Date, as a stockholder of the Company. 44 51 SECTION 3.13. Indemnification. (a) For six years after the Effective Time, Heafner will cause the Surviving Corporation to indemnify and hold harmless the present and former officers, directors, employees and agents of the Company and its Subsidiaries in respect of acts or omissions occurring on or prior to the Effective Time to the extent provided under the Company's certificate of incorporation and bylaws in effect on the date hereof; provided that such indemnification shall be subject to any limitation imposed from time to time under applicable law. For three years after the Effective Time, Heafner will cause the Surviving Corporation to provide officers' and directors' liability insurance in respect of acts or omissions occurring on or prior to the Effective Time covering each such person currently covered by the Company's officers' and directors' liability insurance policy on terms substantially similar to those of such policy in effect on the date hereof, provided that in satisfying its obligation under this Section 3.13, Heafner shall not be obligated to cause the Surviving Corporation to pay premiums in excess of the amount per annum the Company paid in its last full fiscal year, which amount has been disclosed to Heafner, and if the Surviving Corporation is unable to obtain the insurance required by this Section 3.13, it shall obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. (b) In the event the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, proper provision shall be made so that the successors and assigns of the Surviving Corporation shall assume the obligations set forth in this Section 3.13. (c) The obligations of Heafner and the Surviving Corporation under this Section 3.13 shall not be terminated or modified in such a manner as to adversely affect any present or former officer, director, employee or agent to whom this Section 3.13 applies without the consent of each such affected person (it being expressly agreed that the present or former officers, directors, employees and agents to whom this Section 3.13 applies shall be third-party beneficiaries of this Section 3.13). (d) Heafner understands that the Company has entered into contractual indemnification arrangements with each of its current directors, a list of which arrangements is set forth in Section 3.13 of the Company Disclosure Schedule and true and correct copies of which have previously been delivered to Heafner. SECTION 3.14. Financing Arrangement. (a) Heafner shall use its commercially reasonable efforts to obtain adequate financing to enable it to consummate the transactions contemplated by this Agreement, all on terms satisfactory to Heafner and to the Company. Following the execution of this Agreement but prior to Closing, the Company shall have the right to inquire of Heafner as to the status of any proposed financing arrangement contemplated by this Section 3.14 and, upon any such inquiry, Heafner shall promptly disclose on a confidential basis such status to the Company and shall provide any details with respect to any anticipated delays affecting such proposed financing arrangement. 45 52 (b) The Company and the Company Stockholders acknowledge that Heafner intends to obtain the financing necessary to consummate the Merger and the Pending Acquisition (including the refinancing of existing indebtedness of Heafner, the Company, the Pending Acquisition Company and their respective subsidiaries) through borrowings under senior bank facilities (the "Senior Facilities") and the placement and sale of unsecured, "high yield" notes (the "High Yield Notes"). The Company and the Company Stockholders agree to provide, and to cause their Representatives (as defined below) to provide, reasonable cooperation and assistance in connection with Heafner's efforts to arrange the Senior Facilities and the placement and sale of the High Yield Notes. Without limiting the generality of the foregoing, the Company and the Company Stockholders acknowledge and agree that certain financial and other information (including the financial statements referred to in Section 2.1(e)) concerning the Company and its Subsidiaries can and will be included in a "confidential offering memorandum" that will be sent by the placement agent for the High Yield Notes to potential purchasers thereof. Heafner shall use its commercially reasonable efforts to prepare and finalize a "preliminary confidential offering memorandum" for the High Yield Notes by no later than the date that is 30 days after the date of this Agreement. SECTION 3.15. Confidentiality. (a) From the date of this Agreement until the first to occur of (i) the Closing Date and (ii) the third anniversary of the termination of this Agreement in accordance with Section 6.2, the Company and Heafner each agree to treat any information, both oral and written (herein collectively referred to as the "Confidential Material"), received by such party (hereinafter referred to as the "Receiving Party") concerning the other party, whether prepared by such other party, its Representatives (as defined below) or otherwise, and irrespective of the form of communication, which is furnished by or on behalf of such other party (hereinafter referred to as the "Delivering Party") in accordance with the provisions of this Agreement, and to take or abstain from taking certain other actions as hereinafter set forth. As used in this Section 3.15, a party's "Representatives" shall include the directors, officers, stockholders, employees, agents, partners or advisors of such party (including, without limitation, attorneys, accountants, consultants, bankers and financial advisors) and those of such party's stockholders, subsidiaries, affiliates and financiers and potential financiers. The term "Confidential Material" also shall be deemed to include all notes, analyses, compilations, studies, interpretations or other documents prepared by the Receiving Party or its Representatives which contain, reflect or are based upon, in whole or in part, the information furnished to the Receiving Party or its Representatives by the Delivering Party or its Representatives pursuant hereto. The term "Confidential Material" does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Receiving Party or its Representatives in violation of this Agreement, (ii) was within the possession of the Receiving Party or its Representatives prior to its being furnished to the Receiving Party or its Representatives by or on behalf of the Delivering Party or its Representatives, provided that the source of such information was not known by the Receiving Party or its Representatives to be bound by an agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Delivering Party or any other party with respect to such information, or (iii) becomes available to the Receiving Party or its Representatives on a non-confidential basis from a source other than the Delivering Party, provided that such source was not known by the Receiving Party or its Representatives, after reasonable inquiry, to be 46 53 bound by an agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Delivering Party or any other party with respect to such information. (b) Except as otherwise provided herein, each of Heafner and the Company agrees that it shall use the other party's Confidential Material solely for the purpose of evaluating the transactions contemplated by this Agreement and for no other purpose, that it shall not use the other party's Confidential Material in connection with the operation of its own business, that the other party's Confidential Material will be kept confidential and that such party and its Representatives will not disclose any of the other party's Confidential Material in any manner whatsoever; provided that a Receiving Party and its Representatives may make any disclosure of Confidential Material (i) to which the Delivering Party gives its prior written consent, (ii) to its Representatives who need to know the Confidential Information for the purpose of evaluating the transactions contemplated by this Agreement and who (excluding attorneys) agree in writing to be bound by the terms of this Section 3.15 to the same extent as if they were parties hereto (other than (A) with respect to Sections 3.15(e) and 3.15(f), which shall not be binding upon any of the auditors, attorneys, banks, financing sources or third party advisors of the Receiving Party, and (B) with respect to Section 3.15(g), which shall not be binding upon any Representatives of the Receiving Party), and (iii) as required by law, government regulation, court order or other lawful process. Each Receiving Party agrees to undertake reasonable precautions to safeguard and protect the confidentiality of the Delivering Party's Confidential Material, to accept responsibility for any breach of this Agreement by any of its Representatives, and at its sole expense to take all reasonable measures (including but not limited to court proceedings) to restrain its Representatives from prohibited or unauthorized disclosure or uses of the Delivering Party's Confidential Material. Neither party shall disclose, either directly or indirectly, to any manufacturer or customer of the other party any aspect of the transactions contemplated by this Agreement or the potential for any such transaction. In addition, except as otherwise provided herein, each Receiving Party agrees that, without the prior written consent of the Delivering Party, it will not disclose to any other person the fact that the Delivering Party's Confidential Material has been made available to such party, that discussions or negotiations are taking place concerning the Agreement or any of the terms, conditions or other facts with respect thereto (including the status thereof). It is understood and agreed that nothing contained herein shall be deemed to inhibit, impair or restrict Heafner's ability or the ability of its Representatives to have discussions or negotiations with other persons for the purposes of discussing or negotiating potential financing of the transactions contemplated hereby as long as each of such persons agrees in writing to be bound by the terms of this Section 3.15 (other than potential purchasers of the High Yield Notes). It is further understood and agreed that in any discussions with third parties regarding the transactions contemplated by this Agreement (including any discussions pursuant to Section 3.5 or discussions arising as a result of a breach of this Section 3.15), Heafner and the Company, together with their respective Representatives, shall characterize such transactions as a "merger of equals" and not as an acquisition by one party of the other party. (c) In the event that a Receiving Party or any of its Representatives is requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the 47 54 Delivering Party's Confidential Material, it shall provide the Delivering Party with prompt written notice of any such request or requirement so that the Delivering Party may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 3.15. If, in the absence of a protective order or other remedy or the receipt of a waiver by the Delivering Party, the Receiving Party or any of its Representatives are nonetheless, upon the advice of counsel, legally compelled to disclose the Delivering Party's Confidential Material to any tribunal or else stand liable for contempt or suffer other censure or penalty, the Receiving Party or its Representatives may, without liability hereunder, disclose to such tribunal only that portion of the Delivering Party's Confidential Material which such counsel advises such party is legally required to be disclosed, provided that it exercises its reasonable best efforts (at the Delivering Party's reasonable cost and expense) to preserve the confidentiality of the Delivering Party's Confidential Material, including by cooperating with the Delivering Party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Delivering Party's Confidential Material by such tribunal. (d) In the event this Agreement is terminated pursuant to Section 6.2 hereof, each Receiving Party will promptly deliver to the Delivering Party all Confidential Material (and all copies thereof) furnished to such Receiving Party or its Representatives by or on behalf of the Delivering Party pursuant hereto; provided that any portion of documentation prepared solely by a Receiving Party or its Representatives in connection with the evaluation of the transactions contemplated hereby, including, without limitation, computer-generated information, analyses, compilations, studies, word processing, visual or auditory records or recordings, that contains or is derived from the Delivering Party's Confidential Material shall be destroyed by such party (and, at the request of the Delivering Party, the Receiving Party shall certify in writing to the Delivering Party as to such destruction). Notwithstanding the return of the Delivering Party's Confidential Material, each Receiving Party and its Representatives will continue to be bound by its obligations of confidentiality and other obligations hereunder. (e) From the date of this Agreement until the earlier of (1) the Closing Date and (2) the first anniversary of the termination of this Agreement in accordance with Section 6.2, each of the Company and Heafner hereby agrees not to solicit for employment, offer employment to, or employ or hire in any manner any person who (x) is employed by the other party or one of its Subsidiaries at any time from and after the date hereof and prior to the termination of this Agreement in accordance with Section 6.2 and (y) whose total annual compensation is then in excess of $25,000; provided, however, that the foregoing restriction shall not apply with respect to any such person whose employment is involuntarily terminated by such other party. (f) The parties agree and acknowledge that each of the Company and Heafner currently has employment agreements with various members of such party's management that contain covenants not to compete against such party following termination of employment. Each of the Company and Heafner agrees at all times to respect such covenants of which such party has knowledge (after reasonable inquiry), and not to take any actions that may violate or conflict with such covenants of which such party has knowledge (after reasonable inquiry), to the extent that such party engages in discussions with any such employees following the termination of their employment with such other party for any reason. 48 55 (g) From the date of this Agreement until the earlier of (i) the Closing Date and (ii) the first anniversary of the termination of this Agreement in accordance with Section 6.2, neither the Company nor Wingate Partners II, L.P. nor any affiliate of either of them shall, directly or indirectly, solicit or initiate, enter into or conduct, discussions concerning, or exchange information or enter into any negotiations concerning, the acquisition of the capital stock or assets of, or a merger involving, the Pending Acquisition Company regarding a possible acquisition transaction; provided that the foregoing restriction shall be void and of no force and effect if the Pending Acquisition Company currently conducts any of its operations in the Company's current market area (which area consists of Maryland, Virginia, North Carolina, Tennessee, South Carolina, Georgia, Alabama, Florida, Mississippi, West Virginia, Delaware and Kentucky). (h) It is further understood and agreed that money damages would not be a sufficient remedy for any breach of this Section 3.15 by a Receiving Party or any of its Representatives and that the Delivering Party shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach. Such remedies shall not be deemed to be the exclusive remedies for a breach by a Receiving Party of this Section 3.15 but shall be in addition to all other remedies available at law or equity to the Delivering Party. No failure or delay by the Delivering Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. SECTION 3.16. Disclosure Supplements. (a) From time to time prior to the Closing, the Company and the Company Stockholders shall promptly supplement their disclosure to Heafner with respect to (i) any matter arising after the date of this Agreement that, if existing or occurring on or prior to the date of this Agreement, would have been required to be set forth or described in the Company Disclosure Schedule or (ii) any information with respect to any matter arising after the date of this Agreement that is necessary to complete or correct any information in such Company Disclosure Schedule or in any representation and warranty of the Company and the Company Stockholders set forth in Section 2.1 that has been rendered inaccurate thereby. Upon the delivery of such supplement to Heafner, the relevant representations and warranties set forth in Section 2.1 and the relevant portions of the Company Disclosure Schedule shall be deemed to have been amended by such additional information and, if such additional information set forth in such supplement (together with any additional information set forth in any prior supplement) reveal facts, events or circumstances that, individually or in the aggregate, could reasonably be expected to have a Company Material Adverse Effect, then the condition stated in Section 4.1(a) shall be deemed not to have been satisfied and this Agreement may be terminated by Heafner in accordance with the provisions of Section 6.2(a)(iii), subject to the cure period specified therein; provided that, if this Agreement is not so terminated and thereafter the Closing occurs, then all rights to seek indemnification pursuant to Section 5.1(a) of this Agreement based upon such additional information set forth in such supplement and the alleged breach of any representation or warranty so amended shall be deemed to have been waived. (b) From time to time prior to the Closing, Heafner shall promptly supplement its disclosure to the Company and the Company Stockholders with respect to (i) any matter arising after the date of this Agreement that, if existing or occurring on or prior to the date of this Agreement, would have been required to be set forth or described in the Heafner Disclosure 49 56 Schedule or (ii) any information with respect to any matter arising after the date of this Agreement that is necessary to complete or correct any information in such Heafner Disclosure Schedule or in any representation and warranty of Heafner set forth in Section 2.3 that has been rendered inaccurate thereby. Upon the delivery of such supplement to the Company and the Company Stockholders, the relevant representations and warranties set forth in Section 2.3 and the relevant portions of the Heafner Disclosure Schedule shall be deemed to have been amended by such additional information and, if such additional information set forth in such supplement (together with any additional information set forth in any prior supplement) reveal facts, events or circumstances that, individually or in the aggregate, could reasonably be expected to have a Heafner Material Adverse Effect, then the condition stated in Section 4.2(a) shall be deemed not to have been satisfied and this Agreement may be terminated by the Company in accordance with the provisions of Section 6.2(a)(iv), subject to the cure period specified therein; provided that, if this Agreement is not so terminated and thereafter the Closing occurs, then all rights to seek indemnification pursuant to Section 5.1(b) of this Agreement based upon such additional information set forth in such supplement and the alleged breach of any representation or warranty so amended shall be deemed to have been waived. (c) Nothing set forth in this Section 3.16 shall relieve any party of any liability for a breach by such party of a covenant or agreement of such party set forth in this Agreement. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of Heafner and Acquisition. The obligations of Heafner and Acquisition to perform this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by Heafner: (a) Representations, Warranties and Covenants. The representations and warranties of the Company and the Company Stockholders made in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date (except for those representations and warranties expressly made as of a particular date, which shall be true and correct only as of such date); provided that the foregoing condition shall be deemed satisfied if the facts, events or circumstances underlying any inaccuracies in any such representations and warranties as of the Closing Date (without giving effect to any "Company Material Adverse Effect" or other material adverse effect qualification or any other materiality qualification or similar qualifications contained therein), individually or in the aggregate, could not reasonably be expected to have a Company Material Adverse Effect, and the Company and the Company Stockholders shall have performed and complied with in all material respects all covenants and agreements required to be performed or complied with on or prior to the Closing Date. (b) Certificates. Heafner shall have received a certificate of the chief executive officer and the chief financial officer of the Company and a certificate of each Company Stockholder, in each case in customary form reasonably satisfactory to the parties. 50 57 (c) Opinion of Counsel. Heafner shall have received the opinion dated the Closing Date of counsel to the Company Stockholders and the Company, in customary form reasonably satisfactory to the parties. (d) HSR Act. The waiting period (and any extension thereof) applicable to the Merger and the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (e) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit the Merger or any of the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or other legal restraint or prohibition preventing the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles shall be in effect. (f) Consents, Amendments and Terminations. Heafner shall have received duly executed and delivered copies of all waivers, consents, terminations and approvals listed in Section 2.1(d) of the Company Disclosure Schedule, all in form and substance reasonably satisfactory to Heafner. Other than the filing of the Certificate of Merger with the Delaware Secretary of State, all consents, notices, authorizations and approvals legally required for the consummation of the Merger and the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement and the Second Amended and Restated Articles shall have been filed, occurred or been obtained. (g) Due Diligence. Heafner and its representatives shall have completed a due diligence review of the condition (financial or otherwise), assets, liabilities, operations and business of, and any other matters relating to, the Company and its Subsidiaries, and the results of such due diligence shall be satisfactory to Heafner; provided that the condition set forth in this Section 4.1(g) shall be deemed to have been satisfied unless Heafner notifies the Company and the Company Stockholders in writing by the close of business on March 27, 1998 that the results of such due diligence are not satisfactory to Heafner. (h) Escrow, Stockholder and Registration Rights Agreements; Investment Letter. Each of the Company Stockholders shall have duly executed and delivered to Heafner the Escrow Agreement in customary form as agreed to by the parties and the Escrow Agent, the Class B Stockholder Agreement, the Registration Rights Agreement and the Investment Letter, which Investment Letter shall be in substantially the form of Exhibit C. (i) Share Certificates and Corporate Records. Heafner shall have received certificates representing all issued and outstanding shares of Company Capital Stock, together with stock powers duly endorsed in blank, and Heafner shall have received the complete stock ledgers, minute books and similar corporate records of the Company. 51 58 (j) Financial Statements. Heafner shall have received an unaudited balance sheet of the Company and related statements of income and retained earnings and cash flows for the most recent month end that is at least 20 days prior to the Closing Date (the "Closing Date Financial Statement"), certified by the chief executive officer and chief financial officer of the Company. (k) Financing. Heafner shall have received adequate financing to consummate the transactions contemplated by this Agreement, all on terms satisfactory to Heafner and the Company; provided that the terms of such financing shall be deemed to be satisfactory to Heafner and the Company if (i) the gross proceeds from such financing shall be sufficient to consummate the transactions contemplated by this Agreement; (ii) the interest rate on any revolving indebtedness included in such financing would be no more than 9.0%; (iii) the interest rate on any other indebtedness included in such financing would no more than 10.5%; and (iv) the other terms of the financing would be reasonably customary for financings of such type (other than any requirement that warrants or other equity securities be issued by Heafner in connection with such financing); and provided, further, that the terms of such financing shall also be deemed to be satisfactory to Heafner and the Company if such financing could be obtained upon the terms listed above if (x) Heafner's existing subordinated borrowings from The 1818 Mezzanine Fund, L.P. (the "1818 Fund") were to remain in place following Closing (without considering the interest rate on such subordinated borrowings for purposes of the interest rate parameters set forth above in this subsection (k) and without issuing any equity securities described above in this subsection (k)), and (y) the consent of the 1818 Fund, which would be required in order to leave such subordinated borrowings in place, could be obtained with the use of commercially reasonable efforts by Heafner. (l) Additional Documents. Heafner shall have received such other documents, certificates or instruments as it may reasonably request. SECTION 4.2. Conditions of Obligations of the Company Stockholders. The obligations of the Company and the Company Stockholders to perform this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by all of the Company Stockholders: (a) Representations, Warranties and Covenants. The representations and warranties of Heafner made in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date (except for those representations and warranties expressly made as of a particular date, which shall be true and correct only as of such date); provided that the foregoing condition shall be deemed satisfied if the facts, events or circumstances underlying any inaccuracies in any such representations and warranties as of the Closing Date (without giving effect to any "Heafner Material Adverse Effect" or other material adverse effect qualification or any other materiality qualification or similar qualifications contained therein), individually or in the aggregate, could not reasonably be expected to have a Heafner Material Adverse Effect, and Heafner and Acquisition shall have performed and complied with in all material respects all covenants and agreements required to be performed or complied with on or prior to the Closing Date. 52 59 (b) Certificate. The Company Stockholders shall have received a certificate of the chief executive officer and the chief financial officer of Heafner, in customary form reasonably satisfactory to the parties. (c) Opinion of Counsel. The Company Stockholders shall have received the opinion dated the Closing Date of counsel to Heafner and Acquisition in customary form reasonably satisfactory to the parties. (d) HSR Act. The waiting period (and any extension thereof) applicable to the Merger and the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (e) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit the Merger or any of the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or other legal restraint or prohibition preventing the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles shall be in effect. (f) Consents. Other than the filing of the Certificate of Merger with the Delaware Secretary of State, all consents, notices, authorizations and approvals legally required for the consummation of the Merger and the transactions contemplated by this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement and the Second Amended and Restated Articles shall have been filed, occurred or been obtained. (g) Escrow, Stockholder and Registration Rights Agreements. Heafner shall have duly executed and delivered to the Company Stockholders the Escrow Agreement, the Class B Stockholder Agreement and the Class B Registration Rights Agreement. (h) Filing of Amended and Restated Articles. The Second Amended and Restated Articles of Incorporation of Heafner, in substantially the form attached hereto as Exhibit D (the "Second Amended and Restated Articles"), shall have been duly filed by Heafner with the Secretary of State of North Carolina. (i) Financing. Heafner shall have received adequate financing to consummate the transactions contemplated by this Agreement, all on terms satisfactory to Heafner and the Company; provided that the terms of such financing shall be deemed to be satisfactory to Heafner and the Company if (i) the gross proceeds from such financing shall be sufficient to consummate the transaction contemplated by this Agreement; (ii) the interest rate on any revolving indebtedness included in such financing would be no more than 9.0%; (iii) the interest rate on any other indebtedness included in such financing would no more than 10.5%; and (iv) the other terms of the financing would be reasonably customary for financings of such type (other than any 53 60 requirement that warrants or other equity securities be issued by Heafner in connection with such financing); and provided, further, that the terms of such financing shall also be deemed to be satisfactory to Heafner and the Company if such financing could be obtained upon the terms listed above if (x) Heafner's existing subordinated borrowings from The 1818 Mezzanine Fund, L.P. (the "1818 Fund") were to remain in place following Closing (without considering the interest rate on such subordinated borrowings for purposes of the interest rate parameters set forth above in this subsection (i) and without issuing any equity securities described above in this subsection (i)), and (y) the consent of the 1818 Fund, which would be required in order to leave such subordinated borrowings in place, could be obtained with the use of commercially reasonable efforts by Heafner. (j) Due Diligence. The Company Stockholders and their representatives shall have completed a due diligence review of the condition (financial or otherwise), assets, liabilities, operations and business of, and any other matters relating to, Heafner and its Subsidiaries, and the results of such due diligence shall be satisfactory to the Company Stockholders; provided that the condition set forth in this Section 4.2(j) shall be deemed to have been satisfied unless the Company Stockholders notify Heafner in writing by the close of business on March 27, 1998 that the results of such due diligence are not satisfactory to the Company Stockholders. (k) Financial Statements. The Company Stockholders shall have received the audited consolidated financial statements of Heafner and its Subsidiaries for the year ended December 31, 1997 (the "Audited Financial Statements") and such Audited Financial Statements shall not differ in any material respect from the unaudited financial statements for such period referred to in Section 2.3(e)(i)(A) (the "Unaudited Financial Statements"); provided that, upon receipt of such Audited Financial Statements, such Audited Financial Statements shall be deemed to replace for all purposes under this Agreement the Unaudited Financial Statements. (l) Additional Documents. The Company Stockholders shall have received such other documents, certificates or instruments as they may reasonably request. ARTICLE V Indemnity SECTION 5.1. Indemnification. (a) Indemnification by Company Stockholders as a Group. From and after the Closing, the Company Stockholders, severally and not jointly, indemnify and hold harmless Heafner and its subsidiaries, affiliates, directors, officers, employees and other agents and representatives from and against any and all liabilities, judgments, claims, settlements, losses, damages (excluding punitive damages and other special damages), fees, liens, taxes, penalties, obligations and expenses (collectively, "Losses") incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation by, or breach of any representation, warranty, covenant or agreement of, the Company or the Company Stockholders as a group contained 54 61 in this Agreement or any certificate or other document delivered by the Company or the Company Stockholders as a group under this Agreement; (ii) the breach of, or failure to perform by, the Company or the Company Stockholders as a group of any agreement made by the Company or the Company Stockholders as a group in this Agreement; and (iii) any and all actions, suits, proceedings, demands, judgments, costs and reasonable legal and other expenses incident to any of the matters referred to in clauses (i) through (ii) of this Section 5.1(a). (b) Indemnification by Company Stockholders Individually. From and after the Closing, and without duplication with respect to any matters within the scope of the provisions of Section 5.1(a), each Company Stockholder, severally and not jointly, indemnifies and holds harmless Heafner, and its subsidiaries, affiliates, directors, officers, employees and other agents and representatives from and against any and all Losses incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation by, or breach of any representation, warranty, covenant or agreement of, such Company Stockholder individually contained in this Agreement or in any certificate or other document delivered by such Company Stockholder individually hereunder; (ii) the breach of, or failure to perform by, such Company Stockholder individually of any agreement made by such Company Stockholder in this Agreement; and (iii) any and all actions, suits, proceedings, demands, judgments, costs and reasonable legal and other expenses incident to any of the matters referred to in clauses (i) and (ii) of this Section 5.1(b). (c) Indemnification by Heafner. From and after the Closing, Heafner indemnifies and holds harmless the Company Stockholders, and their respective agents and representatives, from and against any and all Losses incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation by, or breach of any representation, warranty, covenant or agreement of, Heafner or Acquisition contained in this Agreement or any certificate or other document delivered by Heafner or Acquisition under this Agreement; (ii) the breach of, or failure to perform by, Heafner or Acquisition of any agreement made by it in this Agreement; and (iii) any and all actions, suits, proceedings, demands, judgments, costs and reasonable legal and other expenses incident to any of the matters referred to in clauses (i) and (ii) of this Section 5.1(c). 55 62 (d) Indemnification Procedures. If any party (the "Indemnified Party") receives notice of any third-party claim or commencement of any third-party action or proceeding (an "Asserted Liability") with respect to which any other party hereto (an "Indemnifying Party") is obligated to provide indemnification pursuant to Section 5.1(a), (b) or (c), the Indemnified Party shall promptly give the Indemnifying Party notice thereof. The Indemnified Party's failure so to notify the Indemnifying Party shall not cause the Indemnified Party to lose its right to indemnification under this Article, except to the extent that such failure materially prejudices the Indemnifying Party's ability to defend against an Asserted Liability that such Indemnified Party has the right to defend against hereunder. Such notice shall describe the Asserted Liability in reasonable detail. The Indemnifying Party may defend against an Asserted Liability on behalf of the Indemnified Party utilizing counsel reasonably acceptable to the Indemnified Party, unless (i) the Indemnified Party reasonably objects to such assumption of the defense on the ground that counsel for such Indemnifying Party cannot represent both the Indemnified Party and the Indemnifying Party because such representation would be reasonably likely to result in a conflict of interest or because there may be defenses available to the Indemnified Party that are not available to such Indemnifying Party, (ii) the Indemnifying Party is not, in the reasonable judgment of the Indemnified Party, capable (by reason of insufficient financial capacity, bankruptcy, receivership, liquidation, managerial deadlock, managerial neglect or similar events) of maintaining a reasonable defense of such action or proceeding, or (iii) the action or proceeding seeks injunctive or other equitable relief against the Indemnified Party. If the Indemnifying Party defends an Asserted Liability, it shall do so at its own expense and shall not be responsible for the costs of defense, investigative costs, attorney's fees or other expenses incurred to defend the Asserted Liability (collectively, "Defense Costs") of the Indemnified Party (which may continue to defend, at its own expense). If the Indemnified Party assumes or maintains the defense of an Asserted Liability by reason of clause (i), (ii) or (iii) above, or because the Indemnifying Party has not elected to assume the defense, then such Indemnifying Party shall indemnify the Indemnified Party for its reasonable Defense Costs. The Indemnifying Party may settle any Asserted Liability only with the consent of the Indemnified Party, which consent shall not be unreasonably withheld. (e) Treatment of Payments. Any payment made pursuant to this Section 5.1 shall be treated as an adjustment to the Merger Consideration for income tax purposes. SECTION 5.2. Limitations. (a) Expiration Date. The indemnification and reimbursement obligations hereunder shall expire on the second anniversary of the Closing Date (the "Expiration Date"), except (i) as to any claims for, or any claims that may result in, any Loss for which indemnity may be sought hereunder of which the Indemnifying Party has received written notice from the Indemnified Party on or before the Expiration Date or (ii) as to any representations, warranties, covenants or agreements expressly surviving such two year period as set forth in Section 6.6. (b) Cap. The total indemnification obligations of the Company Stockholders (other than for claims relating to or arising out of Section 2.1(c), 2.2(a), 3.1, 3.12 or 3.15 (collectively, the "Heafner Excluded Claims")) to Heafner pursuant to this Article V and Section 3.8 shall not exceed (i) for all Company Stockholders in the aggregate $17,500,000 and (ii) for each Company Stockholder an amount equal to the product of (x) $17,500,000 and (y) a fraction, the numerator 56 63 of which is the amount of the Cash Consideration received by such Company Stockholder and the denominator of which is $18,000,000; provided that, after the first anniversary of the Closing Date, the amount of the total indemnification obligations of the Company Stockholders (other than for claims relating to or arising out of Heafner Excluded Claims and other than with respect to indemnification claims against the Company Stockholders that were paid on or prior to such first anniversary) to Heafner pursuant to this Article V and Section 3.8 shall not exceed an amount equal to the sum of (x) $8,750,000 and (y) the amount of all indemnification claims against the Company Stockholders pending on such anniversary date (which sum shall not exceed (1) $17,500,000 less (2) the aggregate amount of all payments made on or prior to such anniversary date by the Company Stockholders with respect to indemnification claims against the Company Stockholders). The total indemnification obligations of Heafner to the Company Stockholders pursuant to this Article V and Section 3.8 shall not exceed in the aggregate $17,500,000; provided that, after the first anniversary of the Closing Date, the amount of the total indemnification obligations of Heafner to the Company Stockholders (other than with respect to indemnification claims against Heafner that were paid on or prior to such first anniversary date) pursuant to this Article V and Section 3.8 shall not exceed an amount equal to the sum of (x) $8,750,000 and (y) the amount of all indemnification claims against Heafner pending on such anniversary date (which sum shall not exceed (1) $17,500,000 less (2) the aggregate amount of all payments made on or prior to such anniversary date by Heafner with respect to indemnification claims against Heafner). Notwithstanding anything to the contrary set forth in this Agreement, the indemnification obligations of the Company Stockholders to Heafner with respect to Heafner Excluded Claims shall not count towards, or be subject to, the limitations set forth in the first sentence of this paragraph (b) or the $300,000 deductible set forth in Section 5.2(c), and there shall be no limitation on such indemnification obligations. (c) Deductible. Heafner shall not be entitled to indemnification pursuant to this Article V or Section 3.8 with respect to any claim for indemnification (other than in connection with Heafner Excluded Claims), unless the aggregate Losses to Heafner, with respect to all claims for indemnification pursuant to Section 5.1(a) and (b) and Section 3.8, exceed $300,000, in which case the Company Stockholders shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay an amount equal to all such Losses (excluding such first $300,000). The Company Stockholders shall not be entitled to indemnification pursuant to this Article V or Section 3.8 with respect to any claim for indemnification (other than claims relating to or arising out of Section 2.3(c), 3.1 or 3.13), unless the aggregate Losses to the Company Stockholders, with respect to all claims for indemnification pursuant to Section 5.1(c) and Section 3.8, exceeds $300,000 in which case Heafner shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay an amount equal to all such Losses (excluding such first $300,000). (d) Form of Payment. (i) The sole recourse for all claims for indemnification made against the Company Stockholders pursuant to this Article V or Section 3.8 shall be to the Class B Stock Consideration, except with respect to Heafner Excluded Claims and claims relating to fraudulent acts or omissions. With respect to claims for indemnification made against the Company Stockholders pursuant to this Article V or Section 3.8, upon the Company Stockholders agreeing to satisfy any such claims or upon a determination of the Company Stockholders' liability hereunder with respect to any such claims, the Company Stockholders may satisfy any such obligations using (at their sole option) 57 64 cash or shares of the Class B Stock Consideration deposited with the Escrow Agent pursuant to the Escrow Agreement. (ii) The sole recourse for all claims for indemnification made against Heafner pursuant to this Article V or Section 3.8 shall be to up to 1,400,667 newly issued shares of Class B Common Stock (as reduced after the first anniversary of the Closing Date pursuant to this Article V) (appropriately adjusted to reflect stock splits (including reverse stock splits) of Class B Common Stock), except with respect to fraudulent acts or omissions. With respect to claims for indemnification made against Heafner pursuant to this Article V or Section 3.8, upon Heafner agreeing to satisfy any such claims or upon a determination of Heafner's liability hereunder with respect to any such claims, such claims shall be satisfied by (at Heafner's sole option) payment of cash or issuance and payment by Heafner of additional shares of Class B Common Stock. (iii) Solely for purposes of satisfying and paying indemnification obligations pursuant to this Article V and Section 3.8, each share of Class B Common Stock being paid or issued to satisfy such indemnification obligations shall be valued at an amount equal to $12.49 (appropriately adjusted to reflect stock splits (including reverse stock splits) of Class B Common Stock). (e) Tax Benefits. The amount of any and all Losses for which indemnification is provided pursuant to this Article V and Section 3.8 shall be (i) increased to take account of any net tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder ("grossed-up" for taxes on such increase) and (ii) reduced to take account of any net tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Losses. In computing the amount of any such tax cost or tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any and all Losses. (f) Insurance Proceeds. The amount of any and all Losses for which indemnification is provided pursuant to this Article V or Section 3.8 shall be net of any amounts actually received by the Indemnified Party under insurance policies with respect to such Losses. In the event that any claim for indemnification asserted under this Article V or Section 3.8 is, or may be, the subject of the Company's or any party's hereto insurance coverages or other right to indemnification or contribution from any third party (a "Third Party Contributor"), the Indemnified Party agrees to promptly notify the applicable insurance carrier of such claim and tender defense thereof to such carrier, and shall also promptly notify any potential Third Party Contributor. Each Indemnified Party agrees to pursue, at the sole cost and expense of the Indemnifying Party, such claims diligently and to reasonably cooperate, at the sole cost and expense of the Indemnifying Party, with each such insurance carrier and Third Party Contributor, and to make no claim for indemnification under this Article V or Section 3.8 for a period of 180 days after making a claim for such insurance or contribution. If insurance coverage or contribution is denied (in whole or in part), or if no resolution of an insurance or contribution claim shall have occurred within such 180 days, the Indemnified Party may proceed for indemnification under this Article V or Section 3.8, and such Indemnifying Party shall be subrogated to the rights of the Indemnified Party against such insurance carrier or Third Party Contributor. 58 65 (g) Sole Remedy. Upon and after the Closing, and except with respect to matters referred to in Sections 3.12 and 3.15, the provisions of this Article V and Section 3.8 represent the sole remedy available to any party hereto for a misstatement or omission from any representation, or a breach of any warranty, covenant or agreement contained in this Agreement, and, except with respect to fraudulent acts or omissions, effective upon and after the Closing, each party hereby unconditionally waives any other rights that they may have at law or in equity for a misstatement or omission from any representation, or a breach of any warranty or covenant or agreement contained in this Agreement. SECTION 5.3. No Election Subject to Section 5.2(g), nothing contained in this Article V or Section 3.8 shall be deemed an election of remedies under this Agreement or limit in any way the liability of any party under this Agreement in the event the Closing does not occur or under any other agreement to which such party is a party relating to this Agreement, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended or Restated Articles or the transactions contemplated by hereby or thereby. SECTION 5.4. Company Stockholders' Representative. Each of the Company Stockholders hereby constitutes and appoints Wingate Management Company II, L.P. (the "Representative") to act as its representative for all purposes under this Article V, and the Representative agrees to accept such appointment. The Representative shall have the authority to act on behalf of, and to bind, each Company Stockholder for all purposes of the provisions of this Article V. Without limiting the generality of the foregoing, each Company Stockholder hereby irrevocably constitutes and appoints, with full power of substitution, the Representative its true and lawful attorney-in-fact, with full power and authority in its name, place and stead, to execute, certify, acknowledge, deliver, file and record all agreements, certificates, instruments and other documents and any amendment thereto, which the Representative deems necessary or appropriate in connection with the Company Stockholders' obligations under this Article V. Each Company Stockholder's appointment of the Representative as its attorney-in-fact shall be deemed to be a power coupled with an interest and still survive the incompetency, bankruptcy or dissolution of the such Company Stockholder giving such power. No new representative may be appointed or substituted without the prior written consent of Heafner. ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement. This Agreement, the Certificate of Merger, the Escrow Agreement, the Class B Stockholder Agreement, the Class B Registration Rights Agreement and the Second Amended and Restated Articles and the schedules, annexes and exhibits hereto and thereto contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and supersede all prior agreements or understandings among the parties. The Letter of Intent, dated January 20, 1998, is expressly superseded, void and no longer of any force or effect. SECTION 6.2. Termination. (a) This Agreement shall terminate on the first to occur of any of the following events: 59 66 (i) the mutual written agreement of Heafner and the Company; (ii) by written notice of Heafner or the Company to the other, if the Closing shall not have occurred prior to the close of business on June 15, 1998; (iii) by written notice of Heafner to the Company, in the event (1) the Company or any Company Stockholder shall have materially breached any of its representations, warranties or agreements contained in this Agreement if the Company or such Company Stockholder fails to cure such breach within five business days following notification thereof by Heafner or (2) the satisfaction of any condition to Heafner's obligations under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach of this Agreement by Heafner or Acquisition; (iv) by written notice of the Company to Heafner, in the event (1) Heafner shall have materially breached any of its representations, warranties or agreements contained in this Agreement if Heafner fails to cure such breach within five business days following notification thereof by the Company or (2) the satisfaction of any condition to the obligations of the Company or the Company Stockholders under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach of this Agreement by the Company or any Company Stockholder; (v) by written notice of the Company to Heafner, if the Company Stockholders, in their collective determination, find the information disclosed pursuant to Section 3.11 to be unsatisfactory (such written notice to be submitted to Heafner by no later than the close of business on March 27, 1998); or (vi) by written notice of the Company to Heafner, if by the date that is 14 days after the date of this Agreement, Heafner has not provided the Company with copies of a "commitment" letter with respect to the Senior Facilities from the bank or banks providing such facilities and a "highly confident" letter from each placement agent or co-agent with respect to the High Yield Notes, in each case in customary form for financings of such type, with respect to the financing contemplated by Section 3.14; provided that the termination right granted to the Company pursuant to this Section 6.2(a) shall be deemed to be waived and expired, if such right is not exercised by the Company within three business days after the end of such 14-day period. (b) Nothing in this Section shall relieve any party of any liability for a breach of this Agreement prior to its termination. Except as aforesaid, upon the termination of this Agreement, all rights and obligations of the parties under this Agreement shall terminate, except their obligations under Sections 3.1, 3.7, 3.15, 6.11 and 6.12. 60 67 SECTION 6.3. Descriptive Headings; Certain Interpretations. (a) Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (b) Whenever any party makes any representation, warranty or other statement to such party's knowledge, such party will be deemed to have made due inquiry into the subject matter of such representation, warranty or other statement. (c) Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) 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. SECTION 6.4. Notices. All notices, requests and other communications to any party hereunder shall be in writing and sufficient if delivered personally or sent by facsimile (with confirmation of receipt) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Heafner, to: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093-0837 Facsimile: (704) 732-6480 Attention: President 61 68 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith If to the Company, to: ITCO Logistics Corporation c/o Wingate Partners 750 N. St. Paul, Suite 1200 Dallas, Texas 75201 Facsimile: (214) 871-8799 Attention: V. Edward Easterling, Jr. with a copy to: Haynes and Boone, L.L.P. 901 Main Street, Suite 3100 Dallas, Texas 75202 Facsimile: (214) 651-5940 Attention: David H. Oden, Esq. If to any Company Stockholder, to the address or facsimile number of such Company Stockholder set forth on the signature pages of this Agreement, with a copy to: Haynes and Boone, L.L.P. 901 Main Street, Suite 3100 Dallas, Texas 75202 Facsimile: (214) 651-5940 Attention: David H. Oden, Esq. or to such other address or facsimile number as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by mail, when delivered at the address specified in this Section or on the fifth business day following the date on which such communication is posted, whichever occurs first. 62 69 SECTION 6.5. Counterparts. 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 but one agreement. SECTION 6.6. Survival. Except as set forth in 5.2, all representations and warranties, agreements and covenants contained in this Agreement or in any document delivered pursuant to this Agreement or in connection with this Agreement (unless otherwise expressly provided) shall survive the Closing and shall remain in full force and effect until the Expiration Date; provided, that the representations and warranties in Sections 2.1(c), 2.2(a) and 2.3(c) and the covenants and agreements in Sections 3.1, 3.6, 3.8, 3.12, 3.13, 3.15, 6.11 and 6.12 and Article V (solely with respect to claims regarding the foregoing sections) shall not expire on the Expiration Date and shall survive, as set forth in such Sections or Articles, or, if not set forth, shall survive forever or until the expiration of the applicable statute of limitations. SECTION 6.7. Benefits of Agreement. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, including in the case of Heafner, to its financing parties. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third party. SECTION 6.8. 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. SECTION 6.9. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by any party hereto without the prior written consent of the other parties; except that Heafner may assign all of its rights hereunder to persons providing Heafner with financing to enable it to consummate the transactions described herein. Any instrument purporting to make an assignment in violation of this Section shall be void. SECTION 6.10. 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, 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. 63 70 SECTION 6.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. SECTION 6.12. DISPUTE RESOLUTION; CONSENT TO JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN ANNEX B TO THIS AGREEMENT. EACH OF THE COMPANY AND THE COMPANY STOCKHOLDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE FOR PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARE NOT GOVERNED BY ANNEX B AND WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH OF THE COMPANY AND THE COMPANY STOCKHOLDERS AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY AND THE COMPANY STOCKHOLDERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE IN ANY SUCH COURT OR ANY CLAIM THAT A LEGAL PROCEEDING COMMENCED IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 64 71 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither ------------------------------------------------ Name: J. Michael Gaither Title: Senior Vice President and General Counsel ITCO MERGER CORPORATION By: /s/ J. Michael Gaither ------------------------------------------------ Name: J. Michael Gaither Title: Secretary ITCO LOGISTICS CORPORATION By: ------------------------------------------------ Name: V. Edward Easterling, Jr. Title: President COMPANY STOCKHOLDERS: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ------------------------------------------------ V. Edward Easterling, Jr., Principal 65 72 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: ------------------------------------------------ Name: Title: ITCO MERGER CORPORATION By: ------------------------------------------------ Name: Title: ITCO LOGISTICS CORPORATION By: /s/ V. Edward Easterling, Jr. ------------------------------------------------ Name: V. Edward Easterling, Jr. Title: President COMPANY STOCKHOLDERS: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ------------------------------------------------ V. Edward Easterling, Jr., Principal 65 73 ---------------------------------------------------- Armistead Burwell, Jr. 1311 Forest Hills Road, B-8 Wilson, NC 27896 /s/ William E. Berry ---------------------------------------------------- William E. Berry 1213 Waverly Road Wilson NC 27896 /s/ Richard P. Johnson ---------------------------------------------------- Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 /s/ Leon R. Ellin ---------------------------------------------------- Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ------------------------------------------------ V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: /s/ James T. Callier ------------------------------------------------ James T. Callier President 66 74 /s/ Armistead Burwell, Jr. ---------------------------------------------------- Armistead Burwell, Jr. 1311 Forest Hills Road, B-8 Wilson, NC 27896 /s/ William E. Berry ---------------------------------------------------- William E. Berry 1213 Waverly Road Wilson NC 27896 /s/ Richard P. Johnson ---------------------------------------------------- Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 /s/ Leon R. Ellin ---------------------------------------------------- Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ------------------------------------------------ V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: ------------------------------------------------ James T. Callier President 66 75 Annex A to the Agreement and Plan of Merger Company Stockholders; Ownership of Shares
Stockholder Preferred Shares % Common Shares % Cash Consideration* Stock Consideration* - ----------- ---------------- --- ------------- --- ------------------ -------------------- 1. Wingate Partners II, L.P. 7,632 94.2 84,800 91.2 2. Armistead Burwell, Jr. 162 2.0 1,800 1.9 3. William E. Berry 108 1.3 1,200 1.3 4. Richard P. Johnson -- -- 1,800 1.9 5. Leon R. Ellin -- -- 1,200 1.3 6. Wingate Affiliates II, L.P. 144 1.8 1,600 1.7 7. Callier Investment Company 54 0.7 600 0.7 ----- ------ ------ ----------- ---------------- 8,100 100.00% 93,000 100.00% $18,000,000 1,400,667 shares
- ---------- * To be allocated in accordance with a schedule to be delivered by the Company at the Closing. A-1 76 ANNEX B TO AGREEMENT AND PLAN OF MERGER DISPUTE RESOLUTION PROCEDURE 1. Scope of Arbitration. The parties to the Agreement and Plan of Merger to which this Annex B is attached (the "Agreement") will submit to final and binding arbitration as the sole and exclusive remedy for all claims for damages arising out of, involving, or relating to (a) the Agreement or (b) the events giving rise to the Agreement, including any and all non-contractual claims for damages related to the Agreement or the events giving rise to it (including claims for fraudulent inducement of contract). Notwithstanding the foregoing, the dispute resolution procedure set forth in this Annex B shall not apply to (i) claims for injunctive or other equitable relief pursuant to Section 3.12 or 3.15 of the Agreement or any other agreement entered into in connection with the Agreement (including the Class B Stockholder Agreement, the Class B Registration Rights Agreement and the Second Amended and Restated Articles) or (ii) any claims for damages arising out of, involving, or relating to the Class B Stockholder Agreement, the Class B Registration Rights Agreement or the Second Amended and Restated Articles (including claims for fraudulent inducement of contract). 2. Notice of Dispute. Any party shall give the other parties written notice of the existence and nature of any dispute proposed to be arbitrated pursuant to this Annex B (the "Written Notice"). Such Written Notice must be served on the other parties as described below. The party serving Written Notice shall be referred to as the "Claiming Party." The party to whom the claims are directed shall be referred to as the "Responding Party." 3. Appointment of Arbitrators. Each party shall appoint one person to serve as an arbitrator within 15 days of receipt of the Written Notice. The two arbitrators thus appointed shall within seven days of their appointment together select a third arbitrator with such knowledge and expertise as necessary to serve as chairman of the panel of arbitrators, and this person shall serve as chairman. The three arbitrators shall determine all matters, including the panel's final decision with respect to the claims presented in the arbitration, by majority vote. If the two arbitrators selected by the parties are unable to agree upon the appointment of the third arbitrator within seven days of their appointment, both shall give written notice of such failure to agree to the parties, and if the parties fail to agree upon the selection of such third arbitrator within five days thereafter, such third arbitrator shall be appointed from, and pursuant to the rules for commercial arbitration of, the American Arbitration Association. Prior to appointment, each arbitrator shall agree to conduct such arbitration in strict accordance with the terms of this Annex B. 4. Initial Meeting of the Arbitrators. Within seven days of the selection of the third arbitrator, the arbitrators shall conduct an initial meeting with the parties (the "Initial Meeting"). All meetings between the arbitrators, or between the arbitrators and the parties, including the Initial Meeting, may be conducted by telephone, with the exception of the arbitration hearing at which evidence is presented. At the Initial Meeting, the parties and the arbitrators shall agree upon a schedule for the arbitration proceedings, with dates no later than the deadlines B-1 77 provided in Section 7 below. The statement of claim, the response to the statement of claim and counterclaims (if any), and the response to the counterclaims (if any) (collectively, the "Pleadings") shall be submitted to each arbitrator on the date they are served, unless service occurs prior to appointment of all three arbitrators. If service of any of the Pleadings occurs prior to the appointment of any of the arbitrators, copies of any such Pleadings shall be submitted to such arbitrator promptly after such arbitrator's appointment. 5. Conduct of the Arbitration. With respect to each dispute to be arbitrated pursuant to this Annex B, no more than eleven months shall pass between the selection of the third arbitrator and the release of a decision by the arbitration panel; no more than eight depositions (lasting in total for all eight depositions no more than 50 hours) may be taken by each of the Claiming Party or the Responding Party, and no more than 30 interrogatories may be asked for by each of the Claiming Party or the Responding Party. Any arbitration held pursuant to this Annex B shall take place in Charlotte, North Carolina. The law of the State of Delaware shall supply the substantive law of the arbitration proceedings, and any claims or counterclaims alleged pursuant to federal law shall be adjudicated as if pled in a federal court in Delaware. All proceedings, including discovery, depositions, and the arbitration hearings shall be governed by the Federal Rules of Civil Procedure and the Local Rules of Civil Procedure of the United States District Court for the District of Delaware, unless such rules conflict with the provisions of this Annex B, in which case the provisions of this Annex B control; provided, however, that the parties agree that the provisions of Federal Rule of Civil Procedure 26(a) shall not apply. 6. Motions. The parties may make applications to the panel of arbitrators regarding issues of discovery, procedure and privilege. Any such motions shall be made to and resolved by the arbitrators as soon as practicable. No party shall be permitted to file any motions for dismissal of claims (including dismissal based upon failure to join an indispensable party), or for summary judgment, concerning the claims or counterclaims asserted in any arbitration under this Annex B. 7. Schedule of Arbitration Proceedings. At the Initial Meeting, the parties and the arbitrators shall agree to a schedule that conforms with the following deadlines: Event Deadline Not Later Than ----- ----------------------- Service of a statement of 15 days after service of the Written Notice claim by the Claiming Party Service of response to the statement of claim and counterclaims (if any) by 21 days after receipt of the statement of the Responding Party claim Service of response to counterclaims (if any) by Seven days after receipt of counterclaims (if the Claiming Party any) B-2 78 Commencement of document One day after service of response to the discovery statement of claim Commencement of deposition 75 days after service of the statement of discovery claim Completion of all discovery 200 days after service of the statement of claim Commencement of the 28 days after completion of discovery arbitration hearing Issuance of a decision by 14 days after receipt of the last hearing the arbitrators transcript by the arbitrators. All sessions of the arbitration hearings shall be promptly transcribed and transcripts shall be promptly provided to the parties and the arbitrators. 8. Decision Binding on the Parties. Unless the parties agree otherwise in writing, the arbitrators' decision shall become binding on the parties at such time as the decision is confirmed by order of the Delaware Court of Chancery. The parties hereby irrevocably and unconditionally submit to the jurisdiction of such court for any and all proceedings relating to such confirmation. Any award ordered shall be paid within 10 days of confirmation of the arbitrators' decision. 9. Cost of Arbitration Proceeding. Except as provided herein, the costs incurred by the parties in conjunction with an arbitration proceeding pursuant to this Annex B, including reasonable attorney's fees, fees paid to experts, and fees for obtaining transcripts shall be paid or reimbursed in accordance with the provisions of Article V of the Agreement. In the event that the arbitrators determine that no party is entitled to indemnification by any other party, then (a) each party shall pay its own expenses, including attorney's fees, fees paid to experts, fees for obtaining transcripts, expenses of witnesses called solely by that party, and all fees charged by the arbitrator appointed by such party and (b) the parties shall each pay fifty percent of all remaining expenses of the arbitration proceeding. 10. Extensions of Time. The parties may jointly agree, in writing, to extend any of the deadlines set forth in Section 7 above. 11. Service of Documents. Any process, notice, memorandum, motion, demand, or other paper or communication, or application to the panel of arbitrators shall be deemed to have been sufficiently served or submitted if (a) personally delivered, or (b) sent by a nationally recognized overnight courier service. B-3 EX-10.10 28 CLASS B STOCKHOLDER AGREEMENT RE ITCO STOCKHOLDERS 1 Exhibit 10.10 CLASS B STOCKHOLDER AGREEMENT (the "Agreement"), dated as of May 20, 1998, between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and the former stockholders (the "ITCO Stockholders") of ITCO Logistics Corporation, a Delaware corporation ("ITCO"). -------------------------------------------------------------------- INTRODUCTION Pursuant to an Agreement and Plan of Merger, dated as of March 10, 1998 (the "Merger Agreement"), among Heafner, ITCO Merger Corporation, a Delaware corporation, ITCO and each of the ITCO Stockholders, the parties have agreed to merge Acquisition with and into ITCO (the "ITCO Merger"). In connection with the ITCO Merger, the ITCO Stockholders are receiving, among other things, newly issued shares of Class B Common Stock, $.01 par value, of the Company (the "Class B Stock") in exchange for their shares of ITCO common stock. As a condition to the consummation of the transactions contemplated in the Merger Agreement, the parties have agreed to enter into this Agreement. The Company and each of the ITCO Stockholders are also parties to a Class B Registration Rights Agreement, dated as of the date hereof (the "Class B Registration Rights Agreement"), with respect to the Class B Stock. Capitalized terms used and not otherwise defined in the text of this Agreement shall have the meanings given in Annex A to this Agreement. The parties agree as follows: ARTICLE I TRANSFERS SECTION 1.1. Transfers and Purchases by the ITCO Stockholders. Prior to the earlier of (x) an Initial Public Offering or (y) a Change of Control, without the prior written consent of the Company and without complying with Section 1.5 of this Agreement, no ITCO Stockholder shall Transfer any ITCO Shares to (i) Brown Brothers Harriman and Company, The 1818 Mezzanine Fund L.P., or any of their respective Affiliates or (ii) any Person that is in the good faith judgment of the Company's Board of Directors a supplier to, or competitor of, the Company and its Subsidiaries. Except as set forth in the immediately preceding sentence, the ITCO Stockholders may transfer ITCO Shares (i) pursuant to the exercise of registration rights under the Registration Rights 2 Agreement, (ii) in a sale or other distribution pursuant to Rule 144 or Rule 144A (or any successor provisions) under the Securities Act, (iii) to another ITCO Stockholder or to an Affiliate of an ITCO Stockholder (including any limited partners of Wingate Partners II, L.P.) who agrees in writing to become bound by all of the provisions of this Agreement (a "Permitted Transferee") or (iv) in accordance with Section 1.2, 1.3, 1.4 or 1.5 of this Agreement. From and after the date of this Agreement, the ITCO Stockholders shall not, and shall cause their respective Affiliates not to, purchase, offer to purchase or enter into any negotiations or discussions regarding the purchase of any shares of capital stock or equity securities of the Company or any of its Subsidiaries without the prior written consent of the Company other than in connection with a Transfer to a Permitted Transferee. When used in this Agreement, "Transfer" means any sale, disposition, pledge or other transfer of ITCO Shares, whether directly or indirectly, and including by means of a change of control of the Person holding such ITCO Shares. SECTION 1.2. Tag-Along Right. (a) Applicability. If, at any time, any of the Principal Stockholders, acting alone or in concert with others (including other Principal Stockholders), desires to transfer to any Person (other than to a Principal Stockholder or a Family Member of such Principal Stockholder), directly or indirectly, in one or a series of related transfers, any of the shares of Common Stock then owned by the Principal Stockholders (each such transferring Principal Stockholder is referred to herein as a "Transferor"), such Principal Stockholder shall comply with the requirements of this Section 1.2; provided, that (i) Susan Gaither Jones may sell up to 462,790 shares of Common Stock (as reduced by any shares of Common Stock sold by Ann Heafner Gaither pursuant to clause (ii) below), and (ii) Ann Heafner Gaither may sell up to 350,000 shares of Common Stock (as reduced by any shares of Common Stock sold by Susan Jones pursuant to clause (i) above), without complying with the requirements of this Section 1.2. (b) Tag-Along Offer. Prior to making any transfer, the Transferor shall submit a written notice to the ITCO Stockholders (the "Transferor's Notice") (i) specifying the number of shares of Common Stock proposed to be transferred (the "Subject Shares"), the identity of the proposed transferee (if known) and the amount of consideration proposed to be received and (ii) containing the Tag-Along Offer. The Transferor shall offer (the "Tag-Along Offer") to include in the proposed transfer a number of ITCO Shares designated by the ITCO Stockholders (the "Tag-Along Shares"), provided, that the number of Tag-Along Shares shall not exceed the product of (x) the number of Subject Shares and (y) a fraction, the numerator of which is the number of ITCO Shares held by the ITCO Stockholders and the denominator of which is the number of shares of Common Stock outstanding on a fully diluted basis. The Tag-Along Offer shall be conditioned upon the Transferor consummating a transfer on substantially the terms described in the Transferor's Notice to the transferee named in the Transferor's Notice, and nothing in this Agreement shall be construed as an obligation on the part of the Transferor to consummate any such transfer. 2 3 (c) Acceptance. The rights set forth in this Section 1.2 shall be exercisable by each ITCO Stockholder by delivery of written notice of exercise (an "Acceptance Notice") to the Transferor within ten business days after receipt of the Transferor's Notice indicating such ITCO Stockholder's desire to exercise such rights and specifying the number of Tag-Along Shares such ITCO Stockholder desires to include. If an ITCO Stockholder does not indicate its desire to exercise the rights set forth in this Section 1.2 in an Acceptance Notice or fails to provide an Acceptance Notice in a timely manner, its rights under this Section 1.2 shall be deemed to have been waived with respect to the particular transfer described in the Transferor's Notice. If an ITCO Stockholder fails to submit an Acceptance Notice to the Transferor within such time period, such failure shall be regarded as a rejection of the Tag-Along Offer by such ITCO Stockholder. Any ITCO Stockholder indicating its desire to transfer Tag-Along Shares in a timely Acceptance Notice is referred to herein as a "Participating ITCO Stockholder." (d) Sale of Shares. If a Transferor consummates a transfer of Subject Shares pursuant to a Transferor's Notice, it shall transfer (or cause the transfer of) (i) all of the Tag-Along Shares included in such transfer by Participating ITCO Stockholders pursuant to timely Acceptance Notices and (ii) the Subject Shares identified in the Transferor's Notice (reduced by the amount of such Tag-Along Shares and by the amount of any shares of Common Stock subject to transfer pursuant to the exercise of tag-along rights granted in the Subordinated Financing Documents) to the proposed transferee in accordance with the terms of such transfer set forth in such Transferor's Notice. The price per share and form of consideration for Tag-Along Shares shall be the same as the Transferor's consideration received for Subject Shares and shall be subject, on a several and not joint basis, to the same representations and warranties, covenants, indemnities, holdbacks and escrow provisions, if any, and any similar components of the Tag-Along Offer to which the Transferor is subject; provided, that (i) to the extent the Participating ITCO Stockholders are required to provide indemnities in connection with the transfer of Tag-Along Shares, no Participating ITCO Stockholder shall be required to provide indemnification that would result in an aggregate liability to such Participating ITCO Stockholder in excess of such Participating ITCO Stockholder's proceeds from the sale of Tag-Along Shares pursuant to this Section 1.2 and (ii) such indemnities shall be made by the Participating ITCO Stockholders severally and not jointly. All fees and expenses incurred by the Participating ITCO Stockholders (including, without limitation, with respect to financial advisors, accountants and counsel to the Participating ITCO Stockholders) in connection with a transfer pursuant to this Section 1.2 shall be borne by the Person incurring such fees and expenses, unless the proposed transferee or the Company is paying the Transferor's fees and expenses, in which case such Person shall to the same extent pay the fees and expenses of the Participating ITCO Stockholders. If a transfer pursuant to a Transferor's Notice does not occur on or before the later of 120 days after the date such Transferor's Notice was received by the ITCO Stockholders or five days after the expiration or waiver of any waiting period applicable to such proposed transfer pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the provisions of this Section 1.2 shall apply anew as if no such Transferor's Notice had been given and no Tag-Along Offer made. 3 4 (e) Termination of Tag-Along Right. The provisions of this Section 1.2 shall terminate and be of no further force and effect from and after the date on which less than 10% of the ITCO Shares are owned by ITCO Stockholders. Any securities transferred in accordance with this Section 1.2 shall not thereafter be subject to the provisions of this Section 1.2. SECTION 1.3. Drag-Along Obligation. In the event that any Person or group (as such term is defined in Section 13(d) of the Exchange Act) desires to acquire at least 90% of the capital stock of the Company, whether directly or indirectly, and the Board of Directors of the Company and the holders of at least 66-2/3% of the voting power of the outstanding shares of capital stock of the Company approve of such acquisition, each ITCO Stockholder agrees to sell to such Person or group all of the shares of capital stock of the Company owned by such ITCO Stockholder and to execute and deliver all such documents and instruments and take all such other actions as may be reasonably necessary to effectuate such sale, provided that the ITCO Stockholders receive in connection with such acquisition the same price per share and form of consideration (including any consideration allocated to employment, consulting or non-competition agreements) as all of the other holders of shares of Common Stock (including the Class A Stock) on a pro rata basis (without regard to any control premium or minority discount that may be applied); provided, further, that the provisions of this Section 1.3 shall terminate and be of no further force and effect from and after the consummation of an Initial Public Offering. The parties intend this Section 1.3 to inure to the benefit of, and be enforceable against the ITCO Stockholders by, the Principal Stockholders. SECTION 1.4. Put Right. (a) Exercise. The ITCO Stockholders shall have the right, exercisable by the ITCO Stockholder Majority, upon (i) a Change of Control (unless pursuant to such Change of Control all of the Capital Stock of the Company is being sold and the ITCO Stockholders are to receive in connection therewith (x) cash or (y) registered or publicly tradeable securities listed on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq for their shares of the Common Stock of the Company) or (ii) the date that is eight months after the earlier to occur of (x) May 4, 2004 and (y) the date on which the holders of a majority in interest of the Warrants have exercised their right to require redemption of the Warrants, to request the Company to redeem all of the issued and outstanding ITCO Shares on the terms set forth in this Section 1.4. Notice of a request for redemption pursuant to this Section 1.4 shall be given in accordance with Section 4.6 of this Agreement and the Company shall redeem (unless otherwise prevented by law) the ITCO Shares on a date (the "Redemption Date") no later than the 180th day after receipt by the Company of such notice. (b) Redemption Price. At any time on or after the Redemption Date, each ITCO Stockholder shall be entitled to receive such ITCO Stockholder's pro rata share of the Equity Value upon actual delivery to the Company or its transfer agent of the certificate representing such ITCO Stockholder's ITCO Shares. 4 5 (c) Termination of Put Right. The provisions of this Section 1.4 shall terminate and be of no further force and effect from and after the consummation of an Initial Public Offering. SECTION 1.5. Right of First Offer. (a) Applicability. If (i) an ITCO Stockholder (the "ITCO Transferor") wishes at any time to Transfer ITCO Shares to a third party (other than a Permitted Transferee) and (ii) Section 1.1 is otherwise inapplicable or unenforceable with respect to such proposed Transfer, such ITCO Stockholder shall first offer (the "First Offer") to sell the Offered Shares to the Company. (b) First Offer. Prior to making any Transfer, the ITCO Stockholder shall submit a written notice to the Company (the "First Offer Notice") (i) specifying the number of ITCO Shares the ITCO Stockholder proposes to Transfer (the "Offered Shares") and (ii) containing a copy of the terms and conditions of the First Offer. Upon receipt of a First Offer Notice, the Company shall be entitled to purchase all, but not less than all, of the Offered Shares upon the terms and conditions set forth in the First Offer Notice. The rights set forth in this Section 1.5 shall be exercisable by the Company by delivery of written notice of exercise (an "Exercise Notice") to the ITCO Transferor within 10 days after receipt of the First Offer Notice. If the Company shall fail to respond to the ITCO Transferor within such 10 day period, such failure shall be regarded as a rejection of the First Offer by the Company. (c) Sale of Shares. The closing of any purchase of Offered Shares by the Company under this Section 1.5 shall be held at the principal office of the Company on or before the 30th day following delivery of the Exercise Notice (or such later time as may be necessary to comply with any applicable Requirement of Law) or at such other time and place as the parties to the transaction may agree. At such closing, the ITCO Transferor shall deliver certificates representing the Offered Shares being purchased by the Company, duly endorsed for transfer and accompanied by all requisite stock transfer taxes, and such shares shall be free and clear of any Liens (and the ITCO Transferor shall so represent and warrant), and the ITCO Transferor shall further represent and warrant that it is the record and beneficial owner of all such shares, with full authority and power to transfer such shares. The ITCO Transferor shall not be required to make any other representations or warranties in connection with such transfer. The Company shall deliver at the closing payment in full in cash for such shares. At such closing, all of the parties to the transaction shall execute and/or deliver such additional documents as are otherwise necessary or appropriate to effectuate the transfer of the Offered Shares. (d) Failure to Purchase. Notwithstanding anything to the contrary contained in this Section 1.5, if the Company does not purchase all of the Offered Shares within the period specified in Section 1.5(c), the ITCO Transferor may Transfer to any other Person all, but not less than all, of the Offered Shares (i) for a purchase price that is no lower than 100% of that stated in the First Offer Notice and (ii) upon terms and conditions otherwise no more favorable to such other Person than those stated in the First Offer Notice; 5 6 provided, however, that such transfer is bona fide and made before 90 days from the later of (i) the date of the rejection of the First Offer, if it is rejected, or the failure to consummate the purchase of the Offered Shares, if the First Offer is not rejected and (ii) the date which is 10 days after the expiration or waiver of any applicable waiting period to such proposed transfer pursuant to the Hart-Scott-Rodino Antitrust Improvements Act, as amended. If such sale is not consummated within the period described in the proviso in the preceding sentence, the restrictions provided for in this Section 1.5 shall again become effective, and no transfer of shares otherwise subject to this Section 1.5 may be made thereafter without again offering the same to the Company in accordance with the terms and conditions of this Agreement. (e) Termination of Right of First Offer. The provisions of this Section 1.5 shall terminate and be of no further force and effect upon the earlier to occur of (i) the consummation of an Initial Public Offering or (ii) a Change of Control of the Company. The Company shall be entitled to refuse to waive compliance with this Section 1.5 in its sole discretion. ARTICLE II AFFIRMATIVE COVENANTS SECTION 2.1. Financial Statements. The Company shall deliver to each ITCO Stockholder: (a) as soon as available, but not later than 120 days after the end of each fiscal year of the Company, a full copy of the audit report containing a copy of the consolidated balance sheet of the Company and its Subsidiaries as of the end of such year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year, all in reasonable detail with footnotes and accompanied by a management summary and analysis of the operations of the Company and its Subsidiaries for such fiscal year and by the opinion of Arthur Andersen LLP (or any successor thereto) or another nationally recognized independent public accounting firm which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent, except as otherwise stated therein, with prior years; (b) as soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each year the unaudited consolidated balance sheet of the Company and its Subsidiaries, and the related consolidated statements of income and cash flow for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company; (c) to the extent prepared by the Company, budgets, documentation of material financial transactions, projections, operating reports, acquisition analyses, 6 7 presentations to banks, financial institutions or potential investors, consultants' reports and such other financial and operating data of the Company and its Subsidiaries as any ITCO Stockholder reasonably may request; (d) at any time when it is not subject to Section 13 or 15(d) of the Exchange Act, upon request, to any ITCO Stockholder and prospective Permitted Transferee of ITCO Shares, information of the type that would satisfy the requirement of subsection (d)(4)(i) of Rule 144A (or any similar successor provision) under the Securities Act; and (e) if and when the Company becomes subject to Section 13 or 15(d) of the Exchange Act or files a registration statement under the Securities Act, promptly after the same are filed, copies of all reports, statements and other documents filed with the Securities and Exchange Commission, at which point Section 2.1(a) and (b) shall expire and no longer be binding upon the Company. Any documents or information supplied by the Company pursuant to clauses (a), (b), (c) or (d) above shall be subject to the confidentiality obligations contained in Section 4.1. SECTION 2.2. Certificates; Other Information. The Company shall furnish to each ITCO Stockholder concurrently with the delivery of the financial statements referred to in Section 2.1(a) and (b) above, a certificate of the Company's Chief Financial Officer stating that, to the best of such officer's knowledge, there exists no default under or breach of Articles 2 and 3, except as specified in such certificates. SECTION 2.3. Notices. Upon actual knowledge of the Chief Executive Officer, the President or the Chief Financial Officer of the Company of the events described below, the Company shall give prompt written notice (but in any event within 10 days) to each ITCO Stockholder of any of the following events: (a) the occurrence of any default under, or breach of, any of the provisions of Articles 2 or 3 accompanied by a certificate specifying the nature of such default or breach, the period of existence thereof and the action that the Company has taken or proposes to take with respect thereto; and (b) any (i) material default or event of default under the Senior Indebtedness of the Company or any other material Contractual Obligation of the Company or any of its Subsidiaries, or (ii) material dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority. Each notice pursuant to this Section 2.3 shall be accompanied by a statement by the Chief Executive Officer, President or Chief Financial Officer of the Company setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 7 8 SECTION 2.4. Preservation of Corporation Existence. The Company shall, and shall cause each of its Subsidiaries to, preserve and maintain in full force and effect (i) its corporate existence and good standing under the laws of its jurisdiction of incorporation or organization and (ii) all material rights, privileges, qualifications, licenses and franchises necessary in the normal conduct of its business. SECTION 2.5. Payment of Obligations. The Company shall, and shall cause each of its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including, without limitation (i) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary in respect thereof; (ii) all lawful claims which the Company and/or its Subsidiaries are obligated to pay, which are due and which, if unpaid, might by law become a Lien upon its property, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; and all payments of principal and interest when due (giving effect to any grace periods relating thereto) on Indebtedness. SECTION 2.6. Compliance with Laws. The Company shall comply, and shall cause each of its Subsidiaries to comply, in all material respects with its articles or certificate of incorporation and by-laws or other organizational or governing documents and all Requirements of Law and with the directions of any Governmental Authority having jurisdiction over it or its business, except (i) for such failures to comply as could not reasonably be expected to have a material adverse effect on the assets, business, operations, properties or financial or other condition of the Company and its Subsidiaries, taken as a whole or (ii) to the extent being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary in respect thereof. SECTION 2.7. Inspection. As often as may be reasonably requested by any ITCO Stockholder, the Company will permit, and will cause each of its Subsidiaries to permit, representatives of such ITCO Stockholder to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers and independent public accountants, in each case, at reasonable times during normal business hours and upon reasonable advance notice to the Company. SECTION 2.8. Board Representation. (a) ITCO Stockholder Nominee. The Company and the Principal Stockholders shall promptly after the date hereof cause a person designated by the ITCO Stockholder Majority to be elected to its Board of Directors, which person shall be either a principal of Wingate Partners II, L.P. or any other individual reasonably acceptable to a majority of members of the existing Board of Directors. Such designee shall serve until the annual meeting of stockholders of the Company immediately following the election of 8 9 such person to the Board of Directors. Commencing with the annual meeting of stockholders of the Company immediately following the election of such person to the Board of Directors, and at each annual meeting of stockholders of the Company thereafter, the ITCO Stockholder Majority shall be entitled from time to time to nominate (in addition to any rights granted to holders of Class B Common Stock as set forth in the Company's articles of incorporation and by-laws) one director to the Company's Board of Directors. The Company shall cause such nominee of the ITCO Stockholder Majority to be included in the slate of nominees recommended by the Board to the Company's stockholders for election as directors, and the Company shall use its best efforts to cause the election of such nominee or nominees, including voting all shares for which the Company holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such person. In addition, each Principal Stockholder agrees to vote all shares of Common Stock for which such Principal Stockholder holds proxies or is otherwise entitled to vote in favor of the election of such person. The Company shall pay the reasonable out-of-pocket expenses incurred by such director in connection with attending meetings of the Board of Directors or any committee thereof. (b) Vacancies. In the event any nominee of the ITCO Stockholder Majority shall cease to serve as a director for any reason (other than by reason of the termination of this Section 2.8 in accordance with Section 2.8(h)), the Company shall use its best efforts to cause the vacancy resulting thereby to be filled by a nominee of the ITCO Stockholder Majority reasonably acceptable to a majority of the Board of Directors of the Company. In addition, each Principal Stockholder agrees to vote all shares of Common Stock for which such Principal Stockholder holds proxies or is otherwise entitled to vote in favor of the election of such person. (c) Committee Representation. In the event that the Board of Directors of the Company establishes committees from time to time, the director nominated by the ITCO Stockholder Majority pursuant to this Section 2.8 shall have the right, upon the request of the ITCO Stockholder Majority, to serve on each such committee. (d) Visitation Rights. In addition to the rights granted pursuant to Section 2.8(a), (b) and (c) above, the ITCO Stockholder Majority shall have the right to have a representative attend all regular and special meetings of the Board of Directors of the Company and any committees thereof. The visitation rights set forth above shall include the right to receive the same notice and materials provided to Board and Committee members. (e) Non-Employee Directors. The ITCO Stockholder Majority shall have the right to approve the nomination of any director to the Board of Directors of the Company who is not a full-time employee of the Company, which approval shall not be unreasonably withheld; provided, however, that the ITCO Stockholder Majority shall not have the right to approve the nomination of any director who is nominated by the holders of shares of any series or class of preferred stock of the Company or by The 1818 9 10 Mezzanine Fund, L.P. or who is a Principal Stockholder or a Family Member of a Principal Stockholder. (f) Inconsistency with Organizational Documents. In the event that any provision of the Company's articles of incorporation or bylaws is inconsistent with any provision of this Section 2.8, the Company shall take such action as may be necessary to amend any such provision in the Company's articles of incorporation or bylaws to remedy such inconsistency. (g) Irrevocable Proxy; Conflicting Agreements. Each Principal Stockholder represents that such Principal Stockholder has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Section 2.8 of this Agreement, and no Principal Stockholder shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Section 2.8 of this Agreement. (h) Termination of Rights. The provisions of this Section 2.8 shall terminate and be of no further force and effect from and after the date on which less than 33% of the ITCO Shares are owned by ITCO Stockholders. SECTION 2.9. Listing. In the event that, and so long as, the Common Stock is listed on the NYSE or quoted or listed on any other national securities exchange or Nasdaq, the Company will quote or list and keep quoted or listed on such exchange or Nasdaq, upon official notice of issuance, all Common Stock issuable or deliverable to the ITCO Stockholders. SECTION 2.10. Class B Common Stock. The Company represents and warrants to the ITCO Stockholders that, pursuant to the Company's articles of incorporation, the Class A Common Stock and the Class B Common Stock have identical rights, powers and privileges, except that the shares of Class A Common Stock are entitled to 20 votes per share and the shares of Class B Common Stock are entitled to one vote per share, in each case on all matters submitted to a vote of the Company's Stockholders. In the event of an Initial Public Offering of the shares of Class A Common Stock, pursuant to the Company's articles of incorporation, all of the outstanding shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on a one-for-one basis. SECTION 2.11. Anti-Dilution. After the date of this Agreement and prior to the earlier of an Initial Public Offering and the date the ITCO Stockholders own no ITCO Shares, without the prior written consent of the ITCO Stockholder Majority, the Company shall not at any time or from time to time issue or sell (x) shares of Common Stock or (y) securities convertible into or exchangeable for shares of Common Stock, or any options, warrants or other rights to acquire shares of Common Stock (other than shares of Common Stock issued upon exercise of the options and warrants outstanding on the date of this Agreement) ("Convertible Securities") (1) to any Principal Stockholder or Family Member or Affiliate of any of them or (2) at a price per share that is less than the 10 11 Current Market Price per share of Common Stock then in effect (treating the price per share of Common Stock, in the case of the issuance of any Convertible Security as equal to (x) the sum of the price for such Convertible Security, plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such Convertible Security into Common Stock divided by (y) the number of shares of Common Stock initially underlying such Convertible Security. Additionally, if a majority of the members of the Company's Board of Directors that are not Principal Stockholders, Family Members or employees of the Company formally object, the Company may not issue or sell Common Stock or Convertible Securities at a price per share of Common Stock (treating the price per share of Common Stock, in the case of the issuance of any Convertible Security, as set forth above in this Section 2.11) of less than $10.00 (as adjusted to reflect stock splits (including reverse stock splits) of Common Stock) other than in connection with a bona fide acquisition of a business to the owner(s) thereof. SECTION 2.12. Termination of Covenants. The provisions of Sections 2.1, 2.2, 2.3 and 2.7 shall terminate and be of no further force and effect upon the consummation of an Initial Public Offering. The provisions of Sections 2.1, 2.2 and 2.3 shall terminate and be of no further force or effect on the date on which less than 33% of the ITCO Shares are owned by ITCO Stockholders. ARTICLE III NEGATIVE COVENANTS SECTION 3.1. Articles of Incorporation and By-laws. The Company shall not amend the articles or certificate of incorporation or by-laws of the Company or any of its Subsidiaries in any way that would or could reasonably be expected to have an adverse effect on the interests of the ITCO Stockholders. SECTION 3.2. Transactions with Affiliates. Except as set forth on Schedule 3.2 or as otherwise permitted by this Agreement, the Company shall not, and shall not allow any of its Subsidiaries to, enter into any transaction with any Affiliate of the Company or of any such Subsidiary, except (i) on terms no less favorable to the Company or such Subsidiary than those the Company or such Subsidiary would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary, (ii) transactions between the Company and its Subsidiaries or between Subsidiaries and (iii) following the prior approval of a majority of the members of the Board of Directors of the Company (excluding Principal Stockholders and Family Members). SECTION 3.3. Limitations on Restricted Payments. Except as set forth on Schedule 3.3 or as otherwise permitted under this Agreement, neither the Company nor any of its Subsidiaries will declare or make any Restricted Payment except that the Company may (i) declare and pay dividends on its Series A Preferred Stock and Series B Preferred Stock, or redeem in accordance with the Amended and Restated Articles the 11 12 Series A Preferred Stock and (ii) make supplemental discretionary payments in an amount up to an aggregate of $250,000 in any calendar year to Ann Heafner Gaither, William H. Gaither and Susan Gaither Jones, in each case so long as the making of such Restricted Payment is not prohibited pursuant to the Subordinated Financing Documents. SECTION 3.4. Termination of Covenants. The provisions of this Article III shall terminate and be of no further force and effect upon the earlier to occur of (i) the consummation of an Initial Public Offering or (ii) the date on which less than 33% of the ITCO Shares are owned by ITCO Stockholders. ARTICLE IV MISCELLANEOUS PROVISIONS SECTION 4.1. Confidentiality. Each ITCO Stockholder will (subject to the Company's sole discretion to waive compliance) utilize such ITCO Stockholder's reasonable best efforts to maintain as confidential any confidential or proprietary information obtained from the Company (including, without limitation, pursuant to Section 2.1), other than information which (i) at the time of disclosure or thereafter is generally available to and known by the public (other than as a result of a disclosure directly or indirectly by such ITCO Stockholder or any of its representatives), (ii) is available to the ITCO Stockholder on a non-confidential basis from a source other than the Company or its Subsidiaries, provided, that such source was not known by such ITCO Stockholder to be bound by a confidentiality agreement (or other duty not to disclose) with the Company or any of its Subsidiaries or (iii) has been independently developed by such ITCO Stockholder, and shall not disclose any information obtained from the Company pursuant to Section 2.1 and 2.7 and required to be maintained as confidential pursuant hereto, except (a) to its advisors, representatives, agents, partners (and their representatives and advisors) and employees (provided that such ITCO Stockholder shall be responsible for any breach of this Section 4.1 by any such Person), (b) in the case of a Transfer expressly permitted by Article I of this Agreement, to any prospective transferee of such ITCO Stockholder's ITCO Shares or of an interest in such ITCO Stockholder (provided, that (x) the ITCO Stockholder shall not disclose to any such Person that is a potential transferee the information (other than budgets) referred to in Section 2.1(c) without the prior written consent of the Board of Directors of the Company, such consent not to be unreasonably withheld, and (y) such prospective transferee enters into a confidentiality agreement with respect to any confidential information on substantially the same terms as agreed to by such ITCO Stockholder in this Section 4.1), (c) as may be required by law (including by court order, subpoena or other administrative order or process) or applicable regulations to which such ITCO Stockholder is or becomes subject, (d) in connection with any litigation arising out of or related to this Agreement, (e) to the executive officers of the Company or any of its Subsidiaries, or (f) with the prior written consent of the Company. SECTION 4.2. Successors and Assigns. Except as otherwise expressly provided herein, the provisions of this Agreement shall be binding upon and inure to the 12 13 benefit of the parties hereto and their respective successors and permitted assigns. No party hereto may assign any of its rights or obligations hereunder without the prior written consent of each other party hereto, except that an ITCO Stockholder may assign its rights and obligations to a Permitted Transferee that agrees in writing to be bound by the provisions of this Agreement. Any purported assignment in violation of this Section 4.2 shall be void. SECTION 4.3. Entire Agreement. This Agreement, the Merger Agreement and the Registration Rights Agreement embody the entire agreement and understanding of the parties hereto and supersede all other agreements or understandings, written or oral, with respect to the subject matter hereof. SECTION 4.4. Parties In Interest. Except as otherwise expressly provided herein, this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns, and no term or provision in this agreement is for the benefit of any other Person. SECTION 4.5. Amendment and Waiver. No modification, amendment or waiver of any provision of, or consent required by, this Agreement, nor any consent to any departure from the terms of this Agreement, shall be effective unless it is in writing and signed by the Company and the ITCO Stockholder Majority. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose given. SECTION 4.6. Notices. All notices, demands and other communications provided for or permitted under this Agreement shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery (a) if to any ITCO Stockholder, addressed to it at the address set forth on the signature page to this Agreement, or at such other address as it shall have furnished to the Company in writing in the manner set forth herein; (b) if to any other holder of ITCO Shares, at the address that such holder shall have furnished to the Company in writing in the manner set forth herein, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such ITCO Shares who has furnished an address to the Company; or (c) if to the Company, addressed to it at the address set forth on the signature page to this Agreement, or at such other address as the Company shall have furnished to each holder of ITCO Shares at the time outstanding in the manner set forth herein. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier, if delivered by overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if sent by facsimile. SECTION 4.7. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, 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 13 14 contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. SECTION 4.8. Rules of Interpretation. 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; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; (vii) 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; and (viii) a reference to an agreement or instrument includes any annexes, exhibits or schedules to the specified agreement or instrument. SECTION 4.9. Remedies. The parties to this Agreement acknowledge that damages at law would be an inadequate remedy for the breach of any provision contained in Article I or Sections 4.1 or 4.2 of this Agreement, and agree in the event of such breach or threatened breach that the non-breaching party may (i) obtain temporary and permanent injunctive relief restraining the breaching party from such breach or threatened breach, and, to the extent permissible under the applicable statutes and rules of procedure, that a temporary injunction may be granted immediately upon the commencement of a proceeding commenced under this Section 4.9 and (ii) enforce specifically such provisions in any legal proceeding. Nothing contained in the preceding sentence shall be construed as prohibiting any party from pursuing any other remedies available at law or in equity for such breach or threatened breach of any such provision of this Agreement. SECTION 4.10. LEGAL PROCEEDINGS; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY PROCEDURAL LAW OF SUCH STATE REQUIRING THE APPLICATION OF THE LAWS OF A DIFFERENT JURISDICTION). EACH PARTY TO THIS AGREEMENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE AND OF ANY DELAWARE STATE COURT FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH 14 15 PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 4.11. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same Agreement. 15 16 IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement as of the date first written above. Company: THE J. H. HEAFNER COMPANY, INC. By: /s/ Michael Gaither ----------------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO Stockholders: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ----------------------------------------------- V. Edward Easterling, Jr., Principal ------------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 ------------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 ------------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 17 IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement as of the date first written above. Company: THE J. H. HEAFNER COMPANY, INC. By: ----------------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO Stockholders: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ----------------------------------------------- V. Edward Easterling, Jr., Principal /s/ Armistead Burwell, Jr. ------------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 ------------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 ------------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 18 IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement as of the date first written above. Company: THE J. H. HEAFNER COMPANY, INC. By: ----------------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO Stockholders: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ----------------------------------------------- V. Edward Easterling, Jr., Principal ------------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 /s/ William E. Berry ------------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 ------------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 19 IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered this Agreement as of the date first written above. Company: THE J. H. HEAFNER COMPANY, INC. By: ----------------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO Stockholders: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ----------------------------------------------- V. Edward Easterling, Jr., Principal ------------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 ------------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 /s/ Richard P. Johnson ------------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 20 /s/ Leon R. Ellin ------------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: ---------------------------------------------- James T. Callier Managing Partner Principal Stockholders (solely for purposes of evidencing their acceptance of and agreement with Section 1.2 and Section 2.8): ---------------------------------------- Ann H. Gaither ----------------------------------------- William H. Gaither ----------------------------------------- Susan G. Jones ------------------------------------------ Thomas R. Jones 21 ------------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ---------------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: ---------------------------------------------- James T. Callier Managing Partner Principal Stockholders (solely for purposes of evidencing their acceptance of and agreement with Section 1.2 and Section 2.8): ---------------------------------------- Ann H. Gaither ----------------------------------------- William H. Gaither ----------------------------------------- Susan G. Jones ------------------------------------------ Thomas R. Jones 22 ------------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: /s/ James T. Callier ---------------------------------------------- James T. Callier Managing Partner Principal Stockholders (solely for purposes of evidencing their acceptance of and agreement with Section 1.2 and Section 2.8): ---------------------------------------- Ann H. Gaither ----------------------------------------- William H. Gaither ----------------------------------------- Susan G. Jones ------------------------------------------ Thomas R. Jones 23 Principal Stockholders (solely for purposes of evidencing their acceptance of and agreement with Section 1.2 and Section 2.8): /s/ Ann H. Gaither ---------------------------------------- Ann H. Gaither /s/ William H. Gaither ----------------------------------------- William H. Gaither /s/ Susan G. Jones ----------------------------------------- Susan G. Jones /s/ Thomas R. Jones ------------------------------------------ Thomas R. Jones 24 ANNEX A TO CLASS B STOCKHOLDER AGREEMENT DEFINED TERMS "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York or the City of Atlanta are authorized or required by law or executive order to close. "Business Value" shall mean the product of 6 times the EBITDA of the Company for the Calculation Period. "Calculation Period" shall mean the twelve month period ending on the last day of the most recently completed month preceding the date of notice of a request for redemption pursuant to Section 1.4. "Capital Lease Obligations" shall mean, as to any Person, Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests in a Person not a corporation) whether now outstanding or hereafter issued, including, without limitation, all common stock and preferred stock and any rights, warrants or options to purchase such Person's capital stock. "Change of Control" of the Company shall mean such time as: (i) The Principal Stockholders and Family Members shall collectively cease to beneficially own outstanding shares of capital stock of the Company, entitling such Principal Stockholders and Family Members to exercise more than 50% 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 Commission under the Exchange Act); (ii) A majority of the Board of Directors of the Company shall consist of Persons other than Continuing Directors. The term "Continuing Director" shall mean any member of the Board of Directors of the Company on the date of this Agreement, any member of the Board of Directors elected by holders of preferred stock of the Company, any member of the Board of Directors of the Company designated by The 1818 Mezzanine Fund, L.P. or the ITCO Stockholder Majority to be elected to the Board of Directors and any other member of the Board of Directors who shall be recommended or 25 elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors of the Company; (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 or consolidation, will directly or indirectly own beneficially 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 of 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. "Class A Stock" shall mean the Class A Common Stock, $.01 par value, of the Company. "Class B Stock" shall mean the Class B Common Stock, $.01 par value, of the Company. "Common Stock" shall mean the Class B Stock and the Class A Stock. "Contingent Obligation" shall mean, as to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation (each a "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire any such primary obligation or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor in respect of any such primary obligation or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of such primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Contractual Obligation" shall mean, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. A-2 26 "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 15 days, ending on such date, on which the national securities exchanges were open for trading, and (b) if the Common Stock is not then listed or quoted in the over-counter market, the Market Price on such date. "EBITDA" shall mean, with respect to any Person for any period, the sum of (a) Net Income for such period (excluding therefrom, to the extent included in determining Net Income, any items of extraordinary gain or loss, including net gains or losses on sale of assets other than asset sales in the ordinary course of business), (b) Interest Expense deducted from revenue in determining such Net Income, (c) Federal, state and local income and franchise taxes deducted from revenue in determining such Net Income, (d) depreciation and amortization and all non-cash charges to the extent deducted from revenue in determining such Net Income, (e) the sum of all supplemental discretionary payments made to Ann Heafner Gaither, William H. Gaither and Susan Gaither Jones pursuant to the Subordinated Financing Documents deducted from revenue in determining such Net Income, less (f) interest income and all non-cash items which increase such Net Income. For purposes of calculating (d) and (e) above, all items that would not be considered operating items in the ordinary course of business or would result in changes in long-term asset or liability accounts shall be excluded. All references contained herein to EBITDA of the Company shall be to the EBITDA of the Company and its Subsidiaries, determined on a consolidated basis. "Equity Value" shall mean an amount equal to the product of (x) the percentage of outstanding Common Stock on a fully diluted basis owned by the ITCO Stockholders, in the aggregate, and (y) the Redemption Value. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission hereunder. "Fair Market Value" shall mean the amount which a willing buyer, under no compulsion to buy, would pay a willing seller under no compulsion to sell, in an arm's-length transaction (without consideration of any minority investment discounts). "Family Member" shall mean (x) a member of a Principal Stockholder's immediate family, which shall include her or his ancestors, spouse, siblings, descendants or spouses (or surviving spouses) of descendants, or (y) a trust, corporation, limited liability company, partnership or other entity, all of the beneficial interests in which shall be held by such Principal Stockholder or one or more persons described in clause (x); provided, however, that during the period any such trust, corporation, limited liability company, partnership or other entity holds any right, title or interest in any Common Stock, no Person other than such Principal Stockholder or one or more Family Members of such Principal Stockholder of the type listed in clause (x) may be or become beneficiaries, stockholders or limited or general partners or owners thereof. A-3 27 "Funded Debt" shall mean all Indebtedness for borrowed money of the Company and its Subsidiaries on a consolidated basis that by its terms or by the terms of any instrument or agreement relating thereto matures more than one year from, or is renewable or extendable at the option of the debtor to a date more than one year from, the date of creation thereof (including an option of the debtor under a revolving credit or similar arrangement obligating the lender or lenders to extend credit over a period of one year or more), and includes any current maturities of any such Indebtedness. "GAAP" shall mean generally accepted United States accounting principles in effect from time to time. "Governmental Authority" shall mean the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Initial Public Offering" shall mean the initial public offering of the Common Stock with gross proceeds of at least $25 million or representing at least 20% of the Common Stock on a fully diluted basis and such Common Stock is listed or quoted on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq. "Indebtedness" shall mean, as to any Person, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable and accrued liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps and similar agreements under which payments are obligated to be made, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) all obligations under Capital Lease Obligations, (g) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) any Contingent Obligation. "Interest Expense" shall mean, with respect to any Person for any period, the sum of (a) gross interest expense of such Person for such period in accordance with GAAP consistently applied, including (i) the amortization of debt discounts, (ii) the amortization of all fees payable in connection with the incurrence of Indebtedness to the extent included in interest expense and (iii) the portion of any payments or accruals with respect to Capital Lease Obligations allocable to interest expense, and (b) any other capitalized interest of such Person determined in accordance with GAAP. All references A-4 28 contained herein to the Interest Expense of the Company shall be to the Interest Expense of the Company and its Subsidiaries, determined on a consolidated basis. "Investment" means (i) the acquisition (whether for cash, property, services, securities or otherwise) of Capital Stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition; and (ii) the making of any advance, loan or other extension of credit to, any Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person, but excluding any accounts receivable created in the ordinary course of business). "ITCO Shares" shall mean the shares of Class B Stock issued to the ITCO Stockholders in connection with the ITCO Merger, and shall be deemed for purposes of this Agreement to include any and all shares of capital stock of the Company or any of its successors or assigns (whether by merger, consolidation, sale of assets or otherwise) or securities convertible into or exchangeable for shares of capital stock of the Company, in each case, that may be issued in respect of, in exchange for or in substitution of such ITCO Shares by reason of any stock dividend, split, reverse split, combination or other adjustment, conversion, recapitalization, reclassification, merger, consolidation or otherwise. "ITCO Stockholder Majority" shall mean the holders of a majority of the ITCO Shares (excluding for purposes of this Agreement any ITCO Shares owned by the Company or any of its Affiliates). "ITCO Stockholders" shall have the meaning given in the preamble to this Agreement, and shall be deemed for purposes of this Agreement to include and refer to any Permitted Transferees (as defined in Section 1.1). "Liabilities" of any Person shall mean all items (except for items of capital stock, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. "Lien" as applied to the property of any Person means: (a) any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capital Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, A-5 29 (c) any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, except to the extent being disputed or contested by the Company or its Subsidiaries by appropriate proceedings and in respect of which any reserve required by GAAP has been appropriately established and maintained, (d) the filing of, or any agreement to give, any financing statement under the UCC or its equivalent in any jurisdiction, excluding informational financial statements relating to property leased by the Company or its Subsidiaries, and (e) in the case of any interest in real estate, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances. "Market Price" shall mean, per share of Common Stock, on any date specified herein: (a) if the Common Stock is then listed or admitted to trading on any national securities exchange, the closing price of the Common Stock on such date; (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security, the last sale price of the Common Stock on such date; or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked price of the Common Stock, on such date as shown by Nasdaq and reported by any member firm of the NYSE selected by the Company; or (d) if neither (a), (b) nor (c) is applicable, the Fair Market Value per share determined in good faith by the Board of Directors of the Company which shall be deemed to be Fair Market Value unless holders of at least 33% of the ITCO Shares request that the Company obtain an opinion of a nationally recognized investment banking firm chosen by the Company (who shall bear the expense) and reasonably acceptable to such requesting holders of the ITCO Shares, in which event the Fair Market Value shall be as determined by such investment banking firm. "Nasdaq" shall mean the National Market System of the Nasdaq Stock Market. "Net Income" shall mean, for any period, the net income (loss) of any Person, determined in accordance with GAAP, after deducting all operating expenses, provisions for taxes and reserves and all other proper deductions in accordance with GAAP. All references contained herein to the Net Income of the Company shall be to the Net Income of the Company and its Subsidiaries, determined on a consolidated basis. "NYSE" shall mean the New York Stock Exchange, Inc. "Person" shall mean any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint A-6 30 stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of any such entity. "Principal Stockholders" shall mean Ann Heafner Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones. "Redemption Value" shall mean the Business Value plus the cash and Temporary Cash Investments of the Company and its Subsidiaries as of the last day of the Calculation Period minus the sum of the Funded Debt and Capital Lease Obligations of the Company and its Subsidiaries as of the last day of the Calculation Period. "Requirements of Law" shall mean, as to any Person, any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Payment" shall mean (a) any dividend or other distribution on any share of the Company's or any Subsidiary's capital stock (except dividends payable solely in shares of their capital stock) or (b) any payment by the Company or any of its Subsidiaries on account of the direct or indirect purchase, redemption, retirement or other acquisition of (i) any shares of the Company's or any such Subsidiary's capital stock (except shares acquired upon the conversion or exercise thereof into other shares of their capital stock), (ii) any option, warrant or other right to acquire shares of the Company's or any such Subsidiary's capital stock (except upon the conversion or exercise thereof into shares of capital stock) or (iii) any Indebtedness of the Company or any such Subsidiary (other than Indebtedness of the Company or any Subsidiary existing on the date hereof (including without limitation the Indebtedness described on Schedule 3.3), as amended, modified, supplemented and/or restated from time to time in accordance with its terms, including any replacement agreement therefor and any refinancing of the debt incurred thereunder, prior to any date set forth for mandatory repayment of principal or interest thereon. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. "Subordinated Financing Documents" shall mean the Senior Subordinated Note and Warrant Purchase Agreement, dated as of May 7, 1997, between the Company and The 1818 Mezzanine Fund, L.P., and the notes and agreements entered into in connection therewith, including the warrants to acquire initially 977,590 shares of Class A Stock of the Company at an exercise price of $.01 per share (the "Warrants") issued to The 1818 Mezzanine Fund, L.P., each as amended or modified from time to time in accordance with its terms. "Subsidiary" shall mean, with respect to any Person, a corporation or other entity of which 50% or more of the combined voting power of the then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having A-7 31 the right to vote in the election of directors is owned, directly or indirectly, by such Person. "Temporary Cash Investment" means any Investment in (i) United States Government Obligations, (ii) commercial paper rated at least A or the equivalent thereof by Moody's Investors Services, Inc. or a similar nationally recognized credit rating agency or (iii) time deposits (including certificates of deposit) with any bank or trust company which is organized, licensed or otherwise regulated under the laws of the United States or any state thereof, the long-term debt securities of which are rated at least A or the equivalent thereof by Moody's Investors Service, Inc. or a similar nationally recognized credit rating agency; provided, in each case, that such Investment matures within one (1) year from the date of acquisition thereof by the Company, or any of its Subsidiaries. "United States Government Obligations" means direct non-callable obligations of, or non-callable obligations guaranteed by the United States for the payment of which obligation the full faith and credit of the United States is pledged. A-8 EX-10.11 29 CLASS B REGISTRATION RIGHTS AGMT RE ITCO STOCKHLDS 1 Exhibit 10.11 CLASS B REGISTRATION RIGHTS AGREEMENT, dated as of May 20, 1998 (the "Agreement"), among The J. H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and the former stockholders (the "ITCO Stockholders") of ITCO Logistics Corporation, a Delaware corporation ("ITCO") ---------------------------------------------------------------------- INTRODUCTION Pursuant to an Agreement and Plan of Merger, dated as of March 10, 1998 (the "Merger Agreement"), among Heafner, ITCO Merger Corporation, a Delaware corporation ("Acquisition"), ITCO and each of the ITCO Stockholders, the parties have agreed to merge Acquisition with and into ITCO (the "ITCO Merger"). In connection with the ITCO Merger, the ITCO Stockholders are receiving, among other things, newly issued shares of Class B Common Stock, $.01 par value, of the Company (the "Class B Stock") in exchange for their shares of ITCO common stock. As a condition to the consummation of the transactions contemplated in the Merger Agreement, the parties have agreed to enter into this Agreement. The Company and each of the ITCO Stockholders are also parties to a Class B Stockholder Agreement, dated as of the date hereof (the "Class B Stockholder Agreement"), with respect to the Class B Stock. The parties agree as follows: ARTICLE I REGISTRATION RIGHTS SECTION 1.1. Requested Registration. (a) Exercise of Rights. At any time, or from time to time following an Initial Public Offering, one or more holders (the "Initiating Holders") of 33% or more of the shares of Class B Stock issued to the ITCO Stockholders in connection with the ITCO Merger may, upon written request, require the Company to effect the registration under the Securities Act of any Registrable Securities held by such Initiating Holders. The Company promptly will give written notice of such requested registration to all other holders of Registrable Securities who may join in such registration, and thereupon the Company will use its reasonable best efforts to effect, at the earliest possible date, the registration under the Securities Act, including by means of an "evergreen" shelf registration on Form S-3 (or any successor form) pursuant to Rule 415 under the Securities Act if so requested in such request (but only if the Company is then eligible to use such a shelf registration and if Form S-3 (or such successor form) is then available to the Company), of 2 (i) the Registrable Securities that the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities that the Company has been requested to register by the holders thereof (such holders together with the Initiating Holders hereinafter are referred to as the "Selling Holders") by written request given to the Company within 20 days after the giving of such written notice by the Company, all to the extent requisite to permit the disposition of the Registrable Securities so to be registered. (b) Registration of Other Securities. Whenever the Company shall effect a registration pursuant to this Section 1.1, no securities (other than (i) Registrable Securities, (ii) securities to be offered and sold by the Company for its own account or (iii) securities to be included in such registration pursuant to Section 2.2 of the Registration Rights Agreement dated May 7, 1997 (the "1818 Registration Rights Agreement") between the Company and The 1818 Mezzanine Fund, L.P.) shall be included among the securities covered by such registration unless the Selling Holders of not less than 51% of all Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of such other securities. (c) Registration Statement Form. Registrations under this Section 1.1 shall be on such appropriate registration form of the Commission as shall be reasonably selected by the Company. (d) Effective Registration Statement. A registration requested pursuant to this Section 1.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (x) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (y) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act, in which case the Company shall use its best efforts to keep such registration statement effective until such time as all of the Registrable Securities cease to be Registrable Securities, (ii) if after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and has not thereafter become effective, or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Selling Holders. (e) Selection of Underwriters. The underwriter or underwriters of each underwritten offering of the Registrable Securities so to be registered shall be selected by the Company and shall be reasonably acceptable to the Selling Holders of more than 50% of each class of Registrable Securities to be included in such registration. (f) Priority in Requested Registration. If the managing underwriter of any underwritten offering shall advise the Company in writing (and the Company shall so advise each 2 3 Selling Holder of Registrable Securities requesting registration of such advice) that, in its opinion, the number of securities requested to be included in such registration exceeds the number that can be sold in such offering within a price range acceptable to the Selling Holders of 66 2/3% of the Registrable Securities requested to be included in such registration, the Company, except as provided in the following sentence, will include in such registration, to the extent of the number and type that the Company is so advised can be sold in such offering, prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included in such registration, pro rata among the Selling Holders requesting such registration on the basis of the estimated gross proceeds from the sale thereof. If the total number of Registrable Securities requested to be included in such registration cannot be included as provided in the preceding sentence, holders of Registrable Securities requesting registration thereof pursuant to Section 1.1, representing not less than 33 1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66 2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 15 days after receipt of such notice by the Company and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 1.1 hereof. (g) Limitations on Registration on Request. Notwithstanding anything in this Section 1.1 to the contrary, in no event will the Company be required to (i) effect, in the aggregate, more than two registrations pursuant to this Section 1.1 or (ii) effect more than one registration pursuant to this Section 1.1 within the twelve-month period occurring immediately subsequent to the effectiveness (within the meaning of Section 1.1(d)) of a registration statement filed pursuant to this Section 1.1. (h) Listing. The Company shall list the Registrable Securities subject to Section 1.1(a) on the National Market System of the Nasdaq Stock Market or another of the national securities exchanges or automated quotation systems. (i) Expenses. The Company will pay all Registration Expenses (except for any underwriting commissions or discounts) in connection with any registration requested pursuant to this Section 1.1. SECTION 1.2. Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time, other than in connection with an Initial Public Offering, proposes to register any shares of Common Stock or any securities convertible into Common Stock under the Securities Act by registration on any form other than Forms S-4 or S-8, whether or not for sale for its own account, it will each such time give prompt written notice to all registered holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 1.2. Upon the written request of any such holder (a "Requesting Holder") made as promptly as practicable and in any event within 20 days after the receipt of any such notice given by the Company, the Company will use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Requesting Holders thereof; provided, however, that prior to the effective date of the registration statement filed in connection with such 3 4 registration, immediately upon notification to the Company from the managing underwriter of the price at which such securities are to be sold, if such price is below the price that any Requesting Holder shall have indicated to be acceptable to such Requesting Holder, the Company shall so advise such Requesting Holder of such price, and such Requesting Holder shall then have the right to withdraw its request to have its Registrable Securities included in such registration statement; provided further, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, in its sole discretion, give written notice of such determination to each Requesting Holder of Registrable Securities and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to cause such registration to be effected as a registration under Section 1.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities; provided further, that the rights of the Requesting Holders under this Section 1.2 are subject to Section 2.1(b) of the 1818 Registration Rights Agreement. No registration effected under this Section 1.2 shall relieve the Company of its obligation to effect any registration upon request under Section 1.1. (b) Priority in Incidental Registrations. If the managing underwriter of any underwritten offering shall inform the Company in writing of its opinion that the number or type of Registrable Securities requested pursuant to Section 1.2(a) to be included in such registration would materially adversely effect such offering, and the Company has so advised the Requesting Holders in writing, then the Company will include in such registration, to the extent of the number and type that the Company is so advised can be sold in (or during the time of) such offering, first, all securities proposed by the Company to be sold for its own account, second, if such offering has been requested by a Person pursuant to any registration rights agreement between the Company and such Person and by the terms of such registration rights agreement the securities subject to such registration rights agreement must be included in such registration prior to those held by the Requesting Holders, the securities requested to be included in such offering by such Person, third, if a Person has requested that the Company include securities of such Person in such offering and by the terms of any registration rights agreement in effect as of the date hereof between the Company and such Person the securities subject to such registration rights agreement must be included in such offering prior to those held by the Requesting Holders, the securities requested to be included in such offering by such Person, fourth, Registrable Securities requested to be included in such registration pursuant to this Agreement and fifth, all other securities proposed to be registered. (c) Expenses. The Company will pay all Registration Expenses (except for any underwriting commissions or discounts) in connection with any registration effected pursuant to this Section 1.2. 4 5 SECTION 1.3. Registration Procedures. If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 1.1 and 1.2, the Company will, as expeditiously as possible: (i) prepare and (within 90 days after the end of the period within which requests for registration may be given to the Company or in any event as soon thereafter as practicable) file with the Commission the requisite registration statement to effect such registration and thereafter use its reasonable best efforts to cause such registration statement to become effective; provided, however, that the Company may discontinue any registration of its securities that are not Registrable Securities (and, under the circumstances specified in Section 1.2(a), its securities that are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (a) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (b) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act if the Company is eligible to file a registration statement on Form S-3, in which case the Company shall use its reasonable best efforts to keep the registration statement effective and updated, from the date such registration statement is declared effective until such time as all of the Registrable Securities cease to be Registrable Securities; (iii) furnish to each seller of Registrable Securities covered by such registration statement, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (iv) use its reasonable best efforts (x) to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the sellers of Registrable Securities covered by such registration statement shall reasonably request, (y) to keep such registration or qualification in effect for so long as such registration statement remains in effect and (z) to take any other action that may be reasonably necessary or advisable to enable such sellers to consummate the disposition in such jurisdictions of the securities to be sold by such sellers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this 5 6 subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of Registrable Securities to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) in the case of an underwritten or "best efforts" offering, furnish, if reasonably available, at the effective date of such registration statement to each seller of Registrable Securities, and each such seller's underwriters, if any, a signed counterpart of (x) an opinion of counsel for the Company, dated the effective date of such registration statement and, if applicable, the date of the closing under the underwriting agreement, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' comfort letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as the underwriters may reasonably request; (vii) cause representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any underwriter of an underwritten or "best efforts" offering of any Registrable Securities; (viii) notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (ix) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall 6 7 satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of Registrable Securities a copy of any amendment or supplement to such registration statement or prospectus; (x) provide and cause to be maintained a transfer agent and registrar (which, in each case, may be the Company) for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration; and (xi) use its reasonable best efforts to list all Registrable Securities covered by such registration statement on the National Market System of the Nasdaq Stock Market or any national securities exchange on which Registrable Securities of the same class covered by such registration statement are then listed and, if no such Registrable Securities are so listed, on the National Market System of the Nasdaq Stock Market or any national securities exchange on which the Common Stock is then listed. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company in a reasonably prompt manner such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subdivision (viii) of this Section 1.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of this Section 1.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. SECTION 1.4. Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Section 1.1, the Company will use its reasonable best efforts to enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnities to the effect and to the extent provided in Section 1.7. The holders of the Registrable Securities proposed to be sold by such underwriters will reasonably cooperate with the Company in the negotiation of the underwriting agreement. Such holders of Registrable Securities to be sold by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such 7 8 underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. No holder of Registrable Securities shall be required to make any representations or warranties to, or agreements with, the Company other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution or any other representations required by applicable law. (b) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 1.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Requesting Holder of Registrable Securities, use its reasonable best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such Requesting Holder among the securities of the Company to be distributed by such underwriters, subject to the provisions of Section 1.2(b). The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such Requesting Holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such Requesting Holder, such Requesting Holder's Registrable Securities and such Requesting Holder's intended method of distribution or any other representations required by applicable law. (c) Underwriting Discounts and Commission. The holders of Registrable Securities sold in any offering pursuant to Section 1.4(a) or Section 1.4(b) shall pay all underwriting discounts and commissions of the underwriter or underwriters with respect to the Registrable Securities sold thereby. SECTION 1.5. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such reasonable access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. SECTION 1.6. Limitations, Conditions and Qualifications to Obligations under Registration Covenants. The Company shall be entitled to postpone for a reasonable period of time (but not exceeding 90 days) the filing of any registration statement otherwise required to be 8 9 prepared and filed by it pursuant to Section 1.1 if the Company determines, in its good faith judgment, that such registration and offering would interfere with any material financing, acquisition, corporate reorganization or other material transaction involving the Company or any of its affiliates and promptly gives the holders of Registrable Securities requesting registration thereof pursuant to Section 1.1 written notice of such determination, containing a general statement of the reasons for such postponement and an approximation of the anticipated delay. If the Company shall so postpone the filing of a registration statement, holders of Registrable Securities requesting registration thereof pursuant to Section 1.1, representing not less than 33 1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66 2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 30 days after receipt of the notice of postponement and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 1.1 hereof. The delay right in favor of the Company contemplated by this Section 1.6 may be exercised no more frequently than once during any calendar year. SECTION 1.7. Indemnification. (a) Indemnification by the Company. The Company will, and hereby does, indemnify and hold harmless, in the case of any registration statement filed pursuant to Section 1.1 or 1.2, each seller of any Registrable Securities covered by such registration statement and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, and their respective directors, officers, partners, members, agents and affiliates against any losses, claims, damages, expenses or liabilities, joint or several, to which such seller or underwriter or any such director, officer, partner, member, agent, affiliate or controlling person may become subject under the Securities Act or otherwise, including, without limitation, the reasonable fees and expenses of legal counsel (including those incurred in connection with any claim for indemnity hereunder), insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such seller or underwriter and each such director, officer, partner, member, agent, affiliate and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such seller or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof; and provided further, that the Company shall 9 10 not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, partner, member, agent or controlling person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. As a condition to including any Registrable Securities in any registration statement, the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 1.7(a)) the Company, and each director of the Company, each officer of the Company and each other Person, if any, who participates as an underwriter in the offering or sale of such securities and each other Person who controls the Company or any such underwriter within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of such indemnifying party under this Section 1.7(b) shall be limited to the amount of the net proceeds received by such indemnifying party in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 1.7(a) or (b), such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 1.7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have 10 11 the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Section 1.7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. (d) Contribution. If the indemnification provided for in this Section 1.7 shall for any reason be held by a court to be unavailable to an indemnified party under Section 1.7(a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 1.7(a) or (b), the indemnified party and the indemnifying party under Section 1.7(a) or (b) shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same, including those incurred in connection with any claim for indemnity hereunder), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement; provided, however, that for purposes of this clause (ii), the relative benefits received by the prospective sellers shall be deemed not to exceed the amount of proceeds received by such prospective sellers. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this Section 1.7(d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 1.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. 11 12 (f) Indemnification Payments. The indemnification and contribution required by this Section 1.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. SECTION 1.8. Transfer of Registration Rights. The rights of the ITCO Stockholders set forth in this Agreement may be assigned only in connection with a transfer or assignment of Registrable Securities by a holder thereof; provided that such transfer of Registrable Securities (i) may otherwise be effected in accordance with applicable securities laws and (ii) is effected in compliance with the restrictions on transfer applicable to such Registrable Securities, if any, contained in the Company's certificate of incorporation or bylaws or any agreement between the Company and any of its stockholders; provided, further, that any such assignment is subject to the provisions herein respecting the minimum numbers or percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. No transfer or assignment will divest a holder of Registrable Securities or any subsequent owner of such rights and powers unless all Registrable Securities are transferred or assigned. This Section 1.8 is not intended to modify or waive any restrictions on transfer of the Registrable Securities that may exist under the Company's certificate of incorporation or bylaws or any agreement between the Company and any of its stockholders. ARTICLE II DEFINITIONS As used in this Agreement, unless the context otherwise requires, the following terms have the following respective meanings: "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean and include the Class A Common Stock, par value $.01, of the Company, the Class B Stock and each other class of capital stock of the Company that does not have a preference over any other class of capital stock of the Company as to dividends or upon liquidation, dissolution or winding up of the Company and, in each case, shall include any other class of capital stock of the Company into which such stock is reclassified or reconstituted. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. "Initial Public Offering" means the initial public offering of the Common Stock and such Common Stock is listed on the New York Stock Exchange, Inc. or quoted or listed on the National Market System of the Nasdaq Stock Market. 12 13 "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Registrable Securities" means any shares of Class B Stock issued to the ITCO Stockholders in connection with the ITCO Merger and any Related Registrable Securities and any shares of Common Stock owned by an ITCO Stockholder. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been sold as permitted by Rule 144 (or any successor provision) under the Securities Act and the purchaser thereof does not receive "restricted securities" as defined in Rule 144, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not, in the opinion of counsel for the holders, require registration of them under the Securities Act or (d) they shall have ceased to be outstanding. All references to percentages of Registrable Securities shall be calculated pursuant to Section 3.6. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with Article I, including, without limitation, all registration and filing fees, all fees of the New York Stock Exchange, Inc., other national securities exchanges or the National Association of Securities Dealers, Inc., all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and compliance, any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions with respect to the Registrable Securities) and the reasonable fees and expenses of one counsel to the Selling Holders (selected by Selling Holders representing at least 50% of the Registrable Securities covered by such registration). Notwithstanding the foregoing, in the event the Company shall determine, in accordance with Section 1.2(a) or Section 1.6, not to register any securities with respect to which it had given written notice of its intention to so register to holders of Registrable Securities, all of the costs of the type (and subject to any limitation to the extent) set forth in this definition and incurred by Requesting Holders in connection with such registration on or prior to the date the Company notifies the Requesting Holders of such determination shall be deemed Registration Expenses. "Related Registrable Securities" means with respect to shares of Class B Stock, any securities of the Company issued or issuable with respect to such shares of Class B Stock by way of a dividend or stock split, or in exchange for or in replacement of the Class B Stock, or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. 13 14 "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act of 1933, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. ARTICLE III MISCELLANEOUS PROVISIONS SECTION 3.1. Rule 144 and Rule 144A. Following an Initial Public Offering, the Company shall take all actions reasonably necessary to enable holders of Registrable Securities to sell such securities without registration under the Securities Act within the limitation of the provisions of (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, (b) Rule 144A under the Securities Act, as such Rule may be amended from time to time, or (c) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. SECTION 3.2. Amendments and Waivers. This Agreement may be amended with the consent of the Company and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of at least 50% of the Registrable Securities affected by such amendment, action or omission to act. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 3.2, whether or not such Registrable Securities shall have been marked to indicate such consent. SECTION 3.3. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. SECTION 3.4. Notices. All notices, demands and other communications provided for or permitted under this Agreement shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery (a) if to any ITCO Stockholder, addressed to it in the manner set forth in the Merger Agreement, or at such other address as it shall have furnished to the Company in writing in the manner set forth herein; (b) if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing in the manner set forth herein, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or (c) if to the 14 15 Company, addressed to it in the manner set forth in the Merger Agreement, or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding in the manner set forth herein. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier, if delivered by overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if sent by facsimile. SECTION 3.5. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and, with respect to the Company, its respective successors and permitted assigns and, with respect to any holder of any Registrable Securities, subject to the provisions respecting the minimum numbers of percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. Except by operation of law, this Agreement may not be assigned by the Company without the prior written consent of the holders of a majority in interest of the Registrable Securities outstanding at the time such consent is requested. SECTION 3.6. Calculation of Percentage Interests in Registrable Securities. For purposes of this Agreement, all references to a percentage of the Registrable Securities shall be calculated based upon the number of shares of Registrable Securities outstanding at the time such calculation is made. SECTION 3.7. No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement. Without limiting the generality of the foregoing, the Company will not hereafter enter into any agreement with respect to its securities that grants, or modify any existing agreement with respect to its securities to grant, to the holder of its securities in connection with an incidental registration of such securities higher priority to the rights granted to the ITCO Stockholders under Section 1.2(b). SECTION 3.8. Remedies. Each holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. SECTION 3.9. Certain Distributions. The Company shall not at any time make a distribution on or with respect to the Class B Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the resulting or surviving corporation and such Registrable Securities are not changed or exchanged) of securities of another issuer if holders of Registrable Securities are entitled to receive such securities in such distribution as holders of Registrable Securities and any of the securities so distributed are registered under the Securities Act, unless the securities to be distributed to the holders of Registrable Securities are also registered under the Securities Act. 15 16 SECTION 3.10. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, 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 contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Purchaser shall be enforceable to the fullest extent permitted by law. SECTION 3.11. Entire Agreement. This Agreement, together with the Class B Stockholder Agreement and the Merger Agreement (in each case, including the exhibits and schedules thereto), is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement, the Class B Stockholder Agreement and the Merger Agreement (in each case, including the exhibits and schedules thereto) supersede all prior agreements and understandings between the parties with respect to such subject matter. SECTION 3.12. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 3.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. SECTION 3.14. Counterparts. This Agreement may be executed in multiple counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same instrument. 16 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Michael Gaither -------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO STOCKHOLDERS: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr., -------------------------------------- V. Edward Easterling, Jr., Principal ------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 ------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: -------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO STOCKHOLDERS: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: -------------------------------------- V. Edward Easterling, Jr., Principal /s/ Armistead Burwell, Jr. ------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 ------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: -------------------------------------- Name: Michael Gaither Title: Senior Vice President and General Counsel ITCO STOCKHOLDERS: WINGATE PARTNERS II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: -------------------------------------- V. Edward Easterling, Jr., Principal ------------------------------------------ Armistead Burwell, Jr. 3214 Rutherford Drive Raleigh, NC 27609 /s/ William E. Berry ------------------------------------------ William E. Berry 1213 Waverly Road Wilson NC 27896 20 /s/ Richard P. Johnson ------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 ------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: -------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: -------------------------------------- James T. Callier Managing Partner 21 ------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 /s/ Leon R. Ellin ------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: -------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: -------------------------------------- James T. Callier Managing Partner 22 ------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 ------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. -------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: -------------------------------------- James T. Callier Managing Partner 23 ------------------------------------------ Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 ------------------------------------------ Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 WINGATE AFFILIATES II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: -------------------------------------- V. Edward Easterling, Jr., Principal CALLIER INVESTMENT COMPANY c/o Wingate 750 North St. Paul, Suite 1200 Dallas, Texas 75201 By: /s/ James T. Callier -------------------------------------- James T. Callier Managing Partner EX-10.12 30 ESCROW AGREEMENT DATED MAY 20, 1998 1 Exhibit 10.12 ESCROW AGREEMENT (the "Agreement"), dated as of May 20, 1998, among The J. H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), the stockholders (the "Company Stockholders") of ITCO Logistics Corporation, a Delaware corporation (the "Company"), and The Chase Manhattan Bank, a New York State chartered bank, as escrow agent (the "Escrow Agent"). ---------------------------------------------------------- INTRODUCTION The Agreement and Plan of Merger, dated as of March 10, 1998 (the "Merger Agreement") among Heafner, ITCO Merger Corporation, the Company and the Company Stockholders requires as a condition to the consummation of the transactions contemplated thereby that Heafner, the Company Stockholders and the Escrow Agent enter into this Agreement and that the Company Stockholders deliver the Escrow (as defined below) to the Escrow Agent in order to provide a fund for indemnity payments that the Company Stockholders may become obligated to make to Heafner as provided in Article V of the Merger Agreement. Capitalized terms used and not otherwise defined herein have the meaning set forth in the Merger Agreement. Heafner, the Company Stockholders and the Escrow Agent agree as follows: 1. Appointment of the Escrow Agent; Delivery of Escrow. Each of Heafner and the Company Stockholders constitutes and appoints the Escrow Agent as, and the Escrow Agent agrees to assume and perform the duties of, the escrow agent under and pursuant to this Agreement. The Escrow Agent acknowledges receipt from each Company Stockholder of (i) the stock certificates set forth opposite such Company Stockholder's name on the signature pages to this Agreement (the "Stock Certificates") representing an aggregate number of 1,400,667 shares (the "Shares") of Class B Common Stock, par value $.01 per share, of Heafner (the "Class B Common Stock"), and (ii) stock powers corresponding to the Stock Certificates duly executed in blank by the Company Stockholders (together with the Stock Certificates and any dividends or distributions in stock or other securities on the Shares, the "Escrow"). 2. Acceptance and Undertaking of the Escrow Agent. The Escrow Agent hereby acknowledges receipt of the documents and instruments comprising the Escrow and covenants and agrees to hold all of the same in escrow, and subsequently to release and distribute, or return, as the case may be, the Escrow or any part thereof, only pursuant to and in strict accordance with all of the terms and conditions of this Agreement. 3. Taxes. All taxes in respect of the Escrow shall be the obligation of and shall be paid when due by the Company Stockholders, which shall indemnify and hold Heafner 2 and the Escrow Agent harmless from and against all such taxes. The Escrow Agent shall have no responsibility for any tax reporting, and, subject to this Agreement, any income on the Escrow shall be paid directly to the Company Stockholders. 4. Claims Against the Escrow. (a) Concurrently with the delivery of a notice to the Representative (as defined in Section 14) of a claim for indemnification pursuant to Article V of the Merger Agreement (a "Claim Notice"), or within a reasonable period thereafter, Heafner will deliver to the Escrow Agent a certificate in substantially the form of Annex I (a "Certificate of Instruction"). No Certificate of Instruction may be delivered without the prior or simultaneous delivery of a Claim Notice. No Certificate of Instruction may be delivered by Heafner after the close of business on the business day immediately preceding the Termination Date (as defined in Section 5). The Escrow Agent shall give written notice to the Company Stockholders and the Representative of its receipt of a Certificate of Instruction not later than the second business day next following receipt thereof, together with a copy of such Certificate of Instruction. (b) If the Escrow Agent (i) shall not, within 45 calendar days following its receipt of a Certificate of Instruction (the "Objection Period"), have received from the Representative a certificate in substantially the form of Annex II (an "Objection Certificate") disputing the Company Stockholders' obligation to pay the Owed Amount (as defined and referred to in such Certificate of Instruction), or (ii) shall have received such an Objection Certificate within the Objection Period and shall thereafter have received either (x) a certificate from Heafner and the Representative substantially in the form of Annex III (a "Resolution Certificate") stating that Heafner and the Representative have agreed that the Owed Amount referred to in such Certificate of Instruction (or a specified portion thereof) is payable to Heafner or (y) a copy of a final, nonappealable order of a court of competent jurisdiction or arbitration panel, each as contemplated by Section 6.12 of the Merger Agreement (accompanied by a certificate of Heafner substantially in the form of Annex IV (an "Arbitration Certificate")), stating that the Owed Amount referred to in such Certificate of Instruction (or a specified portion thereof) is payable to one or more of the Indemnified Parties by the Company Stockholders, then the Escrow Agent shall (1) in the case of (b)(i) or (b)(ii)(x), on the second business day next following the first to occur of (A) the expiration of the Objection Period or (B) the Escrow Agent's receipt of a Resolution Certificate or (2) in the case of (b)(ii)(y), on the fifth business day next following the day on which written notice of the Escrow Agent's receipt of an Arbitration Certificate is given by the Escrow Agent to the Representative, deliver to Heafner a number of shares having an aggregate value equal to the Owed Amount (or such specified portion) (based on a valuation, solely for these purposes, of $12.49 per share, appropriately adjusted to reflect stock splits and reverse stock splits). (c) Subject to Section 4(b) above, deliveries to Heafner shall be made upon its written instruction to the Escrow Agent, specifying the number of shares to be delivered. In the event that the number of Shares being delivered pursuant to paragraph (b) above is less than all of the Shares in the Escrow, then Heafner shall deliver or cause to be delivered to the Escrow Agent, in exchange for the original Stock Certificates (or Replacement Stock Certificates, as the 2 3 case may be), a new certificate (or new certificates) in the names of the Company Stockholders representing shares not being delivered pursuant to paragraph (b) (together with any stock certificates delivered pursuant to Section 5(a) below, the "Replacement Stock Certificates") and, if requested by the Escrow Agent, the Company Stockholders shall deliver additional stock powers executed by the Company Stockholders in blank. The Escrow shall thereafter consist of the Replacement Stock Certificates and corresponding stock powers. The Escrow Agent shall have no obligation to verify the calculations made to determine the number of shares to be delivered or the allocations made. (d) The Escrow Agent shall give written notice to Heafner of its receipt of an Objection Certificate not later than the second business day next following receipt thereof, together with a copy of such Objection Certificate. The Escrow Agent shall give written notice to the Representative of its receipt of an Arbitration Certificate not later than the second business day next following receipt thereof, together with a copy of such Arbitration Certificate. (e) Upon delivery by the Escrow Agent of the shares representing the Owed Amount referred to in a Certificate of Instruction, such Certificate of Instruction shall be deemed canceled. Upon the receipt by the Escrow Agent of a Resolution Certificate or an Arbitration Certificate and the payment by the Escrow Agent of the Owed Amount referred to therein, the related Certificate of Instruction shall be deemed canceled. (f) Upon Heafner's determination that it has no claim or has released its claim with respect to an Owed Amount referred to in a Certificate of Instruction (or a specified portion thereof), Heafner will deliver to the Escrow Agent prior to the expiration of the applicable Objection Period a certificate substantially in the form of Annex V (a "Heafner Cancellation Certificate") canceling such Certificate of Instruction (or such specified portion thereof, as the case may be), and such Certificate of Instruction (or portion thereof) shall thereupon be deemed canceled. The Escrow Agent shall give written notice to the Representative of its receipt of a Heafner Cancellation Certificate not later than the second business day next following receipt thereof, together with a copy of such Heafner Cancellation Certificate. (g) Upon receipt of a final, nonappealable order of a court of competent jurisdiction to the effect that none of the Owed Amount referred to in a Certificate of Instruction as to which the Representative delivered an Objection Certificate within the Objection Period is payable to Heafner by the Company Stockholders, the Representative may, provided no Resolution Certificate or Arbitration Certificate shall have previously been received by the Escrow Agent, deliver a copy of such order (accompanied by a certificate of the Representative substantially in the form of Annex VI (a "Company Stockholder Cancellation Certificate")) canceling such Certificate of Instruction, and such Certificate of Instruction shall thereupon be deemed canceled. The Escrow Agent shall give written notice to Heafner of its receipt of a Company Stockholder Cancellation Certificate not later than the second business day next following receipt thereof, together with a copy of such Company Stockholder Cancellation Certificate. 3 4 (h) The Escrow Agent shall have no obligation to verify that the order attached to an Arbitration Certificate or Company Stockholder Cancellation Certificate constitutes a final, nonappealable order of a court of competent jurisdiction, and shall be entitled to rely upon Heafner's or the Representative's statement to that effect. (i) In no event shall the aggregate amount of claims paid out from this Escrow to Heafner pursuant to this Agreement exceed the amount of property constituting the Escrow. 5. Release of Shares and Termination. (a) On May 20, 1999 (the "Release Date"), the Escrow Agent shall deliver to the Representative a number of Shares (the "Released Shares") (as then constituted after any necessary exchanges of share certificates have been made in accordance with Sections 4(b) and (c) and Section 5(a) hereof) at a location designated by the Representative such that the aggregate value of the remaining Shares constituting the Escrow is $8,750,000 plus an amount equal to the total of Owed Amounts subject to any Objection Certificates that have not been canceled in accordance with paragraph (e), (f) or (g) of Section 4 (based in each case on a valuation, solely for these purposes, of $12.49 per share, appropriately adjusted to reflect stock splits and reverse stock splits). The Representative shall cause to be delivered to the Escrow Agent, as necessary, in exchange for the original Stock Certificates (or Replacement Stock Certificates, as the case may be), a Replacement Stock Certificate or Replacement Stock Certificates in the names of the Company Stockholders representing shares not being delivered pursuant hereto and, if requested by the Escrow Agent, the Company Stockholders shall deliver additional stock powers executed by the Company Stockholders in blank. The Escrow shall thereafter consist of the Replacement Stock Certificates and corresponding stock powers. The Escrow Agent shall have no obligation to verify the calculations made to determine the number of shares to be delivered or the allocations made. At such time on or following the Release Date as all Certificates of Instruction received by the Escrow Agent have been canceled in accordance with paragraph (e), (f) or (g) of Section 4 and no further Certificates of Instruction have been received by the Escrow Agent, the Escrow Agent shall promptly notify the Representative and, upon the written instruction of the Representative, shall deliver the Released Shares to the Representative at a location designated by the Representative. (b) On May 20, 2000 (the "Termination Date"), the Escrow Agent shall deliver to the Representative the Escrow (as then constituted after any necessary exchanges of share certificates have been made in accordance with Sections 4(b) and (c) and Section 5(a) hereof) at a location designated by the Representative, less that number of Shares which represents (based upon a valuation of $12.49 per share, appropriately adjusted to reflect stock splits and reverse stock splits) an amount equal to the total of Owed Amounts subject to any Certificate(s) of Instruction that have not been canceled in accordance with paragraph (e), (f) or (g) of Section 4. At such time on or following the Termination Date as all Certificates of Instruction received by the Escrow Agent on or prior to the Termination Date have been canceled in accordance with paragraph (e), (f) or (g) of Section 4, the Escrow Agent shall promptly deliver to the Representative at a location designated by the Representative, the remaining Escrow (as it 4 5 shall then be constituted after any necessary exchanges of share certificates have been made in accordance with Sections 4(b) and (c) hereof) and this Agreement (other than Sections 6, 7 and 8) shall automatically terminate. The Escrow Agent shall be entitled to require payment of amounts owed to it under Section 8 before distributing the Escrow in accordance with this Section 5. 6. Duties and Obligations of the Escrow Agent. The duties and obligations of the Escrow Agent shall be limited to and determined solely by the provisions of this Agreement and the certificates delivered in accordance with this Agreement, and the Escrow Agent is not charged with knowledge of or any duties or responsibilities in respect of any other agreement or document. In furtherance and not in limitation of the foregoing: (i) the Escrow Agent shall be fully protected in relying in good faith upon any written certification, notice, direction, request, waiver, consent, receipt or other document that the Escrow Agent reasonably believes to be genuine and duly authorized, executed and delivered; (ii) the Escrow Agent shall not be liable for any error of judgment, or for any act done or omitted by it, or for any mistake in fact or law, or for anything that it may do or refrain from doing in connection with this Agreement; provided, however, that notwithstanding any other provision in this Agreement, the Escrow Agent shall be liable for its willful misconduct or gross negligence; (iii) the Escrow Agent may seek the advice of legal counsel selected with reasonable care in the event of any dispute or question as to the construction of any of the provisions of this Agreement or its duties under this Agreement, which counsel shall not be attorneys of any of the Representative, the Company Stockholders, Heafner or their respective Affiliates, and it shall incur no liability and shall be fully protected in respect of any action taken, omitted or suffered by it in good faith in accordance with the opinion of such counsel; (iv) in the event that the Escrow Agent shall in any instance, after seeking the advice of legal counsel pursuant to the immediately preceding clause, in good faith be uncertain as to its duties or rights under this Agreement, it shall be entitled to refrain from taking any action in that instance and its sole obligation, in addition to those of its duties under this Agreement as to which there is no such uncertainty, shall be to keep safely all property held in the Escrow until it shall be directed otherwise in writing by each of the parties to this Agreement or by a final, nonappealable order of a court of competent jurisdiction; provided that in the event that the Escrow Agent has not received such written direction or court order within 180 calendar days after requesting the same, it may interplead Heafner, the Representative and the Company Stockholders in any court of competent jurisdiction and request that such court determine its rights and duties under this Agreement unless the parties to this Agreement otherwise agree; (v) the Escrow Agent may execute any of its powers or responsibilities under this Agreement and exercise any rights under this Agreement either directly or by or 5 6 through agents or attorneys selected with reasonable care, which shall not be agents or the attorneys of any of Heafner, the Representative, the Company Stockholders or their respective Affiliates. Nothing in this Agreement shall be deemed to impose upon the Escrow Agent any duty to qualify to do business or to act as fiduciary or otherwise in any jurisdiction other than the State of New York and the Escrow Agent shall not be responsible for and shall not be under a duty to examine into or pass upon the validity, binding effect, execution or sufficiency of any certificates or Shares in the Escrow, this Agreement, the Merger Agreement or of any amendment or supplement to this Agreement. The Escrow Agent shall not be liable for any other party's failure to comply with its covenants relating to the transactions contemplated by the Merger Agreement, including without limitation under applicable securities laws; (vi) other than the obligations as specifically set forth herein, the Escrow Agent shall not be obligated to preserve or protect any rights with respect to the property comprising the Escrow or to receive or give any notice with respect thereto, all of which shall remain the sole responsibility of the Representative; and (vii) Anything in this Agreement to the contrary notwithstanding, in no event shall the Escrow Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. 7. Cooperation. The Representative, the Company Stockholders and Heafner shall provide to the Escrow Agent all instruments and documents within their respective powers to provide that are necessary for the Escrow Agent to perform its duties and responsibilities under this Agreement. Each of the Representative, the Company Stockholders and Heafner have provided the Escrow Agent with a certificate setting forth the names of officers authorized to deliver instructions hereunder and a sample of the genuine signature of such officers and the Escrow Agent shall be entitled to rely upon such certificates until a substitute certificate is delivered hereunder. 8. Fees and Expenses; Indemnity. The Representative and Heafner shall each be liable to the Escrow Agent for one-half of the fees of the Escrow Agent for its services under this Agreement as and when billed to the Representative and Heafner by the Escrow Agent. Each of the Representative, the Company Stockholders and Heafner shall be jointly and severally liable to reimburse and indemnify the Escrow Agent and its employees, officers, directors and agents, for, and hold it harmless against, any loss, liabilities, damages, cost or expense, including but not limited to reasonable attorneys' fees, reasonably incurred by the Escrow Agent in connection with the Escrow Agent's performance of its duties and obligations under this Agreement, as well as the reasonable costs and expenses of defending against any claim or liability relating to this Agreement; provided that notwithstanding the foregoing, none of such persons shall be required to indemnify the Escrow Agent for any such loss, liability, cost or expense arising as a result of the Escrow Agent's willful misconduct or gross negligence. The Escrow Agent shall be entitled to recover the full amount of such losses, liabilities, damages, 6 7 costs and expenses from any of the Representative, the Company Stockholders and Heafner; provided that in the event that the Representative and the Company Stockholders, on the one hand, and Heafner, on the other hand, pays an amount in excess of one-half of the full amount of such losses, liabilities, damages, costs and expenses, the Representative and the Company Stockholders shall be entitled to reimbursement from Heafner, and Heafner shall be entitled to reimbursement from the Representative and the Company Stockholders, jointly and severally, of the amount of such excess. The Escrow Agent shall have a lien on and right of setoff against the Escrow for unpaid amounts owed to it hereunder. 9. Resignation and Removal of the Escrow Agent. (a) The Escrow Agent may resign 30 calendar days following the giving of prior written notice thereof to Heafner and the Representative. In addition, the Escrow Agent may be removed and replaced on a date designated in a written instrument signed by Heafner and the Representative and delivered to the Escrow Agent. Notwithstanding the foregoing, no such resignation or removal shall be effective until a successor escrow agent has acknowledged its appointment as such as provided in paragraph (c) below. In either event, upon the effective date of such resignation or removal, the Escrow Agent shall deliver the property comprising the Escrow to such successor escrow agent, together with such records maintained by the Escrow Agent in connection with its duties under this Agreement and other information with respect to the Escrow as such successor may reasonably request. (b) If a successor escrow agent shall not have acknowledged its appointment as such as provided in paragraph (c) below, in the case of a resignation, prior to the expiration of 30 calendar days following the date of a notice of resignation or, in the case of a removal, on the date designated for the Escrow Agent's removal, as the case may be, because Heafner and the Representative are unable to agree on a successor escrow agent, or for any other reason, the Escrow Agent may select a successor escrow agent and any such resulting appointment shall be binding upon all of the parties to this Agreement. (c) Upon written acknowledgment by a successor escrow agent appointed in accordance with Sections 9(b) and (c) of its agreement to serve as escrow agent under this Agreement and the receipt of the property then comprising the Escrow, the Escrow Agent shall be fully released and relieved of all duties, responsibilities and obligations under this Agreement, subject to the proviso contained in clause (ii) of Section 6 and subject to survival of Section 8, and such successor escrow agent shall for all purposes of this Agreement be the Escrow Agent. 10. Notices. All notices, requests and other communications under this Agreement must be in writing and will be deemed to have been duly given if delivered personally, by overnight courier or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: if to the Company Stockholders or the Representative, to: Wingate Management Partners II, L.P. 750 N. St. Paul, Suite 1200 7 8 Dallas, Texas 75201 Facsimile: (214) 871-8799 Attention: V. Edward Easterling, Jr. with a copy to: Haynes & Boone, L.L.P. 901 Main Street, Suite 3100 Dallas, Texas 75202 Facsimile: (214) 651-5940 Attention: David H. Oden, Esq. if to Heafner, to: The J. H. Heafner Company, Inc. 814 East Main Street Lincolnton, North Carolina 28093 Facsimile: (704) 732-6480 Attention: President with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Telephone: (212) 841-1000 Telecopy: (212) 841-1010 Attention: Scott F. Smith, Esq. If to the Escrow Agent, to: The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 Facsimile: (212) 946-8156 Attention: Escrow Administration, 15th Floor All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, 8 9 and (iii) if delivered by mail or overnight courier in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other person to whom a copy of such notice is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties to this Agreement. 11. Amendments, etc. This Agreement may be amended or modified, and any of the terms of this Agreement may be waived, only by a written instrument duly executed by or on behalf of the Representative, Heafner and the Escrow Agent. No waiver by any party of any term or condition contained of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. 12. GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. THE PARTIES HERETO EACH HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURT. THE PARTIES HERETO EACH IRREVOCABLY WAIVES, TO THE FULLEST EXTENT SUCH PARTY MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION THAT SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 13. Business Day. For all purposes of this Agreement, the term "business day" shall mean a day other than Saturday, Sunday or any day on which banks located in New York City are authorized or obligated to close. 14. Appointment of Representative. Each of the Company Stockholders hereby constitutes and appoints Wingate Management Company II, L.P. (the "Representative") to act as its representative for all purposes under this Agreement, and the Representative agrees by executing this Agreement to accept such appointment. The Representative shall have the authority to act on behalf of, and to bind, each Company Stockholder for all purposes of this Agreement. Without limiting the generality of the foregoing, each Company Stockholder hereby irrevocably constitutes and appoints the Representative its true and lawful attorney-in-fact, with full power of substitution, and with full power and authority in its name, place and stead, to 9 10 execute, certify, acknowledge, deliver, file and record all agreements, certificates, instruments and other documents and any amendment thereto, which the Representative deems necessary or appropriate in connection with the performance of this Agreement by such Company Stockholder. Each Company Stockholder's appointment of the Representative as its attorney-in-fact shall be deemed to be a power coupled with an interest and still survive the incompetency, bankruptcy or dissolution of the such Company Stockholder giving such power. No new representative may be appointed or substituted without the prior written consent of Heafner. 15. Miscellaneous. (a) This Agreement is binding upon and will inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions of this Agreement. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. (b) The parties agree that the shares in Escrow may not be sold, pledged or otherwise transferred or disposed of during the term of this Agreement, except as provided in Section 4(c), 5 and 9(a) hereof. (c) While the Shares are in Escrow, the Company Stockholders shall have the right to vote the shares. 10 11 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. COMPANY STOCKHOLDERS: Certificate No. CB-1 WINGATE PARTNERS II, L.P. representing 1,277,167 Shares By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. EDWARD EASTERLING, JR. ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. ____ representing ______ Shares -------------------------------------------- Armistead Burwell, Jr. Certificate No. ____ representing ______ Shares -------------------------------------------- William E. Berry Certificate No. ____ representing ______ Shares -------------------------------------------- Richard P. Johnson Certificate No. ____ representing ______ Shares -------------------------------------------- Leon R. Ellin 12 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. COMPANY STOCKHOLDERS: Certificate No. ____ WINGATE PARTNERS II, L.P. representing _________ Shares By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. CB-2 /s/ ARMISTEAD BURWELL, JR. representing 27,110 Shares -------------------------------------------- Armistead Burwell, Jr. Certificate No. ____ representing ______ Shares -------------------------------------------- William E. Berry Certificate No. ____ representing ______ Shares -------------------------------------------- Richard P. Johnson Certificate No. ____ representing ______ Shares -------------------------------------------- Leon R. Ellin 13 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. COMPANY STOCKHOLDERS: Certificate No. ____ WINGATE PARTNERS II, L.P. representing _________ Shares By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. ____ representing ______ Shares -------------------------------------------- Armistead Burwell, Jr. Certificate No. CB-3 /s/ WILLIAM E. BERRY representing 18,073 Shares -------------------------------------------- William E. Berry Certificate No. ____ representing ______ Shares -------------------------------------------- Richard P. Johnson Certificate No. ____ representing ______ Shares -------------------------------------------- Leon R. Ellin 14 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. COMPANY STOCKHOLDERS: Certificate No. ____ WINGATE PARTNERS II, L.P. representing _________ Shares By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. ____ representing ______ Shares -------------------------------------------- Armistead Burwell, Jr. Certificate No. ____ representing ______ Shares -------------------------------------------- William E. Berry Certificate No. CB-4 /s/ RICHARD P. JOHNSON representing 27,110 Shares -------------------------------------------- Richard P. Johnson Certificate No. ____ representing ______ Shares -------------------------------------------- Leon R. Ellin 15 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. COMPANY STOCKHOLDERS: Certificate No. ____ WINGATE PARTNERS II, L.P. representing _________ Shares By: WINGATE MANAGEMENT COMPANY II, L.P., its general partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. ____ representing ______ Shares -------------------------------------------- Armistead Burwell, Jr. Certificate No. ____ representing ______ Shares -------------------------------------------- William E. Berry Certificate No. ____ representing ______ Shares -------------------------------------------- Richard P. Johnson Certificate No. CB-5 /s/ LEON R. ELLIN representing 18,073 Shares -------------------------------------------- Leon R. Ellin 16 Certificate No. CB-6 WINGATE AFFILIATES II, L.P. representing 24,097 Shares By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. EDWARD EASTERLING, JR. ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. ____ CALLIER INVESTMENT COMPANY representing _____ Shares By: ---------------------------------------- James T. Callier, Jr., President REPRESENTATIVE: WINGATE MANAGEMENT COMPANY II, L.P. By: WINGATE MANAGEMENT LIMITED, L.L.C., its general partner By: /s/ V. EDWARD EASTERLING, JR. ---------------------------------------- Name: V. Edward Easterling, Jr. Title: Principal HEAFNER: THE J.H. HEAFNER COMPANY, INC. By: ---------------------------------------- J. Michael Gaither Senior Vice President and General Counsel ESCROW AGENT: By: ---------------------------------------- 17 Certificate No. ____ WINGATE AFFILIATES II, L.P. representing ______ Shares By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. CB-7 CALLIER INVESTMENT COMPANY representing 9,037 Shares By: /s/ JAMES T. CALLIER, JR. ---------------------------------------- James T. Callier, Jr., Managing Partner REPRESENTATIVE: WINGATE MANAGEMENT COMPANY II, L.P. By: ___________________, its general partner By: ---------------------------------------- Name: Title: HEAFNER: THE J.H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ---------------------------------------- J. Michael Gaither Senior Vice President and General Counsel ESCROW AGENT: By: ---------------------------------------- 18 Certificate No. ____ WINGATE AFFILIATES II, L.P. representing ______ Shares By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: ---------------------------------------- V. Edward Easterling, Jr., Principal Certificate No. CB-7 CALLIER INVESTMENT COMPANY representing 9,037 Shares By: ---------------------------------------- James T. Callier, Jr., President REPRESENTATIVE: WINGATE MANAGEMENT COMPANY II, L.P. By: ___________________, its general partner By: ---------------------------------------- Name: Title: HEAFNER: THE J.H. HEAFNER COMPANY, INC. By: ---------------------------------------- J. Michael Gaither Senior Vice President and General Counsel ESCROW AGENT: THE CHASE MANHATTAN BANK By: /s/ SAVERIO A. LUNETTA ---------------------------------------- Saverio A. Lunetta Vice President EX-10.13 31 STOCK PURCHASE AGREEMENT DATED MARCH 11, 1998 1 EXHIBIT 10.13 ================================================================================ STOCK PURCHASE AGREEMENT BETWEEN THE J.H. HEAFNER COMPANY, INC. AND THE SHAREHOLDERS OF THE SPEED MERCHANT, INC. DATED AS OF MARCH 11, 1998 ================================================================================ 2 TABLE OF CONTENTS INTRODUCTION...................................................................1 ARTICLE I PURCHASE AND SALE OF THE SHARES SECTION 1.1. The Shares........................................................1 SECTION 1.2. Purchase Price....................................................1 SECTION 1.3. Closing...........................................................1 SECTION 1.4. Purchase Price Adjustment.........................................2 (a) Closing Date Balance Sheet.....................................2 (b) Cooperation....................................................2 (c) Adjustments to Purchase Price..................................2 (d) Payment of Adjustments.........................................2 (e) Disputes.......................................................2 SECTION 1.5. Changes in Closing Date and Non-Compete Payments..................3 ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Sellers.....................3 (a) Organization, Standing and Power...............................3 (b) Authority; Binding Agreements; Title to Shares.................3 (c) Capitalization; Equity Interests...............................4 (d) Conflicts; Consents............................................5 (e) Financial Information..........................................5 (f) Absence of Changes.............................................6 (g) Assets, Property and Related Matters; Real Property............7 (h) Intellectual Property.........................................10 (i) Insurance.....................................................10 (j) Agreements....................................................11 (k) Litigation....................................................11 (l) Compliance; Governmental Authorizations.......................11 (m) Labor Relations; Employees....................................13 (n) Related Party Transactions....................................15 (o) Taxes.........................................................16 (p) Disclosure....................................................17 (q) Bank Accounts; Powers-of-Attorney.............................17 (r) Inventory.....................................................17 (s) Brokers.......................................................17 (t) Parnelli-Jones................................................17 (u) Phase III Materials..........................................18 SECTION 2.2. Representations and Warranties by the Purchaser.................18 (a) Organization and Standing.......................................18 (b) Authority; Binding Agreements...................................18 i 3 (c) Conflicts; Consents.............................................18 (d) Investment Representation.......................................18 (e) Brokers.........................................................18 ARTICLE III ADDITIONAL AGREEMENTS SECTION 3.1. Costs and Expenses...............................................19 SECTION 3.2. Conduct of Business..............................................19 SECTION 3.3. Reasonable Efforts; Further Assurances...........................20 SECTION 3.4. No Shopping......................................................20 SECTION 3.5. Access and Information...........................................21 (a) Access Prior to Closing.........................................21 (b) Confidentiality.................................................21 (c) Equitable Relief................................................22 SECTION 3.6. Confidentiality; Non-Competition.................................22 (a) Confidential Information........................................22 (b) Covenant Not To Compete.........................................22 (c) Enforceability..................................................24 (d) Remedies........................................................24 (e) Acknowledgment..................................................24 SECTION 3.7. Releases; Prior Compensation.....................................25 SECTION 3.8. Public Announcements.............................................25 SECTION 3.9. Tax Matters......................................................25 (a) Transfer Taxes..................................................25 (b) Responsibility for Company Taxes................................25 (c) Tax Treatment...................................................26 (d) Filing of Returns...............................................26 (e) Cooperation in Tax Matters......................................26 (f) Tax Audits and Assessments......................................26 (g) Activities between Signing and Closing..........................27 (h) Payment of Pre-Closing Date Taxes...............................27 SECTION 3.10. Fresno Warehouse................................................27 SECTION 3.11. Additional Adjustment Amount....................................27 (a) Management of Arizona Business..................................28 (b) Additional Adjustment Amount....................................28 (c) Payment.........................................................28 SECTION 3.12. Additional Information..........................................29 (a) Delivery of Final Disclosure Schedule...........................29 (b) Phase III Materials.............................................29 (c) Disclosure Supplements..........................................30 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of the Purchaser.......................30 (a) Authorization...................................................30 (b) Representations, Warranties and Covenants.......................30 (c) Consents, Amendments and Terminations...........................30 ii 4 (d) Certificates....................................................31 (e) Opinion of Counsel..............................................31 (f) Financial Statements............................................31 (g) Due Diligence...................................................31 (h) Financing.......................................................31 (i) Employment Agreements...........................................31 (j) Corporate Directors and Officers................................31 (k) Share Certificates and Corporation Records......................31 (l) HSR Act.........................................................31 (m) No Legal Bar....................................................31 (n) No Legal Bar....................................................32 (n) Other Documents.................................................32 SECTION 4.2. Conditions of Obligations of the Sellers.........................39 (a) Authorization...................................................32 (b) Representations, Warranties and Covenants.......................32 (c) Certificate.....................................................32 (f) Employment Agreements...........................................32 (g) HSR Act.........................................................32 (h) No Legal Bar....................................................32 (i) Other Documents.................................................33 ARTICLE V INDEMNITY SECTION 5.1. Indemnification..................................................33 (a) Indemnification by Sellers......................................33 (b) Indemnification by Purchaser....................................33 (c) Indemnification Procedures......................................33 (d) Tax Benefits....................................................34 (e) Insurance Proceeds..............................................34 (f) Treatment of Payments...........................................35 SECTION 5.2. Limitations......................................................35 (a) Expiration Date.................................................35 (b) Cap.............................................................35 (c) Threshold.......................................................35 (d) Sole Remedy.....................................................35 (e) Several Liability; Certain Representations......................36 SECTION 5.3. No Election......................................................36 ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement.................................................36 SECTION 6.2. Termination......................................................36 SECTION 6.3. Descriptive Headings; Certain Interpretations....................37 SECTION 6.4. Notices..........................................................37 SECTION 6.5. Counterparts.....................................................38 SECTION 6.6. Survival.........................................................38 SECTION 6.7. Benefits of Agreement............................................38 iii 5 SECTION 6.8. Amendments and Waivers...........................................38 SECTION 6.9. Assignment.......................................................39 SECTION 6.10. Enforceability..................................................39 SECTION 6.11. Governing Law...................................................39 SECTION 6.12. Dispute Resolution; Consent To Jurisdiction.....................39 ANNEXES A Shareholders; Ownership of Shares B Dispute Resolution Procedure EXHIBITS A-1 Form of Officers' Certificate A-2 Form of Seller's Certificate B Form of Opinion of Counsel of the Company and the Sellers C-1 Form of Soares Employment Agreement C-2 Form of Barney Employment Agreement C-3 Form of Roberts Employment Agreement D Form of Fresno Warehouse Sale/Leaseback iv 6 STOCK PURCHASE AGREEMENT, dated as of March 11, 1998 (the "Agreement"), between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Purchaser"), and each of the Stockholders (each, a "Seller" and, collectively, the "Sellers") of The Speed Merchant, Inc., a California corporation d/b/a the Speed Merchant and Competition Parts Warehouse (the "Company"). INTRODUCTION The Company owns and operates a wholesale and retail tire and automotive parts business located in California and Arizona. The Sellers desire to sell all of the outstanding shares (the "Shares") of common stock, no par value (the "Common Stock"), of the Company to the Purchaser, and the Purchaser desires to purchase the Shares on the terms and conditions set forth in this Agreement. The parties agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES SECTION 1.1. The Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (defined below), each Seller shall sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from each Seller, all of the Shares owned by such Seller (which Shares are listed on Annex A), free and clear of all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, "Claims"). SECTION 1.2. Purchase Price. The purchase price (the "Purchase Price") for the Shares and the non-compete agreements set forth in Section 3.6 shall be cash in the amount of $42,400,000, of which $35,000,000 is payable as consideration for the Shares (the "Closing Date Payment") and $7,400,000 is payable as set forth in Section 3.6(b) as consideration for such non-compete agreements (the "Non-Compete Payments"). The Closing Date Payment shall be made to the Sellers at Closing in proportion to their ownership of Shares as set forth on Annex A and shall be made by wire transfer of immediately available funds to accounts designated by the Sellers no later than two business days prior to the Closing Date. The Non-Compete Payments shall be due and payable according to the terms set forth in Section 3.6(b). SECTION 1.3. Closing. The closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall take place at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019, or such other place or places as the Sellers and the Purchaser shall agree, at 10:00 a.m. (New York time) on the later of April 29, 1998 and two business days following the date on which all conditions set forth in Article IV 7 shall have been satisfied or waived, or such other date and time agreed to by the Sellers and the Purchaser (such date, the "Closing Date"). SECTION 1.4. Purchase Price Adjustment. (a) Closing Date Balance Sheet. Within 90 days after the Closing Date, the Purchaser and the Sellers shall cause Arthur Andersen LLP to audit the balance sheet of the Company as of the Closing Date (the "Closing Date Balance Sheet"), in accordance with generally accepted accounting principles. Notwithstanding the foregoing sentence, the parties have reviewed the accounting principles applied in connection with the Company's October 31, 1997 balance sheet (as referred to in Section 2.1(e)(i)(A)) and hereby agree that such accounting principles shall be applied in connection with the preparation of the Closing Date Balance Sheet. (b) Cooperation. The Sellers shall be responsible for preparing the Closing Date Balance Sheet. Each of the Sellers, the Purchaser and their respective representatives shall have the right to review the others' work papers or records of the Company used or prepared in connection with the preparation of the Closing Date Balance Sheet, and shall, if requested, make available such work papers or records and direct the auditors or other representatives to allow the Sellers, the Purchaser, or their respective representatives to review any and all work papers or records of such auditors or other representatives used in connection with the preparation of the Closing Date Balance Sheet. (c) Adjustments to Purchase Price. If (i) the Company's net worth (the difference between the Company's assets and liabilities) as of the Closing Date as shown on the Closing Date Balance Sheet is less than an amount equal to the sum of (x) $6,296,402 plus (y) an amount equal to the Company's net earnings for the period beginning on October 31, 1997 and ending on the Closing Date or (ii) the Company's working capital (the difference between the Company's current assets and current liabilities) as of the Closing Date as shown on the Closing Date Balance Sheet is less than $4,000,000, the Sellers shall pay to the Purchaser an amount equal to the largest of the differences in dollar amount under clauses (i) or (ii) above. The amounts described in clauses (i) and (ii) of the preceding sentence shall be computed in accordance with the accounting principles used in the preparation of the Closing Date Balance Sheet and shall each be further adjusted to give effect to the acquisition of certain assets (the "Arizona Business") by Phoenix Racing, Inc., a California corporation and a wholly owned subsidiary of the Company ("Phoenix"), and to give effect to the transaction costs incurred by the Company in connection with the acquisition of certain assets from RPJ Tire Company, Inc. and Dob's Tire Stores, Inc. ("Parnelli-Jones") and the acquisition itself, if it is consummated on or prior to the Closing Date. (d) Payment of Adjustments. Any payment under this Section shall be made within 10 days after the later of (i) the date of delivery of the Closing Date Balance Sheet and (ii) the date on which any dispute referred to in clause (e) is resolved. The Sellers shall be jointly and severally liable with respect to any such payment. (e) Disputes. Each of the Sellers and the Purchaser shall have the right to dispute any amounts shown on the Closing Date Balance Sheet by giving written notice to the other 2 8 within 15 days after receipt of the Closing Date Balance Sheet as audited and opined on by Arthur Andersen LLP, which notice shall specify in reasonable detail the nature and extent of such disagreement. If the Sellers and the Purchaser have not resolved the dispute within 15 days of such notice, the dispute shall be submitted to an independent accountant of national standing reasonably acceptable to the Sellers and the Purchaser, whose decision shall be binding on the parties hereto. The cost of such accountant shall be shared equally by the Sellers and the Purchaser. SECTION 1.5. Changes in Closing Date and Non-Compete Payments. Notwithstanding Section 1.2, if the Sellers determine in good faith that the security to be arranged by the Purchaser pursuant to Section 3.6(b)(v) is not reasonably satisfactory to the Sellers, the Purchaser and the Sellers agree for all purposes of this Agreement that the aggregate amount of the Closing Date Payment shall be increased to $40,000,000 and the aggregate amount of the Non-Compete Payment shall be reduced to $2,400,000 (payable in each case as set forth in Section 1.2), whereupon the covenant set forth in Section 3.6(b)(v) shall be deemed to have been performed and complied with for purposes of Section 4.2(b). Annex A shall be amended to reflect any changes made pursuant to this Section 1.5. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Sellers. The Sellers jointly and severally represent and warrant to the Purchaser as follows: (a) Organization, Standing and Power. Each of the Company and Phoenix (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of California and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of the Company and Phoenix is duly qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary because of the property owned, leased or operated by it or because of the nature of its business as now being conducted, and each such jurisdiction is listed in Section 2.1(a) of the disclosure schedule being delivered to the Purchaser simultaneously with the execution of this Agreement (the "Disclosure Schedule"). Each of the Company and Phoenix has delivered to the Purchaser complete and correct copies of its articles of incorporation and by-laws, in each case as amended to the date of this Agreement, and has made available to the Purchaser its minute books and stock records. Section 2.1(a) of the Disclosure Schedule contains a true and correct list of the directors and officers of the Company and Phoenix as of the date of this Agreement and at all times since the last action of the board of directors and the shareholders of the Company. (b) Authority; Binding Agreements; Title to Shares. Each Seller has the legal power and capacity to enter into this Agreement, and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of the Sellers, and constitutes the valid and binding obligation of each Seller, enforceable against such Seller in accordance with its terms, subject to the laws of general application relating to 3 9 bankruptcy, insolvency and the relief of debtors and rules and laws governing specific performance, injunctive relief and other equitable remedies. Each Seller is the lawful owner of record and beneficially of the number of Shares set forth opposite such Sellers' name on Annex A, and such Seller has, and will transfer to the Purchaser at the Closing, good and marketable title to such number of Shares, free and clear of all Claims, and with no restriction on the voting rights or other incidents of record and beneficial ownership attaching to such Shares. (c) Capitalization; Equity Interests. The authorized capital stock of the Company consists of 1,000,000 shares of Common Stock and no shares of preferred stock. At the time of execution of this Agreement, 14,118 shares of Common Stock were issued and outstanding. The authorized capital stock of Phoenix consists of 1,000,000 shares of common stock, no par value, and no shares of preferred stock. At the time of execution of this Agreement, 1,000,000 shares of common stock of Phoenix were issued and outstanding. The Sellers own of record and beneficially all of the outstanding capital stock of the Company, and the Company owns of record and beneficially all of the outstanding capital stock of Phoenix. Except as set forth above, at the time of execution of this Agreement, no shares of capital stock or other voting securities of the Company or Phoenix are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company and Phoenix are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness or securities of the Company or Phoenix having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of the Company or Phoenix, as applicable, may vote. There are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or Phoenix is a party or by which the Company or Phoenix is bound obligating the Company or Phoenix to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company or Phoenix or obligating the Company or Phoenix to issue, grant, extend or enter into any such security, option, warrant, call right, commitment, agreement, arrangement or undertaking. There are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating the Company or Phoenix to repurchase, redeem or otherwise acquire any shares of capital stock or other voting securities of the Company or Phoenix or any securities of the type described in the two immediately preceding sentences. The Company does not have any subsidiaries or own or hold any equity or other security interests in any other entity other than Phoenix, and Phoenix does not have any subsidiaries or own or hold any equity or other security interests in any other entity. Except as set forth in Section 2.1(c) of the Disclosure Schedule, neither the Company nor Phoenix is subject to any liability for any claim that the Company or Phoenix violated any applicable Federal or state securities laws in connection with the issuance of capital stock. For purposes of this Agreement, a "subsidiary" of any person means another person under the control of such person (where "control" means the direct or indirect possession of the power to elect at least a majority of the Board of Directors or other governing body of a person through the ownership of voting securities, ownership or partnership interests, by contract or otherwise, or if no such governing body exists, the direct or indirect ownership of 50% or more of the equity interests of a person); and a "person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity (governmental or private). 4 10 (d) Conflicts; Consents. The execution and delivery by the Sellers of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Sellers with any of the provisions hereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company or Phoenix, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company or Phoenix or any Seller is a party, or by which the Company or Phoenix or any Seller or any of the Company's or Phoenix's or any Seller's properties or assets, may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained before the Closing (which waivers or consents are set forth in Section 2.1(d) of the Disclosure Schedule), (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or Phoenix or any Seller or any of the Company's or Phoenix's or any Seller's properties or assets or (iv) result in the creation or imposition of any Claim upon any Shares or any property or assets used or held by the Company or Phoenix. Except as set forth in Section 2.1(d) of the Disclosure Schedule, no consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by any Seller of this Agreement or the consummation of the transactions contemplated hereby except for the filing of a premerger notification and report form under the Hart-Scott-Rodino Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act") and the expiration or early termination of the applicable waiting period under the HSR Act. (e) Financial Information. (i) The following financial statements are contained in Section 2.1(e) of the Disclosure Schedule: (A) the consolidated balance sheets of the Company at October 31, 1995, 1996 and 1997 and the related consolidated statements of income and retained earnings and cash flows for the fiscal years then ended together with the opinion of KPMG Peat Marwick LLP thereon; and (B) (i) the unaudited, internally prepared quarterly consolidated balance sheets of the Company at January 31, April 30, July 31 and October 31, 1997 and (ii) the unaudited, internally prepared monthly consolidated balance sheets of the Company at November 30 and December 31, 1997, together with the related consolidated statements of income for each such fiscal quarter or calendar month, as applicable. Except as set forth in Section 2.1(e) of the Disclosure Schedule, all such financial statements have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior periods and fairly present the financial condition, results of operations and cash flows of the Company. The consolidated balance sheets of the Company as at the dates set forth present fairly the financial position of the Company as at the dates thereof, and the related consolidated statements of income and retained earnings and cash flows of the Company for each of the respective specified periods then ended present fairly the results of operations of the Company for each of the respective periods then ended. For the purposes of this Agreement, 5 11 all financial statements referred to in this paragraph shall include any notes and schedules to such financial statements. (ii) Except as set forth in Section 2.1(e)(ii) of the Disclosure Schedule, the Company does not have, and as a result of the transactions contemplated herein, will not have, any liabilities or obligations (whether absolute, accrued, contingent or otherwise, and whether due or to become due), except for liabilities and obligations (A) reflected on the balance sheets of the Company referred to in Section 2.1(e)(i), (B) liabilities and obligations in respect of acquisitions of inventory made in the ordinary course of business, and (C) liabilities and obligations not described in clause (B) that have been (1) incurred in the ordinary course of business consistent with past practice since December 31, 1997 or (2) which individually do not exceed $50,000 or in the aggregate do not exceed $100,000. All reserves established by the Company are reflected on the balance sheets of the Company or in the footnotes to the financial statements of the Company and are adequate and there are no loss contingencies that are required to be accrued by Statement of Financial Accounting Standard No. 5 of the Financial Accounting Standards Board which are not provided for on such balance sheets. (f) Absence of Changes. Except as set forth in Section 2.1(f) of the Disclosure Schedule, since October 31, 1997, the Company and Phoenix have been operated in the ordinary course consistent with past practice and there has not been: (i) any material adverse change in the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company and Phoenix taken as a whole; (ii) any obligation or liability (whether absolute, accrued, contingent or otherwise, and whether due or to become due) incurred by the Company or Phoenix, other than obligations under customer contracts, current obligations and liabilities incurred in the ordinary course of business and consistent with past practice; (iii) any payment, discharge, satisfaction or settlement of any claim or obligation of the Company or Phoenix, except in the ordinary course of business and consistent with past practice; (iv) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or Phoenix or any direct or indirect redemption, purchase or other acquisition of any such shares; (v) any issuance or sale, or any contract entered into for the issuance or sale, of any shares of capital stock or securities convertible into or exercisable for shares of capital stock of the Company or Phoenix; (vi) any sale, assignment, pledge, encumbrance, transfer or other disposition of any tangible asset of the Company or Phoenix (other than sales of inventory to customers in the ordinary course of business consistent with past practice), or any sale, assignment, 6 12 transfer or other disposition of any patents, trademarks, service marks, trade names, copyrights, licenses, franchises, know-how or any other intangible assets; (vii) any creation of any claim or other encumbrance on any property of the Company or Phoenix, except in the ordinary course of business consistent with past practice and which claims or encumbrances together with all other such claims and encumbrances would not have a material adverse effect on the business of the Company and Phoenix, taken as a whole; (viii) any write-down of the value of any asset of the Company or Phoenix or any write-off as uncollectible of any accounts or notes receivable or any portion thereof, other than write-downs or write-offs which, individually or in the aggregate, do not exceed $25,000; (ix) any cancellation of any debts or claims or any amendment, termination or waiver of any rights of value to the Company or Phoenix, other than debts, claims or rights which individually do not exceed $25,000 or in the aggregate do not exceed $50,000; (x) any capital expenditure or commitment or addition to property, plant or equipment of the Company or Phoenix, individually in excess of $10,000; (xi) any general increase in the compensation of employees of the Company or Phoenix (including any increase pursuant to any written bonus, pension, profit-sharing or other benefit or compensation plan, policy or arrangement or commitment), or any increase in any such compensation or bonus payable to any officer, shareholder, director, consultant or agent of the Company or Phoenix having an annual salary or remuneration in excess of $75,000; (xii) any damage, destruction or loss (whether or not covered by insurance) affecting any asset or property of the Company or Phoenix resulting in liability or loss in excess of $25,000; (xiii) any change in the independent public accountants of the Company or Phoenix or in the accounting methods or accounting practices followed by the Company or Phoenix or any change in depreciation or amortization policies or rates; (xiv) to the knowledge of the Sellers any agreement or action not otherwise referred to in items (i) through (xiii) above entered into or taken that is material to the Company or Phoenix; or (xv) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing items (i) through (xiv). (g) Assets, Property and Related Matters; Real Property. (i) The Company has good title to, or a valid leasehold interest in, as applicable, all of the assets reflected on the financial statements contained in Section 2.1(e) of the Disclosure Schedule, free and clear of all 7 13 Claims except as set forth in Section 2.1(g)(i) of the Disclosure Schedule. Such assets (A) are in good operating condition and repair, subject to ordinary wear and tear and (B) constitute all of the properties, interests, assets and rights held for use or used in connection with the business and operations of the Company and constitute all those necessary (in the reasonable business judgment of the Sellers) to continue to operate the business of the Company consistent with current and historical practice. All items of personal property owned by the Company with an original cost or book value in excess of $10,000 are listed in Section 2.1(g)(i) of the Disclosure Schedule. (ii) Section 2.1(g)(ii) of the Disclosure Schedule sets forth a list of all real property owned or leased by the Company or Phoenix (each a "Company Property"). The Company or Phoenix is the sole owner or holder of, and has, good and marketable fee title to, or a good, valid and existing leasehold estate in each Company Property, free and clear of all liens, encumbrances and restrictions affecting title to or the use and occupancy of such Company Property, except as disclosed in Section 2.1(g)(ii) of the Disclosure Schedule ("Permitted Encumbrances"). No Company Property violates the terms or conditions of any Permitted Encumbrance. (iii) With respect to each Company Property leased by the Company or Phoenix, (A) the Company or, to the knowledge of the Sellers, Phoenix is the owner and holder of all the leasehold interests and estates purported to be granted by such leases, (B) all leases to which the Company or Phoenix is a party are in writing and in full force and effect and constitute valid and binding obligations of the Company or Phoenix and, to the knowledge of the Sellers, of the other parties thereto, enforceable in accordance with their terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules and laws governing specific performance, injunctive relief and other equitable remedies, and (C) the Company has delivered to the Purchaser true and complete copies of all such leases. There exists no default, or any event which upon notice or the passage of time, or both, would give rise to any default, in the performance by the Company or Phoenix or, to the knowledge of the Sellers, by any lessor under any lease (except for such defaults that are, individually and in the aggregate, immaterial). Except as set forth in Section 2.1(g)(ii) of the Disclosure Schedule, neither the Company nor Phoenix, and to the knowledge of the Sellers, no other person has, granted any oral or written right to anyone other than the Company or Phoenix to lease, sublease or otherwise occupy any of the properties described in Section 2.1(g)(ii) of the Disclosure Schedule through the end of the applicable lease periods. (iv) Each Company Property owned or leased by the Company and, to the knowledge of the Sellers, each Company Property owned or leased by Phoenix, together with all appurtenances and improvements, as used, constructed or maintained by the Company or Phoenix at any time, conform in all material respects to applicable Federal, state, local and foreign laws, rules, regulations and orders ("Legal Requirements"), and, except as otherwise disclosed on Section 2.1(g)(iv) of the Disclosure Schedule, no notices of violation of any Legal Requirements have been issued by any governmental authority with respect to any Company Property owned or leased by the Company or, to the knowledge of the Sellers, owned or leased by Phoenix, including all building, fire, health, zoning, setback, subdivision and environmental 8 14 laws, regulations or ordinances. Without limiting the foregoing, each Company Property is in good operating condition and repair and, to the knowledge of the Sellers, no condition exists which would interfere with the Company's or Phoenix's customary use and operation thereof. The use of the buildings and structures located on each Company Property owned or leased by the Company or, to the knowledge of the Sellers, owned or leased by Phoenix or any appurtenances or equipment does not violate any restrictive covenants or encroach on any property owned by others. No condemnation proceeding is pending or, to the knowledge of the Sellers, threatened which would preclude or impair the use of any Company Property by the Company or Phoenix for the uses for which they are intended. (v) Section 2.1(g)(v) of the Disclosure Schedule lists each permit necessary or appropriate for the Company and, to the knowledge of the Sellers, for Phoenix in connection with its ownership, lease or use of any Company Property. Each such permit held by the Company and, to the knowledge of the Sellers, each such permit held by Phoenix was duly issued and obtained, currently is in full force and effect, and shall remain in full force and effect for the term set forth therefor on Section 2.1(g)(v) of the Disclosure Schedule. To the knowledge of the Sellers, no default or violation, or event which with the passage of time or giving of notice or both would become a default or violation, has occurred in the due observance of any permit (except for such defaults or violations as are, in the aggregate, immaterial). The Sellers have delivered to the Purchaser true and complete copies of all such permits. (vi) Each Company Property owned or leased by the Company and, to the knowledge of the Sellers, each Company Property owned or leased by Phoenix is properly and duly zoned for its current use, and such current use is in all respects a lawful use. No governmental authority having jurisdiction over any Company Property has issued or, to the knowledge of the Sellers, has threatened to issue any notice or order that requires, as of the date hereof or a specified date in the future, any repairs, alterations, additions or improvements thereto. The Sellers have no knowledge of any actual or pending imposition of any assessments for public improvements with respect to any Company Property and, to the knowledge of the Sellers, no such improvements have been constructed or planned that would be paid for by means of assessments upon any Company Property. (vii) Each Company Property is located on public roads and streets with adequate ingress and egress available between such streets and the Company Property, and, to the knowledge of the Sellers, all utility systems required in connection with the use, occupancy and operation of each Company Property are sufficient for their present purposes, are fully operational and in working order, and are benefited by customary utility easements providing for the continued use and maintenance of such systems. In the reasonable business judgment of the Sellers, each Company Property consists of sufficient land, parking areas, sidewalks, driveways and other improvements to permit the continued use of such Company Property in the manner and for the purposes to which it is presently devoted. (viii) Except as set forth in Section 2.1(g)(viii) of the Disclosure Schedule, no portion of any Company Property is located in any flood zone area designated as Zone A or Zone 9 15 Z (or any Zone having the prefix A or Z) (or any successor designation) pursuant to applicable regulations of the Federal Emergency Management Agency, or any successor thereto. (ix) None of the Sellers is a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"). (x) Except as set forth in Section 2.1(g)(x) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any lease of the Company or, to the knowledge of the Sellers, any lease to which Phoenix is a party. No consent from the lessor or any other person under any lease is required in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for those obtained prior to the Closing and listed in Section 2.1(d) of the Disclosure Schedule. (h) Intellectual Property. Except as set forth on Section 2.1(h) of the Disclosure Schedule, the Company owns or licenses all patents, trademarks, service marks, trade names and copyrights, in each case registered or unregistered, inventions, software (including documentation and object and source code listings relating to software other than commercially available software used by the Company pursuant to "shrink-wrap" licenses), know-how, trade secrets and other intellectual property rights (collectively, the "Intellectual Property") used in its business as presently conducted. Section 2.1(h) of the Disclosure Schedule contains a list of all Intellectual Property owned and used by the Company (excluding all commercially available software used by the Company pursuant to "shrink-wrap" licenses) and any Intellectual Property which is licensed for use by others. No use by the Company in its business of Intellectual Property owned by the Company, and (to the knowledge of the Sellers) no use by the Company in its business of Intellectual Property licensed from third parties for use by the Company, infringes any rights owned or held by any other person. There is no pending or, to the knowledge of the Sellers, threatened claim or litigation against the Company contesting its right to use any Intellectual Property. To the knowledge of the Sellers, no person is infringing the rights of the Company in any Intellectual Property. Neither the Company nor any Seller has received any notice that a product or service sold by the Company violates or infringes any intellectual property right owned or held by any other person. In the case of commercially available "shrink-wrap" software programs, neither the Company nor, to the knowledge of the Sellers, any of its employees has made or is using any unauthorized copies of any such software programs. (i) Insurance. Section 2.1(i) of the Disclosure Schedule contains a true and complete list of all policies of casualty, liability, theft, fidelity, life and other forms of insurance held by the Company or Phoenix. True and complete copies of such policies have been delivered to the Purchaser. Except as set forth in Section 2.1(i) of the Disclosure Schedule, all insurance policies are in the name of the Company or Phoenix, outstanding and in full force and effect, all premiums with respect to such policies are currently paid and such policies will not be affected by, or terminated or lapse by reason of, the transactions contemplated by this Agreement. Neither the Company nor Phoenix has received notice of cancellation or termination of any such 10 16 policy, nor has it been denied or had revoked or rescinded any policy of insurance, nor borrowed against any such policies. Except as set forth in Section 2.1(i) of the Disclosure Schedule, no claim under any such policy is pending. (j) Agreements. Section 2.1(j) of the Disclosure Schedule contains a true and complete list of all contracts, agreements and other instruments to which the Company or Phoenix is a party (A) relating to indebtedness for money borrowed or capital leases, (B) of duration of six months or more from the date hereof and not cancelable without penalty on 30 days or less notice, (C) relating to commitments in excess of $100,000, (D) relating to the employment or compensation of any stockholder, director, officer, employee, consultant or other agent of the Company or Phoenix which are not terminable at will by the Company or Phoenix, (E) relating to the sale or other disposition of any assets, properties or rights which were entered into outside the ordinary course of the business of the Company or Phoenix, (F) relating to the lease of or similar arrangement with respect to any machinery, equipment, motor vehicles, furniture, fixture or similar property which individually provide for annual payments by the Company or Phoenix in excess of $50,000, (G) between the Company or Phoenix and any Seller or affiliate of any Seller, (H) that restricts the operation of the Company or Phoenix anywhere in the world or (I) that is entered into other than in the ordinary course of business. Each of the Company and Phoenix is not in default under any such agreement or instrument where such default could, singly or in the aggregate with defaults under other agreements or instruments, have a material adverse effect on the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company and Phoenix, taken as a whole, and, to the knowledge of the Sellers, all such agreements or instruments are in full force and effect. Except as set forth in Section 2.1(j) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any Agreement required to be listed in Section 2.1(j) of the Disclosure Schedule. The Company has delivered to the Purchaser true and complete copies of all documents described in Section 2.1(j) of the Disclosure Schedule. (k) Litigation. Except as set forth in Section 2.1(k) of the Disclosure Schedule, there have not been for the past five years, nor are there, any suits, actions, claims, investigations or legal or administrative or arbitration proceedings in respect of the Company or Phoenix pending or, to the knowledge of the Sellers, threatened, whether at law or in equity, or before or by any Federal, foreign, state or municipal or other governmental department, commission, board, bureau, agency or instrumentality. Except as set forth in Section 2.1(k) of the Disclosure Schedule, there have not been for the past five years, nor are there any judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Company or Phoenix or any Seller or any of their respective assets or properties. (l) Compliance; Governmental Authorizations. (i) The Company and Phoenix have complied and are in compliance with all Federal, state, local and foreign laws, ordinances, rules, regulations, interpretations and orders (including those relating to disposal of materials, environmental protection and occupational safety and health) applicable to the Company or Phoenix or their respective businesses (except for instances of non-compliance which 11 17 individually and in the aggregate are immaterial and could not lead to criminal liability), and, to the knowledge of the Sellers, there are no present or past conditions relating to the Company or Phoenix, or relating to any Company Property or any appurtenances thereto or improvements thereon, that could lead to any material liability against, or have a material adverse effect on, the Company and Phoenix (taken together), for violation of any health or safety laws. Each of the Company and Phoenix has all Federal, state, local and foreign governmental licenses and permits necessary to conduct its business as presently being conducted, which licenses and permits (and any exceptions thereto) are set forth in Section 2.1(l)(i) of the Disclosure Schedule. Such licenses and permits are in full force and effect, no violations are or have been recorded in respect of any thereof, no proceeding is pending or, to the knowledge of the Sellers, threatened, to revoke or limit any thereof, and the Sellers do not know of any basis for any such proceeding, and the consummation of the transactions contemplated in this Agreement will not result in the non-renewal, revocation or termination of any such license or permit (except, in each case, for such violations, proceedings, non-renewals, revocations or terminations as are, in the aggregate, immaterial). (ii) Each of the Company and Phoenix validly holds all permits required under all applicable Federal, state, county or local laws, ordinances, regulations, official interpretations and orders relating to disposal of materials or the discharge of chemicals, gases or other substances or Hazardous Materials (defined below) into the environment or to the safety or protection of the environment (the "Environmental Laws"). Neither the Company nor Phoenix has violated, nor is the Company or Phoenix in violation of, any requirements of any Environmental Laws in connection with the conduct of its business or in connection with the use, maintenance or operation of any Company Property (except for violations which individually and in the aggregate are immaterial and could not lead to criminal liability). There are no present or past conditions relating to the Company or Phoenix or relating to any Company Property, or, to the knowledge of the Sellers, relating to any real property previously owned, leased or operated by the Company or Phoenix or any of their respective present or past affiliates, that in any such case could lead to any material liability of the Company or Phoenix under any Environmental Law. Except as set forth on Section 2.1(l)(ii) of the Disclosure Schedule, the Company and Phoenix have operated each Company Property and have received, handled, used, stored, treated, shipped and disposed of all hazardous or toxic materials, substances and wastes (whether or not on its properties or properties owned or operated by others) in compliance with all applicable Environmental Laws (except for instances of non-compliance which individually and in the aggregate are immaterial and could not lead to criminal liability). Except as set forth in Section 2.1(l)(ii) of the Disclosure Schedule, neither the Company nor Phoenix has engaged in or permitted the sale or dispensation (to customers, employees or other persons), handling, transportation, discharge, emission, treatment, storage or disposal of gasoline or other motor vehicle fuels at or under any Company Property or any property or facility previously owned, leased or operated by the Company. "Hazardous Materials" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; (B) any "hazardous waste" or "petroleum," as defined by the Resource Conservation and Recovery Act, as amended; (C) any petroleum product; (D) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law, as amended or hereafter amended; or (E) any 12 18 radioactive material, including any source, special nuclear or by-product material as defined at 42 U.S.C. Section 2011 et seq., as amended or hereafter amended. (m) Labor Relations; Employees. (i) (A) There is no labor strike, slowdown, stoppage or lockout pending, affecting, or, to the knowledge of any Seller, threatened against the Company or Phoenix, and during the last five years there has not been any such action with respect to the Company or, to the knowledge of the Sellers, Phoenix; (B) there are no union claims to represent the employees of the Company or, to the knowledge of the Sellers, Phoenix, nor have there been any such claims within the last five years with respect to the Company or, to the knowledge of the Sellers, Phoenix; (C) there is no written or oral contract, commitment, agreement, understanding or other arrangement with any labor organization, nor work rules or practices agreed to with any labor organization or employee association, applicable to employees of the Company or, to the knowledge of the Sellers, applicable to Phoenix, nor is the Company or, to the knowledge of the Sellers, Phoenix a party to or bound by any collective bargaining or similar agreement; (D) there is, and within the last five years has been, no representation of the employees of the Company or, to the knowledge of the Sellers, Phoenix by any labor organization and, to the knowledge of the Sellers, there are no union organizing activities among the employees of the Company or Phoenix; (E) Section 2.1(m)(i) of the Disclosure Schedule sets forth all written personnel policies, rules or procedures applicable to employees of the Company and, to the knowledge of the Sellers, applicable to employees of Phoenix, and the Sellers have delivered to the Purchaser complete and accurate copies of all such written policies, rules or procedures; (F) neither the Company nor, to the knowledge of the Sellers, Phoenix has engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance, regulation, interpretation or order and each of the Company and, to the knowledge of the Sellers, Phoenix is, and has for the past five years been, in compliance with all applicable laws, ordinances, regulations, interpretations or orders respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; (G) there is no unfair labor practice charge or complaint against the Company (or against any Seller with respect to the Company) or, to the knowledge of the Sellers, Phoenix pending or, to the knowledge of any Seller, threatened before the National Labor Relations Board or any similar state or foreign agency; (H) there is no grievance pending or, to the knowledge of any Seller, threatened against the Company or, to the knowledge of the Sellers, Phoenix arising out of any collective bargaining agreement or other grievance procedure; (I) there are no charges with respect to or relating to the Company or, to the knowledge of the Sellers, Phoenix pending or, to the knowledge of any Seller, threatened before the Equal Employment Opportunity Commission or any other governmental entity responsible for the prevention of unlawful employment practices; (J) none of the Company or any Seller or, to the knowledge of the Sellers, Phoenix has received notice of the intent of any governmental entity responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or, to the knowledge of the Sellers, Phoenix and, to the knowledge of the Sellers, no such investigation is in progress; and (K) no complaints, lawsuits or other proceedings are pending or, to the knowledge of any Seller, threatened in any forum by or on behalf of any present or former employee of the Company or any applicant for employment by the Company or classes of the foregoing alleging breach of any express or implied contract, commitment, agreement, understanding or other arrangement for employment, any law 13 19 governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with any employment relationship, nor to the knowledge of the Sellers is any such complaint, lawsuit or other proceeding pending or threatened by or on behalf of any present or former employee of Phoenix or any applicant for employment by Phoenix or classes of the foregoing. (ii) Section 2.1(m)(ii) of the Disclosure Schedule contains a list of each pension, retirement, savings, deferred compensation, and profit-sharing plan and each stock option, stock appreciation, stock purchase, performance share, bonus or other incentive plan, severance plan, health, group insurance or other welfare plan, or other similar plan and any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), under which the Company has any current or future obligation or liability (including any potential, contingent or secondary liability under Title IV of ERISA) or under which any employee or former employee (or beneficiary of any employee or former employee) of the Company has or may have any current or future right to benefits (the term "plan" shall include any contract, agreement, policy or understanding, each such plan being hereinafter referred to individually as a "Plan"). The Company has delivered to the Purchaser true and complete copies of (A) each Plan, (B) the summary plan description for each Plan, (C) the latest annual report, if any, which has been filed with the IRS for each Plan, (D) the most recent IRS determination letter for each Plan that is a pension plan (as defined in ERISA) and (E) copies of reports for the three most recent Plan years showing compliance with discrimination rules under those of Code Sections 401(a), 401(k), 401(m), 419, 419A, 505. 501(c)(9), 105(h), 125 or 129 applicable to such Plan. Each Plan intended to be tax qualified under Sections 401(a) and 501(a) of the Code is and has been determined by the IRS to be tax qualified under Sections 401(a) and 501(a) of the Code and, since such determination, no amendment to or failure to amend any such Plan and to the knowledge of the Sellers no other event or circumstance has occurred that could adversely affect its tax qualified status. There has been no prohibited transaction within the meaning of Section 4975 of the Code and Section 406 of Title I of ERISA with respect to any Plan. (iii) No Plan is subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA. No Plan is subject to Title IV of ERISA. During the past five years, neither the Company nor any business or entity then controlling, controlled by, or under common control with the Company contributed to or was obliged to contribute to an employee pension plan that was subject to Title IV of ERISA. (iv) There are no actions, claims, lawsuits or arbitrations (other than routine claims for benefits) pending, or, to the knowledge of the Sellers, threatened, with respect to any Plan or the assets of any Plan, and no Seller has knowledge of any facts which could give rise to any such actions, claims, lawsuits or arbitrations (other than routine claims for benefits). Each Plan has been administered in all material respects in accordance with its terms and with all applicable laws (including, without limitation, ERISA). The Company has satisfied all funding, compliance and reporting requirements for all Plans. With respect to each Plan, the Company has paid all contributions (including employee salary reduction contributions) and all insurance 14 20 premiums that have become due and any such expense accrued but not yet due has been properly reflected in the financial information in Section 2.1(e) of the Disclosure Schedule. (v) No Plan provides or is required to provide, now or in the future, health, medical, dental, accident, disability, death or survivor benefits to or in respect of any person beyond termination of employment, except to the extent required under any state insurance law or under Part 6 of Subtitle B of Title I of ERISA and under Section 4980(B) of the Code. No Plan covers any individual other than employees of the Company, other than spouses and dependents of employees under health and child care policies listed in Section 2.1(m)(ii) of the Disclosure Schedule, true and complete copies of which have been delivered to the Purchaser. (vi) Except as set forth in Section 2.1(m)(vi) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (A) entitle any employee of the Company to severance pay or termination benefits, (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (C) (by itself) obligate the Purchaser or the Company, or any of their respective affiliates, to pay or otherwise be liable for any compensation, vacation days, pension contribution or other benefits to any employee, consultant or agent of the Company for periods before the Closing Date or for personnel whom the Purchaser does not employ. (vii) The Company has not made any representations or warranties (whether written or oral, express or implied) contractually or otherwise to any client or customer of the Company that the Company employees rendering services to such client or customer are not "leased employees" (within the meaning of Section 414(n) of the Code) or that such employees would not be required to participate under any pension benefit plan (within the meaning of Section 3(2) of ERISA) (a "Pension Benefit Plan") of such client or customer relating either to (A) providing benefits to employees of the Company under a Pension Benefit Plan of the Company or (B) making contributions to or reimbursing such client or customer for any contributions made to a Pension Benefit Plan of such client or customer on behalf of employees of the Company. (n) Related Party Transactions. Except as set forth in Section 2.1(n) of the Disclosure Schedule, no current or former partner, director, officer, employee or shareholder of the Company or Phoenix or any associate or affiliate (as defined in the rules promulgated under the Securities Exchange Act of 1934) thereof, or any relative with a relationship of not more remote than first cousin of any of the foregoing, is presently, or during the 12-month period ending on the date hereof has been, (i) a party to any transaction with the Company or Phoenix (including any contract, agreement or other arrangement providing for the furnishing of services by, or rental of real or personal property from, or otherwise requiring payments to, any such director, officer, employee or shareholder or such associate) or (ii) to the knowledge of the Sellers, the direct or indirect owner of an interest in any corporation, firm, association or business organization which is a present (or potential) competitor, supplier or customer of the Company or Phoenix, nor does any such person receive income from any source other than the Company or Phoenix which relates to the businesses of the Company or Phoenix or should properly accrue to the Company or Phoenix. 15 21 (o) Taxes. (i) All Federal, state, local and foreign tax returns and tax reports required to be filed on or prior to the Closing Date by the Company and Phoenix have been or will be filed or a valid request for extension has been or will be filed with respect thereto, on a timely basis (including any extensions) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed. All such returns and reports are and will be true, correct and complete. All Federal, state, local and foreign income, profits, franchise, sales, use, occupation, property, excise, employment and other taxes (including interest, penalties and withholdings of tax) due from and payable by the Company or Phoenix on or prior to the Closing Date have been or will be fully paid on a timely basis or will be adequately reserved for on the Closing Date Balance Sheet. Neither the Company nor Phoenix is not currently the beneficiary of any extension of time within which to file any tax return. (ii) No claim has ever been made by an authority in a jurisdiction where the Company or Phoenix does not file tax returns that it is or may be subject to taxation by that jurisdiction, and neither the Company nor Phoenix has received any notice, or request for information from any such authority. (iii) No issues have been raised with the Company or Phoenix by the Internal Revenue Service (the "IRS") or any other taxing authority in connection with any tax return or report filed by the Company or Phoenix and there are no issues which, either individually or in the aggregate, could result in any liability for tax obligations of the Company or Phoenix relating to periods ending on or before October 31, 1997 in excess of the accrued liability for taxes shown on the combined financial statements contained in Section 2.1(e)(i) of the Disclosure Schedule. No waivers of statutes of limitations have been given or requested with respect to the Company or Phoenix. (iv) No differences exist between the amounts of the book basis and the tax basis of assets that are not accounted for by an accrual on the books of the Company and Phoenix for Federal income tax purposes. Neither the Company nor Phoenix required to include in income any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary change in accounting method initiated by the Company or Phoenix, and the IRS has proposed no adjustment or change in accounting method. (v) All transactions or methods of accounting that could give rise to an understatement of Federal income tax (within the meaning of Section 6661 of the Code for tax returns filed on or before December 31, 1990, and within the meaning of Section 6662 of the Code for tax returns filed after December 31, 1990) have been adequately disclosed on the tax returns in accordance with Section 6661(b)(2)(B) of the Code for tax returns filed on or prior to December 31, 1990, and in accordance with Section 6662(d)(2)(B) of the Code for tax returns filed after December 31, 1990. (vi) Neither the Company nor Phoenix has been a United States real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(ii) of the Code. 16 22 (vii) Each of the Company and Phoenix has complied (and until the Closing will comply) with all applicable laws relating to the payment and withholding of taxes (including withholding and reporting requirements under Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and similar provisions under any other laws) and, within the time and in the manner prescribed by law, has withheld from wages, fees and other payments and paid over to the proper governmental or regulatory authorities all amounts required. (viii) Neither the Company nor Phoenix is a party to any tax-sharing or tax indemnity agreement or any other agreement of a similar nature that remains in effect. (p) Disclosure. To the knowledge of the Sellers, there have been no events, transactions or information relating to the Company or Phoenix which, singly or in the aggregate, could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), assets, liabilities, operations or business of the Company and Phoenix, taken as a whole. No representation or warranty of the Sellers contained in this Agreement, and no statement contained in any certificate, schedule, annex, list or other writing furnished to the Purchaser, contains any untrue statement of a material fact. (q) Bank Accounts; Powers-of-Attorney. Section 2.1(q) of the Disclosure Schedule contains a true and complete list of (A) all bank accounts and safe deposit boxes of the Company and Phoenix and all persons who are signatories thereunder or who have access thereto and (B) the names of all persons holding general or special powers-of-attorney from the Company or Phoenix and a summary of the terms thereof. (r) Inventory. The inventory included in the financial statements contained in Section 2.1(e) of the Disclosure Schedule is the only inventory used or held for use in the Company's business, is valued for financial statement purposes at the lower of cost or market value, and, except as set forth in Section 2.1(r) of the Disclosure Schedule, is useable and salable in the ordinary course of business. All inventory used or held for use in the business of Phoenix is valued for financial statement purposes at the lower of cost or market value and, except as set forth in Section 2.1(r) of the Disclosure Schedule, is useable and salable in the ordinary course of business. (s) Brokers. No agent, broker, investment banker, person or firm acting on behalf of any Seller or the Company or Phoenix or under the authority of any Seller or the Company or Phoenix 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. (t) Parnelli-Jones. Notwithstanding any provision to the contrary in this Section 2.1, the Sellers make no representations or warranties of any kind with respect to the business to be acquired by Phoenix from Parnelli-Jones, including, without limitation, the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the business to be acquired by Phoenix from Parnelli-Jones. 17 23 (u) Phase III Materials. Section 2.1(u) of the Disclosure Schedule sets forth a description of certain information relating to the Company's miscellaneous income, including certain information relating to the tire supplier annual volume bonus (AVB) programs in which the Company participates. SECTION 2.2. Representations and Warranties by the Purchaser. The Purchaser represents and warrants to the Sellers as follows: (a) Organization and Standing. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. (b) Authority; Binding Agreements. The Purchaser has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules and laws governing specific performance, injunctive relief and other equitable remedies. (c) Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Purchaser with the provisions hereof do not and will not (i) conflict with or result in a breach of the certificate of incorporation, by-laws or other constitutive documents of the Purchaser, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or (iii) conflict with or result in a default under (or give rise to any right of acceleration under) any material term of any material agreement relating to indebtedness for borrowed money to which the Purchaser is a party or the material terms of any securities issued by the Purchaser or instruments convertible or exchangeable for such securities, except for conflicts, breaches or defaults as to which requisite waivers or consents will have been obtained before the Closing. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Purchaser of this Agreement and the consummation of the transactions contemplated hereby, except for (i) the filing of a premerger notification and report form under the HSR Act and the expiration or early termination of the applicable waiting period under the HSR Act and (ii) the consent of the Purchaser's senior and subordinated lenders (it being understood and agreed that obtaining or failing to obtain the consent of the Purchaser's senior and subordinated lenders is deemed to be within the control of the Purchaser solely for purposes of Section 3.1(b)(i)). (d) Investment Representation. The Purchaser is acquiring the Shares for its own account and not with a view to distribution within the meaning of the applicable Federal securities laws. (e) Brokers. No agent, broker, investment banker, person or firm acting on behalf of the Purchaser or under the authority of the Purchaser is or will be entitled to any broker's or 18 24 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 ADDITIONAL AGREEMENTS SECTION 3.1. Costs and Expenses. (a) All fees, costs and expenses incurred in the pursuit of the transactions contemplated by this Agreement, including the fees and expenses of its counsel, financial advisors and accountants (collectively, "Transaction Costs"), incurred by the Purchaser shall be paid by the Purchaser. Any Transaction Costs incurred by the Sellers or the Company shall be paid or reimbursed by the Purchaser up to an aggregate maximum of $100,000 (plus any Transaction Costs incurred in connection with the additional legal opinion work done by the Sellers' counsel after the date hereof relating to the issues of enforceability of the covenant not to compete, employment agreements and choice of law provisions), and any Transaction Costs incurred by the Sellers or the Company in excess of such $100,000 shall be paid or reimbursed by the Sellers. (b) The Purchaser shall pay the Sellers a fee in immediately available funds of $1,000,000 if (i) the Closing does not occur on or prior to the close of business on June 22, 1998 for any reason in the control of the Purchaser (including the failure to satisfy the condition set forth in Section 4.1(h)) and this Agreement is terminated pursuant to Section 6.2 and (ii) (A) the condition set forth in Section 4.1(g) has been satisfied or deemed satisfied and (B) the condition set forth in Section 4.1(b) has been satisfied (assuming for purposes of this Section 3.1(b) that the date of termination of this Agreement is the Closing Date). (c) In the event that the Closing does not occur on or prior to the close of business on June 22, 1998 for any reason in the control of the Company or the Sellers not precipitated by the Purchaser and this Agreement is terminated pursuant to Section 6.2, the Sellers shall pay the Purchaser a fee in immediately available funds of $1,000,000; provided that the Purchaser has performed or complied with all covenants and agreements required to be performed or complied with on or prior to the date of termination of this Agreement and the representations and warranties of the Purchaser as set forth in Section 2.2 above are true and correct as of such date. (d) Any fee due pursuant to Section 3.1(b) or (c) (i) shall be paid within five business days after the termination of this Agreement pursuant to Section 6.2, (ii) is in addition to, and not in lieu of, any other remedies available at law or equity for a breach of this Agreement prior to its termination and (iii) shall be paid without deduction, set-off or counterclaim of any kind. SECTION 3.2. Conduct of Business. From the date of this Agreement until the Closing Date, except as set forth in Section 3.2 of the Disclosure Schedule or as otherwise consented to by the Purchaser in writing, the Sellers shall cause the Company and Phoenix to operate their respective businesses only in the ordinary course of business consistent with past practice. The Sellers shall use all commercially reasonable efforts to cause the Company and Phoenix to preserve intact the present organization of the Company and Phoenix; keep available 19 25 the services of the present officers and employees of the Company and Phoenix; preserve the Company's and Phoenix's goodwill and relationships with customers, suppliers, licensors, licensees, contractors, distributors, lenders and other persons having significant business dealings with the Company or Phoenix; continue all current sales, marketing and other promotional policies, programs and activities; maintain the assets of the Company and Phoenix in good repair, order and condition; and maintain the Company's and Phoenix's insurance policies and risk management programs and in the event of casualty, loss or damage to any assets of the Company or Phoenix, repair or replace such assets with assets of comparable quality, as the case may be. Without limiting the generality of the foregoing, the Sellers shall not (and shall not permit the Company or Phoenix to), without the prior written consent of the Purchaser, directly or indirectly (i) cause or permit any state of affairs, action or omission described in Section 2.1(f) (substituting $25,000 for $10,000 in clause (x) of Section 2.1(f) for purposes of this Section 3.2), (ii) enter into or give any material waiver, amendment or consent under the definitive purchase agreement between the Company and Parnelli-Jones, or (iii) take, or agree in writing or otherwise to take, any action which would make any representation or warranty of any Seller contained in this Agreement untrue or incorrect as of the date when made or as of any future date or which could prevent the satisfaction of any condition to closing set forth in Article IV. The Sellers shall promptly notify the Purchaser if they intend to take any action with respect to the acquisition of assets or properties from Parnelli Jones that could reasonably be expected to be of material interest to the Purchaser, and shall refrain from taking such actions if the Purchaser so instructs (such instruction to be delivered within twenty-four hours). SECTION 3.3. Reasonable Efforts; Further Assurances. The Purchaser and the Sellers each agree to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary and reasonably appropriate under applicable laws and regulations, to consummate and make effective the transactions contemplated by this Agreement as expeditiously as practicable and to ensure that the conditions set forth in Article IV are satisfied, insofar as such matters are within the control of any of them. In case at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties to this Agreement shall take or cause to be taken all such necessary action, including the execution and delivery of such further instruments and documents, as may be reasonably requested by any party for such purposes or otherwise to complete or perfect the transactions contemplated by this Agreement. SECTION 3.4. No Shopping. From the date of this Agreement until the earlier of (i) the Closing Date and (ii) the date this Agreement is terminated in accordance with Section 6.2, no Seller shall, and no Seller shall permit the Company or Phoenix or any partner, director, officer or agent of the Company or Phoenix to, directly or indirectly, solicit or initiate, enter into or conduct, discussions concerning, or exchange information (including by way of furnishing information concerning the Company or Phoenix or their respective businesses) or enter into any negotiations concerning, or respond to any inquiries or solicit, receive, entertain or agree to any proposals for, the acquisition of the assets of, or any substantial part thereof (except for sales of inventory in the ordinary course of the Company's or Phoenix's business), or a merger involving, the Company or Phoenix or the transfer of all or a substantial part of the capital stock of the Company or Phoenix to any person other than the Purchaser or one of its affiliates or the formation of any joint venture or 20 26 strategic alliance involving the Company or Phoenix. In addition, during such time period, no Seller shall authorize, direct or knowingly permit any employee or agent of the Company or Phoenix to do any of the foregoing and the Sellers shall notify the Purchaser of the identity of any person who approaches any Seller or the Company or Phoenix with respect to any of the foregoing. SECTION 3.5. Access and Information. (a) Access Prior to Closing. From the date of this Agreement until the first to occur (i) of the Closing Date and (ii) the termination of this Agreement in accordance with Section 6.2, the Sellers shall cause the Company and Phoenix to permit the Purchaser, its financing parties and their respective representatives to make such investigation of the business, operations and properties of the Company and Phoenix as the Purchaser deems necessary or desirable in connection with the transactions contemplated by this Agreement. Such investigation shall include access to the respective directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of the Company and Phoenix and the properties, books, records and commitments of the Company and Phoenix. Sellers shall furnish the Purchaser and its representatives with such financial, operating and other data and information, and copies of documents with respect to the Company or Phoenix or any of the transactions contemplated by this Agreement, as the Purchaser shall from time to time request. Such access and investigation shall be coordinated through Sellers (or Company representatives as designated by Sellers) and shall occur only during periods reasonably determined by Sellers so as not to disrupt the operations of the Company and Phoenix. Such access and information shall not in any way affect or diminish any of the representations or warranties hereunder. Without limiting the foregoing, during such period, Sellers shall keep the Purchaser informed as to the business and operations of the Company and Phoenix and shall consult with the Purchaser as appropriate. Notwithstanding this Section 3.5, it is understood and agreed that the Sellers may refuse to permit the Purchaser to commence employee interviews until the Purchaser has notified the Sellers of its acceptance of the materials furnished pursuant to Section 3.12(b). (b) Confidentiality. Until Closing and at all times following the termination of this Agreement pursuant to Section 6.2, the Purchaser and the Sellers each agree that all financial or other information about the Purchaser, the Company or any Seller, or other information of a confidential or proprietary nature, disclosed to the other at any time in connection with the proposed transaction shall be kept confidential by the party receiving such information and shall not be disclosed to any person or used by the receiving party (other than to its agents or employees, and, in the case of the Purchaser, its financing parties which have been bound by confidentiality obligations similar to those contained in this Section 3.5(b)), in connection with the transactions contemplated by this Agreement) except: (i) with the prior written consent of the disclosing party; (ii) as may be required by applicable law or court process; (iii) such information which may have been acquired or obtained by lawful means by such party (other than through disclosure by the other party in connection with the transaction contemplated by this Agreement); or (iv) such information which is or becomes generally available to the public other than as a result of a violation of this provision. 21 27 (c) Equitable Relief. The parties acknowledge that damages at law would be an inadequate remedy for the breach by any party of Section 3.5(b), and agree in the event of such breach that any non-breaching party may obtain temporary and permanent injunctive relief restraining the breaching party from such breach, and, to the extent permissible under applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. SECTION 3.6. Confidentiality; Non-Competition. (a) Confidential Information. Each Seller recognizes and hereby acknowledges that, as a stockholder and senior executive of the Company, he knows of, and has been exposed to, confidential business information concerning information, ideas, know how, trade secrets, processes, computer software, methods, practices, techniques, technical plans, customer lists, pricing techniques and information, marketing plans, financial information, and all other compilations of information that relate to the business of the Company Group and its current and prospective customers ("Confidential Information"). Each Seller recognizes and hereby acknowledges that such Confidential Information is a valuable asset of the Company Group. Each Seller agrees to safeguard such Confidential Information for the exclusive benefit of the members of the Company Group and agrees that, after the Closing, he will not disclose, distribute or publish such Confidential Information to any person, company, business or corporation, provided that Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by such Seller or by a person who received such information from such Seller in violation of this Agreement). "Company Group" shall mean the Purchaser, the Company and their respective subsidiaries and affiliates. (b) Covenant Not To Compete. (i) Each Seller acknowledges and recognizes his possession of Confidential Information and acknowledges and recognizes the highly competitive nature of the business of the members of the Company Group. Accordingly, in consideration of the Purchaser entering into this Agreement, the transactions contemplated by this Agreement, the payments specified in subsections (ii) and (iii) below and the premises contained herein, each Seller agrees that, during the Covenant Period (defined below), such Seller will not, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal or another business or firm, directly or indirectly (1) engage in the States of Arizona, California, New Mexico, Nevada, Oregon, Utah and Washington in any Competing Business, (2) divert, take away or solicit, or attempt to divert, take away or solicit any businesses or individuals that were customers of the Company Group, (3) contact or communicate with any employee of any member of the Company Group for the purpose of inducing or otherwise encouraging such employee to terminate his or her employment with such person, provided, however, that this Section 3.6(b) shall not preclude such Seller from giving an employment reference at the request of a prospective employer of such employee, or (4) assist others in engaging in any of the foregoing actions described in clauses (1), (2) or (3) above. "Covenant Period" means the five-year period commencing on the Closing Date and ending on the fifth anniversary of the Closing Date. "Competing Business" means any business that is competitive 22 28 with the business of any member of the Company Group (including, without limitation, the wholesale or retail tires or automotive parts businesses). (ii) The covenant not to compete of the Sellers set forth in Section 3.6(b)(i) is in further consideration of the payment by the Purchaser to Arthur C. Soares ("Soares") of a Non-Compete Payment in an amount equal to $6,500,000 payable in annual installments as follows: $500,000 on the first-year anniversary of the Closing Date, $1,000,000 on the second-year anniversary of the Closing Date, $1,670,000 on each of the third-year and fourth-year anniversaries of the Closing Date, and $1,660,000 on the fifth-year anniversary of the Closing Date. Notwithstanding the foregoing sentence, if the aggregate amount of the Non-Compete Payment is reduced pursuant to Section 1.5, the Non-Compete Payment payable to Soares shall be in an amount equal to $2,250,000 payable in installments as follows: $750,000 on each of the third-year, fourth-year and fifth-year anniversaries of the Closing Date. The Purchaser shall also pay Soares interest on the unpaid balance of such Non-Compete Payment at a rate of 8% per annum for the period from and including the Closing Date to but excluding the date payment is due under this Section 3.6. Such interest payments shall be made annually at the same time as the payment of the annual installment of such Non-Compete Payment. Soares acknowledges and agrees that the Purchaser shall be entitled to set off or apply all or a portion of the unpaid Non-Compete Payment (including the interest payments thereon) payable to Soares against any obligations of Soares to the Purchaser or its affiliates now or hereafter existing under Article V. In the event Purchaser intends to set-off any amount payable to Soares under this Section 3.6 against any such obligations, the Purchaser shall notify Soares no later than the date on which such amount is payable. (iii) The covenant not to compete of the Sellers set forth in Section 3.6(b)(i) is in further consideration of the payment by the Purchaser to Ray C. Barney ("Barney") of a Non-Compete Payment in an amount equal to $900,000 payable in installments as follows: $100,000 on the second-year anniversary of the Closing Date, $200,000 on the third-year anniversary of the Closing Date, and $300,000 on each of the fourth-year and fifth-year anniversaries of the Closing Date. Notwithstanding the foregoing sentence, if the aggregate amount of the Non-Compete Payment is reduced pursuant to Section 1.5, the Non-Compete Payment payable to Barney shall be in an amount equal to $150,000 payable in installments as follows: $50,000 on each of the third-year, fourth-year and fifth-year anniversaries of the Closing Date. The Purchaser shall also pay Barney interest on the unpaid balance of such Non-Compete Payment at a rate of 8% per annum for the period from and including the Closing Date to but excluding the date payment is due under this Section 3.6. Such interest payments shall be made annually at the same time as the payment of the annual installment of such Non-Compete Payment. Barney acknowledges and agrees that the Purchaser shall be entitled to set off or apply all or a portion of the unpaid Non-Compete Payment (including the interest payments thereon) payable to Barney against any obligations of Barney to the Purchaser or its affiliates now or hereafter existing under Article V. In the event Purchaser intends to set-off any amount payable to Barney under this Section 3.6 against any such obligations, the Purchaser shall notify Barney no later than the date on which such amount is payable. 23 29 (iv) Any amount payable by the Purchaser to either Seller pursuant to this Section 3.6 and not paid when due shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment at a rate of 10% per annum. (v) The Purchaser agrees on or prior to the Closing to use all commercially reasonable efforts to arrange for security for the Non-Compete Payments on terms and conditions reasonably satisfactory to each Seller and to execute and deliver or obtain such security agreements, letters of credit or other documents and instruments in favor of the Sellers as are necessary in connection therewith. (c) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Section 3.6 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 Sellers and the Purchaser consider the restrictions contained in this Section 3.6 to be reasonable for the purposes of preserving the Company's goodwill and proprietary rights, if any particular provision of this Section 3.6 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 Sellers and the Purchaser consider the restrictions contained in Section 3.6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Section 3.6 is unenforceable against any Seller, the provisions of this 3.6 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. (d) Remedies. The parties acknowledge that the Purchaser's damages at law would be an inadequate remedy for the breach by any Seller of any provision of this Section 3.6, and agree in the event of such breach that the Purchaser may obtain temporary and permanent injunctive relief restraining such Seller 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 in this Agreement shall be construed as prohibiting the Purchaser from pursuing other remedies available at law or equity for such breach or threatened breach of this Section 3.6 of this Agreement. Without limiting the generality of the foregoing, the Sellers acknowledge that, in the event of a breach or threatened breach by any Seller of any of the provisions of subsection (b) of this Section 3.6, the Purchaser's damages may exceed the amount paid to the Sellers (singly or in the aggregate) in consideration of their covenants set forth in such paragraph (b). (e) Acknowledgment. Each Seller acknowledges that he is entering into the covenants contained in this Section 3.6, inter alia, due to his position, prior to the Closing Date, as a stockholder of the Company. 24 30 SECTION 3.7. Releases; Prior Compensation. Each Seller will agree and acknowledge, effective upon the Closing, that such Seller has been paid in full for all services rendered to the Company and Phoenix and has no outstanding claims against the Company or Phoenix or the Purchaser for any amounts arising because of such employment or otherwise except as contemplated by this Agreement or by the employment agreements referred to in Section 4.1(i). Each Seller agrees to release, effective as of the Closing Date, the Company and all of the Company's subsidiaries and affiliates from all rights such Seller may have to acquire any securities of the Company or any of its subsidiaries and affiliates and all actions, suits, debts, promises, agreements, damages, demands or claims of any kind whatsoever arising from any event or action prior to the Closing Date that any Seller had, has or may in the future have against the Company or any of its subsidiaries and affiliates (including, without limitation, all claims or rights either of the Sellers may have at any time as a result of the failure to take any action described in Section 2.1(c) of the Disclosure Schedule), except for the matters arising under this Agreement or related to the transactions contemplated hereby. SECTION 3.8. Public Announcements. The Purchaser, on the one hand, and the Sellers, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation. SECTION 3.9. Tax Matters. (a) Transfer Taxes. The Sellers shall be responsible for all transfer, excise, stamp, sales, use, recording or similar taxes or fees arising out of the sale, transfer, conveyance or assignment of the Shares by the Sellers and the transactions contemplated hereby. (b) Responsibility for Company Taxes. (i) Notwithstanding any other provision of this Agreement (including, without limitation, Section 5.1), in the event that the Closing occurs, the Sellers shall be liable for and shall indemnify the Purchaser and the Company for taxes of the Company and Phoenix for any taxable years or periods that end on or before the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of such taxable years ending on and including the Closing Date but only to the extent such taxes exceed the aggregate amount accrued (to the extent such accruals are consistent with past practice) for taxes on the Closing Date Balance Sheet. (ii) In the event that the Closing occurs, the Purchaser and the Company and Phoenix shall be liable for and shall indemnify the Sellers for taxes of the Company and Phoenix for any taxable years or periods that begins after the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of the taxable years beginning on the day after the Closing Date. (iii) For purposes of subparagraphs (b)(i) and (b)(ii) above, whenever it is necessary to determine the liability for taxes of the Company or Phoenix for a portion of a taxable year or 25 31 period that begins before and ends after the Closing Date, the determination of such taxes for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date, shall be determined by assuming that the Company or Phoenix had a taxable year or period which ended at the close of business on the Closing Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned based on the number of days in the year elapsed to and including the Closing Date. (c) Tax Treatment. Any payment by the Purchaser or any Seller under this Section 3.9 will be treated for tax purposes as an adjustment (an increase or a reduction) to the Purchase Price. (d) Filing of Returns. All tax returns with respect to the Company and Phoenix (i) shall, to the extent required to be filed on or before the Closing Date (taking into account any valid extensions), be caused by the Sellers to be filed by the Company or Phoenix when due in accordance with all applicable laws and (ii) shall, as of the time of filing, correctly reflect in all material respects the facts regarding the income, business, assets, operations, activities and status of the Company or Phoenix, as applicable, and any other information required to be shown therein. (e) Cooperation in Tax Matters. After the Closing Date, the Purchaser and each Seller shall: (i) assist in all reasonable respects (and cause their respective affiliates to assist) the other party in preparing any tax returns or reports which such other party is responsible for preparing and filing in accordance with this Section 3.9; (ii) cooperate in all reasonable respects in preparing for any audits of, or disputes with taxing authorities regarding, and tax returns of the Company or Phoenix; (iii) make available to the other and to any taxing authority as reasonably requested all information, records and documents relating to taxes of the Company or Phoenix; (iv) provide timely notice to the other in writing of any pending or threatened tax audit or assessments of the Company or Phoenix for taxable periods for which the other may have a liability under this Section 3.9; and (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any tax audit or information request with respect to any such taxable period. (f) Tax Audits and Assessments. 26 32 (i) The Purchaser shall notify the Sellers in writing upon receipt by the Purchaser or the Company or Phoenix of notice of any pending or threatened Federal, state, local or foreign tax audits or assessments which may materially affect the tax liabilities of the Company or Phoenix for which the Sellers would be required to indemnify the Purchaser and the Company or Phoenix. The Sellers shall have the right to participate in the resolution of any such tax audit or assessment. (ii) The Sellers shall notify the Purchaser in writing upon receipt by any of the Sellers of notice of any pending or threatened federal, state, local or foreign tax audits or assessments which may materially affect the tax liabilities of the Company or Phoenix for which the Purchaser and the Company or Phoenix would be required to indemnify the Sellers. The Purchaser shall have the right to participate in the resolution of any such tax audit or assessment. (g) Activities between Signing and Closing. From the date hereof until the Closing, without the prior written consent of Purchaser, neither the Company nor Phoenix shall make or change any tax election, change any annual tax accounting period, adopt or change any method of tax accounting, file any amended tax return, enter into any closing agreement, settle any tax claim or assessment, surrender any right to claim a tax refund, consent to any extension or waiver of the limitations period applicable to any tax claim or assessment or take or omit to take any other action, if any such other action or omission would have the effect of materially increasing the tax liability of the Company or Phoenix. (h) Payment of Pre-Closing Date Taxes. All taxes that are not due and payable on or prior to the Closing Date but which relate to a tax period ending on or prior to the Closing Date shall be paid by Seller when due but only to the extent such taxes exceed the amount accrued (to the extent such accruals are consistent with past practice) on the Closing Date Balance Sheet. SECTION 3.10. Fresno Warehouse. On or prior to the Closing Date, the Sellers shall have the right, at their option, to (i) cause the Company to sell to the Sellers the premises known as 5333 North Cornelia Ave., Fresno, California (the "Fresno Warehouse") and (ii) enter into a long-term lease with the Company relating to the continued use and occupation by the Company of the Fresno Warehouse, in each case pursuant to definitive documentation in form and substance reasonably satisfactory to the Purchaser containing the terms and conditions set forth in Exhibit D. In the event that any taxes, charges or fees are payable by the Company in connection with the transfer of the Fresno Warehouse to the Sellers (including, without limitation, in connection with the repayment or assumption of any indebtedness relating to the Fresno Warehouse) or such transfer has an adverse effect on the earnings of the Company, the Sellers shall pay to the Company any additional amounts necessary for the Company to be in the same economic position (after taking into account any taxes imposed as a result of the payment of such additional amounts) as if such taxes, charges or fees had not been imposed or such adverse effect had not occurred. SECTION 3.11. Additional Adjustment Amount. 27 33 (a) Management of the Company and the Arizona Business. The Purchaser agrees that the Sellers shall be given the opportunity, during the period beginning on the Closing Date and ending on the first-year anniversary of the Closing Date (the "Management Period"), to manage the Company and the Arizona Business, subject only to (i) the exercise of reasonable and prudent business judgment on the part of each Seller, (ii) the terms of the employment agreements between the Company and each Seller and (iii) the fiduciary duties of the members of the Board of Directors of the Purchaser. It is the intent of the parties to this Agreement that the Sellers be given broad managerial discretion and responsibility within the Company Group during the Management Period for decisions affecting the Company and the Arizona Business, including those affecting earnings and profitability. The Sellers shall promptly notify the Purchaser in writing in the event they believe that any corporate-level decision made during the Management Period could reasonably be expected to have an net adverse impact on the earnings and profitability of the Company or the Arizona Business, such notice to set forth in reasonable detail the basis for the Sellers' belief. The Purchaser and the Sellers agree to negotiate in good faith to make appropriate adjustments to the EBITDA of the Arizona Business (when calculating the Additional Adjustment Amount, as defined below) and the EBITDA of the Company (when calculating the Synergy Bonus and Incentive Bonus, each as defined in the employment agreements between the Company and each Seller) to the extent such decision has a net negative effect on EBITDA of the Arizona Business or the Company, as applicable. (b) Additional Adjustment Amount. An Additional Adjustment Amount relating to the Arizona Business shall be payable by the Purchaser to the Sellers in accordance with Section 3.11(c). "Additional Adjustment Amount" shall mean an amount (to be calculated by the Purchaser within 30 days following the end of the Management Period) equal to (i) the product of (A) the earnings before interest, taxes, depreciation and amortization ("EBITDA") of the Arizona Business during the Management Period and (B) 6.0, minus (ii) the aggregate purchase price paid by the Company for the Arizona Business, minus (iii) the amount of any additional costs or expenses incurred, or purchase price payable, by the Company, in connection with the acquisition of the Arizona Business (including amounts reserved against such costs, expenses or payments). For purposes of calculating the Additional Adjustment Amount, (x) the Purchaser shall account for the Arizona Business on a stand-alone basis using the accounting principles applied in preparing the Closing Date Balance Sheet and (y) no corporate-level overhead costs incurred by the Purchaser shall be allocated to the Arizona Business. (c) Payment. If the Additional Adjustment Amount with respect to the Arizona Business is less than zero, the Purchaser shall be entitled to set off or apply all or a portion of any such Additional Adjustment Amount against the Non-Compete Payments due to the Sellers under Section 3.6. Any such set-off shall be made pro rata in proportion to the Sellers' ownership of Shares on the Closing Date as set forth on Annex A. If the Additional Adjustment Amount with respect to the Arizona Business is greater than zero, the Purchaser shall pay such Additional Adjustment Amount to the Sellers as an addition to the Purchase Price within 30 days following the calculation of such Additional Adjustment Amount in accordance with Section 3.11(b). Any Additional Adjustment Amount payable to the Sellers shall be payable in cash or, at the election of any Seller, (i) in shares of common stock of the Purchaser having a fair market value equal to such Additional Adjustment Amount or (ii) options or warrants to acquire the 28 34 number of shares of common stock of the Purchaser referred to in clause (i). Any Additional Adjustment Amounts payable to the Sellers shall be allocated among the Sellers in proportion to their ownership of Shares on the Closing Date as set forth on Annex A. SECTION 3.12. Additional Information. (a) Delivery of Final Disclosure Schedule. (i) As soon as practicable, but in no event more than seven days, after the date of this Agreement, the Sellers shall deliver to the Purchaser and its representatives a final draft of the Disclosure Schedule (as of the date of this Agreement) (the "Final Draft Disclosure Schedule"), together with true and complete copies of all documents and information relating to any item set forth on such Final Draft Disclosure Schedule which the Purchaser and its representatives have not had the opportunity to review as of the time of such delivery. The Sellers shall promptly furnish any other supporting documents or information reasonably necessary to verify the disclosures made on the Final Draft Disclosure Schedule which may be requested by the Purchaser after the date of delivery of the Final Draft Disclosure Schedule. Delivery of such documents and information shall in no way limit the Sellers' obligations under Section 3.5(a). (ii) On or before the fourteenth day from and after delivery of the Final Draft Disclosure Schedule and all supporting documentation referred to in the first two sentences of Section 3.12(a)(i), the Purchaser shall inform the Sellers in writing whether the Final Draft Disclosure Schedule is acceptable to the Purchaser. The Purchaser shall have the opportunity to request modifications to the Final Draft Disclosure Schedule during such fourteen-day period, and the Purchaser and the Sellers shall attempt in good faith to resolve any disputes regarding the Final Draft Disclosure Schedule. If as of such fourteenth day the Purchaser has not informed the Sellers in writing that the Final Draft Disclosure Schedule is acceptable, this Agreement shall terminate forthwith with no liability or obligations whatsoever from any party to any other party hereto. It is understood and agreed that the Purchaser may deem the Final Draft Disclosure Schedule acceptable or unacceptable in its sole discretion, and may elect to terminate this Agreement as set forth in this Section 3.12(a)(ii) for any reason or no reason. (iii) If the Purchaser does not elect to terminate this Agreement as set forth in Section 3.12(a)(ii), the Final Draft Disclosure Schedule (as modified through and including the date of acceptance by the Purchaser by mutual agreement of the Purchaser and the Sellers) shall be deemed for all purposes of this Agreement to be the Disclosure Schedule as of the date of this Agreement. Notwithstanding anything contained in this Section 3.12(a), any modification, supplement or amendment to the Final Draft Disclosure Schedule that arises from or relates to facts, events or circumstances occurring after the date of this Agreement shall not be deemed to be a part of the Disclosure Schedule as of the date accepted by the Purchaser but shall be deemed to be a supplement or amendment to the Disclosure Schedule made pursuant to Section 3.12(c). (b) Phase III Materials. Promptly upon the Purchaser's request, but in no event more than five days after the date the Disclosure Schedule has been accepted by the Purchaser pursuant to Section 3.12(a), the Sellers shall deliver to the Purchaser and its representatives true and complete copies of all documents and information relating to the items described in Section 29 35 2.1(u) of the Disclosure Schedule. Delivery of such documents and information shall in no way limit the Sellers' obligations under Section 3.5(a). (c) Disclosure Supplements. Each Seller shall have the continuing obligation until the Closing promptly to supplement or amend the Disclosure Schedule with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedule (a "Subsequent Development"); provided, that (i) if the Purchaser is notified by way of any such supplement or amendment of a Subsequent Development that occurs or arises after the date of this Agreement and the Closing thereafter occurs, then all rights of the Purchaser to seek indemnification pursuant to Section 5.1(a)(i) based upon a breach of representation or warranty caused by such Subsequent Development shall be deemed to have been waived, and (ii) no supplement or amendment to the Disclosure Schedule delivered to the Purchaser shall have any effect for the purpose of determining whether the condition set forth in Section 4.1(b) has been satisfied unless such supplement or amendment has previously been accepted in writing by the Purchaser. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of the Purchaser. The obligations of the Purchaser to perform this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by the Purchaser: (a) Authorization. All actions necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement shall have been duly and validly taken by each of the Sellers and each of the Sellers shall have full power and authority to enter into and deliver this agreement and to consummate the transactions contemplated by this Agreement. (b) Representations, Warranties and Covenants. The representations and warranties of the Sellers shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date; provided, that the foregoing condition shall be deemed to have been satisfied if the facts, events or circumstances underlying any inaccuracies in any such representations and warranties as of the Closing Date (without giving effect to any material adverse effect qualification or any other materiality or similar qualifications contained therein) individually or in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company and Phoenix (taken as a whole). The Sellers shall have performed and complied with all covenants and agreements required to be performed or complied with on or prior to the Closing Date. As of the Closing Date, there shall have been no material adverse change in the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company and Phoenix (taken as a whole). (c) Consents, Amendments and Terminations. The Purchaser shall have received duly executed and delivered copies of all waivers, consents, terminations and approvals listed in 30 36 Section 2.1(d) of the Disclosure Schedule, all in form and substance reasonably satisfactory to the Purchaser. (d) Certificates. The Purchaser shall have received a certificate of the chief executive officer and the chief financial officer of the Company and a certificate of each Seller, each in substantially the form of Exhibits A-1 and A-2, respectively. (e) Opinion of Counsel. The Purchaser shall have received the opinion dated the Closing Date of counsel to the Sellers and the Company, in substantially the form of Exhibit B. (f) Financial Statements. The Purchaser shall have received a balance sheet of the Company and related statements of income and retained earnings and cash flows for the most recent month end prior to the Closing Date (the "Closing Date Financial Statement"), certified by the chief executive officer and chief financial officer of the Company. (g) Due Diligence. The Purchaser and its representatives shall have completed a due diligence review of the condition (financial or otherwise), assets, liabilities, operations and business of, and any other matters relating to, the Company and Phoenix and the Sellers, and the results of such due diligence shall be satisfactory to the Purchaser; provided, that the condition set forth in this Section 4.1(g) shall be deemed to have been satisfied unless the Purchaser notifies the Sellers in writing within five business days after the date all materials required to be delivered to the Purchaser pursuant to Section 3.12(b) have been delivered that such materials are not substantially as represented to the Purchaser in Section 2.1(u). (h) Financing. The Purchaser shall have received adequate financing to consummate the transactions contemplated by this Agreement, all on terms satisfactory to the Purchaser. (i) Employment Agreements. Each of Arthur C. Soares, Ray C. Barney and Elizabeth Roberts shall have duly executed and delivered to the Purchaser Employment Agreements in substantially the forms of Exhibits C-1, C-2 and C-3, respectively. (j) Corporate Directors and Officers. At the request of Purchaser, the Purchaser shall have received the resignations (effective upon Closing) of the officers and directors of the Company so requested to resign. (k) Share Certificates and Corporate Records. The Purchaser shall have received certificates representing all of the Shares, together with stock powers duly endorsed in blank and the Purchaser shall have received the complete stock ledgers, minute books and similar corporate records of the Company. (l) HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (m) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit any of the 31 37 transactions contemplated by this Agreement. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or other legal restraint or prohibition preventing the transactions contemplated by this Agreement shall be in effect. (n) Releases. The Purchaser shall have received a release from each Seller effective upon the Closing with respect to all matters set forth in Section 3.7, each in form and substance satisfactory to the Purchaser. (o) Other Documents. The Purchaser shall have received such other customary documents, certificates or instruments as it may reasonably request. SECTION 4.2. Conditions of Obligations of the Sellers. The obligations of the Sellers to perform this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by all of the Sellers: (a) Authorization. All actions necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement shall have been duly and validly taken by the Purchaser and the Purchaser shall have full power and authority to enter into and deliver such agreements and to consummate transactions contemplated by this Agreement. (b) Representations, Warranties and Covenants. The representations and warranties of the Purchaser contained herein shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date, and the Purchaser shall have performed and complied with all covenants and agreements required to be performed or complied with on or prior to the Closing Date. (c) Certificate. The Sellers shall have received a certificate of the President or a Vice President of the Purchaser confirming the matters set forth in Section 4.2(b) in form and substance reasonably satisfactory to the Sellers. (f) Employment Agreements. Each of Arthur C. Soares, Ray C. Barney and Elizabeth Roberts shall have duly executed and delivered to the Purchaser Employment Agreements in substantially the forms of Exhibits C-1, C-2 and C-3, respectively (g) HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (h) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit any of the transactions contemplated by this Agreement. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or 32 38 other legal restraint or prohibition preventing the transactions contemplated by this Agreement shall be in effect. (i) Other Documents. The Sellers shall have received such other customary documents, certificates or instruments as it may reasonably request. ARTICLE V INDEMNITY SECTION 5.1. Indemnification. (a) Indemnification by Sellers. The Sellers jointly and severally indemnify and hold harmless the Purchaser and its affiliates, directors, officers, employees and other agents and representatives from and against any and all liabilities, judgments, claims, settlements, losses, damages, lost profits, diminutions in value, fees, liens, taxes, penalties, obligations and expenses (collectively, "Losses") incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation or breach of any representation, warranty, covenant or agreement of any Seller contained in this Agreement or any certificate or other document delivered by any Seller or the Company under this Agreement; (ii) the non-fulfillment by any Seller of any agreement made by such Seller in this Agreement; or (iii) any and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident to any of the matters referred to in clauses (i) through (ii) of this Section 5.1(a). (b) Indemnification by Purchaser. The Purchaser indemnifies and holds harmless the Sellers, and their respective agents and representatives, from and against any and all Losses incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation or breach of any representation, warranty, covenant or agreement of the Purchaser contained in this Agreement or any certificate or other document delivered by the Purchaser under this Agreement; (ii) the non-fulfillment by the Purchaser of any agreement made by it in this Agreement; or (iii) any and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident to any of the matters referred to in clauses (i) through (ii) of this Section 5.1(b). (c) Indemnification Procedures. In case any claim or litigation which might give rise to any obligation of a party under the indemnity and reimbursement provisions of this Agreement 33 39 (each an "Indemnifying Party") shall come to the attention of the party seeking indemnification hereunder (the "Indemnified Party"), the Indemnified Party shall notify in writing promptly the Indemnifying Party of the existence, nature and amount of potential loss. Failure to give such notice shall not prejudice the rights of the Indemnified Party, except to the extent that the Indemnifying Party shall have been materially prejudiced by such failure. With respect to claims or litigation concerning third parties, the Indemnifying Party shall be entitled to participate in and, if (i) in the judgment of the Indemnified Party such claim can properly be resolved by money damages alone and the Indemnifying Party has the financial resources to pay such damages and (ii) the Indemnifying Party admits that this indemnity fully covers the claim or litigation, the Indemnifying Party shall be entitled to direct the defense of any claim at its expense, but such defense shall be conducted by legal counsel reasonably satisfactory to the Indemnified Party. The parties shall cooperate in all reasonable respects in the preparation and conduct of any such defense, including making available (upon reasonable notice and during normal business hours) to the other party and legal counsel books and records of such party relevant to such defense. No Indemnifying Party in the defense of any third parties claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which (i) contains any equitable order, judgment or term that affects, restrains or interferes with the business of an Indemnified Party and (ii) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. (d) Tax Benefits. The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be (i) increased to take account of any net tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder ("grossed-up" for taxes on such increase) and (ii) reduced to take account of any net tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Losses. In computing the amount of any such tax cost or tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any and all Losses. (e) Insurance Proceeds. The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be net of any amounts actually received by the Indemnified Party under insurance policies with respect to such Losses. In the event that any claim for indemnification asserted under this Article V is, or may be, the subject of the Company's or any party's hereto insurance coverages or other right to indemnification or contribution from any third party (a "Third Party Contributor"), the Indemnified Party agrees to promptly notify the applicable insurance carrier of such claim and tender defense thereof to such carrier, and shall also promptly notify any potential Third Party Contributor. Each Indemnified Party agrees to pursue, at the sole cost and expense of the Indemnifying Party, such claims diligently and to reasonably cooperate, at the sole cost and expense of the Indemnifying Party, with each such insurance carrier and Third Party Contributor, and to make no claim for indemnification under this Article V for a period of 180 days after making a claim for such insurance or contribution. If insurance coverage or contribution is denied (in whole or in part), or if no resolution of an insurance or contribution claim shall have occurred within such 180 days, the Indemnified Party may proceed for indemnification 34 40 under this Article V, and such Indemnifying Party shall be subrogated to the rights of the Indemnified Party against such insurance carrier or Third Party Contributor. (f) Treatment of Payments. Any payment made pursuant to this Section 5.1 shall be treated as an adjustment to the Purchase Price for income tax purposes. SECTION 5.2. Limitations. (a) Expiration Date. The indemnification and reimbursement obligations hereunder shall expire on the second anniversary of the Closing Date (the "Expiration Date"), except (i) as to any claims for, or any claims that may result in, any Loss for which indemnity may be sought hereunder of which the Indemnifying Party has received written notice from the Indemnified Party on or before the Expiration Date or (ii) as to any representations, warranties, covenants or agreements expressly surviving such two year period as set forth in Section 6.6. (b) Cap. The total indemnification obligations of the Sellers (other than for claims relating to or arising out of Section 1.4, Section 2.1(b), (c), (o) or (s), Section 3.1, Section 3.6, Section 3.7, Section 3.9, Section 3.10 or Section 3.11 (collectively, the "Purchaser Excluded Claims")) to the Purchaser pursuant to this Article V shall not exceed (i) for all Sellers in the aggregate $9,000,000 and (ii) for each Seller an amount equal to the product of (x) $9,000,000 and (y) the quotient obtained by dividing (1) the number of Shares owned by such Seller as specified on Annex A by (2) 14,118. Notwithstanding anything to the contrary set forth in this Agreement, the indemnification obligations of the Sellers to the Purchaser with respect to Purchaser Excluded Claims shall not count towards, or be subject to, the limitations set forth in the first sentence of this paragraph (b) or the $250,000 threshold set forth in Section 5.2(c), and there shall be no limitation on such indemnification obligations. The total indemnification obligations of the Purchaser (other than for claims relating to or arising out of Section 2.2(b), Section 3.1, Section 3.6(b)(ii), Section 3.6(b)(iii), Section 3.9 or Section 3.11) to the Sellers pursuant to this Article V shall not exceed in the aggregate $9,000,000. (c) Threshold. The Purchaser shall not be entitled to indemnification pursuant to this Article V with respect to any claim for indemnification (other than in connection with Purchaser Excluded Claims), unless the aggregate Losses to the Purchaser, with respect to all claims for indemnification pursuant to Section 5.1(a), exceed $250,000, in which case the Sellers shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay an amount equal to all such Losses (including such first $250,000). The Sellers shall not be entitled to indemnification pursuant to this Article V with respect to any claim for indemnification (other than claims relating to or arising out of Section 2.2(b), Section 3.1, Section 3.6(b)(ii), Section 3.6(b)(iii), Section 3.9 or Section 3.11), unless the aggregate Losses to the Sellers, with respect to all claims for indemnification pursuant to Section 5.1(c), exceeds $250,000, in which case the Purchaser shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay an amount equal to all such Losses (including such first $250,000). (d) Sole Remedy. If the Closing occurs, and except for the Purchaser's rights of set-off contained in Sections 3.6(b)(ii) and (iii) and 3.11(c), the provisions of this Article V shall represent the sole remedy available to any party hereto for a claim for money damages arising from, 35 41 by reason of or in connection with any misrepresentation or breach or non-fulfillment of any representation, warranty, covenant or agreement contained in this Agreement or otherwise. (e) Several Liability; Certain Representations. Notwithstanding any provision in this Agreement to the contrary, (i) the representations and warranties made in Sections 2.1(b) and 2.1(d) (but only to the extent Section 2.1(d) relates to agreements binding on, legal requirements applicable to, and properties or assets of, any Seller) are hereby deemed to be made by each Seller severally in proportion to such Seller's ownership of Shares on the Closing Date and not jointly and severally by the Sellers and (ii) the representation and warranty made in Section 2.1(c) is hereby deemed for purposes of this Article V to have been made without reference to any matter described in Section 2.1(c) of the Disclosure Schedule. SECTION 5.3. No Election. Subject to Section 5.2(d), nothing contained in this Article V shall be deemed an election of remedies under this Agreement or limit in any way the liability of any party under any other agreement to which such party is a party relating to this Agreement or the transactions contemplated by this Agreement. ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement. This Agreement and the Employment Agreements and the schedules, annexes and exhibits hereto and thereto contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Employment Agreements and supersede all prior agreements or understandings among the parties. The Letter of Intent, dated December 5, 1997, is expressly superseded, void and no longer of any force or effect. SECTION 6.2. Termination. (a) This Agreement shall terminate on the first to occur of any of the following events: (i) the mutual written agreement of the Purchaser and the Sellers; (ii) by written notice of the Purchaser, on one hand, or the Sellers, on the other hand, to the other, if the Closing shall not have occurred prior to the close of business on June 22, 1998; (iii) by written notice of the Purchaser to the Sellers, in the event any Seller shall have materially breached any of its representations, warranties or agreements contained in this Agreement if such Seller fails to cure such breach within five business days following notification thereof by the Purchaser; (iv) by written notice of the Sellers to the Purchaser, in the event the Purchaser shall have materially breached any of its representations, warranties or agreements contained in this Agreement if the Purchaser fails to cure such breach within five business days following notification thereof by the Sellers; or 36 42 (v) by written notice of the Purchaser to the Sellers, as set forth in Section 3.12(a)(ii). (b) Nothing in this Section shall relieve any party of any liability for a breach of this Agreement prior to its termination. Except as aforesaid, upon the termination of this Agreement, all rights and obligations of the parties under this Agreement shall terminate, except their obligations under Sections 3.1, 3.5(b) and 3.8. SECTION 6.3. Descriptive Headings; Certain Interpretations. (a) Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (b) Whenever any party makes any representation, warranty or other statement to such party's knowledge, such party will be deemed to have made due inquiry into the subject matter of such representation, warranty or other statement. (c) Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) 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. SECTION 6.4. Notices. All notices, requests and other communications to any party hereunder shall be in writing and sufficient if delivered personally or sent by facsimile (with confirmation of receipt) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Purchaser, to: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093-0837 Facsimile: (704) 732-6480 Attention: President 37 43 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith If to any Seller, to the address or facsimile number of such Seller set forth on the signature pages of this Agreement, with a copy to: Jackson Tufts Cole & Black, LLP 60 South Market Street 10th Floor San Jose, California 95113-2336 Facsimile: (408) 998-4889 Attention: Richard Scudellari or to such other address or facsimile number as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by mail, when delivered at the address specified in this Section or on the fifth business day following the date on which such communication is posted, whichever occurs first. SECTION 6.5. Counterparts. 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 but one agreement. SECTION 6.6. Survival. Except as set forth in 5.2, all representations and warranties, agreements and covenants contained in this Agreement or in any document delivered pursuant to this Agreement or in connection with this Agreement (unless otherwise expressly provided) shall survive the Closing and shall remain in full force and effect until the Expiration Date; provided that the representations and warranties in Section 2.1(a), (b) (c), (l) and (o) and the covenants and agreements in Section 3.1, 3.3, 3.5(b), 3.6, 3.7 and 3.9 shall not expire on the Expiration Date and shall survive, as set forth in such Sections, or, if not set forth, shall survive forever or until the expiration of the applicable statute of limitations. SECTION 6.7. Benefits of Agreement. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including in the case of the Purchaser, to its financing parties. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third party. SECTION 6.8. Amendments and Waivers. No modification, amendment or waiver of any provision of, or consent required by, this Agreement, nor any consent to any departure 38 44 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. SECTION 6.9. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by any party hereto without the prior written consent of the other parties; except that the Purchaser may assign this Agreement and all of its rights and obligations to an affiliate of the Purchaser provided that the Purchaser guarantees such affiliate's obligations under this Agreement. Any instrument purporting to make an assignment in violation of this Section shall be void. SECTION 6.10. 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, 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. SECTION 6.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 6.12. DISPUTE RESOLUTION; CONSENT TO JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN ANNEX B TO THIS AGREEMENT. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARE NOT GOVERNED BY ANNEX B AND WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT OR ANY CLAIM THAT A LEGAL PROCEEDING COMMENCED IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 39 45 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ------------------------------ J. Michael Gaither Senior Vice President and General Council SELLERS: Agreed and acknowledged by: /s/ ARTHUR C. SOARES - ------------------------------ ------------------------------ Name: Arthur C. Soares (Spouse) Address: 16641 Harwood Road Los Gatos, CA 95032 Agreed and acknowledged by: /s/ KATHY L. BARNEY /s/ RAY C. BARNEY - ------------------------------ ------------------------------ Name: Ray C. Barney (Spouse) Address: 216 Fieldcrest Court Danville, CA 94506 EX-10.14 32 ESCROW AGREEMENT DATED MAY 20, 1998 1 Exhibit 10.14 ESCROW AGREEMENT (the "Agreement"), dated as of May 20, 1998, among The J. H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), the former stockholders (the "CPW Stockholders") of The Speed Merchant, Inc., a California corporation (the "Company"), and First Union National Bank, a national banking association, as escrow agent (the "Escrow Agent"). --------------------------------------------------------- INTRODUCTION The Stock Purchase Agreement, dated as of March 11, 1998 (the "Stock Purchase Agreement") between Heafner and the CPW Stockholders contemplates the payment following the closing of the transactions contemplated thereby of certain amounts (the "Non-Compete Payments") by Heafner to each of the CPW Stockholders in exchange for certain non-compete covenants as set forth on Schedule A to this Agreement. Pursuant to the Stock Purchase Agreement, Heafner has agreed to use all commercially reasonable efforts to arrange for security for the Non-Compete Payments on terms and conditions reasonably satisfactory to the CPW Stockholders. In order to provide for such security, Heafner and the CPW Stockholders desire to arrange for the delivery of the Escrow (as defined below) to the Escrow Agent. Capitalized terms used and not otherwise defined herein have the meaning set forth in the Stock Purchase Agreement. Heafner, the CPW Stockholders and the Escrow Agent agree as follows: 1. Appointment of the Escrow Agent; Delivery of Escrow. Each of Heafner and the CPW Stockholders constitutes and appoints the Escrow Agent as, and the Escrow Agent agrees to assume and perform the duties of, the escrow agent under and pursuant to this Agreement. The Escrow Agent acknowledges receipt from Heafner of a letter of credit in the form attached hereto as Exhibit A (as the same may be amended, renewed, replaced, reduced or extended from time to time, the "Letter of Credit" or the "Escrow"). 2. Acceptance and Undertaking of the Escrow Agent. The Escrow Agent hereby acknowledges receipt of the documents and instruments comprising the Escrow and covenants and agrees to hold all of the same in escrow, and subsequently to release and distribute, or return, as the case may be, the Escrow or any part thereof, only pursuant to and in strict accordance with all of the terms and conditions of this Agreement. 3. Notice of Payment. Heafner shall give written notice to the issuer of the Letter of Credit and the Escrow Agent promptly upon making each Non-Compete Payment of the amount and date of such payment. 2 4. Claims Against the Escrow. (a) Concurrently with the delivery by the Representative (as defined in Section 14) of a written notice to Heafner of a claim by either CPW Stockholder that all or a portion of any Non-Compete Payment shall not have been made when due (a "Claim Notice"), or within a reasonable period thereafter, the Representative will deliver to the Escrow Agent a certificate in substantially the form of Annex I (a "Certificate of Instruction"). No Certificate of Instruction may be delivered without the prior or simultaneous delivery of a Claim Notice. No Certificate of Instruction may be delivered by the Representative after the close of business on the third business day immediately preceding the Termination Date (as defined in Section 5). The Escrow Agent shall give written notice to Heafner of its receipt of a Certificate of Instruction not later than the second business day next following receipt thereof, together with a copy of such Certificate of Instruction and Claim Notice. (b) If the Escrow Agent (i) shall not, within 30 calendar days following its receipt of a Certificate of Instruction (the "Objection Period"), have received from Heafner a certificate in substantially the form of Annex II (an "Objection Certificate") disputing Heafner's obligation to pay all or a portion of the Owed Amount (as defined and referred to in such Certificate of Instruction), or (ii) shall have received such an Objection Certificate within the Objection Period which objects to the payment of all or a portion of the Owed Amount and shall thereafter have received either (x) a certificate from Heafner and the Representative substantially in the form of Annex III (a "Resolution Certificate") stating that Heafner and the Representative have agreed that the Owed Amount referred to in such Certificate of Instruction (or a specified portion thereof) is payable to one or more CPW Stockholders or (y) a copy of a final, nonappealable order of an arbitrator or court of competent jurisdiction (accompanied by a certificate of the Representative substantially in the form of Annex IV (a "Litigation Certificate")) stating that the Owed Amount referred to in such Certificate of Instruction (or a specified portion thereof) is payable to one or more of the CPW Stockholders by Heafner, or (iii) shall have received such an Objection Certificate within the Objection Period which objects to the payment of only a portion of the Owed Amount then the Escrow Agent shall (1) in the case of (b)(i), on the second business day next following the expiration of the Objection Period, (2) in the case of (b)(ii)(x), on the second business day next following the Escrow Agent's receipt of a Resolution Certificate, 2 3 (3) in the case of (b)(ii)(y), on the fifth business day next following the day on which written notice of the Escrow Agent's receipt of a Litigation Certificate is given by the Escrow Agent to Heafner and (4) in the case of (b)(iii), on the second business day next following the Escrow Agent's receipt of an Objection Certificate described in (b)(iii), draw under the Letter of Credit an amount equal to the Owed Amount (or, in the case of (b)(iii), the undisputed portion thereof) and within two business days after such draw has been honored pay over and distribute such amount by bank check made payable to the Representative or by wire transfer of immediately available funds to an account designated in writing by the Representative. The Escrow Agent shall have no responsibility to invest any funds drawn under the Letter of Credit for the benefit of any other party to this Agreement nor any liability for any failure to invest such funds. (c) The Escrow Agent shall give written notice to the Representative of its receipt of an Objection Certificate not later than the second business day next following receipt thereof, together with a copy of such Objection Certificate. The Escrow Agent shall give written notice to Heafner of its receipt of a Litigation Certificate not later than the second business day next following receipt thereof, together with a copy of such Litigation Certificate. (d) Upon delivery by the Escrow Agent of the Owed Amount referred to in a Certificate of Instruction, such Certificate of Instruction shall be deemed canceled. Upon the receipt by the Escrow Agent of a Resolution Certificate or a Litigation Certificate and the payment by the Escrow Agent of the Owed Amount referred to therein, the related Certificate of Instruction shall be deemed canceled. (e) Upon the Representative's determination that the CPW Stockholders have no claim or have released their claim with respect to an Owed Amount referred to in a Certificate of Instruction (or a specified portion thereof), the Representative will deliver to the Escrow Agent prior to the expiration of the applicable Objection Period a certificate substantially in the form of Annex V (a "CPW Stockholder Cancellation Certificate") canceling such Certificate of Instruction (or such specified portion thereof, as the case may be), and such Certificate of Instruction (or portion thereof) shall thereupon be deemed canceled. The Escrow Agent shall give written notice to Heafner of its receipt of a CPW Stockholder Cancellation Certificate not later than the second business day next following receipt thereof, together with a copy of such CPW Stockholder Cancellation Certificate. (f) Upon receipt of a final, nonappealable order of an arbitrator or court of competent jurisdiction to the effect that none of the Owed Amount referred to in a Certificate of Instruction as to which Heafner delivered an Objection Certificate within the Objection Period is payable to the CPW Stockholders by Heafner, Heafner may, provided no Resolution Certificate or Litigation Certificate shall have previously been received by the Escrow Agent with respect to such Certificate of Instruction, deliver a copy of such order (accompanied by a certificate of Heafner substantially in the form of Annex VI (a "Heafner Cancellation Certificate")) canceling such Certificate of Instruction, and such Certificate of Instruction shall thereupon be deemed 3 4 canceled. The Escrow Agent shall give written notice to the Representative of its receipt of a Heafner Cancellation Certificate not later than the second business day next following receipt thereof, together with a copy of such Heafner Cancellation Certificate. (g) The Escrow Agent shall have no obligation to verify that the order attached to a Litigation Certificate or Heafner Cancellation Certificate constitutes a final, nonappealable order of an arbitrator or court of competent jurisdiction, and shall be entitled to rely upon Heafner's or the Representative's written certification to that effect. (h) Heafner and the Representative shall notify the Escrow Agent of each payment by Heafner of all or a portion of a Non-Compete Payment to the CPW Stockholders by delivering a certificate to the Escrow Agent, substantially in the form of Annex VII (a "Payment Certificate"). Within five business days after receipt of a Payment Certificate, the Escrow Agent shall deliver to the issuer of the Letter of Credit a certificate, in the form of Annex C to the Letter of Credit (or such other form as the issuer of the Letter of Credit may require), reducing the Letter of Credit by the amount set forth in such Payment Certificate. (i) Within 20 days (but in no event later than 10 days prior to the Termination Date (as defined in the Letter of Credit)) of its receipt of (a) a notice that an Event of Default has occurred and is continuing under (and as defined in) the Amended and Restated Loan and Security Agreement, dated as of May 20, 1998, among Heafner, certain of its subsidiaries, the financial institutions from time to time party thereto, Fleet Capital Corporation and First Union National Bank, as co-agents, and BankBoston, N.A., as administrative agent, or (b) a notice that the Letter of Credit will not be renewed, the Escrow Agent shall draw on the Letter of Credit in the full amount thereof by delivering to the issuer of the Letter of Credit a certificate in the form of Annex B thereto (or such other form as such issuer may require) and deposit the amount so drawn in an account maintained by the Escrow Agent. From and after the time any such deposit is made, the terms of this Escrow Agent with respect to the Letter of Credit and the Escrow shall be deemed to refer to the amount on deposit with the Escrow Agent, and the Escrow Agent shall disburse the funds so deposited upon the instructions of Heafner or the Representative, as the case may be, all in accordance with the terms of this Agreement; provided that upon the Escrow Agent's receipt of a Payment Certificate to which the Representative has not objected within the time specified in Section 4(h), the Escrow Agent shall deliver to Heafner the amount described in such Payment Certificate. (j) In no event shall the aggregate amount of claims paid out from this Escrow to the Representative on behalf of the CPW Stockholders pursuant to this Agreement exceed the amount of the Letter of Credit as in effect on the date of this Agreement. 5. Termination Date. On May 25, 2003 (the "Termination Date"), the Escrow Agent shall return the Letter of Credit to the issuer thereof for cancellation, provided that there is no Certificate of Instruction that has not been canceled in accordance with paragraph (d), (e) or (f) of Section 4. At such time on or following the Termination Date as all Certificates of Instruction received by the Escrow Agent on or prior to the Termination Date have been canceled in accordance with paragraph (d), (e) or (f) of Section 4, the Escrow Agent shall promptly return 4 5 the Letter of Credit to the issuer thereof for cancellation of the Letter of Credit and this Agreement (other than Sections 6, 7 and 8) shall automatically terminate. The Escrow Agent shall be entitled to require payment of amounts owed to it under Section 8 before returning the Letter of Credit in accordance with this Section 5. 6. Duties and Obligations of the Escrow Agent. The duties and obligations of the Escrow Agent shall be limited to and determined solely by the provisions of this Agreement and the certificates delivered in accordance with this Agreement and shall have no implied duties or obligations, and the Escrow Agent is not charged with knowledge of or any duties or responsibilities in respect of any other agreement or document. In furtherance and not in limitation of the foregoing: (i) the Escrow Agent shall be fully protected in relying in good faith upon any written certification, notice, direction, request, waiver, consent, receipt or other document that the Escrow Agent reasonably believes to be genuine and duly authorized, executed and delivered; (ii) the Escrow Agent shall not be liable for any error of judgment, or for any act done or omitted by it, or for any mistake in fact or law, or for anything that it may do or refrain from doing in connection with this Agreement (provided, however, that notwithstanding any other provision in this Agreement, the Escrow Agent shall be liable for its willful misconduct or gross negligence), and in no event shall the Escrow Agent be liable for any incidental, special, consequential or punitive damages; (iii) the Escrow Agent may seek the advice of legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions of this Agreement or its duties under this Agreement, which counsel shall not be attorneys of any of the CPW Stockholders, Heafner or their respective Affiliates, and it shall incur no liability and shall be fully protected in respect of any action taken, omitted or suffered by it in good faith in accordance with the opinion of such counsel; (iv) in the event that the Escrow Agent shall in any instance, after seeking the advice of legal counsel pursuant to the immediately preceding clause, in good faith be uncertain as to its duties or rights under this Agreement, it shall be entitled to refrain from taking any action in that instance and its sole obligation, in addition to those of its duties under this Agreement as to which there is no such uncertainty, shall be to keep safely all property held in the Escrow until it shall be directed otherwise in writing by each of the parties to this Agreement or by a final, nonappealable order of a court of competent jurisdiction; provided that in the event that the Escrow Agent has not received such written direction or court order within 180 calendar days after requesting the same, it may interplead Heafner and the CPW Stockholders in any court of competent jurisdiction and request that such court determine its rights and duties under this Agreement unless the parties to this Agreement otherwise agree; (v) the Escrow Agent may execute any of its powers or responsibilities under this Agreement and exercise any rights under this Agreement either directly or by or 5 6 through agents or attorneys selected with reasonable care, which shall not be agents or the attorneys of any of Heafner, the CPW Stockholders or their respective Affiliates. Nothing in this Agreement shall be deemed to impose upon the Escrow Agent any duty to qualify to do business or to act as fiduciary or otherwise in any jurisdiction other than North Carolina and the Escrow Agent shall not be responsible for and shall not be under a duty to examine into or pass upon the validity, binding effect, execution or sufficiency of any Letter of Credit in the Escrow, this Agreement, the Stock Purchase Agreement or of any amendment or supplement to this Agreement. The Escrow Agent shall not be liable for any other party's failure to comply with its covenants relating to the transactions contemplated by the Stock Purchase Agreement; (vi) the Escrow Agent shall not be obligated to take any legal action or commence any proceedings in connection with this Agreement, or to appear in, prosecute or defend any such legal action or proceeding; and (vii) other than the obligations as specifically set forth herein, the Escrow Agent shall not be obligated to preserve or protect any rights with respect to the property comprising the Escrow or to receive or give any notice with respect thereto. 7. Cooperation. The CPW Stockholders and Heafner shall provide to the Escrow Agent all instruments and documents within their respective powers and capacity to provide that are necessary for the Escrow Agent to perform its duties and responsibilities under this Agreement. Each of the CPW Stockholders and Heafner have provided the Escrow Agent with a certificate setting forth the names of persons authorized to deliver instructions hereunder and a sample of the genuine signature of such persons and the Escrow Agent shall be entitled to rely upon such certificates until a substitute certificate is delivered hereunder. 8. Fees and Expenses; Indemnity. The CPW Stockholders shall be jointly and severally liable to the Escrow Agent for the fees of the Escrow Agent for its services under this Agreement as and when billed to the Representative by the Escrow Agent. The Representative shall be entitled to reimbursement from Heafner for fees paid by the Representative to the extent such fees exceed $2,500 per year. Each of the Representative and Heafner shall be jointly and severally liable to reimburse and indemnify the Escrow Agent and its employees, officers, directors and agents, for, and hold it harmless against, any loss, liabilities, damages, cost or expense, including but not limited to reasonable attorneys' fees, reasonably incurred by the Escrow Agent in connection with the Escrow Agent's performance of its duties and obligations under this Agreement, as well as the reasonable costs and expenses of defending against any claim or liability relating to this Agreement; provided that notwithstanding the foregoing, none of such persons shall be required to indemnify the Escrow Agent for any such loss, liability, cost or expense arising as a result of the Escrow Agent's willful misconduct or gross negligence. The Escrow Agent shall be entitled to recover the full amount of such losses, liabilities, damages, costs and expenses from any of the CPW Stockholders or Heafner; provided that in the event that any such person pays any such amount hereunder, the CPW Stockholders, on the one hand, and Heafner, on the other, shall be entitled to reimbursement of one-half such amount from Heafner or the CPW Stockholders (as the case may be). The Escrow 6 7 Agent shall be entitled to set off amounts drawn on the Letter of Credit against unpaid amounts owed to it hereunder. The obligations of Heafner, the Representative and the CPW Stockholders under this Section 8 shall survive the termination of this Agreement and inure to the benefit of each Escrow Agent serving under this Agreement regardless of the resignation or removal of such Escrow Agent. All amounts owing under this Section 8 shall immediately become due and payable on the effective date of the Escrow Agent's resignation or removal. 9. Resignation and Removal of the Escrow Agent. (a) The Escrow Agent may resign 30 calendar days following the giving of prior written notice thereof to Heafner and the Representative. In addition, the Escrow Agent may be removed and replaced on a date designated in a written instrument signed by Heafner and the Representative and delivered to the Escrow Agent. Notwithstanding the foregoing, no such resignation or removal shall be effective until a successor escrow agent has acknowledged its appointment as such as provided in paragraph (c) below. In either event, upon the effective date of such resignation or removal, the Escrow Agent shall deliver the property comprising the Escrow to such successor escrow agent, together with such records maintained by the Escrow Agent in connection with its duties under this Agreement, such documents and instruments as are necessary to amend or reissue the Letter of Credit in the name of the successor escrow agent and such other information with respect to the Escrow as such successor may reasonably request. (b) If a successor escrow agent shall not have acknowledged its appointment as such as provided in paragraph (c) below, in the case of a resignation, prior to the expiration of 30 calendar days following the date of a notice of resignation or, in the case of a removal, on the date designated for the Escrow Agent's removal, as the case may be, because Heafner and the Representative are unable to agree on a successor escrow agent, or for any other reason, the Escrow Agent may select a successor escrow agent and any such resulting appointment shall be binding upon all of the parties to this Agreement. (c) Upon written acknowledgment by a successor escrow agent appointed in accordance with Sections 9(b) and (c) of its agreement to serve as escrow agent under this Agreement and the receipt of the property then comprising the Escrow, the Escrow Agent shall be fully released and relieved of all duties, responsibilities and obligations under this Agreement, subject to the proviso contained in clause (ii) of Section 6, and such successor escrow agent shall for all purposes of this Agreement be the Escrow Agent. 10. Notices. All notices, requests and other communications under this Agreement must be in writing and will be deemed to have been duly given if delivered personally, by overnight courier or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: if to the CPW Stockholders or the Representative, to: Arthur C. Soares 16641 Harwood Road Los Gatos, CA 95032 7 8 Facsimile: (408) 356-9918 with a copy to: Jackson Tufts Cole & Black, LLP 60 South Market Street, 10th Floor San Jose, CA 95113-2336 Facsimile: (408) 998-4889 Attention: Richard Scudellari, Esq. if to Heafner, to: The J. H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Facsimile: (704) 423-8987 Attention: Secretary with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith, Esq. If to the Escrow Agent, to: First Union National Bank Corporate Trust Department, 9th Floor 230 South Tryon Street Charlotte, NC 28288-1179 All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail or overnight courier in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other person to whom a copy of such notice is to be delivered pursuant to this Section). Any party from time to time may change its 8 9 address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties to this Agreement. 11. Amendments, etc. This Agreement may be amended or modified, and any of the terms of this Agreement may be waived, only by a written instrument duly executed by or on behalf of the Representative, Heafner and the Escrow Agent. No waiver by any party of any term or condition contained of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. 12. GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. THE PARTIES HERETO EACH HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SITTING IN NEW YORK CITY SOLELY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURT. THE PARTIES HERETO EACH IRREVOCABLY WAIVES, TO THE FULLEST EXTENT SUCH PARTY MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION THAT SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 13. Business Day. For all purposes of this Agreement, the term "business day" shall mean a day other than Saturday, Sunday or any day on which banks located in North Carolina are authorized or obligated to close. 14. Appointment of Representative. Each of the CPW Stockholders hereby constitutes and appoints Arthur C. Soares (the "Representative") to act as his representative for all purposes under this Agreement, and the Representative agrees by executing this Agreement to accept such appointment. The Representative shall have the authority to act on behalf of, and to bind, each CPW Stockholder for all purposes of this Agreement. Without limiting the generality of the foregoing, each CPW Stockholder hereby irrevocably constitutes and appoints the Representative his true and lawful attorney-in-fact, with full power of substitution, and with full power and authority in his name, place and stead, to execute, certify, acknowledge, deliver, file and record all agreements, certificates, instruments and other documents and any amendment thereto, which the Representative deems necessary or appropriate in connection with the performance of this Agreement by such CPW Stockholder. Each CPW Stockholder's appointment of the Representative as his attorney-in-fact shall be deemed to be a power coupled 9 10 with an interest and still survive the incompetency, bankruptcy or dissolution of the such CPW Stockholder giving such power. No new representative may be appointed or substituted without the prior written consent of Heafner; provided, that if Arthur C. Soares becomes incapacitated or dies during the term of this Agreement, he shall be replaced by Ray C. Barney or such person as Mr. Barney may designate. 15. Miscellaneous. This Agreement is binding upon and will inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions of this Agreement. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Heafner hereby represents and warrants to the Escrow Agent as follows: (a) Heafner is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to carry on its business as now conducted; (b) Heafner has the requisite corporate power and authority to enter into this Agreement, (c) the execution and delivery by Heafner of this Agreement has been duly authorized by all necessary action on the part of Heafner; and (d) this Agreement has been duly executed and delivered by Heafner, and constitutes the valid and binding obligation of Heafner, enforceable against Heafner in accordance with its terms. 10 11 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. CPW STOCKHOLDERS: /s/ ARTHUR C. SOARES --------------------------------------------- Arthur C. Soares /s/ RAY C. BARNEY --------------------------------------------- Ray C. Barney REPRESENTATIVE: /s/ ARTHUR C. SOARES --------------------------------------------- Arthur C. Soares HEAFNER: THE J.H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ----------------------------------------- J. Michael Gaither Senior Vice President and General Counsel ESCROW AGENT: FIRST UNION NATIONAL BANK By: ----------------------------------------- Name: Title: 10 12 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be executed as of the date first above written. CPW STOCKHOLDERS: --------------------------------------------- Arthur C. Soares --------------------------------------------- Ray C. Barney REPRESENTATIVE: --------------------------------------------- Arthur C. Soares HEAFNER: THE J.H. HEAFNER COMPANY, INC. By: --------------------------------------------- J. Michael Gaither Senior Vice President and General Counsel ESCROW AGENT: FIRST UNION NATIONAL BANK By: /s/ SHANNON SCHWARTZ --------------------------------------------- Name: Shannon Schwartz Title: Assistant Vice President 9 EX-10.15 33 LETTER OF CREDIT DATED MAY 20, 1998 1 EXHIBIT 10.15 [BankBoston letterhead] IRREVOCABLE STANDBY LETTER OF CREDIT DATE: MAY 20, 1998 CREDIT NUMBER: BENEFICIARY 50062961 FIRST UNION NATIONAL BANK EXPIRY DATE: ESCROW AGENT MAY 20, 1999 CORPORATE TRUST DEPARTMENT, 9TH FLOOR 230 SOUTH TRYON STREET CHARLOTTE, NORTH CAROLIA 28288-1179 APPLICANT: J.H. HEAFNER COMPANY, INC. A NORTH CAROLINA CORPORATION 814 EAST MAIN STREET LINCOLNTON, NORTH CAROLINA 28093 Gentlemen: We hereby open in your favor our Irrevocable Letter of Credit No. 50062961 for the account of The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner") with its principal address at 814 East Main Street, Lincolnton, North Carolina 28093 for a sum or sums not exceeding a total of US $7,400,000 (Seven Million Four Hundred Thousand and no/100s United States Dollars) (such amount as reduced from time to time pursuant to the terms hereof, the "Credit Amount") available effective the date hereof and expiring at Boston, Massachusetts on the Termination Date (as hereinafter defined). This Letter of Credit is issued to you in your capacity as Escrow Agent under the Escrow Agreement dated May 20, 1998 (the "Escrow Agreement") among Heafner, Arthur C. Soares, individually and in his capacity as Representative (the "Representative"), Ray C. Barney and you. The initial term of this Letter of Credit shall end on May 20, 1999, provided that unless we shall have notified you not later than 30 days prior to such date (or any succeeding anniversary of such date to which the term of this Letter of Credit shall theretofore have been extended) of our intention not to extend the term hereof, the term of this Letter of Credit shall automatically be extended to the first anniversary of such date (or of any succeeding such date) (May 20, 1999 and each anniversary thereof to which the term of this Letter of Credit has been so extended, being the "Expiration Date"). Subject to the terms and conditions hereof, we hereby irrevocably authorize you to draw on us, an aggregate amount not to exceed the Credit Amount. Drawings shall be made by presentation of the following documents: 2 [BankBoston Letterhead] PAGE 2 OF 3, LETTER OF CREDIT NO. 50062961 (1) your sight draft in the amount of such drawing accompanied by your certificate in the form of Annex A hereto (a "Payment Draft"); and (2) your sight draft in the entire remaining Credit Amount accompanied by your certificate in the form of Annex B hereto (the "Termination Draft" and together with the Payment Drafts, the "Drafts"). Any sight draft drawn under this Letter of Credit must bear on its face the clause "DRAWN UNDER BANKBOSTON IRREVOCABLE LETTER OF CREDIT NO. 50062961 DATED MAY 20, 1998." Following the receipt by us of any Draft as above provided for, we shall pay you in accordance with the UCP (as hereinafter defined), by wire transfer or other deposit of immediately available funds to such bank and account number as shall be designated by you in your sight draft, PROVIDED that such demand for payment and the documents presented in connection therewith conform to the terms and conditions hereof. If we determine that any demand for payment made by you hereunder is not, in any instance, in strict conformity with the terms and conditions of this Letter of Credit, we shall give you immediate notice that the purported negotiation was not effected in accordance with the terms and conditions of this Letter of Credit and return to you any documents presented to us. Upon being so notified, you may attempt to correct any such non-conforming demand if and to the extent that you are able to do so prior to the Termination Date. Upon our honoring of any Draft presented by you hereunder, the Credit Amount shall be reduced by an amount equal to the amount of such Draft. The amount of this Letter of Credit shall be irrevocably reduced, from time to time, by us upon receipt from you of your certificate in the form of Annex C attached hereto and made a part hereof. Upon any such irrevocable reduction of the amount of this Letter of Credit, we may require you to surrender this Letter of Credit to us in exchange for a substitute irrevocable letter of credit, having a Credit Amount equal to the Credit Amount as so reduced, but otherwise in a form and having terms identical to this Letter of Credit. This Letter of Credit shall automatically terminate and be delivered to us for cancellation at 5:00 p.m. (Boston, Massachusetts time) on the date (the "Termination Date") that is the first to occur of (1) the Expiration Date, (2) the date that we make payment in full of all amounts available to be drawn hereunder, (3) the date that we receive your certificate in the form of Annex B hereto that reduces the Credit Amount to zero, and (4) the 30th day (or if such date is not a banking day, then on the next succeeding banking day) after we have given you notice in the manner specified below that an Event of Default has occurred and is continuing under the Amended and Restated Loan and Security Agreement dated as of May 20, 1998 (as amended and in effect), to which Heafner and we are parties. All documents, notices and other communications to us with respect to this Letter of Credit shall be in writing and shall be personally delivered (including by courier against a receipt therefor) at our office at 150 Federal Street, 4th floor, Boston, Massachusetts 02110, Attn: Trade Services (the "Issuer's Office"), in each case referring to the number of this Letter of Credit. All notices and other communications to you as 3 [BankBoston Letterhead] PAGE 3 OF 3, LETTER OF CREDIT NO. 50062961 the beneficiary of this Letter of Credit shall be in writing to the address set forth below and shall be personally delivered (including by courier against a receipt therefor) to such address: Address: FIRST UNION NATIONAL BANK ESCROW AGENT CORPORATE TRUST DEPARTMENT, 9TH FLOOR 230 SOUTH TRYON STREET CHARLOTTE, NORTH CAROLIA 28288-1179 This Letter of Credit is subject to and governed by the 1993 Revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, Publication 500. This Letter of Credit is transferable in full but not in part to any successor Escrow Agent under the Escrow Agreements and may be successively transferred. Transfer of the amount available to be drawn under this Letter of Credit to such transferee shall be effected by the presentation to us of this Letter of Credit accompanied by a certificate in substantially the form of Annex D hereto and the other documents (if any) referred to therein. Upon such presentation we shall forthwith transfer the same to your transferee or, if so requested by your transferee, issue an irrevocable letter of credit to your transferee having a Credit Amount equal to the Credit Amount on the date of transfer in a form and having terms identical to this Letter of Credit. We hereby agree with the drawer of any drafts drawn under and in compliance with the terms and conditions of this Letter of Credit that the same shall be duly honored upon due presentation to us and shall be paid from our own funds. Very truly yours, /s/ LISA A. GE[illegible] - -------------------------------- Authorized Signature 4 [BankBoston Letterhead] ANNEX A CERTIFICATE FOR DRAWING IN CONNECTION WITH PAYMENTS DUE UNDER THE ESCROW AGREEMENT Irrevocable Letter of Credit No. ______________ The undersigned, the beneficiary of Irrevocable Letter of Credit No. __________ (the "Letter of Credit", terms defined therein and not otherwise defined herein being used herein as therein defined) issued by BankBoston, N.A. (the "Bank") in favor of the undersigned, hereby certifies to the Bank, in connection with the Letter of Credit, as follows: 1. The undersigned is the Escrow Agent under the Escrow Agreement. 2. The undersigned is making a drawing under the Letter of Credit with respect to the payment of amounts due under and in accordance with the terms of the Escrow Agreement, to the Representative. 3. The amount of the draft accompanying this Certificate is equal to $____________ representing all amounts due and owing to said Representative in accordance with the terms of the Escrow Agreement. 4. The amount of the draft accompanying this Certificate was computed in accordance with the terms of the Escrow Agreement and does not exceed the Credit Amount. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ___ day of _________ 199_/200_. FIRST UNION NATIONAL BANK, Escrow Agent _________________________ Authorized Signer 5 [BankBoston Letterhead] ANNEX B CERTIFICATE FOR DRAWING IN CONNECTION WITH TERMINATION DATE Irrevocable Letter of Credit No. ______________ The undersigned, the beneficiary of Irrevocable Letter of Credit No. __________ (the "Letter of Credit", terms defined therein and not otherwise defined herein being used herein as therein defined) issued by BankBoston, N.A. (the "Bank") in favor of the undersigned, hereby certifies to the Bank, in connection with the Letter of Credit, as follows: 1. The undersigned is the Escrow Agent under the Escrow Agreement. 2. The undersigned is making a drawing under the Letter of Credit with respect to the creation of a cash escrow deposit under and in accordance with the terms of the Escrow Agreement. 3. The amount of the draft accompanying this Certificate is equal to $____________ representing the entire Credit Amount/ 4. The amount of the draft accompanying this Certificate was computed in accordance with the terms of the Escrow Agreement and is equal to, but does not exceed the Credit Amount. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ___ day of _________ 199_/200_. FIRST UNION NATIONAL BANK, Escrow Agent ___________________________ Authorized Signer 6 [BankBoston Letterhead] ANNEX C CERTIFICATE OF REDUCTION Irrevocable Letter of Credit No. ______________ The undersigned, the beneficiary of Irrevocable Letter of Credit No. __________ (the "Letter of Credit", terms defined therein and not otherwise defined herein being used herein as therein defined) issued by BankBoston, N.A. (the "Bank") in favor of the undersigned, hereby certifies to the Bank, in connection with the Letter of Credit, as follows: 1. The undersigned is the Escrow Agent under the Escrow Agreement. 2. The undersigned is delivering this Certificate under and in accordance with the terms of the Escrow Agreement. 3. Upon your receipt of this Certificate, the Credit Amount of the Letter of Credit shall be reduced by $______________ representing the amount of a payment made by Heafner to the Representative and acknowledged by the Representative. 4. After giving effect to such reduction, the Credit Amount shall be $_____________. 5. The amount of the reduction specified in paragraph 3 above was computed in accordance with the terms of the Escrow Agreement and does not reduce the Credit Amount to zero. [Alternate 5] 5. The amount of the reduction specified in paragraph 3 above was computed in accordance with the terms of the Escrow Agreement and reduces the Credit Amount to zero. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ___ day of _________ 199_/200_. FIRST UNION NATIONAL BANK, Escrow Agent __________________________ Authorized Signer 7 [BankBoston Letterhead] ANNEX D INSTRUCTION TO TRANSFER FIRST UNION NATIONAL BANK ESCROW AGENT CORPORATE TRUST DEPARTMENT, 9TH FLOOR 230 SOUTH TRYON STREET CHARLOTTE, NORTH CAROLIA 28288-1179 Attention: Irrevocable Letter of Credit No. --------------------- Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: ------------------------------------ (name of transferee) ----------------------------------- ----------------------------------- (address) all rights of the undersigned beneficiary to draw under the captioned Letter of Credit (the "Letter of Credit"). Capitalized terms used herein and not defined herein, have the meanings ascribed to them in the Letter of Credit. The transferee is the successor Escrow Agent under the Escrow Agreement. By this transfer, all rights of the undersigned beneficiary in the Letter of Credit are transferred to the transferee and the transferee shall hereafter have the sole right as beneficiary thereof; provided, however, that no rights shall be deemed to have been transferred to the transferee until such transfer complies with the requirement of the Letter of Credit pertaining to transfers. The Letter of Credit is returned and delivered herewith and in accordance therewith, we request that this transfer be effected and, if requested by the transferee, that you issue a new irrevocable letter of credit in favor of the transferee in accordance with the Letter of Credit. Very truly yours, [TRANSFEROR] ------------------------- Authorized Signer EX-10.16 34 STOCK PURCHASE AGREEMENT DATED APRIL 9, 1997 1 Exhibit 10.16 STOCK PURCHASE AGREEMENT BETWEEN THE J.H. HEAFNER COMPANY, INC. AND THE SHAREHOLDERS OF OLIVER & WINSTON, INC. DATED: APRIL 9, 1997 2 TABLE OF CONTENTS
Page INTRODUCTION......................................................................................................1 ARTICLE I PURCHASE AND SALE OF THE SHARES...................................................................................1 SECTION 1.1. The Shares...........................................................................................1 SECTION 1.2. Purchase Price.......................................................................................1 SECTION 1.3. Closing..............................................................................................2 SECTION 1.4. Purchase Price Adjustment............................................................................2 ARTICLE II REPRESENTATIONS AND WARRANTIES....................................................................................4 SECTION 2.1. Representations and Warranties of the Sellers as a Group.............................................4 (a) Organization, Standing and Power.....................................................................4 (b) Capitalization; Equity Interests.....................................................................4 (c) Conflicts; Consents..................................................................................5 (d) Financial Information................................................................................5 (e) Absence of Changes...................................................................................6 (f) Assets, Property and Related Matters; Real Property..................................................7 (g) Patents, Trademarks and Similar Rights...............................................................9 (h) Insurance...........................................................................................10 (i) Agreements..........................................................................................10 (j) Litigation..........................................................................................11 (k) Compliance; Governmental Authorizations.............................................................11 (l) Labor Relations; Employees..........................................................................12 (m) Related Party Transactions..........................................................................14 (n) Taxes...............................................................................................15 (o) Disclosure..........................................................................................16 (p) Bank Accounts; Powers-of-Attorney...................................................................16 (q) Inventory...........................................................................................16 (r) Brokers.............................................................................................16 SECTION 2.2. Representations and Warranties of the Sellers Individually.........................................16 (a) Authority; Binding Agreements; Title to Shares......................................................16 (b) Conflicts; Consents.................................................................................17 (c) Brokers.............................................................................................17 (d) Pending Challenges..................................................................................17
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Page SECTION 2.3. Representations and Warranties by the Purchaser....................................................17 (a) Organization and Standing...........................................................................17 (b) Authority; Binding Agreements.......................................................................17 (c) Conflicts; Consents.................................................................................18 (d) Investment Representation...........................................................................18 (e) Pending Challenges..................................................................................18 (f) Broker..............................................................................................18 ARTICLE III ADDITIONAL AGREEMENTS............................................................................................18 SECTION 3.1. Expenses............................................................................................18 SECTION 3.2. Conduct of Business.................................................................................19 SECTION 3.3. Reasonable Efforts; Further Assurances..............................................................20 SECTION 3.4. Winston Rights......................................................................................21 SECTION 3.5. No Shopping.........................................................................................21 SECTION 3.6. Access and Information..............................................................................21 SECTION 3.7. Confidentiality; Non-Competition....................................................................22 SECTION 3.8. Releases; Prior Compensation........................................................................23 SECTION 3.9. Public Announcements................................................................................24 SECTION 3.10. Tax Matters........................................................................................24 SECTION 3.11. Sellers' Representative............................................................................26 ARTICLE IV CONDITIONS PRECEDENT.............................................................................................27 SECTION 4.1. Conditions to Obligations of the Purchaser..........................................................27 (a) Authorization.......................................................................................27 (b) Representations and Warranties......................................................................27 (c) Certificates........................................................................................27 (d) Escrow Agreement....................................................................................27 (e) Opinion of Counsel..................................................................................27 (f) Financial Statements................................................................................27 (g) Due Diligence.......................................................................................27 (h) Financing...........................................................................................27 (i) Indebtedness Payoff.................................................................................28 (j) Employment Agreements...............................................................................28 (k) Corporate Directors and Officers....................................................................28 (l) Share Certificates and Corporation Records..........................................................28 (m) HSR Act.............................................................................................28 (n) Other Documents.....................................................................................28
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Page SECTION 4.2. Conditions of Obligations of the Sellers............................................................28 (a) Authorization.......................................................................................28 (b) Representations and Warranties......................................................................28 (c) Certificate.........................................................................................28 (d) Escrow Agreement....................................................................................28 (e) HSR Act.............................................................................................29 (f) Other Documents.....................................................................................29 ARTICLE V INDEMNITY........................................................................................................29 SECTION 5.1. Indemnification.....................................................................................29 SECTION 5.2. Limitations.........................................................................................31 SECTION 5.3. No Election.........................................................................................33 ARTICLE VI MISCELLANEOUS....................................................................................................33 SECTION 6.1. Entire Agreement....................................................................................33 SECTION 6.2. Termination.........................................................................................33 SECTION 6.3. Descriptive Headings; Certain Interpretations.......................................................34 SECTION 6.4. Notices.............................................................................................34 SECTION 6.5. Counterparts........................................................................................35 SECTION 6.6. Survival............................................................................................36 SECTION 6.7. Benefits of Agreement...............................................................................36 SECTION 6.8. Amendments and Waivers..............................................................................36 SECTION 6.9. Assignment..........................................................................................36 SECTION 6.10. Enforceability.....................................................................................36 SECTION 6.11. Trustee and Fiduciary Capacity.....................................................................36 SECTION 6.12. Governing Law......................................................................................37 SECTION 6.13. Dispute Resolution; Consent To Jurisdiction........................................................37
ANNEXES A Shareholders; Ownership of Shares B Dispute Resolution Procedure EXHIBITS A-1 Form of Officers' Certificate A-2 Form of Seller's Certificate` B Form of Escrow Agreement iii 5 STOCK PURCHASE AGREEMENT, dated as of April 9, 1997 (the "Agreement"), between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Purchaser"), each of the Shareholders (each, a "Seller" and, collectively, the "Sellers") of Oliver & Winston, Inc., a California corporation (the "Company"), and William S. Johnstone, Jr., Trustee, as the representative (the "Sellers' Representative") of the Sellers. INTRODUCTION The Company owns and operates a retail tire business located in California, Nevada and Arizona. The Sellers desire to sell all of the outstanding shares (the "Shares") of Capital Stock, $.10 par value (the "Common Stock"), of the Company to the Purchaser, and the Purchaser desires to purchase the Shares on the terms and conditions set forth in this Agreement. The parties agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES SECTION 1.1. The Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below in Section 1.3), each Seller shall sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from each Seller, all of the Shares owned by such Seller (which Shares are listed on Annex A), free and clear of all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, the "Claims"). Prior to the Closing, William S. Johnstone, Jr., as Trustee of The Sam M. Winston Separate Property Trust, dated July 26, 1989, will transfer (the "Bonburg Transfer") 36,100.97 shares of Common Stock to Thomas J. Bonburg (who is deemed to be a "Seller" for all purposes under this Agreement). SECTION 1.2. Purchase Price. (a) The purchase price (the "Purchase Price") for the Shares and the non-compete agreement set forth in Section 3.6 shall be cash in the amount of $37,263,744 (the "Purchase Price), of which $37,063,744 is payable as consideration for the Shares and $200,000 is payable as consideration for such non-compete agreement. The Purchase Price shall be paid to the Sellers at the Closing in proportion to their ownership of Shares as set forth on Annex A (except for the Escrow Amount, as hereinafter defined) and, except as set forth in Section 1.2(b), shall be made by certified or bank check or checks, or, at the option of the Sellers, by wire transfer to an account or accounts of Sellers designated to the Purchaser by the Sellers' Representative. 6 (b) At the Closing, the Purchaser shall deliver $5,680,000 of the Purchase Price (the "Escrow Amount") to the escrow agent (the "Escrow Agent") named in the Escrow Agreement (as defined below in Section 4.1(d)). The Escrow Amount consists of a portion of the Purchase Price that, subject to the terms of Article V and the Escrow Agreement, would otherwise be payable to the Sellers (other than Thomas J. Bonburg) in accordance with Section 1.2(a). Prior to the Closing, the Purchaser shall select a bank or trust company to act as the Escrow Agent, which selection shall be reasonably acceptable to the Sellers (other than Thomas J. Bonburg). SECTION 1.3. Closing. If this Agreement has not been terminated pursuant to Section 6.2(a), the closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall take place at the offices of Howard, Darby & Levin, 1330 Avenue of the Americas, New York, New York 10019, or such other place or places as the Sellers' Representative and the Purchaser shall agree, at 10:00 a.m. (Eastern standard time) on the later of April 30, 1997 and two business days following the date on which all conditions set forth in Article IV shall have been satisfied or waived, or such other date and time agreed to by the Sellers' Representative and the Purchaser (such date, the "Closing Date"). SECTION 1.4. Purchase Price Adjustment. (a) Within 90 days after the Closing Date, the Purchaser and the Sellers' Representative shall cause Arthur Andersen LLP to audit, at the Purchaser's expense, the balance sheet of the Company as of the Closing Date (the "Closing Date Balance Sheet"), in accordance with generally accepted accounting principles consistently applied with such principles used in connection with the Company's financial statements for the fiscal year ended September 30, 1996. (b) The Sellers' Representative and the Purchaser shall cooperate with one another and with such independent accountants in the delivery of the Closing Date Balance Sheet. Each of the Sellers' Representative, the Purchaser and their respective representatives shall have the right to review the others' work papers or records of the Company used or prepared in connection with the preparation of such balance sheet, and shall, if requested, make available such work papers or records and direct the auditors or other representatives to allow the Sellers' Representative, the Purchaser, or their respective representatives to review any and all work papers or records of such auditors or other representatives, which are not proprietary work papers or records of such auditors or other representatives, as the case may be, used in connection with the preparation of such balance sheet. (c) (i) If the Closing occurs during the period beginning on April 30, 1997 and ending on May 15, 1997 and (1) the Company's net worth (the difference between the Company's assets and liabilities) as of the Closing Date as shown on the Closing Date Balance Sheet is less than $500,000, (2) the Company's working capital (the difference between the Company's current assets and current liabilities exclusive of the current portion of long-term debt and the current portion of deferred service and warranty revenue) as of the Closing Date as shown on the Closing Date Balance Sheet is less than $1.00, or (3) the sum of the Company's 2 7 outstanding revolving credit and line of credit balances, and the amount of "pooled funds" (as that term is used on the Company's financial statements), as of the Closing Date as shown on the Closing Date Balance Sheet is greater than $8,300,000, the Sellers shall pay to the Purchaser an amount equal to the lesser of (x) the largest of the differences in dollar amounts under clauses (1), (2) and (3) above and (y) $1,000,000. Solely for purposes of determining the amount, if any, of an adjustment to the Purchase Price pursuant to this subsection (c)(i), if the Closing occurs during the period beginning on May 1, 1997 and ending on May 5, 1997, the Closing shall be deemed to have occurred on April 30, 1997 and the Closing Date Balance Sheet shall be as of April 30, 1997. (ii) If the Closing occurs during the period beginning on May 16, 1997 and ending on May 31, 1997 and (1) the Company's net worth (the difference between the Company's assets and liabilities) as of the Closing Date as shown on the Closing Date Balance Sheet is less than $500,000, (2) the Company's working capital (the difference between the Company's current assets and current liabilities exclusive of the current portion of long-term debt and the current portion of deferred service and warranty revenue) as of the Closing Date as shown on the Closing Date Balance Sheet is less than $1.00, or (3) the sum of the Company's outstanding revolving credit and line of credit balances, and the amount of "pooled funds" (as that term is used on the Company's financial statements), as of the Closing Date as shown on the Closing Date Balance Sheet is greater than $8,500,000, the Sellers shall pay to the Purchaser an amount equal to the lesser of (x) the largest of the differences in dollar amounts under clauses (1), (2) and (3) above and (y) $500,000. Solely for purposes of determining the amount, if any, of an adjustment to the Purchase Price pursuant to this subsection (c)(ii), if the Closing occurs during the period beginning on May 20, 1997 and ending on May 28, 1997, any amount paid by the Company to Cooper Tire on or around May 20, 1997 in respect of outstanding invoices which are not past due shall be deducted from the amount determined pursuant to clause (3) above. (iii) The calculations described in paragraphs (i) and (ii) of this subsection (c) shall not reflect the impact, if any, of (1) the purchase by the Company of the Intellectual Property (as defined below in Section 2.1(g)) previously licensed to the Company pursuant to the agreements, each dated as of August 13, 1985, between the Company and Sam M. Winston (collectively, the "Winston Rights"), (2) the Bonburg Transfer, and (3) the amount of any cash distribution to the Sellers (other than The Sam M. Winston Separate Property Trust) made by the Company after the date of this Agreement and prior to the Closing not in excess of $400,000 in the aggregate. (d) Any payment under this Section shall be made within 10 days after the later of (i) the date of delivery of the Closing Date Balance Sheet and (ii) the date on which any dispute referred to in clause (e) is resolved. (e) Each of the Sellers' Representative and the Purchaser shall have the right to dispute any amounts shown on the Closing Date Balance Sheet by giving written notice to the other within 30 days after receipt of such balance sheet, which notice shall specify in reasonable detail the nature and extent of such disagreement. If the Sellers' Representative and the Purchaser have not resolved the dispute within 15 days of such notice, the dispute shall promptly 3 8 be submitted to another "big six" accounting firm (the "Independent Accountant") reasonably acceptable to Sellers' Representative and the Purchaser. The decision of the Independent Accountant shall be binding on the parties hereto. The cost of the Independent Accountant shall be shared equally by the Sellers and the Purchaser. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Sellers as a Group. The Sellers jointly and severally represent and warrant to the Purchaser as follows: (a) Organization, Standing and Power. The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of California and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary because of the property owned, leased or operated by it or because of the nature of its business as now being conducted, and each such jurisdiction is listed in Section 2.1(a) of the disclosure schedule being delivered to the Purchaser simultaneously with the execution of this Agreement (the "Disclosure Schedule"). The Company has delivered to the Purchaser complete and correct copies of its articles of incorporation and by-laws and all amendments to the date of this Agreement and has made available to the Purchaser its minute books and stock records. Section 2.1(a) of the Disclosure Schedule contains a true and correct list of the directors and officers of the Company as of the date of this Agreement and at all times since the last action of the board of directors and the shareholders of the Company. (b) Capitalization; Equity Interests. The authorized capital stock of the Company consists of 1,000,000 shares of Common Stock and no shares of preferred stock. At the time of execution of this Agreement, 181,942 shares of Common Stock were issued and outstanding. The Sellers own of record and beneficially all of the outstanding capital stock of the Company. Except as set forth above, at the time of execution of this Agreement, no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. 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 shareholders of the Company may vote. There are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company is a party or by which the Company is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company or obligating the Company to issue, grant, extend or enter into any such security, option, warrant, call right, commitment, agreement, arrangement or undertaking. There are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating the Company to repurchase, redeem or otherwise acquire any shares of capital stock or 4 9 other voting securities of the Company or any securities of the type described in the two immediately preceding sentences. Except as set forth in Section 2.1(b) of the Disclosure Schedule, the Company does not have any subsidiaries or own or hold any equity or other security interests in any other entity. The Company is not subject to any liability for any claim that the Company violated any applicable Federal or state securities laws in connection with the issuance of capital stock. For purposes of this Agreement, a "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person; and a "person" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity (governmental or private). (c) Conflicts; Consents. The execution and delivery by the Sellers of this Agreement and the Escrow Agreement, the consummation of the transactions contemplated hereby and thereby and compliance by the Sellers with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company may be a party, or by which the Company or any of the Company's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as are set forth in Section 2.1(c) of the Disclosure Schedule, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of the Company's properties or assets or (iv) result in the creation or imposition of any Claim upon any property or assets used or held by the Company. (d) Financial Information. (i) The following financial statements are contained in Section 2.1(d) of the Disclosure Schedule: (A) the balance sheets of the Company at September 30, 1994, 1995 and 1996 and the related statements of operations and retained earnings and cash flows for the years then ended together with the opinion of Deloitte & Touche thereon; (B) the unaudited, internally prepared balance sheet of the Company at December 31, 1996 and the related statement of operations and cash flows for the three month period then ended; and (C) the unaudited, internally prepared balance sheets of the Company at January 31, 1997 and February 28, 1997 and the related statements of operations and cash flows for the one month periods then ended. Except as set forth in Section 2.1(d) of the Disclosure Schedule, all such financial statements have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior periods and fairly present in all material respects the financial position, results of operations and cash flows of the Company (subject, in the case of unaudited 5 10 statements, to normal year-end audit adjustments). The balance sheets of the Company as at the dates set forth present fairly in all material respects the financial position of the Company as at the dates thereof, and the related statements of operations and cash flows of the Company for each of the respective specified periods then ended present fairly in all material respects the results of operations of the Company for each of the respective periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). For the purposes of this Agreement, all financial statements referred to in this paragraph shall include any notes to such financial statements. (ii) There were no material liabilities or obligations (whether absolute, accrued, contingent or otherwise, and whether due or to become due) in respect of the Company which were required to be, in accordance with generally accepted accounting principles and, in the case of unaudited statements, the Company's consistently applied accounting principles, and were not shown or provided for on the balance sheets of the Company to which such liabilities or obligations relate. All reserves established by the Company are reflected on the balance sheets of the Company or in the footnotes to the financial statements of the Company and are adequate and there are no loss contingencies that are required to be accrued by Statement of Financial Accounting Standard No. 5 of the Financial Accounting Standards Board which are not provided for on such balance sheets. (e) Absence of Changes. Except as set forth in Section 2.1(e) of the Disclosure Schedule, since September 30, 1996, the Company has been operated in the ordinary course consistent with past practice and there has not been: (i) any material adverse change in the condition (financial or other), assets, liabilities, operations, business or prospects of the Company; (ii) any obligation or liability (whether absolute, accrued, contingent or other, and whether due or to become due) incurred by the Company, other than obligations under customer contracts, current obligations and liabilities incurred in the ordinary course of business and consistent with past practice; (iii) any payment, discharge or satisfaction of any claim or obligation of the Company, except in the ordinary course of business and consistent with past practice; (iv) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or any direct or indirect redemption, purchase or other acquisition of any such shares; (v) any issuance or sale, or any contract entered into for the issuance or sale, of any shares of capital stock or securities convertible into or exercisable for shares of capital stock of the Company; (vi) any sale, assignment, pledge, encumbrance, transfer or other disposition of any tangible asset of the Company (other than sales of inventory to customers or sales of equipment no longer used or necessary in connection with the 6 11 conduct of the Company's business, in each case in the ordinary course of business consistent with past practice), or any sale, assignment, transfer or other disposition of any patents, trademarks, service marks, trade names, copyrights, licenses, franchises, know-how or any other intangible assets; (vii) any creation of any claim or other encumbrance on any property of the Company, except in the ordinary course of business consistent with past practice and which claims or encumbrances together with all other such claims and encumbrances would not have a material adverse effect on the business of the Company; (viii) any write-down of the value of any asset of the Company or any write-off as uncollectible of any accounts or notes receivable or any portion thereof, other than write-downs or write-offs which in the aggregate do not exceed $10,000; (ix) any cancellation of any debts or claims or any amendment, termination or waiver of any rights of value to the Company, other than refunds to customers in the ordinary course of business and consistent with past practice that in the aggregate are immaterial in amount; (x) through the date of this Agreement, any capital expenditure or addition to property, plant or equipment of the Company, individually or in the aggregate, in excess of $25,000; (xi) any general increase in the compensation of employees of the Company (including any increase pursuant to any written bonus, pension, profit-sharing or other benefit or compensation plan, policy or arrangement or commitment), or any increase in any such compensation or bonus payable to any officer, shareholder, director or consultant of the Company having an annual salary or remuneration in excess of $50,000; (xii) any damage, destruction or loss (whether or not covered by insurance) affecting any asset or property of the Company resulting in liability or loss in excess of $25,000 per incident or $100,000 in the aggregate; (xiii) any change in the independent public accountants of the Company or in the accounting methods or accounting practices followed by the Company or any change in depreciation or amortization policies or rates; (xiv) any agreement or action not otherwise referred to in items (i) through (xiii) above entered into or taken that is material to the Company; or (xv) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing items (i) through (xiv). (f) Assets, Property and Related Matters; Real Property. (i) Except as set forth in Section 2.1(f)(ii) of the Disclosure Schedule, the Company has good title to, or a valid 7 12 leasehold interest in, as applicable, all of the assets reflected on the financial statements contained in Section 2.1(d) of the Disclosure Schedule, free and clear of all Claims. Such assets (A) are in good operating condition and repair, subject to ordinary wear and tear and (B) constitute all of the properties, interests, assets and rights held for use or used in connection with the business and operations of the Company and constitute all those necessary to continue to operate the business of the Company consistent with current and historical practice. All items of personal property owned by the Company with an original cost or book value in excess of $5,000 are listed in Section 2.1(f)(i) of the Disclosure Schedule. (ii) Section 2.1(f)(ii) of the Disclosure Schedule sets forth a list of all real property owned or leased by the Company (each a "Company Property"). The Company is the sole owner or holder of, and has, good and marketable fee title to, or a good, valid and existing leasehold estate in each Company Property, free and clear of all liens, encumbrances, restrictions and other matters affecting title to or the use and occupancy of such Company Property, except as disclosed in Section 2.1(f)(ii) of the Disclosure Schedule ("Permitted Encumbrances"). No Company Property violates the terms or conditions of any Permitted Encumbrance. (iii) With respect to each Company Property leased by the Company, (A) the Company is the owner and holder of all the leasehold interests and estates purported to be granted by such leases, (B) all leases to which the Company is a party are in writing and in full force and effect and constitute valid and binding obligations of the Company and, to the knowledge of the Sellers, of the other parties thereto, enforceable in accordance with their terms, and (C) the Company has delivered to the Purchaser true and complete copies of all such leases. Except as set forth in Section 2.1(f)(ii) of the Disclosure Schedule, there exists no default, or any event which upon notice or the passage of time, or both, would give rise to any default, in the performance by the Company or by any lessor under any lease. Except as set forth in Section 2.1(f)(ii) of the Disclosure Schedule, the Company has not, and to the knowledge of the Sellers, no other person has, granted any oral or written right to anyone other than the Company to lease, sublease or otherwise occupy any of the properties described in Section 2.1(f)(ii) of the Disclosure Schedule through the end of the applicable lease periods. (iv) Each Company Property and all appurtenances and improvements, as used, constructed or maintained by the Company at any time, conform to applicable Federal, state, local and foreign laws and regulations ("Legal Requirements"), and, except as otherwise disclosed on Section 2.1(f)(iv) of the Disclosure Schedule, no notices of violation of any Legal Requirements have been issued by any governmental authority with respect to any Company Property, including all building, fire, health, zoning, setback, subdivision and environmental laws, regulations or ordinances. Without limiting the foregoing, each Company Property is in good operating condition and repair and no condition exists which would interfere with the Company's customary use and operation thereof. The use of the buildings and structures located on each Company Property or any appurtenances or equipment does not violate any restrictive covenants or encroach on any property owned by others. No condemnation proceeding is pending or, to the knowledge of the Sellers, threatened which would preclude or impair the use of any Company Property by the Company for the uses for which they are intended. 8 13 (v) Section 2.1(f)(v) of the Disclosure Schedule lists each permit necessary or useful for the Company to own, lease or use any Company Property as presently used by the Company. Each such permit was duly issued and obtained, currently is in full force and effect, and, unless the Company violates the terms of such permit after the Closing, shall remain in full force and effect for the term therefor. No default or violation, or event which with the passage of time or giving of notice or both would become a default or violation, has occurred in the due observance of any permit. (vi) Except as set forth in Section 2.1(f)(vi) of the Disclosure Schedule, no part of any Company Property is subject to any building or use restrictions that would restrict or prevent in any material respect the present use and operation of such Company Property, and each Company Property is properly and duly zoned for its current use, and such current use is in all respects a conforming use. No governmental authority having jurisdiction over any Company Property has issued or, to the knowledge of the Sellers, has threatened to issue any notice or order that adversely affects the use or operation of any Company Property, or requires, as of the date hereof or a specified date in the future, any repairs, alterations, additions or improvements thereto, or the payment or dedication of any money, fee, exaction or property. The Sellers have no knowledge of any actual or pending imposition of any assessments for public improvements with respect to any Company Property and, to the knowledge of the Sellers, no such improvements have been constructed or planned that would be paid for by means of assessments upon any Company Property. (vii) Each Company Property is located on public roads and streets, and all utility systems required in connection with the use, occupancy and operation of each Company Property are sufficient for their present purposes, are fully operational and in working order. Each Company Property consists of sufficient land, parking areas, sidewalks, driveways and other improvements to permit the continued use of such Company Property in the manner and for the purposes to which it is presently devoted. (viii) None of the Shareholders is a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986. (ix) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any lease of the Company. No consent from the lessor or any other person under any lease is required in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for those listed in Section 2.1(c) of the Disclosure Schedule. (g) Patents, Trademarks and Similar Rights. The Company owns or possesses an exclusive license for all patents, trademarks, service marks, trade names and copyrights, in each case registered or unregistered, inventions, software (including documentation and object and source code listings), know-how, trade secrets and other intellectual property rights (collectively, the "Intellectual Property") used in its business as presently conducted. Section 2.1(g) of the Disclosure Schedule contains a list of all Intellectual Property owned and used by 9 14 the Company (including the Winston Rights) and any Intellectual Property which is licensed for use by others. No Intellectual Property or product or service sold or provided by the Company infringes any rights owned or held by any other person. There is no pending or, to the knowledge of the Sellers, threatened claim or litigation against the Company contesting its right to use any Intellectual Property. To the knowledge of the Sellers, no person is infringing the rights of the Company in any Intellectual Property. In the case of commercially available "shrink-wrap" software programs (such as Lotus 1-2-3), neither the Company nor, in connection with the Company's business, any of its employees has made or is using any unauthorized copies of any such software programs. (h) Insurance. Section 2.1(h) of the Disclosure Schedule contains a true and complete list of all policies of casualty, liability, theft, fidelity, life and other forms of insurance currently held by the Company. True and complete copies of such policies have been delivered to the Purchaser. All insurance policies are in the name of the Company, outstanding and in full force and effect, all premiums with respect to such policies are currently paid and such policies will not be affected by, or terminated or lapse by reason of, the transactions contemplated by this Agreement. The Company has not received notice of cancellation or termination of any such policy, nor has it been denied or had revoked or rescinded any policy of insurance, nor borrowed against any such policies. Except as set forth in Section 2.1(h) of the Disclosure Schedule, no claim under any such policy is pending. (i) Agreements. (i) Section 2.1(i)(i) of the Disclosure Schedule contains a true and complete list of all written or oral contracts, agreements and other instruments to which the Company is a party (A) relating to indebtedness for money borrowed or capital leases, (B) of duration of six months or more from the date hereof and not cancelable without penalty on 30 days or less notice, (C) relating to commitments in excess of $10,000, (D) relating to the employment or compensation of any director, officer, employee, consultant or other agent of the Company, (E) relating to the sale or other disposition of any assets, properties or rights, (F) relating to the lease or similar arrangement of any machinery, equipment, motor vehicles, furniture, fixture or similar property, (G) between the Company and any Seller or affiliate of any Seller, (H) that restricts the operation of the Company anywhere in the world or (I) that is otherwise material to the Company or entered into other than in the ordinary course of business. Except as set forth in Section 2.1(i)(i) of the Disclosure Schedule, the Company is not in default under any such agreement or instrument where such default could, singly or in the aggregate with defaults under other agreements or instruments, have a material adverse effect on the Company's condition (financial or otherwise), assets, liabilities, operations, business or prospects and, to the knowledge of the Sellers, all such agreements or instruments are in full force and effect. (ii) Except as set forth in Section 2.1(i)(ii) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will create a breach of, or constitute a default under, any Agreement required to be listed in Section 2.1(i)(i) of the Disclosure Schedule. The Company has delivered to the Purchaser true and complete copies of all documents described in Section 2.1(i)(i) of the Disclosure Schedule. 10 15 (j) Litigation. Except as set forth in Section 2.1(j) of the Disclosure Schedule, there have not been for the past 12 months or, in the case of any such matters for which any potential liability of the Company was not fully covered by insurance, the past three years, nor are there, any suits, actions, claims, investigations or legal or administrative or arbitration proceedings in respect of the Company, pending or, to the knowledge of the Sellers, threatened, whether at law or in equity, or before or by any Federal, foreign, state or municipal or other governmental department, commission, board, bureau, agency or instrumentality. Except as set forth in Schedule 2.1(j) of the Disclosure Schedule, there have not been for the past three years, nor are there any judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Company or any Seller or any of their respective assets or properties. (k) Compliance; Governmental Authorizations. (i) Except as set forth in Section 2.1(k) of the Disclosure Schedule, the Company has complied and is in compliance with all Federal, state, local and foreign laws, ordinances, regulations, interpretations and orders (including those relating to disposal of materials, environmental protection and occupational safety and health) applicable to the Company or its business. Except as set forth in Section 2.1(k) of the Disclosure Schedule, there are no present or past conditions relating to the Company, or relating to any Company Property or any appurtenances thereto or improvements thereon, that could lead to any material liability against, or have a material adverse effect on, the Company, for violation of any applicable health or safety laws. Except as set forth in Section 2.1(k) of the Disclosure Schedule, the Company has not violated (other than such violations that have been fully cured or remedied and pursuant to which the Company has no liability (contingent or otherwise)), nor is the Company in violation of, any requirements of any Federal, state, county or local laws, ordinances, regulations, interpretations and orders relating to disposal of materials or the discharge of chemicals, gases or other substances or Hazardous Materials (as defined below) into the environment or to the safety or protection of the environment (the "Environmental Laws") in connection with the conduct of its business or in connection with the use, maintenance or operation of any Company Property. Except as set forth in Section 2.1(k) of the Disclosure Schedule, there are no present or past conditions relating to the Company or relating to any Company Property, nor are there any present or past conditions relating to any real property previously owned, leased or operated by the Company or any of its present or past affiliates, that in any such case could lead to any liability of the Company under any Environmental Law. Except as set forth in Section 2.1(k) of the Disclosure Schedule, the Company has neither engaged in nor permitted the sale or dispensation (to customers, employees or other persons), handling, transportation, discharge, emission, treatment, storage or disposal of gasoline or other motor vehicle fuels at or under any Company Property or any property or facility previously owned, leased or operated by the Company or one of its past or present affiliates. Except as set forth in Section 2.1(k) of the Disclosure Schedule, the Company has operated each Company Property and has received, handled, used, stored, treated, shipped and disposed of all hazardous or toxic materials, substances and wastes (whether or not on its properties or properties owned or operated by others) in compliance with all applicable Environmental Laws (other than such instances of non-compliance that have been fully cured or remedied and pursuant to which the Company has no liability (contingent or otherwise)). "Hazardous Materials" means (A) any "hazardous substance" as defined by the Comprehensive 11 16 Environmental Response, Compensation and Liability Act of 1980, as amended; (B) any "hazardous waste" or "petroleum," as defined by the Resource Conservation and Recovery Act, as amended; (C) any petroleum product; (D) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law, as amended or hereafter amended; or (E) any radioactive material, including any source, special nuclear or by-product material as defined at 42 U.S.C. Section 2011 et seq., as amended or hereafter amended. (ii) The Company has all Federal, state, local and foreign governmental licenses and permits necessary to conduct its business as presently being conducted, which licenses and permits (and any exceptions thereto) are listed in Section 2.1(k) of the Disclosure Schedule. Such licenses and permits are in full force and effect, no violations are or have been recorded in respect of any thereof (other than such violations that have been fully cured or remedied), no proceeding is pending or, to the knowledge of the Sellers, threatened, to revoke or limit any thereof, and the Sellers do not know of any basis for any such proceeding and the consummation of the transactions contemplated in this Agreement will not result in the non-renewal, revocation or termination of any such license or permit. The Company validly holds all permits required under all applicable Environmental Laws. (l) Labor Relations; Employees. (i) Except as set forth in Section 2.1(l)(i) of the Disclosure Schedule, (A) there is no labor strike, dispute, slowdown, stoppage or lockout pending, affecting, or, to the knowledge of any Seller, threatened against the Company, and during the last five years there has not been any such action and there are no existing or prior facts, circumstances or conditions that may lead to such an action; (B) there are no union claims to represent the employees of the Company nor have there been any such claims within the last five years; (C) there is no written or oral contract, commitment, agreement, understanding or other arrangement with any labor organization, nor work rules or practices agreed to with any labor organization or employee association, applicable to employees of the Company, nor is the Company a party to or bound by any collective bargaining or similar agreement; (D) there is, and within the last five years has been, no representation of the employees of the Company by any labor organization and, to the knowledge of the Sellers, there are no union organizing activities among the employees of the Company, nor does any question concerning representation exist concerning such employees; (E) Schedule 2.1(l) sets forth all personnel policies, rules or procedures (whether written or oral) applicable to employees of the Company, and the Sellers have delivered to the Purchaser complete and accurate copies of all such written policies, rules or procedures plus summaries of all oral policies, rules or procedures; (F) the Company has not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance, regulation, interpretation or order and the Company is, and has for the past five years been, in compliance with all applicable laws, ordinances, regulations, interpretations or orders respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; (G) there is no unfair labor practice charge or complaint against the Company (or against any Seller with respect to the Company) pending or, to the knowledge of any Seller, threatened before the National Labor Relations Board or any similar state or foreign agency and there are no existing or prior facts, circumstances or conditions that could form the basis therefor; (H) there is no grievance pending 12 17 or, to the knowledge of any Seller, threatened against the Company arising out of any collective bargaining agreement or other grievance procedure and there are no existing or prior facts, circumstances or conditions that could form the basis therefor; (I) there are no charges with respect to or relating to the Company pending or, to the knowledge of any Seller, threatened before the Equal Employment Opportunity Commission or any other governmental entity responsible for the prevention of unlawful employment practices and there are no existing or prior facts, circumstances or conditions that could form the basis therefor; (J) neither the Company nor any Seller has received notice of the intent of any governmental entity responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company and no such investigation is in progress; and (K) no complaints, lawsuits or other proceedings are pending or, to the knowledge of any Seller, threatened in any forum by or on behalf of any present or former employee of the Company, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract, commitment, agreement, understanding or other arrangement for employment, any law governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with any employment relationship. (ii) Section 2.1(l)(ii) of the Disclosure Schedule contains a list of each pension, retirement, savings, deferred compensation, and profit-sharing plan and each stock option, stock appreciation, stock purchase, performance share, bonus or other incentive plan, severance plan, health, group insurance or other welfare plan, or other similar plan and any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), under which the Company has any current or future obligation or liability or under which any employee or former employee (or beneficiary of any employee or former employee) of the Company has or may have any current or future right to benefits (the term "plan" shall include any contract, agreement, policy or understanding, each such plan being hereinafter referred to individually as a "Plan"). The Company has delivered to the Purchaser true and complete copies of (A) each Plan, (B) the summary plan description for each Plan and (C) the latest annual report, if any, which has been filed with the IRS for each Plan. Each Plan intended to be tax qualified under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 (the "Code") has been determined by the IRS to be tax qualified under Sections 401(a) and 501(a) of the Code and, since such determination, no amendment to or failure to amend any such Plan adversely affects its tax qualified status. There has been no prohibited transaction within the meaning of Section 4975 of the Code and Section 406 of Title I of ERISA with respect to any Plan. (iii) No Plan is subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA. No Plan is subject to Title IV of ERISA. During the past five years, neither the Company nor any business or entity then controlling, controlled by, or under common control with the Company contributed to or was obliged to contribute to an employee pension plan that was subject to Title IV of ERISA. (iv) There are no actions, claims, lawsuits or arbitrations (other than routine claims for benefits) pending, or, to the knowledge of the Sellers, threatened, with respect to any Plan or the assets of any Plan, and no Seller has knowledge of any facts which could give 13 18 rise to any such actions, claims, lawsuits or arbitrations (other than routine claims for benefits). Except as provided in Section 2.1(l)(iv), the Company has satisfied all funding, compliance and reporting requirements for all Plans. With respect to each Plan, the Company has paid all contributions (including employee salary reduction contributions) and all insurance premiums that have become due and any such expense accrued but not yet due has been properly reflected in the financial information in Section 2.1(d) of the Disclosure Schedule. (v) No Plan provides or is required to provide, now or in the future, health, medical, dental, accident, disability, death or survivor benefits to or in respect of any person beyond termination of employment, except to the extent required under any state insurance law or under Part 6 of Subtitle B of Title I of ERISA and under Section 4980(B) of the Code. No Plan covers any individual other than employees of the Company, other than dependents of employees under health and child care policies listed in Section 2.1(l)(ii) of the Disclosure Schedule, true and complete copies of which have been delivered to the Purchaser. (vi) Except as set forth in Section 2.1(l)(vi) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (A) entitle any employee of the Company to severance pay or termination benefits, (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (C) obligate the Purchaser or the Company, or any of their respective affiliates, to pay or otherwise be liable for any compensation, vacation days, pension contribution or other benefits to any employee, consultant or agent of the Company for periods before the Closing Date or for personnel whom the Purchaser does not employ. (vii) The Company has not made any representations or warranties (whether written or oral, express or implied) contractually or otherwise to any client or customer of the Company that the Company employees rendering services to such client or customer are not "leased employees" (within the meaning of Section 414(n) of the Code) or that such employees would not be required to participate under any pension benefit plan (within the meaning of Section 3(2) of ERISA) (a "Pension Benefit Plan") of such client or customer relating either to (A) providing benefits to employees of the Company under a Pension Benefit Plan of the Company or (B) making contributions to or reimbursing such client or customer for any contributions made to a Pension Benefit Plan of such client or customer on behalf of employees of the Company. (m) Related Party Transactions. Except as set forth in Section 2.1(m) of the Disclosure Schedule, no current or former partner, director, officer, employee or shareholder of the Company or any associate or affiliate (as defined in the rules promulgated under the Securities Exchange Act of 1934) thereof, or any relative with a relationship of not more remote than first cousin of any of the foregoing, is presently, or during the 12-month period ending on the date hereof has been, (i) a party to any transaction with the Company (including any contract, agreement or other arrangement providing for the furnishing of services by, or rental of real or personal property from, or otherwise requiring payments to, any such director, officer, employee or shareholder or such associate) or (ii) to the knowledge of the Sellers, the direct or indirect owner of an interest in any corporation, firm, association or business organization which is a 14 19 present (or potential) competitor, supplier or customer of the Company, nor does any such person receive income from any source other than the Company which relates to the Company's businesses or should properly accrue to the Company. (n) Taxes. (i) The Company is a "small business corporation" and has maintained a valid election to be an "S" corporation under Subchapter S of the Code, and the equivalent provisions of all applicable state income tax statutes since October 1, 1987. Except as set forth in Section 2.1(n) of the Disclosure Schedule, all Federal, state, local and foreign tax returns and tax reports that are due for periods ending on or prior to the Closing Date by the Company have been filed or a valid request for extension has been filed with respect thereto, on a timely basis (including any extensions) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed. All such returns and reports are and will be true, correct and complete. Except as set forth in Section 2.1(n) of the Disclosure Schedule, all Federal, state, local and foreign income, profits, franchise, sales, use, occupation, property, excise, employment and other taxes (including interest, penalties and withholdings of tax) due from and payable by the Company on or prior to the Closing Date have been fully paid on a timely basis. Except as set forth in Section 2.1(n) of the Disclosure Schedule, the Company is not currently the beneficiary of any extension of time within which to file any tax return. (ii) To the Sellers' knowledge, no written claim has ever been made by an authority in a jurisdiction where the Company does not file tax returns that it is or may be subject to taxation by that jurisdiction, and the Company has not received any notice, or request for information from any such authority. (iii) Except as set forth in Section 2.1(n) of the Disclosure Schedule, no issues have been raised in writing with the Company by the Internal Revenue Service (the "IRS") or any other taxing authority in connection with any tax return or report filed by the Company and there are no issues which, either individually or in the aggregate, could result in any liability for tax obligations of the Company relating to periods ending on or before September 30, 1996 in excess of the accrued liability for taxes shown on the combined financial statements contained in Section 2.1(d) of the Disclosure Schedule. No waivers of statutes of limitations have been given or requested in writing with respect to the Company. (iv) The Company neither is nor has been a United States real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(ii) of the Code. (v) The Company has complied (and until the Closing will comply) with all applicable laws relating to the payment and withholding of taxes (including withholding and reporting requirements under Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and similar provisions under any other laws) and, within the time and in the manner prescribed by law, has withheld from wages, fees and other payments and paid over to the proper governmental or regulatory authorities all amounts required. 15 20 (o) Disclosure. To the knowledge of the Sellers, there have been no events, transactions or information relating to the Company which, singly or in the aggregate, could reasonably be expected to have a material adverse effect on the condition (financial or other), assets, liabilities, operations, business or prospects of the Company. No representation or warranty of the Sellers contained in this Agreement, and no statement contained in any certificate, schedule, annex, list or other writing furnished to the Purchaser, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained herein or therein, in light of the circumstances under which they were made, not misleading. (p) Bank Accounts; Powers-of-Attorney. Section 2.1(p) of the Disclosure Schedule contains a true and complete list of (A) all bank accounts and safe deposit boxes of the Company and all persons who are signatories thereunder or who have access thereto and (B) the names of all persons holding general or special powers-of-attorney from the Company and a summary of the terms thereof. (q) Inventory. The inventory included in the financial statements contained in Section 2.1(d) of the Disclosure Schedule is the only inventory used or held for use in the Company's business, is valued for financial statement purposes at the lower of cost or market in aggregate using the last in, first out method value. Such inventory, net of applicable reserves, is useable and salable in the ordinary course of business. (r) Brokers. Except as set forth in Section 2.1(r) of the Disclosure Schedule, 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. SECTION 2.2. Representations and Warranties of the Sellers Individually. Each Seller severally represents and warrants to the Purchaser as follows: (a) Authority; Binding Agreements; Title to Shares. (i) Such Seller has the legal power and capacity to enter into this Agreement and the Escrow Agreement, and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by such Seller, and constitutes the valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms. The Escrow Agreement when executed and delivered by such Seller will constitute the valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms. (ii) The record and beneficial ownership of the Shares being sold by such Seller under this Agreement and the number of such Shares are as set forth opposite such Sellers' name on Annex A, and such Seller has, and will transfer or cause to be transferred to the Purchaser at the Closing, good and marketable title to such number of Shares, free and clear of all Claims, and with no restriction on the voting rights or other incidents of record and beneficial ownership. 16 21 (b) Conflicts; Consents. The execution and delivery by such Seller of this Agreement and the Escrow Agreement, the consummation of the transactions contemplated hereby and thereby and compliance by such Seller with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the constitutive documents, if any, of such Seller, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which such Seller is a party, or by which such Seller or any of such Seller's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been, or before the Closing will be, obtained (which waivers or consents are set forth in Section 2.2(b) of the Disclosure Schedule), (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to such Seller or any of such Seller's properties or assets or (iv) result in the creation or imposition of any Claim upon any of such Seller's Shares. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by such Seller of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby, except for the filing of a premerger notification and report form by the Sellers under the Hart-Scott- Rodino Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"). (c) Brokers. Except as set forth in Section 2.2(c) of the Disclosure Schedule, no agent, broker, investment banker, person or firm acting on behalf of such Seller or under the authority of such Seller 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. (d) Pending Challenges. There is no legal or regulatory proceeding pending or, to the knowledge of such Seller, threatened that could have a material adverse effect on such Seller's ability to consummate the transactions contemplated by this Agreement and the Escrow Agreement. SECTION 2.3. Representations and Warranties by the Purchaser. The Purchaser represents and warrants to the Sellers as follows: (a) Organization and Standing. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. (b) Authority; Binding Agreements. The Purchaser has all requisite corporate power and authority to enter into this Agreement and the Escrow Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. The Escrow Agreement when executed and delivered by the 17 22 Purchaser will constitute the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. (c) Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement and the Escrow Agreement, the consummation of the transactions contemplated hereby and thereby and compliance by the Purchaser with any of the provisions hereof and thereof does not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Purchaser, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser is a party, or by which the Purchaser or any of the Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been, or before the Closing will be, obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or any of the Purchaser's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Purchaser's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Purchaser of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby, except for the filing of a premerger notification and report form by the Purchaser under the HSR Act. (d) Investment Representation. The Purchaser is acquiring the Shares for its own account and not with a view to distribution within the meaning of the applicable Federal securities laws. (e) Pending Challenges. There is no legal or regulatory proceeding pending or, to the knowledge of the Purchaser, threatened that could have a material adverse effect on the Purchaser's ability to consummate the transactions contemplated by this Agreement and the Escrow Agreement. (f) Broker. Other than T&Co. (the fees and expenses of which shall be paid by the Purchaser), no agent, broker, investment banker, person or firm acting on behalf of the Purchaser or under the authority of the Purchaser 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 ADDITIONAL AGREEMENTS SECTION 3.1. Expenses. (a) The Purchaser, on the one hand, and the Sellers and the Company, on the other hand, shall each bear their respective costs incurred in the pursuit of the transactions contemplated by this Agreement, including the fees and expenses of their respective lawyers, financial advisors and accountants ("Transaction Costs"). The Company shall bear any Transaction Costs incurred by the Sellers and, except as expressly set forth in this Agreement, neither the Purchaser nor the Company shall have any recourse against the Sellers 18 23 with respect to such costs either before or after the Closing. After the Closing, the Purchaser agrees to pay, or cause the Company to pay, the Transaction Costs of the Sellers and the Company that have not been paid by the Company prior to the Closing. The Sellers acknowledge and agree that Section 3.1(a) of the Disclosure Schedule sets forth the Sellers' good faith estimate of the Transaction Costs that have been or will be incurred by the Sellers and the Company. (b) Notwithstanding anything to the contrary set forth in Section 3.1(a), the Purchaser shall reimburse the Sellers and the Company for their respective Transaction Costs up to an aggregate maximum of $300,000 if (i) the Closing does not occur on or prior to the close of business on May 31, 1997 for any reason in the control of the Purchaser (including the failure to satisfy the condition set forth in Section 4.1(h)) and this Agreement is terminated pursuant to Section 6.2 and (ii) (A) neither the Sellers nor the Company have materially misrepresented the Company's financial condition, business or operations as of the date of this Agreement through the written financial and other information presented to the Purchaser on or before the date of this Agreement, (B) the Company has operated its business in the ordinary course between the date of this Agreement and the date of termination of this Agreement and (C) no event or condition has occurred after the date of this Agreement which has a material adverse effect on the Company's financial condition, business or operations. (c) Notwithstanding anything to the contrary set forth in Section 3.1(a), in the event that (i) the Closing does not occur on or prior to the close of business on May 31, 1997 for any reason in the control of the Company or the Sellers not precipitated by the Purchaser and (ii) prior to September 30, 1997, either the Company or the Sellers enter into a letter of intent or other agreement relating to the acquisition of more than 50% of the equity of, or all or substantially all of the assets of, the Company, immediately upon the closing of such transaction, the Sellers shall cause the Company to reimburse the Purchaser for (A) the Purchaser's Transaction Costs up to a maximum of $300,000 and (B) any amounts paid by the Purchaser to the Company or the Sellers pursuant to Section 3.1(b). SECTION 3.2. Conduct of Business. (a) From the date of this Agreement until the Closing Date, except as otherwise consented to by the Purchaser in writing or as described in Section 3.2(a) of the Disclosure Schedule, the Sellers shall cause the Company to operate its business only in the ordinary course of business consistent with past practice. (b) Without limiting the generality of the foregoing, the Sellers shall use their best efforts to prohibit the Company, without the prior written consent of the Purchaser, directly or indirectly, to cause or permit any state of affairs, action or omission described in clauses (i) through (xv) of Section 2.1(e). (c) From the date of this Agreement until the Closing Date, the Sellers shall cause the Company to refrain from incurring any additional indebtedness (other than in the ordinary course of business consistent with past practice). 19 24 (d) From the date of this Agreement until the Closing Date, the Sellers shall cause the Company to refrain from making any commitment for capital expenditures or additions to property, plant or equipment of the Company individually in excess of $25,000. (e) If, after the date of this Agreement and prior to the Closing Date, any of the information or disclosures set forth on the Disclosure Schedule shall have become outdated or incorrect, or facts, circumstances or occurrences requiring disclosure shall have arisen, the Sellers shall make, or cause to be made, in writing such additions, updates or corrections to the Disclosure Schedule as may be necessary to augment, update or correct the Disclosure Schedule. The Purchaser may elect not to close the transactions contemplated by this Agreement based upon the underlying facts, circumstances or occurrences described in such additions, updates or corrections. If the Purchaser so elects not to close, the parties shall have no further rights or obligations under this Agreement, except the parties' rights and obligations under Sections 3.1, 3.7(a) and 3.9; provided that, notwithstanding the foregoing, if such underlying facts, circumstances or occurrences were within the control of the Sellers or the Company and, in instances not involving a violation of Section 3.5, result in a material adverse change to the Company, the Sellers shall be liable to the Purchaser only for its Transaction Costs, except in the instance of a violation of Section 3.5, in which event the Sellers shall be liable to the Purchaser for its actual damages. If, notwithstanding such additions, updates or corrections, the Purchaser elects to close the transactions contemplated by this Agreement, the representations and warranties of the Sellers set forth in this Agreement shall be deemed made for all purposes of this Agreement with reference to such augmented, updated or corrected Disclosure Schedules. The phrase "facts, circumstances or occurrences . . . within the control of . . . the Company," as opposed to the phrase "within the control of the Sellers," for the purposes of this Agreement, means facts, circumstances or occurrences resulting from a corporate officer of the Company knowingly violating the provisions of Sections 3.2(a), 3.2(b), 3.2(c), 3.2(d), 3.3, 3.4, 3.5, 3.6, 3.7(a)(i) and 3.9. Promptly after the date of this Agreement, the Sellers shall cause the corporate officers of the Company to be informed of such provisions. Notwithstanding the foregoing, if the adverse facts, circumstances or occurrences, if any, set forth in such additions, updates or corrections are remedied by the Sellers prior to the Closing, the Purchaser shall not have the right to elect not to close pursuant to this paragraph (d), provided that, if such adverse facts, circumstances or occurrences do not result in a material adverse change to the Company but were within the control of the Sellers or the Company, as herein defined, the Sellers shall prior to the Closing remedy such adverse facts, circumstances or occurrences to the extent that they do not exceed, individually or collectively, the sum of $50,000, or if they can not be remedied by the payment of money, the Sellers shall use their best efforts to remedy the same. (f) The Purchaser agrees that the reserves established by the Company and reflected on the Company's audited balance sheet at September 30, 1996 contained in Section 2.1(d) of the Disclosure Schedule are adequate, and that the methodology used in determining such reserves is consistent with generally accepted accounting principles. SECTION 3.3. Reasonable Efforts; Further Assurances. The Purchaser and the Sellers each agree to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and 20 25 regulations, to consummate and make effective the transactions contemplated by this Agreement as expeditiously as practicable and to ensure that the conditions set forth in Article IV are satisfied, insofar as such matters are within the control of any of them. Without limiting the generality of the foregoing, the Purchaser and the Sellers each agree to use their reasonable best efforts to make or cause to be made, within three business days of the date of this Agreement, the filings required of such party under the HSR Act with respect to the transactions contemplated by this Agreement. If requested by the Sellers, the Purchaser shall deliver to the appropriate authorities on behalf of the Sellers the Sellers' filings required under the HSR Act at the same time the Purchaser delivers its filings under the HSR Act to such authorities. If requested by the Purchaser, the Sellers shall cause the Company to use its reasonable best efforts to obtain, before the Closing, requisite waivers or consents to the conflicts, breaches or defaults listed in Section 2.1(c) of the Disclosure Schedule. In case at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties to this Agreement shall take or cause to be taken all such necessary action, including the execution and delivery of such further instruments and documents, as may be reasonably requested by any party for such purposes or otherwise to complete or perfect the transactions contemplated by this Agreement. SECTION 3.4. Winston Rights. At or prior to the Closing, the Sellers shall cause the Company to acquire from Demetra M. Winston and William S. Johnstone, Jr., Trustee of the Sam M. Winston and Demetra M. Winston Community Property Trust dated January 8, 1990 good and marketable title to the Winston Rights, free and clear of all Claims, for a purchase price of $379,000 (the "Winston Purchase Price"). At the Closing, on behalf of the Company in connection with the Company's acquisition of the Winston Rights, the Purchaser shall pay the Winston Purchase Price to Demetra M. Winston and William S. Johnstone, Jr., Trustee of the Sam M. Winston and Demetra M. Winston Community Property Trust dated January 8, 1990. SECTION 3.5. No Shopping. From the date of this Agreement until the earlier of (i) the Closing Date and (ii) the date this Agreement is terminated in accordance with Section 6.2, no Seller shall, and no Seller shall permit the Company or any partner, director, officer or agent of the Company or such Seller to, directly or indirectly, solicit or initiate, enter into or conduct, discussions concerning, or exchange information (including by way of furnishing information concerning the Company or its business) or enter into any negotiations concerning, or solicit, entertain or agree to any proposals for, the acquisition of the assets of, or any substantial part thereof, or a merger involving, the Company or the transfer of all or a substantial part of the capital stock of the Company to any person other than the Purchaser or one of its affiliates. In addition, during such time period, no Seller shall authorize, direct or knowingly permit any employee or agent of the Company or such Seller to do any of the foregoing and the Sellers shall notify the Purchaser of the identity of any person who approaches any Seller or the Company with respect to any of the foregoing. SECTION 3.6. Access and Information. From the date of this Agreement until the first to occur (i) of the Closing Date and (ii) the termination of this Agreement in accordance with Section 6.2, the Sellers shall cause the Company to permit the Purchaser, its financing parties and their respective representatives to make such investigation of the business, operations and properties of the Company as the Purchaser deems necessary or desirable in connection with the 21 26 transactions contemplated by this Agreement. Such investigation shall include reasonable access to the respective directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of the Company and the properties, books, records and commitments of the Company. Sellers shall furnish the Purchaser and its representatives with such financial, operating and other data and information, and copies of documents with respect to the Company or any of the transactions contemplated by this Agreement, as the Purchaser shall from time to time request. Such access and investigation shall be made after prior consultation with William S. Johnstone, Jr. or Thomas J. Bonburg and upon reasonable notice and at reasonable places and times. The Purchaser shall obtain the Company's written consent prior to contacting any of the Company's significant business relationships. The Sellers shall ensure that such consent shall not be unreasonably withheld. Such access and information shall not in any way affect or diminish any of the representations or warranties hereunder. Without limiting the foregoing, during such period, Sellers shall keep the Purchaser informed as to the business and operations of the Company and shall consult with the Purchaser as appropriate. SECTION 3.7. Confidentiality; Non-Competition. (a) (i) Until Closing, the Purchaser and the Sellers each agree that all financial or other information about the Purchaser, the Company or any Seller, or other information of a confidential or proprietary nature, disclosed to the other at any time in connection with the proposed transaction shall be kept confidential by the party receiving such information and shall not be disclosed to any person or used by the receiving party (other than to its agents or employees, or in the case of the Purchaser, its financing parties, in connection with the transactions contemplated by this Agreement) except: (1) with the prior written consent of the disclosing party; (2) as may be required by applicable law or court process; (3) such information which may have been acquired or obtained by such party (other than through disclosure by or on behalf of the other party in connection with the transaction contemplated by this Agreement); or (4) such information which is or becomes generally available to the public other than as a result of a violation of this provision. Each Seller shall be bound by the terms of this subparagraph (a)(i) for a period of five years after Closing. (ii) Effective upon the Closing and for a period of five years after the Closing, each Seller agrees that all financial or other confidential or proprietary information concerning the Company known by such Seller shall be kept confidential by such Seller and shall not be disclosed to any person except: (1) as otherwise expressly permitted pursuant to the terms of this Agreement, (2) with the prior written consent of the Purchaser; (3) as may be required by applicable law or court process; or (4) such information which is or becomes generally available to the public other than as a result of a violation of this provision. Notwithstanding the foregoing, William S. Johnstone, Jr., in his fiduciary capacity as Trustee of The Sam M. Winston Separate Property Trust, The Sam M. Winston Life Insurance Trust No. 2 dated May 22, 1987 and The Sam M. Winston Life Insurance Trust No. 3 dated November 12, 1992, may disclose such confidential information as is reasonably necessary to any court having jurisdiction over the affairs of such trusts in order to obtain instructions from such court regarding the administration of such trusts, and shall request that, if possible, such court seal the files so that such information remains confidential. (b) Each Seller by this Agreement acknowledges and recognizes such Seller's possession of confidential or proprietary information and the highly competitive nature of the 22 27 business of the Company and accordingly agrees that, in consideration of the Purchaser entering into this Agreement and the transactions contemplated by this Agreement and the premises contained herein, such Seller will not, from and after the date of the Closing for a period of five years after the date of the Closing, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, (i) directly or indirectly engage in the United States in any competitive business, (ii) assist others in engaging in any competitive business in the manner described in the foregoing clause (i), or (iii) induce any employee of the Company, the Purchaser, or any affiliate of the Purchaser, to terminate employment with the Company, the Purchaser or such affiliate, as the case may be, or hire any employee of the Company, the Purchaser or any other affiliate of the Purchaser to work with any Seller or any company or business affiliated with any Seller. The Sellers' ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this paragraph (b). (c) In the event of a breach or threatened breach by any party of the provisions of Section 3.7, the non-breaching party shall be entitled to an injunction restraining such party from such breach. Nothing contained in this paragraph (c) or elsewhere in this Agreement shall be construed as prohibiting the non-breaching party from pursuing any other remedies available at law or equity for such breach or threatened breach of this Agreement nor limiting the amount of damages recoverable in the event of a breach or threatened breach by any party of the provisions of this Section. Without limiting the generality of the foregoing, the Sellers acknowledge that, in the event of a breach or threatened breach by any Seller of any of the provisions of paragraph (b) of Section 3.7, the Purchaser's damages may exceed the amount paid to the Sellers (singly or in the aggregate) in consideration of their covenants set forth in such paragraph (b). Notwithstanding anything to the contrary set forth in this Agreement, nothing contained in this Section 3.7 shall entitle the Purchaser to seek an injunction or otherwise pursue remedies available at law or in equity from any Seller in connection with a breach or threatened breach of the provisions of paragraph (b) of Section 3.7 other than such Seller or Sellers alleged to have breached or threatened to breach such provisions. SECTION 3.8. Releases; Prior Compensation. (a) Each Seller agrees and acknowledges that he has been paid in full for all services rendered to the Company and has no outstanding claims against the Company or the Purchaser for any amounts arising because of such employment or otherwise. Each Seller hereby releases the Company and all of the Company's affiliates from all rights such Seller may have to acquire any securities of the Company and all actions, suits, debts, promises, agreements, damages, demands or claims of any kind whatsoever arising from any event or action prior to the Closing Date that any Seller had, has or may in the future have against the Company, except for the matters arising under this Agreement or related to the transactions contemplated hereby. (b) After the Closing, the Purchaser will cause the Company to indemnify and hold harmless the officers and directors of the Company in respect of acts or omissions of such persons acting in such capacities occurring on or prior to the Closing to the extent provided under the Company's articles of incorporation and bylaws in effect on the date hereof; provided that 23 28 such indemnification shall be subject to any limitations imposed from time to time under applicable law. SECTION 3.9. Public Announcements. The Purchaser, on the one hand, and the Sellers, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation. Prior to Closing, neither the Purchaser, on the one hand, nor the Sellers, on the other hand, shall issue any such press release or make any such public statement without the other's prior consent, which consent shall not be unreasonably withheld. SECTION 3.10. Tax Matters. (a) (i) The Purchaser and each Seller shall join in making timely and irrevocable elections under Section 338(h)(10) of the Code and, if permissible, similar elections under any applicable state income tax laws, with respect to the Company. In such event, the Purchaser and each Seller shall report the transaction consistent with such elections under Section 338(h)(10) of the Code and any applicable state tax provision (the "Elections") and shall take no position contrary thereto unless and to the extent required to do so pursuant to a determination (as defined in Section 1313(a) of the Code or any similar state or local tax provision). (ii) The Purchaser shall prepare, and the Purchaser and each Seller shall execute at the Closing any and all forms necessary to effectuate the Elections (including IRS Form 8023-A and any similar forms under applicable state income tax laws (the "Section 338 Forms")). The Purchaser and each Seller shall cause the Section 338 Forms to be duly executed by an authorized person, and the Purchaser shall duly and timely file the Section 338 Forms in accordance with applicable tax laws and the terms of this Agreement. (iii) The Purchaser and each Seller agree to allocate the Aggregate Deemed Sale Price (as defined under applicable Treasury Regulations) of the assets of the Company as set forth in a schedule that will be generated with the assistance of Arthur Andersen, Purchaser's accountants, by the Closing Date, in accordance with the guidelines of the Internal Revenue Service, which shall reflect an allocation agreed to by the parties. The parties hereby agree that at least $9.0 million of the Aggregate Deemed Sale Price shall be allocated to assets with useful lives of no more than three, five or seven years. The Purchaser and each Seller will reflect such allocation in all applicable tax returns filed by any of them, including but not limited to the Section 338 Forms. The Purchaser and each Seller will not take a position before any taxing authority or otherwise (including in any tax return) inconsistent with such allocation unless and to the extent required to do so pursuant to a determination (as defined in Section 1313(a) of the Code or any similar state or local law). (b) The Sellers shall be responsible for all transfer, excise, stamp, sales, use, recording or similar taxes or fees arising out of the sale, transfer, conveyance or assignment of the Shares by the Sellers and the transactions contemplated hereby other than any California state transfer, sales and use or "S" corporation tax resulting from the Elections, which shall be borne 24 29 by or for the account of the Purchaser. The Seller shall make any required filing under applicable law. (c) (i) Other than as set forth in Section 3.10(b) or 3.10(g), the Sellers shall be liable for and shall indemnify the Purchaser and the Company for taxes of the Company for any taxable years or periods that end on or before the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of such taxable years ending on and including the Closing Date (except to the extent that any such taxes (x) have been paid by the Company prior to the Closing Date or (y) are reflected on the Closing Date Balance Sheet). (ii) Following the Closing, the Purchaser and the Company shall be liable for and shall indemnify the Sellers for taxes of the Company for any taxable years or periods that begins after the Closing Date and, with respect to any taxable years or periods beginning before and ending after the Closing, the portion of the taxable years beginning on the day after the Closing Date. (iii) For purposes of subparagraphs (c)(i) and (c)(ii) above, whenever it is necessary to determine the liability for taxes of the Company for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of such taxes for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date, shall be determined using the closing of books method described in Section 1362(e)(1) of the Code. (d) Any payment by the Purchaser or any Seller under this Section 3.10 will be treated for tax purposes as an adjustment to the Purchase Price. (e) The Sellers shall cause the Company to file when due all tax returns that are required to be filed by the Company for taxable years or periods ending on or before the Closing Date, and the Purchaser shall file or cause to be filed when due all other tax returns that are required to be filed by or with respect to the Company. (f) After the Closing Date, the Purchaser and each Seller shall: (i) assist in all reasonable respects (and cause their respective affiliates to assist) the other party in preparing any tax returns or reports which such other party is responsible for preparing and filing in accordance with this Section 3.10; (ii) cooperate in all reasonable respects in preparing for any audits of, or disputes with taxing authorities regarding, and tax returns of the Company; (iii) make available to the other and to any taxing authority as reasonably requested all information, records and documents relating to taxes of the Company, except to the extent determined by counsel for the party involved to be privileged or work product; 25 30 (iv) provide timely notice to the other in writing of any pending or threatened tax audit or assessments of the Company for taxable periods for which the other may have a liability under this Section 3.10; and (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any tax audit or information request with respect to any such taxable period. (g) Purchaser shall indemnify and hold harmless each Seller from and against any and all losses arising from or related to any Federal, state and local tax liabilities (the "Tax Losses") imposed on such Seller that result from the Elections, and for any interest and penalties accruing on the Tax Losses and all costs of defending against the imposition of the Tax Losses, but only to the extent that the Tax Losses (i) exceed the amount by which (A) losses relating to Federal, state and local taxes incurred by such Seller with respect to the gain allocated to such Seller on the deemed asset sale by the Company resulting from the Elections are greater than (B) losses relating to the Federal, state and local taxes which would have been incurred by such Seller with respect to the gain recognized upon the sale of the Company by such Seller if the Elections had not been made and (ii) are not offset by up to $5.75 million of ordinary income deduction at the Company level resulting from the Bonburg Transfer, which deduction is not disallowed by applicable taxing authorities. For purposes of calculating the amount of any Tax Losses, it is assumed that each Seller is subject to the highest Federal, state or local income tax rate applicable to such Seller or, if the income of such Seller is taxable to another person, to such other person and that no Seller or such other person, as the case may be, has any items of income, gain, loss, deduction or credit other than that resulting from (i) the operations of the Company or (ii) the transactions contemplated by this Agreement. Any payment made by Purchaser pursuant to this Section 3.10(g) shall be "grossed-up" to an amount which, after deduction of any Tax Losses thereon (based on the assumptions set forth in the preceding sentence), is equal to Tax Losses in respect of which the payment is made. (h) (i) The Purchaser shall notify the Sellers in writing upon receipt by the Purchaser or the Company of notice of any pending or threatened Federal, state, local or foreign tax audits or assessments which may materially affect the tax liabilities of the Company for which the Sellers would be required to indemnify the Purchaser and the Company. The Sellers' Representative shall have the right to participate in the resolution of any such tax audit or assessment. (ii) The Sellers shall notify the Purchaser in writing upon receipt by any of the Sellers of notice of any pending or threatened federal, state, local or foreign tax audits or assessments which may materially affect the tax liabilities of the Company for which the Purchaser and the Company would be required to indemnify the Sellers. The Purchaser shall have the right to participate in the resolution of any such tax audit or assessment. SECTION 3.11. Sellers' Representative. Each Seller appoints William S. Johnstone, Jr. as Sellers' Representative under this Agreement and authorizes the Purchaser to rely on the authority of the Sellers' Representative for all purposes under this Agreement. 26 31 ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of the Purchaser. The obligations of the Purchaser to perform this Agreement are subject to the satisfaction or waiver of the following conditions unless waived by the Purchaser: (a) Authorization. All actions necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement shall have been duly and validly taken by each of the Sellers and each of the Sellers shall have full power and authority to enter into and deliver this agreement and to consummate the transactions contemplated by this Agreement. (b) Representations and Warranties. The representations and warranties of the Sellers shall be true and correct as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date, and the Sellers shall have performed and complied with all covenants and agreements required to be performed or complied with on or prior to the Closing Date. As of the Closing Date, there shall have been no material adverse change in the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company. (c) Certificates. The Purchaser shall have received a certificate of the chief executive officer and the chief financial officer of the Company, in substantially the form of Exhibit A-1, and a certificate of each Seller, in substantially the form of Exhibit A-2. (d) Escrow Agreement. Each Seller shall have executed and delivered to the Purchaser an Escrow Agreement, in substantially the form of Exhibit B (the "Escrow Agreement"). (e) Opinion of Counsel. The Purchaser shall have received the opinions dated the Closing Date of Hahn & Hahn, counsel to the Sellers and the Company, and O'Melveny & Myers, special New York counsel to the Sellers and the Company, each in form and substance satisfactory to the Purchaser. (f) Financial Statements. The Purchaser shall have received a balance sheet of the Company and a related statement of operations and cash flows for the most recent quarter and month end prior to the Closing Date (the "Closing Date Financial Statement"), certified by the chief executive officer and chief financial officer of the Company. (g) Due Diligence. The Purchaser and its representatives shall have completed a due diligence review of the condition (financial or otherwise), assets, liabilities, operations and business of, and any other matters relating to, the Company and the Sellers, and the results of such due diligence shall be satisfactory to the Purchaser. (h) Financing. The Purchaser shall have received adequate financing to consummate the transactions contemplated by this Agreement, all on terms satisfactory to the Purchaser. 27 32 (i) Indebtedness Payoff. The Purchaser shall have received evidence of the full repayment or satisfaction of outstanding loans from the Company to related parties (which loans are described in Section 4.1(i) of the Disclosure Schedule). (j) Employment Agreements. Each of Thomas J. Bonburg, Dwight Hansen, Joe Marino, Lauren Smith, Alan Wilson and Randy Hogan shall have duly executed and delivered to the Purchaser an Employment Agreement, each in form and substance satisfactory to the Purchaser. (k) Corporate Directors and Officers. All officers and directors of the Company shall have tendered their resignations (effective upon Closing) to the Purchaser. (l) Share Certificates and Corporation Records. The Purchaser shall have received certificates representing all of the Shares, together with stock powers duly endorsed in blank and the Purchaser shall have received the complete stock ledgers, minute books and similar corporate records of the Company. (m) HSR Act. Any applicable waiting period under the HSR Act relating to the transactions contemplated by this Agreement shall have expired. (n) Other Documents. The Purchaser shall have received such other documents, certificates or instruments that are customary for a transaction of the type described herein as it may reasonably request. SECTION 4.2. Conditions of Obligations of the Sellers. The obligations of the Sellers to perform this Agreement are subject to the satisfaction or waiver of the following conditions: (a) Authorization. All actions necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement shall have been duly and validly taken by the Purchaser and the Purchaser shall have full power and authority to enter into and deliver such agreements and to consummate transactions contemplated by this Agreement. (b) Representations and Warranties. The representations and warranties of the Purchaser contained herein shall be true and correct as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date, and the Purchaser shall have performed and complied with all covenants and agreements required to be performed or complied with on or prior to the Closing Date. (c) Certificate. The Sellers shall have received a certificate of the President or a Vice President of the Purchaser confirming the matters set forth in Section 4.2(b) in form and substance reasonably satisfactory to the Sellers. (d) Escrow Agreement. The Purchaser shall have executed and delivered to the Sellers the Escrow Agreement. 28 33 (e) HSR Act. Any applicable waiting period under the HSR Act relating to the transactions contemplated by this Agreement shall have expired. (f) Other Documents. The Sellers shall have received such other documents, certificates or instruments that are customary for a transaction of the type described herein as they may reasonably request. ARTICLE V INDEMNITY SECTION 5.1. Indemnification. (a) The Sellers jointly and severally indemnify and hold harmless the Purchaser and its affiliates, directors, officers, employees and other agents and representatives from and against any and all liabilities, judgments, claims, settlements, losses, damages, fees, liens, taxes, penalties, obligations and expenses (collectively, "Losses") incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation or breach of any representation, warranty or agreement of the Sellers as a group contained in this Agreement or any certificate or other document delivered by the Company or the Sellers as a group under this Agreement (in the case of the representations and warranties set forth in Section 2.1(d), determined without giving effect to any "in all material respects" qualification or any other materiality or similar qualification contained in such representations and warranties); (ii) the conduct of the business or other operations of the Company before or on the Closing Date (other than as the same may have been conducted in the ordinary course or as expressly permitted by this Agreement) or any condition existing relating to product or environmental liability prior to the Closing Date; and (iii) any and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident to any of the matters referred to in clauses (i) through (iii) of this Section 5.1(a). (b) Each Seller severally, but not jointly, indemnifies and holds harmless the Purchaser, and its affiliates, directors, officers, employees and other agents and representatives from and against any and all Losses incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation or breach of any representation, warranty, covenant or agreement of such Seller contained in this Agreement or in any certificate or other document delivered by such Seller hereunder; (ii) the non-fulfillment by such Seller of any agreement made by such Seller in this Agreement; and 29 34 (iii) any and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident to any of the matters referred to in clauses (i) and (ii) of this Section 5.1(b). (c) The Purchaser indemnifies and holds harmless the Sellers, and their respective agents and representatives, from and against any and all Losses incurred or suffered by any such person arising from, by reason of or in connection with: (i) any misrepresentation or breach of any representation, warranty or agreement of the Purchaser contained in this Agreement or any certificate or other document delivered by the Purchaser under this Agreement; (ii) the non-fulfillment by the Purchaser of any agreement made by it in this Agreement; (iii) the conduct of the business or other operations of the Company after the Closing Date and any product or environmental liability created after the Closing Date; and (iv) any and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident to any of the matters referred to in clauses (i) through (iii) of this Section 5.1(c). (d) In case any claim or litigation which might give rise to any obligation of a party under the indemnity and reimbursement provisions of this Agreement (each an "Indemnifying Party") shall come to the attention of the party seeking indemnification hereunder (the "Indemnified Party"), the Indemnified Party shall notify in writing promptly the Indemnifying Party of the existence, nature and amount of potential loss. Failure to give such notice shall not prejudice the rights of the Indemnified Party, except to the extent that the Indemnifying Party shall have been materially prejudiced by such failure. The Indemnifying Party shall be entitled to participate in and, if (i) in the judgment of the Indemnified Party such claim can properly be resolved by money damages alone and the Indemnifying Party has the financial resources to pay such damages and (ii) the Indemnifying Party admits that this indemnity fully covers the claim or litigation, the Indemnifying Party shall be entitled to direct the defense of any claim at its expense, but such defense shall be conducted by legal counsel reasonably satisfactory to the Indemnified Party. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party in the preparation and conduct of any such defense, including making available (upon reasonable notice and during normal business hours) to the Indemnifying Party and legal counsel books and records of the Indemnified Party relevant to such defense. No Indemnifying Party in the defense of any claim or litigation shall, except with the consent of each Indemnified Party (which consent shall not be unreasonably withheld), consent to entry of any judgment or enter into any settlement which (i) contains any equitable order, judgment or term that affects, restrains or interferes with the business of an Indemnified Party and (ii) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. Claims for indemnification and reimbursement pursuant to the 30 35 provisions of this Agreement shall be made by a party based upon such party's good faith judgment. (e) Any payment made pursuant to this Section 5.1 shall be treated as an adjustment to the Purchase Price for income tax purposes. SECTION 5.2. Limitations. (a) The indemnification and reimbursement obligations hereunder shall expire on the second anniversary of the Closing Date (the "Expiration Date"), except (i) as to any claims for, or any claims that may result in, any liability, judgment, claim, settlement, loss, damage, fee, lien, tax, penalty, obligation or expense for which indemnity may be sought hereunder of which the Indemnifying Party has received written notice from the Indemnified Party on or before the Expiration Date or (ii) as to any representations, warranty or agreement expressly surviving such two year period as set forth in Section 6.6. On or promptly after the fifth anniversary of the Closing Date, the Purchaser shall execute and deliver to the Sellers' Representative an instrument releasing each Seller from any and all liability that such Seller may have to the Purchaser under this Agreement (other than with respect to claims surviving such five year period pursuant to the immediately preceding sentence or Section 6.6). The form of such instrument shall be reasonably acceptable to the Purchaser and the Sellers and shall be agreed upon prior to the Closing. (b) The total indemnification obligations of the Sellers (other than for claims relating to or arising out of any Company Income Tax (as defined below), Section 1.4, Section 2.1(b), Section 2.2 or Section 3.7(b) (collectively, the "Purchaser Excluded Claims")) to the Purchaser pursuant to this Article V shall not exceed (i) for all Sellers (other than Thomas J. Bonburg) in the aggregate $5,680,000 and (ii) for each Seller (other than Thomas J. Bonburg) an amount equal to the product of (x) $5,680,000 and (y) the quotient obtained by dividing (1) the number of Shares owned by such Seller as specified on Annex A (assuming that the Bonburg Transfer has occurred) by (2) 146,183.8. Notwithstanding anything to the contrary set forth in this Agreement, Thomas J. Bonburg in his capacity as a Seller shall have no indemnification obligations to the Purchaser pursuant to this Article V (other than with respect to Purchaser Excluded Claims relating to or arising out of Section 2.2 or Section 3.7(b), which shall not count towards, or be subject to, the limitations set forth in the immediately preceding sentence or the percentage limitations or $100,000 deductible set forth in Section 5.2(c), and there shall be no limitation on such indemnification obligations). Notwithstanding anything to the contrary set forth in this Agreement, the indemnification obligations of the Sellers (other than Thomas J. Bonburg) to the Purchaser with respect to Purchaser Excluded Claims shall not count towards, or be subject to, the limitations set forth in the first sentence of this paragraph (b) or the percentage limitations or $100,000 deductible set forth in Section 5.2(c), and there shall be no limitation on such indemnification obligations. The total indemnification obligations of the Purchaser (other than for claims relating to or arising out of Section 2.3 or 3.10(g)) to the Sellers pursuant to this Article V shall not exceed in the aggregate $8,000,000. For purposes of calculating the total indemnification obligations of the parties pursuant to this Article V, (i) legal fees and expenses incurred by an Indemnifying Party in the defense of an Indemnified Party against a third party claim shall be included and (ii) costs and expenses incurred or reimbursed by an Indemnifying Party in connection with the pursuit of insurance or third party indemnification or contribution claims pursuant to 31 36 Section 5.2(e) shall be excluded. "Company Income Tax" means any federal or state income tax liability of the Company, including any interest, penalty or addition thereto, whether disputed or not, for all periods ending on or prior to the Closing Date. (c) The Purchaser shall not be entitled to indemnification pursuant to this Article V with respect to any claim for indemnification (other than in connection with Purchaser Excluded Claims), unless the aggregate Loss to the Purchaser, with respect to all claims for indemnification pursuant to Section 5.1(a) and (b), exceeds $100,000, in which case the Sellers shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay an amount equal to 50% of such Losses in excess of such first $100,000 of Losses to the extent that the total amount of Losses does not exceed $2,000,000 and 78% of such Losses to the extent they exceed $2,000,000; provided that the foregoing limitations shall not apply to any adjustment of the Purchase Price contemplated by Section 1.4. The Sellers shall not be entitled to indemnification pursuant to this Article V with respect to any claim for indemnification (other than claims relating to or arising out of Section 3.10(g)), unless the aggregate Loss to the Sellers, with respect to all claims for indemnification pursuant to Section 5.1(c), exceeds $100,000, in which case the Purchaser shall be obligated, subject to the limitations set forth in paragraph (b) of this Section 5.2, to pay in full the aggregate amount of such excess. (d) The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be (i) increased to take account of any net tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder ("grossed-up" for taxes on such increase) and (ii) reduced to take account of any net tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Losses. In computing the amount of any such tax cost or tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any and all Losses. (e) The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be net of any amounts actually received by the Indemnified Party under insurance policies with respect to such Losses. In the event that any claim for indemnification asserted under this Article V is, or may be, the subject of the Company's or any party's hereto insurance coverages or other right to indemnification or contribution from any third party (a "Third Party Contributor"), the Indemnified Party agrees to promptly notify the applicable insurance carrier of such claim and tender defense thereof to such carrier, and shall also promptly notify any potential Third Party Contributor. Each Indemnified Party agrees to pursue, at the sole cost and expense of the Indemnifying Party, such claims diligently and to reasonably cooperate, at the sole cost and expense of the Indemnifying Party, with each such insurance carrier and Third Party Contributor, and to make no claim for indemnification under this Article V for a period of 180 days after making a claim for such insurance or contribution. If insurance coverage or contribution is denied (in whole or in part), or if no resolution of an insurance or contribution claim shall have occurred within such 180 days, the Indemnified Party may proceed for indemnification under this Article V, and such Indemnifying Party shall be subrogated to the rights of the Indemnified Party against such insurance carrier or Third Party Contributor. 32 37 (f) The Purchaser shall not be entitled to indemnification pursuant to this Article V with respect to a claim for indemnification arising from a condition or an event that is alleged to be a violation of an Environmental Law if, and only to the extent that, the alleged violation was initially discovered by, or initially revealed to, the Purchaser as a direct result of a pro-active, affirmative investigation initiated by, or on behalf of, the Purchaser for the sole purpose of seeking to discover potential indemnification claims pursuant to this Article V for violations of Environmental Laws occurring prior to the Closing. Notwithstanding anything to the contrary set forth in the immediately preceding sentence, the Purchaser shall be entitled to such indemnification pursuant to this Article V if the circumstances giving rise to such indemnification claim arose from or in connection with any one of the following: (i) a third party claim or a notice, directive or other communication from a governmental body (federal, state, local or foreign), (ii) an investigation resulting from a demonstrable event or occurrence giving rise to a reasonable belief that a potential violation of an Environmental Law has or had occurred, (iii) an investigation initiated by, or on behalf of, a party providing financing to the Purchaser or the Company, or (iv) the conduct of the Purchaser's and the Company's business in the ordinary course, including the receipt by the Purchaser or the Company of any notices, communications or information in connection therewith (other than any notices, communications or information received by the Purchaser or the Company from consultants hired by the Purchaser or the Company for the sole purpose of conducting an investigation of the specific type described in the first sentence of this paragraph (f)). SECTION 5.3. No Election. Nothing contained in this Article V shall be deemed an election of remedies under this Agreement or limit in any way the liability of any party under any other agreement to which such party is a party relating to this Agreement or the transactions contemplated by this Agreement. ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement. This Agreement and the schedules and exhibits hereto contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and supersede all prior agreements or understandings among the parties. The Letter of Intent, dated November 4, 1996, and the Confidentiality Agreement, dated June 15, 1995, are expressly superseded, void and no longer of any force or effect. SECTION 6.2. Termination. (a) This Agreement shall terminate on the earlier to occur of any of the following events: (i) the mutual written agreement of the Purchaser and the Sellers' Representative; (ii) by written notice of the Purchaser or the Sellers' Representative to the other, if the Closing shall not have occurred prior to the close of business on May 31, 1997; 33 38 (iii) if any Seller shall have materially breached any of its representations, warranties or agreements contained in this Agreement and such Seller shall have failed to cure such breach within 10 days following written notification thereof by the Purchaser; or (iv) if the Purchaser shall have materially breached any of its representations, warranties or agreements contained in this Agreement and the Purchaser shall have failed to cure such breach within 10 days following notification thereof by the Sellers' Representative. (b) Nothing in this Section shall relieve any party of any liability for a breach of this Agreement prior to its termination. Except as aforesaid, upon the termination of this Agreement, all rights and obligations of the parties under this Agreement shall terminate, except their obligations under Sections 3.1, 3.7(a) and 3.9. SECTION 6.3. Descriptive Headings; Certain Interpretations. (a) Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (b) Whenever any party makes any representation, warranty or other statement to such party's knowledge, such party will be deemed to have made reasonable inquiry into the subject matter of such representation, warranty or other statement. (c) Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) 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. SECTION 6.4. Notices. All notices, requests and other communications to any party hereunder shall be in writing and sufficient if delivered personally or sent by telecopy (with confirmation of receipt) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 34 39 If to the Purchaser, to: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093-0837 Telecopy: (704) 732-6480 Attention: President with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Telecopy: (212) 841-1010 Attention: Scott F. Smith If to the Sellers or the Sellers' Representative, to: Mr. William S. Johnstone, Jr. c/o Hahn & Hahn 301 E. Colorado Boulevard Ninth Floor Pasadena, California 91101 Telecopy: (818) 449-7357 with a copy to: Hahn & Hahn 301 E. Colorado Boulevard Ninth Floor Pasadena, California 91101 Telecopy: (818) 449-7357 Attention: George R. Baffa or to such other address or telecopy number as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by mail, when delivered at the address specified in this Section or on the fifth business day following the date on which such communication is posted, whichever occurs first. SECTION 6.5. Counterparts. 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 but one agreement. 35 40 SECTION 6.6. Survival. Except as set forth in Section 5.2, all representations and warranties, agreements and covenants contained in this Agreement or in any document delivered pursuant to this Agreement or in connection with this Agreement (unless otherwise expressly provided) shall survive the Closing and shall remain in full force and effect until the Expiration Date; provided that (i) the representations and warranties in Sections 2.1(b) and (n), Section 2.2(a) and Section 2.3(b) and the agreements in Sections 3.7, 3.8, 3.10 and 3.11 shall not expire on the Expiration Date and shall survive, as set forth in such Sections, or, if not set forth, shall survive forever or, if applicable, until the expiration of the applicable statute of limitations and (ii) the representations and warranties in Section 2.1(k) shall not expire on the Expiration Date and shall survive until the first to occur of (a) the fifth anniversary of the Closing Date and (b) the expiration of the applicable statute of limitations. SECTION 6.7. Benefits of Agreement. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement is for the sole benefit of the parties hereto and their respective successors and assigns and not for the benefit of any third party. SECTION 6.8. 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. SECTION 6.9. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by any party hereto without the prior written consent of the other parties; except that the Purchaser (i) may assign its rights under this Agreement as collateral security for any person providing financing to the Purchaser or the Company in connection with the consummation of the transactions contemplated hereby and (ii) may assign this Agreement and all of its rights and obligations to an affiliate of the Purchaser; provided that no such assignment by the Purchaser shall release it from any of its liabilities or obligations hereunder. Any instrument purporting to make an assignment in violation of this Section shall be void. SECTION 6.10. 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, 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. SECTION 6.11. Trustee and Fiduciary Capacity. The parties acknowledge that William S. Johnstone, Jr., in his capacity as Trustee of The Sam M. Winston Separate Property Trust dated July 26, 1989, Trust dated December 20, 1976 f/b/o/ Melissa Winston Alfieri, Trust dated December 20, 1976 f/b/o Sam M. Winston, II, Trust dated December 21, 1982 f/b/o 36 41 Melissa Winston Alfieri and Trust dated December 21, 1982 f/b/o Sam M. Winston, II, is entering into this Agreement in his fiduciary capacity only, and that William S. Johnstone, Jr., is also entering into this Agreement individually as a Trustee of The William S. Johnstone, Jr. Separate Property Trust dated October 5, 1993. SECTION 6.12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 6.13. DISPUTE RESOLUTION; CONSENT TO JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN ANNEX B TO THIS AGREEMENT. EACH OF THE SELLERS HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARE NOT GOVERNED BY ANNEX B AND WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH OF THE SELLERS AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF THE SELLERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 37 42 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ------------------------------------------ Name: J. Michael Gaither Title: Sr. Vice President General Council Secretary SELLERS: THE SAM M. WINSTON SEPARATE PROPERTY TRUST, dated July 26, 1989 By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------------ William S. Johnstone, Jr., Trustee Trust dated December 20, 1976 f/b/o Melissa Winston Alfieri By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------------ William S. Johnstone, Jr., Trustee Trust dated December 20, 1976 f/b/o Sam M. Winston, II By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------------ William S. Johnstone, Jr., Trustee Trust dated December 21, 1982 f/b/o Melissa Winston Alfieri By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------------ William S. Johnstone, Jr., Trustee 38 43 Trust dated December 21, 1982 f/b/o Sam M. Winston, II By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------ William S. Johnstone, Jr., Trustee THE WILLIAM S. JOHNSTONE, JR. SEPARATE PROPERTY TRUST, dated October 5, 1993 By: /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------ William S. Johnstone, Jr., Trustee /s/ THOMAS J. BONBURG ------------------------------------ Thomas J. Bonburg SELLERS' REPRESENTATIVE /s/ WILLIAM S. JOHNSTONE, JR. ------------------------------------ William S. Johnstone, Jr. 39 EX-10.19 35 THE J.H. HEAFNER COMPANY 1997 STOCK OPTION PLAN 1 Exhibit 10.19 THE J.H. HEAFNER COMPANY 1997 STOCK OPTION PLAN 1. Purpose. The purpose of the 1997 Stock Option Plan (the "Plan") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), is to attract and retain employees (including officers), directors and independent contractors of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons to enhance the value of the Company over the long term by encouraging them to acquire a proprietary interest in the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity if, at the time of granting of an Option, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (b) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Optionee in his or her most recent written beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or, if there is no such designation or no such designated person survives the Optionee, then the person, persons, trust or trusts entitled by will or applicable law to receive such rights or, if no such person has such right then the Optionee's executor or administrator. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means any of the following: (i) the acquisition by any person or entity not controlled by the Company's stockholders of more than 50% of the shares of the common stock of the Company, (ii) the sale of all or substantially all of the Company's assets, (iii) the majority of the Board of Directors of the Company consisting of persons other than any member of the Board of Directors of the Company on the Effective Date (a "Continuing Director") and any other member of the Board of Directors who is 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 of the Company, (iv) a transaction resulting in Ann Heafner Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones owning, collectively, less than 50% of the combined voting power of the then outstanding shares of common stock of the Company, or (v) the issuance of common stock of the Company in a public offering. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee, consisting of at least two members of the Board, established by the Board to administer the Plan. 2 (g) "Company" means The J. H. Heafner Company, Inc., a corporation organized under the laws of the State of North Carolina, or any successor corporation. (h) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. (i) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (j) "NQSO" means any Option not designated as an ISO. (k) "Option" means a right, granted to an Optionee under Section 6(b) of the Plan, to purchase shares of Stock, subject to the terms and conditions of this Plan. An Option may be either an ISO or an NQSO, provided that ISOs may be granted only to employees of the Company or a Subsidiary. (l) "Optionee" means a person who, as an employee, director or independent contractor of the Company, a Subsidiary or an Affiliate, has been granted an Option. (m) "Plan" means this J.H. Heafner Company, Inc. 1997 Stock Option Plan, as amended from time to time. (n) "Stock" means the common stock, par value $.01 per share, of the Company. (o) "Stock Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (p) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. (q) "Ten Percent Shareholder" means a person or persons who own, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries. 3. Administration. The Plan shall be administered by the Committee which shall consist of a committee of not less than two persons appointed by the Board. The Committee shall have full power to construe and interpret the Plan, to establish rules for its administration and to grant Options. The Committee may establish rules setting forth terms and conditions for a specified group of Options. The Committee may act by a majority of a quorum (a quorum being a majority of the members of such Committee) present at a called meeting or by unanimous written consent of all of its members. All actions taken and decisions made by the Board or the Committee pursuant to the Plan shall be binding and conclusive on all persons interested in the Plan. 4. Eligibility. 2 3 Options may be granted in the discretion of the Committee to employees (including officers), directors and independent contractors of the Company and its present or future Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted and the type of Options granted (including the number of shares to be covered by such Options), the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 265,000 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in private transactions or otherwise. The number of shares of Stock available for issuance under the Plan shall be reduced by the number of shares of Stock subject to outstanding Options. If any shares subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Optionee, the shares of Stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan. In no event shall any Optionee acquire, pursuant to any awards of Options under this Plan, more than 5% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, stock split, reverse split, any reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, license arrangement, strategic alliance or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of any Optionees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock which may thereafter be issued in connection with Options, (ii) the number and kind of shares of Stock issued or issuable in respect of outstanding Options, and (iii) the exercise price, grant price, or purchase price relating to any Option; provided that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code. 6. Specific Terms of Options. (a) General. Options may be granted at the discretion of the Committee. The term of each Option shall be for such period as may be determined by the Committee. The Committee may make rules relating to Options, and may impose on any Option or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. (b) Options. The Committee is authorized to grant Options to Optionees on the following terms and conditions: i) Type of Option. The Stock Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO (in the event its terms, and the individual to whom it is granted, satisfy the requirements for ISOs under the Code), or an NQSO. ii) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided that, in the case of 3 4 an ISO, (i) such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option or such other exercise price as may be required by the Code, (ii) if the Optionee is a Ten Percent Shareholder, such exercise price shall not be less than 110% of the Fair Market Value of a share of Stock on the date of grant of such Option and in no event shall the exercise price for the purchase of shares of Stock be less than par value. Options shall be exercised by (i) giving written notice thereof to the Company, and (ii) paying the exercise price. In addition to any other method of payment which may be acceptable to the Committee, payment may be effected, either in whole or in part, by the surrender to the Company of outstanding Stock. Any Stock so surrendered shall be valued at the Fair Market Value on the date on which such shares are surrendered. iii) Term and Exercisability of Options. The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Stock Option Agreement. As a condition to exercising any Option, the Optionee shall exercise and deliver to the Company an agreement in substantially the form of Exhibit A hereto or in such other form as the Company may reasonably require. iv) Payment of Cash or Stock Upon Exercise. Upon exercise of an Option, the Company may, in the sole discretion of the Committee, either (A) issue to the Optionee the shares of Stock subject to the Option, or (B) in lieu of issuing Stock, pay to the Optionee in cash an amount equal to the excess, if any, of the aggregate Fair Market Value of the shares of Stock subject to such Option as of the close of the fiscal year in which exercise occurs over the aggregate exercise price of the shares of Stock purchasable under such Option. Notwithstanding the foregoing, if at the time of exercise of the Option, the Company has issued Stock in a public offering it will no longer have the right to pay cash to an Optionee in lieu of issuing Stock. v) Termination of Employment, etc. An Option may not be exercised unless the Optionee is then in the employ or a director of, or then maintains an independent contractor relationship with, the Company or any Subsidiary or Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has continuously maintained any of such relationships since the date of grant of the Option; provided that, the Stock Option Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option. The Committee may establish a period during which the Beneficiaries of an Optionee who died while an employee, director or independent contractor of the Company or any Subsidiary or Affiliate or during any extended period referred to in the immediately preceding proviso may exercise those Options which were exercisable on the date of the Optionee's death; provided that no Option shall be exercisable after its expiration date. vi) Nontransferability. Options shall not be transferable by an Optionee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of an Optionee only by such Optionee. 4 5 vii) Other Provisions. Options may be subject to such other conditions as the Committee may prescribe in its discretion. 7. Change in Control Provisions. Upon a Change in Control, any and all Options then outstanding shall terminate, provided that all Options granted under the Plan shall, immediately prior to the Change in Control, become fully vested and immediately exercisable by the Optionee. Nothing contained herein shall prevent the substitution of a new option by the Company after a Change in Control. 8. General Provisions. (a) Fair Market Value of Common Stock. In determining the Fair Market Value of the Stock for purposes of the Plan, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. In the event the Stock becomes listed on any national stock exchange or quoted on the national market quotations system, the Fair Market Value of the Stock shall, as of any day, be the closing price for the immediately preceding trading day. (b) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan and any Stock Option Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Optionee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (c) No Right to Continued Employment, etc. Nothing in the Plan or in any Option granted or Stock Option Agreement entered into pursuant to the Plan shall confer upon any Optionee the right to continue in the employ of, or to continue as a director of or an independent contractor to, the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Stock Option Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Optionee's employment, directorship or independent contractor relationship. (d) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Option granted, any payment relating to an Option under the Plan (including from a distribution of Stock), or any other payment to an Optionee, amounts of withholding and other taxes due in connection with any transaction involving an Option, and to take such other action as the Committee may deem advisable to enable the Company and an Optionee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Optionee's tax obligations. (e) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. 5 6 (f) No Rights to Options; No Stockholder Rights. No person shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Optionees. Except as provided specifically herein, an Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to such Optionee for such shares. (g) Unfunded Status of Options. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained in the Plan or any Option shall give any such Optionee any rights that are greater than those of a general creditor of the Company. (h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of North Carolina without giving effect to the conflict of laws principles thereof. (i) Effective Date; Plan Termination. (i) The Plan shall take effect upon its adoption by the Board (the "Effective Date"), but the Plan (and any grants of Options made prior to the stockholder approval mentioned herein), shall be subject to the approval of the holder(s) of a majority of the issued and outstanding shares of voting securities of the Company entitled to vote, which approval must occur within twelve months of the date the Plan is adopted by the Board. In the absence of such approval, such Options shall be null and void. (ii) The Board may terminate the Plan at any time with respect to any shares of Stock that are not subject to Options. Unless terminated earlier by the Board, the Plan shall terminate ten years after the Effective Date and no Options shall be granted under the Plan after such date. Termination of the Plan under this Section 8(h) will not affect the rights and obligations of any Optionee with respect to Options granted prior to termination. 6 EX-10.20 36 FORM OF STOCK OPTION AGREEMENT 1 Exhibit 10.20 THE J.H. HEAFNER COMPANY STOCK OPTION AGREEMENT Number of shares subject to option: _________ This Agreement (the "Agreement") made this ______ day of _____, 1997, between The J. H. Heafner Company, a North Carolina corporation (the "Company"), and _____________ (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of the J.H. Heafner 1997 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 _______ shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $1.10 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This option is eligible to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). (c) Exercise of Option. (i) Subject to the other terms of this Agreement regarding the exercisability of this Option, this Option may be exercised in accordance with the following vesting schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- --------------------------- May 28, 1998 _____ x 10% May 28, 1999 _____ x 30% May 28, 2000 _____ x 60% May 28, 2001 _____ x 100%
Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with paragraph 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in paragraph 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of 2 the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (ii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised, issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board of Directors of the Company (the "Board") acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter in accordance with the vesting schedule in Section 2(c) hereof, by giving the Company written notice of such exercise within 180 days after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Optionee's employment with the Company shall terminate because of permanent disability, the Optionee may exercise the Option to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter, in either event according to the vesting schedule in Section 2(c), by giving the Company written notice of such exercise within 180 days after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee's employment shall terminate for any reason other than death or permanent disability as aforesaid or for Cause (as hereinafter defined), the Optionee may exercise the Option to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter, in either event according to the vesting schedule in Section 2(c), by giving the Company written notice of such exercise within 180 days after the date of termination of employment, but in no event later than the Expiration Date. (iv) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment except that the Optionee may exercise the Option to the extent vested as of the date of such termination by giving the Company written notice thereof within 30 days after such termination. For purposes of this Agreement, "Cause" shall mean (i) the Employee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Employee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Employee's other material breach of his obligations under this Agreement, which is not corrected 2 3 within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (e) Nontransferability. This Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by such Optionee. (f) Forfeiture of Option Gain. If at any time within 12 months after the later of (i) termination of employment or (ii) the date on which the Optionee exercises any portion of this Option, the Optionee violates the terms of the covenants regarding confidential information, soliciting customer accounts, non-competition or hiring of employees, currently set forth in Sections 5 and 6 of the Employment Agreement between the Company and the Optionee dated the date hereof (the "Employment Agreement"), (A) then any income realized by the Optionee upon the exercise of this Option or upon the sale of Shares acquired by exercise of this Option at any time, whether before or after the date of termination of employment, shall promptly be paid by the Optionee to the Company and (B) any unexercised Options shall be canceled. The Company shall have the right to set off against any amount payable by the Company to the Optionee, including, without limitation, salary, benefits or other amounts, any amounts owed by the Optionee to the Company under this subparagraph (f). The Committee may waive the requirements of this subparagraph (f) if it determines in its sole discretion that such action is in the best interests of the Company. (g) Adjustments. In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Common Stock, or other property), recapitalization, stock split, reverse split, any reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, license arrangement, strategic alliance or other corporate transaction or event, affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of the Optionee under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of Shares which may thereafter be issued in connection with Options, (ii) the number and kind of Shares issued or issuable in respect of outstanding Options, and (iii) the Exercise Price relating to any Option; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with Section 424(h) of the Code. (h) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. (i) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and 3 4 (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (j) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (k) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. (l) Condition Precedent. In consideration for and as a condition precedent to being eligible to participate in the Plan, the Optionee shall have executed and delivered to the Company the Employment Agreement. 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 The J.H. Heafner Company, 814 East Main Street, P.O. Box 837, Lincolnton, NC 28093-0837; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 4 5 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(g), shall be effective unless it is in writing and signed by the parties hereto. 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 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. THE J. H. HEAFNER COMPANY By:______________________________ Name: Title: ________________________________ Address:________________________ ________________________________ ________________________________ 5 EX-10.21 37 FORM OF STOCKHOLDER AGREEMENT 1 EXHIBIT 10.21 Form of Stockholders' Agreement to be entered into upon exercise of Options under Option Agreement STOCKHOLDERS' AGREEMENT, dated as of ________________, _____, between THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and _______________________ (the "Purchaser"). Introduction The Purchaser is, upon the date hereof, exercising his option to purchase _________ shares (the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), at a price of $__________ per Share (the "Purchase Price"), pursuant to the Company's 1997 Stock Option Plan (the " Option Plan"). On or about May 7, 1997, (i) the Company entered into the Loan and Security Agreement with BankBoston, N.A., pursuant to which up to $65.0 million in indebtedness (the "Senior Financing") was made available to the Company and Oliver & Winston, Inc. ("Winston"), (ii) the Company issued senior subordinated notes in the principal amount of $16.0 million pursuant to a Senior Subordinated Note and Warrant Purchase Agreement with The 1818 Mezzanine Fund, L.P. (the "Senior Subordinated Financing"), (iii) the Company issued warrants (the "Warrants") in connection with the Senior Subordinated Financing and, (iv) the Company issued shares of Series A Cumulative Redeemable Preferred Stock and shares of Series B Cumulative Redeemable Preferred Stock (collectively, the "Preferred Stock") to The Kelly-Springfield Tire Company. Subsequent to such date, certain members of management of the Company and Winston (the "Management Stockholders") entered into a Securities Purchase and Stockholders' Agreement dated as of May 28, 1997 (the "Stockholders' Agreement"), pursuant to which the Management Stockholders agreed to purchase shares of Common Stock and agreed to certain restrictions on the transferability of their shares of Common Stock. All of such transactions are referred to herein as the "Overall Transaction." As a condition to the Purchaser's exercise of his option to acquire the Shares, the Purchaser is entering into this agreement. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: -1- 2 ARTICLE I Transferability of Shares SECTION 1.1. Stock Transfer Restrictions. The Purchaser shall not sell, assign, pledge, give away or otherwise transfer (a "Transfer") any Shares except in accordance with the procedures set forth in this Agreement. Any attempted Transfer of Shares not permitted by this Agreement shall be null and void, and the Company shall not in any way give effect to any such Transfer. Any proposed Transfer of Shares shall be null and void, and the Company shall not in any way give effect to any such Transfer, unless the transferee of such Shares who is not, immediately prior to such Transfer, a Management Stockholder shall agree in writing to be bound by and comply with the provisions of this Agreement SECTION 1.2. Termination of Employment. (a) Transfers upon Termination for Cause. If the Company shall terminate the Purchaser's employment for "Cause" or the Purchaser shall terminate his employment with the Company other than for "Good Reason" (as such terms are defined below), the Company shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to purchase all or part of such Purchaser's Shares at the Repurchase Price applicable thereto, provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from making such repurchase to the full extent it would otherwise do so, the Company shall have the right to purchase such Shares until the expiration of 45 days after such first anniversary. For purposes of this Section 1.2, "Company" shall include Winston with respect to a Purchaser employed directly by Winston. For purposes of this Agreement, "Cause", with respect to the Purchaser, has the meaning set forth in the employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean (i) the Purchaser's conviction of, or plea of guilty or nolo contendere to a felony, (ii) the Purchaser's gross negligence in the performance of his employment services to the Company, which is not corrected within 15 business days after written notice, (iii) the Purchaser's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of such services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Purchaser's other material breach of his obligations as an employee or officer of the Company which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. "Good Reason", with respect to the Purchaser, has the meaning set forth in the employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean (i) the failure of the Company to pay any undisputed amount due to the Purchaser in connection with his employment by the Company or a substantial diminution in benefits provided pursuant to such employment, (ii) a substantial diminution in the 2 3 status, position and responsibilities of the Purchaser that is not instituted to all senior management of the Company or (iii) the Company 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 Purchaser is currently assigned. "Repurchase Price" means, with respect to each Share, the greater of (i) the Purchase Price applicable thereto and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of the Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plan and in-the-money Warrants). "Net Equity Value" means the sum of (x) 6 times the Company's EBITDA (as calculated in accordance with the Loan and Security Agreement dated May 7, 1997 among the Company, Winston, the financial institutions identified therein and BankBoston, N.A., as agent) for the 12 full calendar months immediately preceding the date on which such termination shall have occurred, plus (y) the aggregate exercise price of all options granted under the Option Plan and all Warrants, which exercise price at the date such termination shall have occurred does not exceed (on a per share basis) the per share market value of the Common Stock, less (z) the aggregate amount of principal of and interest on (in the case of debt) and liquidation value of (in the case of capital stock) the Senior Financing, Senior Subordinated Financing and Preferred Stock outstanding as of the date of such termination. (b) Termination other than for Cause. If the Company shall terminate the Purchaser's employment other than for Cause or the Purchaser shall terminate his employment with the Company for Good Reason, the Purchaser shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to require the Company to purchase all or part of the Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from purchasing such Shares to the extent so required by the Purchaser borrowed money from purchasing such Shares to the extent so required by the Purchaser, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the option is not exercised, the Company shall have the right, commencing on the first anniversary and continuing until the second anniversary thereof, to purchase all of the Purchaser's Shares at the Repurchase Price applicable thereto. (c) Termination or Repurchase upon Death. If the Purchaser's employment with the Company shall terminate due to the Purchaser's death, or, following any other termination of employment by the Company, the Purchaser shall die, the Company shall have the right to purchase, and the Purchaser's descendants shall have the right to require the Company to purchase, all or part of the Purchaser's Shares at the Repurchase Price applicable thereto, commencing on the date of death of the Purchaser and continuing until the first anniversary thereof; provided that if and to the extent that, prior to such anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from purchasing such Shares to the extent so required by the Purchaser's descendants, the Company shall not be 3 4 obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. (d) Delivery of Payment. The Company or the Purchaser, as the case may be, shall notify the other of such party's exercise of its rights under this Section 1.2 by giving written notice of such exercise at least 10 and not more than 30 days before the date established by such electing party for such purchase or sell, as the case may be. On the date so designated, the Company shall deliver the appropriate Repurchase Price to the Purchaser by certified check or money order and the Purchaser shall deliver the certificates evidencing the Shares being purchased, duly endorsed for transfer as the Company may direct, and free and clear of any claim, encumbrance, pledge, lien, security interest or other restriction ("Claim"). If any Shares evidenced by a certificate so surrendered are not being purchased pursuant to the terms hereof, the Company shall promptly issue to the Purchaser a replacement certificate evidencing the Shares not so purchased. SECTION 1.3. Transfers Among Management or to Descendants. (a) The Purchaser may, so long as any right has not been exercised with respect to such Shares pursuant to Section 1.2, Transfer any Shares to a Management Stockholder or other management employee of the Company or Winston who has or does acquire shares of Common Stock pursuant to a purchase agreement substantially in the form of the agreement entered into with the Management Stockholders or pursuant to an exercise of any option under the Option Plan (a "Management Employee"). The Purchaser may Transfer by will or the laws of descent and distribution any Shares to the Purchaser's descendants. Such transfer shall be effective only if the transferee agrees to be bound by the terms of this Agreement. SECTION 1.4. Right of First Refusal. With respect to any Shares that the Company had the right to purchase pursuant to Section 1.2(a) or Section 1.2(c) but failed to so purchase prior to the expiration of the one-year period referred to therein (as the same may be extended due to the Company's inability to purchase such Shares as described therein), the following provisions shall apply. (a) If the Purchaser desires to Transfer any such Shares (other than pursuant to Section 1.3), the Purchaser shall deliver to the Company and the Management Stockholders and Management Employees a written notice, which shall be irrevocable for a period of 45 days after delivery, offering all of such Shares to the Company and the Management Stockholders and Management Employees at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase all (but not part) of such Shares at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within such 30-day period. (b) If the Company fails to accept such offer, then upon the earlier of the expiration of such 30-day period or upon the receipt of a written rejection of such offer from the Company, the Management Stockholders and Management Employees (as a group) shall have the second right and option, until 15 days after the expiration of the 30-day period, to purchase 4 5 on a pro rata basis with all Management Stockholders and Management Employees so electing all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within the 15-day period. (c) If the Company and the Management Stockholders and Management Employees do not elect to purchase the Shares so offered, then the Purchaser may Transfer all (but not part) of such Shares at a price not less than the price, and on terms not more favorable to the transferee of such Shares than the terms, stated in the original written notice of intention to sell, at any time within 15 days after the expiration of the period in which the Management Stockholders and Management Employees could elect to purchase such Shares. If such Shares are not sold by the Purchaser during such 15-day period, the right of the Purchaser to sell such Shares shall expire and the rights and obligations set forth in this Section 1.4 shall be reinstated with respect to such Shares. SECTION 1.5. Lock-up Agreements. If the Company proposes to register under the Securities Act any of its Common Stock for sale to the public, the Purchaser shall enter into such agreement (a "Lock-up Agreement") as may be requested by the underwriters of such registered offering, pursuant to which Lock-up Agreement the Purchaser shall refrain from selling any Shares during the period of distribution of Common Stock by such underwriters and for a period of up to 180 days following the effective date of such registration. ARTICLE II Representations and Warranties of the Purchasers The Purchaser represents and warrants to the Company as follows: SECTION 2.1. Capacity; Binding Agreements. The Purchaser has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. SECTION 2.2. Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Purchaser with any of the provisions hereof do not and will not (i) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser is a party, or by which the Purchaser or any of the Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or any of the Purchaser's properties or assets or (iii) result in the creation or imposition of any Claim upon any of the Purchaser's properties or assets. 5 6 SECTION 2.3. Restrictive Legend. The Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE IS FURTHER LIMITED BY THE PROVISIONS OF THE STOCKHOLDER'S AGREEMENT BETWEEN THE J.H. HEAFNER COMPANY, INC. AND THE MANAGEMENT STOCKHOLDER IDENTIFIED THEREIN, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICE OF THE COMPANY." SECTION 2.4. Nature of Purchaser. The Purchaser has such knowledge and experience in financial and business matters so that he is capable of evaluating the relative merits and risks of purchasing the Shares. The Purchaser has adequate means of providing for his current economic needs and possible personal contingencies, has no need for liquidity in his investment in the Company and is able financially to bear the risks of such investment. ARTICLE III Miscellaneous SECTION 3.1. Option Shares; Dividends; Reclassifications. If, subsequent to the date hereof, any additional shares of Common Stock are issued to the Purchaser pursuant to the exercise of any option (including options granted under the Option Plan), warrant or other security convertible into or exercisable for shares of Common Stock, or any shares or other securities are issued with respect to, or in exchange for, any of the Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares of Common Stock and such other shares or securities shall be deemed to be Shares for all purposes of this Agreement. SECTION 3.2. Survival of Provisions; Termination. (a) All of the representations, warranties and covenants made herein and each of the provisions of this Agreement shall, except as otherwise expressly set forth herein, survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchaser, the acceptance of the Shares and payment therefor or the termination of this Agreement. 6 7 (b) This Agreement shall terminate upon the earliest to occur of the (i) issuance by the Company or sale by the shareholders of the Company to the public on a Form S-1 under the Securities Act of shares of Common Stock representing at least 40% of the Common Stock outstanding after such issuance or sale, (ii) tenth anniversary of the date of this Agreement and (iii) written consent of the Purchaser, all Management Stockholders, all Management Employees and the Company. Upon such a termination, all rights and obligations shall terminate, except the Purchaser's obligations under Section 1.5 with respect to a Lock-up Agreement entered into in connection with a public offering referred to in the foregoing clause (i), if applicable. SECTION 3.3. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 3.3: (a) if to the Company: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, North Carolina 28093-0837 Attention: J. Michael Gaither Telecopier No.: (704) 732-6480 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 (b) if to the Purchaser, at the address set forth opposite the Purchaser's name on the signature pages hereof. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 3.4. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The provisions of Article I also shall inure to the benefit of and be enforceable by any Management Stockholder or Management Employee. The Purchaser may assign its rights hereunder only in conjunction with, and to a transferee of, a Transfer permitted pursuant to the terms of Article I, and any such assignee shall be deemed to be a "Purchaser" for purposes of this Agreement. The 7 8 Company may not assign any of its rights or obligations hereunder without the consent of the Purchaser; provided that any successor by merger or consolidation of the Company or similar transaction shall be bound by and benefit from the terms hereof as if named as the Company hereunder. SECTION 3.5. Amendment and Waiver. No failure or delay on the part of the Company or the Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof; provided that notice of any such waiver shall be given to each party hereto as set forth herein. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and the Purchaser. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchaser from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchaser in any case shall entitle the Company or the Purchaser to any other or further notice or demand in similar or other circumstances. SECTION 3.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 3.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 3.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 3.10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. SECTION 3.11. Entire Agreement. This Agreement, together with the terms of the Common Stock, is intended by the parties as a final expression of their agreement and 8 9 intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the Common Stock, supersede all prior agreements and understandings among the parties with respect to such subject matter. SECTION 3.12. Expenses. Each party to this Agreement shall each bear its or his own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of lawyers, financial advisors and accountants. SECTION 3.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article or Section is to the Article or Section of this Agreement. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Stockholders' Agreement to be executed and delivered as of the date first above written. THE J. H. HEAFNER COMPANY, INC. By:_____________________________ Name: Title: _____________________________ Address for Notices: Name: 10 EX-10.22 38 STOCKHOLDERS' AGREEMENT 1 EX 10.22 STOCKHOLDERS' AGREEMENT, dated as of October 15, 1996, by and among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones (each a "Stockholder" and collectively, the "Stockholders") relating to The J.H. Heafner Company, Inc., a North Carolina corporation (the "Corporation"). The Stockholders desire to enter into this Agreement to facilitate the ongoing operation, management and success of the Corporation. The Stockholders acknowledge that the long term interest of the Corporation may include certain corporate restructurings and acquisitions, including, without limitation, the acquisition (and the financing of such acquisition) by the Corporation of certain assets including all of the capital stock and related assets (including tradenames and trademarks) of Oliver & Winston, Inc. In consideration of the foregoing and the agreements and mutual covenants contained herein, the Stockholders agree as follows: ARTICLE I Right of First Refusal Section 1. Transfer of Shares. (A) No Stockholder shall sell, assign, pledge or otherwise transfer (a "Transfer") any of the issued and outstanding shares of the common stock, par value $100.00 per share, of the Corporation (the "Shares") other than to a Permissible Transferee (defined below), without first complying with the terms, conditions and provisions of this Article; provided, however, that, any Permissible Transferee shall take any such Shares subject to all of the terms, conditions and provisions of this Agreement and, as a condition to such Transfer, such Permissible Transferee shall execute a counterpart to this Agreement and become a Stockholder for all purposes hereunder. "Permissible Transferees" shall include: (i) Ann Heafner Gaither; (ii) descendants of Ann Heafner Gaither, (iii) corporations, partnerships, limited liability companies and charitable organizations controlled (as defined below) by the persons described in clauses (i) and (ii) hereof; (iv) any trust which meets both the "Control Test" and the "Beneficial Ownership Test"; and (v) the estate of any person to the extent the Shares held by such person are distributable pursuant to the terms of such person's will or through intestate distribution, as the case may be, to a person described in clauses (i) through (iv) hereof. The "Control Test" shall be considered met by any trust if a majority of the trustees of such trust are described in clauses (i), (ii) and (iii) hereof. The "Beneficial Ownership Test" shall be considered met by any trust if such trust (A) is for the exclusive benefit of Ann Heafner Gaither, one or more charitable organizations controlled by the persons described in clauses (i) and (ii) hereof or one or more descendants of Ann Heafner 2 Gaither or (B) is a trust that meets the requirements of Section 2056(b) (7) of the Internal Revenue Code of 1986 as amended which is for the lifetime benefit of Ann Heafner Gaither's spouse or one or more of the persons described in clauses (i) through (iv) hereof. For purposes of clause (iii) hereof, an organization shall be deemed to be controlled if (but only if) persons described in clauses (i) through (iii) hereof (A) constitute a majority of the members of the board of directors, if such organization is a charitable foundation, (B) constitute a majority of the members of the board of directors and own more than 50% by value of the outstanding shares, if such organization is a corporation (other than a charitable foundation), (C) represent a majority of the general partnership interests and own more than 50% by value of the general and limited partnership interests, if such organization is a partnership, or (D) constitute a majority of the trustees, if such organization is a charitable trust. (B) In the event a Stockholder (a "Selling Stockholder") proposes to accept any bona fide offer for the purchase of any or all of his Shares (the "Subject Shares") from any person other than a Permissible Transferee (the "Offer"), the Selling Stockholder shall give written notice of the Offer to the Corporation and the other Stockholders. The written notice shall disclose the name and address of the proposed purchaser, the price per Share, the number of shares and all other terms, conditions and provisions of the Offer. (C) The Corporation shall have an option to purchase all or part of the Subject Shares at the same price and on the same terms and conditions as the Offer, pursuant to the following provisions: (i) Corporation Option Period. The Corporation shall have twenty days after the receipt of written notice from the Selling Stockholder (the "Corporation Option Period") to exercise its option to purchase any or all of the Subject Shares. (ii) Exercise of Option. The Corporation shall exercise its option by giving written notice to the Selling Stockholder and the other Stockholders of the number of Subject Shares that it agrees to purchase. If the Corporation declines to exercise its option, it shall give written notice to the Stockholders of such decision. (D) In the event the Corporation does not purchase all of the Subject Shares, each Stockholder, other than the Selling Stockholder, shall have an option to purchase that number of Subject Shares not purchased by the Corporation equal to the product of (i) the quotient obtained by dividing the number of Shares owned by such Stockholder by the total number of Shares (other than the Subject Shares) and (ii) the Subject Shares at the same price and on the same terms and conditions as the Offer, pursuant to the following provisions: (i) First Option Period. Each Stockholder, other than the Selling Stockholder, shall have twenty days after receipt of notice from the Corporation -2- 3 that it is not electing to purchase all of the Subject Shares (the "First Option Period") to exercise such Stockholder's option to purchase any or all of the Subject Shares offered during the Option Period (each an "Accepting Stockholder"). (ii) Exercise of Option. Each Accepting Stockholder shall exercise such Stockholder's option by giving written notice to the Selling Stockholder and the Corporation of the number of Subject Shares that such Stockholder agrees to purchase. The failure of any Stockholder to give written notice to the Selling Stockholder within the First Option Period shall constitute a rejection of such Stockholder's option to purchase such Stockholder's pro rata portion of the Subject Shares. (iii) Shares Upon Which the Option Is Not Initially Exercised. Any Subject Shares, upon which the option described in this Section has not been exercised, shall be offered to Accepting Stockholders, if any, such that each Accepting Stockholder shall be offered that number of Subject Shares equal to the product of (i) the quotient obtained by dividing the number of Subject Shares upon which such Accepting Stockholder has exercised his option by the total number of Subject Shares and (ii) that number of Subject Shares upon which the Option Period has expired. Each Accepting Stockholder shall have the ten days (the "Second Option Period") after the date the written notice referred to in the preceding sentence is deemed effective to exercise such Stockholder's option to purchase the Subject Shares offered to such Stockholders pursuant to the terms of the preceding sentence. (E) For a period of thirty days after expiration of the First Option Period, or if applicable, for a period of thirty days after expiration of the Second Option Period, the Selling Stockholder shall have the right to Transfer to the proposed purchaser, at the price and on the terms and conditions of the Offer, the Subject Shares with respect to which the Corporation and any Stockholder shall have failed to exercise an option pursuant to this Section. In the event of a sale of any or all of the Subject Shares to the proposed purchaser, the Subject Shares in the hands of such purchaser shall continue to be subject to all of the terms, conditions and provisions of this Agreement and as a condition to such sale, such purchaser shall execute a counterpart to this Agreement and shall become a Stockholder for all purposes hereunder. Section 2. Involuntary Transfer and Foreclosure. Prior to any involuntary transfer or foreclosure upon any Shares owned by any Stockholder, such Stockholder, his or her representatives and any person seeking to foreclose upon or otherwise acquire such Shares through involuntary procedures shall be required to give written notice to all the other Stockholders disclosing in full the nature and details of the involuntary transfer or foreclosure, including the price per share, if any, to be paid for the Shares. Upon the effective date of such written notice, the Stockholder -3- 4 owning such Shares shall be deemed to have proposed to sell such Shares for purposes of Section 1 of this Article to a person other than a Permissible Transferee pursuant to an offer for the price per share set out in such written notice, and the Corporation and each of the other Stockholders shall have an option to purchase such Shares pursuant to the terms, conditions and provisions of Section 1 of this Article, free and clear of any claim of the person seeking to foreclose upon or otherwise acquire such Shares, except as to any interest which such person may have in the amount to be paid for such Shares. ARTICLE II Voting of the Shares The Stockholders agree to enter into a Voting Trust Agreement of even date pursuant to which Ann Heafner Gaither and William H. Gaither have sole voting power over the Shares. ARTICLE III Endorsement of Share Certificates Each Share certificate shall be endorsed with the following legend: The Shares represented by this certificate are subject to the transfer and voting provisions and restrictions set forth in the Stockholders' Agreement dated as of October 15, 1996 among Ann Heafner Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert Comer Gaither and Thomas R. Jones. Such Stockholders' Agreement provides, among other things, for a right of first refusal relating to the securities represented by this certificate and that the securities represented by this certificate must be voted by Ann Heafner Gaither and William H. Gaither pursuant to the Voting Trust Agreement, dated as of October 15, 1996, among all of the Stockholders of the Corporation. By acceptance of this certificate, each holder hereof agrees to be bound by the provisions of the Stockholders' Agreement, a copy of which has been filed with the Secretary of the Corporation and may be obtained, without charge, upon written request at the Corporation's principal office during regular business hours. Each Stockholder agrees that he will deliver all certificates for Shares owned by him to the Secretary of the Corporation for the purpose of affixing such legend thereto. ARTICLE IV After-Acquired or Substitute Interests -4- 5 (A) In the event of the issuance by the Corporation of additional shares of capital stock, or of any stock dividends on or any subdivisions, combinations or reclassification of the Shares presently owned or hereafter acquired by the Stockholders, the restrictions, options and obligations contained in this Agreement shall be applicable to all shares and options on shares of the Corporation issued in respect of the Shares. (B) If any Stockholder shall at any time exchange all or any number of his Shares for any interest in any entity, all of the provisions of this Agreement shall apply to such interest in such entity as would have applied to such Shares if such Shares had not been exchanged for such interest. ARTICLE V Miscellaneous Section 1. Filing of Agreement. An executed copy of this Agreement shall be filed with the Secretary of the Corporation. The Stockholders shall cause the Corporation to furnish free of charge to any stockholder thereof a copy of this Agreement upon written request. Section 2. Notices. Any and all notices, designations, consents, offers, acceptances or any other communication provided for herein shall be made by hand delivery, first-class mail (registered or certified, return receipt requested), or overnight air courier guaranteeing next day delivery to the address set forth on Schedule I to this Agreement. Any Stockholder may change the address listed in the foregoing sentence by giving written notice to the Corporation and the other Stockholders. Except as otherwise provided in this Agreement, each such notice shall be deemed effective at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Section 3. Amendment and Termination. (A) The provisions of this Agreement may be amended only by the written consent of Stockholders holding more than 75% of the Shares then outstanding (after taking into account Article IV hereof). (B) The provisions of this Agreement shall terminate upon the first to occur of the following events: (i) the consummation of a public offering of the Corporation's common stock in which the public float is not less than $20 million; and (ii) the written consent of Stockholders holding more than 75% of the Shares then outstanding (after taking into account Article IV hereof). -5- 6 In addition, in the event the Corporation is dissolved or liquidated, this Agreement shall automatically terminate. Notwithstanding anything to the contrary in this clause (B), the provisions of Article IV shall terminate on the tenth anniversary hereof unless each of the Stockholders agree in writing to extend the duration of the Article for a period not to exceed ten years beyond the date that the first Stockholder executes the instrument providing for the extension. Section 4. Waiver. No failure or delay on the part of the Stockholders or any of them in exercising any right, power or privilege hereunder, and no course of dealing among the Stockholders shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder preclude the simultaneous or later exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights and remedies which the Stockholders or any of them would otherwise have. Section 5. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Section 6. Governing Law. This Agreement shall be governed and construed in accordance with the law of the State of North Carolina. -6- 7 Section 7. Benefit and Binding Effect This Agreement shall be binding upon and shall inure to the benefit of each of the Stockholders and their respective executors, administrators and personal representatives and heirs and assigns. This Agreement has been duly executed by each of the undersigned. /s/ ANN HEAFNER GAITHER ANN HEAFNER GAITHER /s/ WILLIAM H. GAITHER WILLIAM H. GAITHER /s/ ALBERT C. GAITHER ALBERT C. GAITHER /s/ SUSAN GAITHER JONES SUSAN GAITHER JONES /s/ LAWSON H. GAITHER LAWSON H. GAITHER /s/ ALBERT COMER GAITHER ALBERT COMER GAITHER /s/ THOMAS R. JONES THOMAS R. JONES -7- 8 Schedule 1 Addresses The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, NC 28093-0837 Ann Heafner Gaither Albert C. Gaither 821 Woodson Road Newton, NC 28658 William H. Gaither 814 E. Main Street Lincolnton, NC 28092 Susan Gaither and Thomas R. Jones 126 W. 6th Street Newton, NC 28658 Lawson H. Gaither 814 E. Main Street Lincolnton, NC 28092 Albert Comer Gaither 301 Watts Street Durham, NC 27701 EX-10.23 39 THE J.H. HEAFNER CO. 1997 RESTRICTED STOCK PLAN 1 EXHIBIT 10.23 THE J.H. HEAFNER COMPANY, INC. 1997 RESTRICTED STOCK PLAN 1. Purpose. The purpose of the 1997 Restricted Stock Plan (the "Plan") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), is to attract and retain officers (including non-employee officers), employees, directors and independent contractors of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons by encouraging them to acquire a proprietary interest in the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity if, at the time of granting of Restricted Stock, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means (A) a Participant's conviction of any crime or offense constituting a felony under applicable law or any other crime or offense constituting fraud, embezzlement, theft, larceny or misappropriation, (B) a Participant's breach or violation of the agreement between the Company and such Participant setting forth the terms and conditions of an award of Restricted Stock under the Plan, (C) a Participant's frequent and unjustifiable absenteeism, other than solely by reason of illness or physical or mental disability and (D) a Participant's willful misconduct or gross negligence in the performance of such Participant's services to the Company or a Subsidiary, as determined by the Board acting in its sole discretion and good faith. (d) "Change in Control" means any of the following: (i) the acquisition by any person or entity not controlled by the Company's Stockholders of more than 80% of the Company's then outstanding Stock, (ii) the sale of all or substantially all of the Company's assets, or (iii) the merger of the Company with or into a corporation that is not an Affiliate. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2 (f) "Committee" means the committee, consisting of at least two member of the Board established by the Board to administer the Plan. (g) "Company" means The J.H. Heafner Company, Inc., a corporation organized under the laws of the State of North Carolina, or any successor corporation. (h) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and good faith. (i) "Participant" means any officer, employee, director or independent contractor of the Company, a Subsidiary or an Affiliate designated by the Committee to receive Restricted Stock under the Plan. (j) "Plan" means this J.H. Heafner Company, Inc. 1997 Restricted Stock Plan, as amended from time to time. (k) "Restricted Period" means the period during which shares of Restricted Stock are subjected to forfeiture and restrictions on transferability pursuant to Section 6 of the Plan. (l) "Restricted Stock" means Stock granted to a Participant pursuant to the Plan which is subject to forfeiture and restrictions on transferability in accordance with Section 6 of the Plan. (m) "Stock" means the common stock, par value $100 per share, of the Company. (n) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. 3. Administration. The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant awards of Restricted Stock; to determine the persons to whom and the time or times at which awards of Restricted Stock should be granted; to determine the number of shares of Restricted Stock to be granted and the terms, conditions and restricted relating to any awards of Restricted Stock; to determine whether, to what extent and under what circumstances awards of Restricted Stock may be canceled, forfeited, exchanged or surrendered; to make adjustments in the terms and conditions of, and the criteria included in, awards of -2- 3 Restricted Stock in recognition of unusual or non-recurring events affecting the Company or any Subsidiary, or in response to changes in applicable laws, regulations or accounting principles; to construe and interpret the Plan and any awards of Restricted Stock; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Restricted Stock Agreements (which need not be identical for each Participant); and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company and any Subsidiary or Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any award of Restricted Stock granted hereunder. 4. Granting and Establishing Terms of Awards. The Committee shall have authority, subject to the terms of the Plan, to determine the officers, employees, directors and independent contractors of the Company or any Subsidiary or Affiliate eligible for awards of Restricted Stock and those to whom Restricted Stock shall be granted, the number of shares of Stock to be covered by each award of Restricted Stock, the time or times at which Restricted Stock shall be granted, the terms and provisions of the instruments by which Restricted Stock shall be evidenced; and to determine the period of time during which restrictions on Restricted Stock shall remain in effect. The grant of Restricted Stock to any Participant shall neither entitle such Participant to, nor disqualify him from, participation in any other award of Restricted Stock. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the award of Restricted Stock under the Plan shall be 250,000 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in private transactions or otherwise. If any shares of Restricted Stock are forfeited, canceled, exchanged or surrendered, the shares of Restricted Stock shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available under the Plan. In no event shall any Participant acquire, pursuant -3- 4 to any awards of Restricted Stock under this Plan, more than 20% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, stock split, reverse split, any reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, license arrangement, strategic alliance or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of any Participants in the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to (i) the number and kind of shares of Stock which may thereafter be issued in accordance with the Plan, or, (ii) the number and kind of shares of Stock issued or issuable in respect of the Plan. 6. Specific Terms of Grants of Restricted Stock. (a) Grant of Restricted Stock. Any award made hereunder of Restricted Stock shall be subject to the terms and conditions of the Plan and to any other terms and conditions not inconsistent with the Plan (including, but not limited to, requiring the Participant to pay the Company an amount equal to at least the par value per share for each share of Restricted Stock awarded) as shall be prescribed by the Committee in its sole discretion. The Committee may require that, as a condition to any award of Restricted Stock under the Plan, the Participant shall have entered into an agreement with the Company setting forth the terms and conditions of such award and such other matters as the Committee, in its sole discretion, shall have determined. As determined by the Committee, the Company shall either (i) transfer or issue to each Participant to whom an award of Restricted Stock has been made the number of shares of Restricted Stock specified by the Committee or (ii) hold such shares of Restricted Stock for the benefit of the Participant for the Restricted Period. (b) Restrictions on Transferability. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered by the Participant during the Restricted Period, except as hereinafter provided. (c) Rights as a Shareholder. Except for the restrictions set forth herein and unless otherwise determined by the Committee, the Participant shall have all the rights of a shareholder with respect to Restricted Stock, including, without limitation, the right to vote and the right to receive dividends. (d) Lapse of Restricted Period. Unless the Committee shall otherwise determine at the date an award of Restricted Stock is made to the Participant, the Restricted Period shall commence upon the date of grant and shall lapse with respect to the shares of Restricted Stock on the earlier of: (a) the tenth anniversary of the date of grant or (b) the date of a Change of Control, unless sooner terminated as otherwise provided herein. -4- 5 (e) Legend. Each certificate issued to a Participant in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant and shall bear the following (or similar) legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND CANNOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER SAID ACT OR IN COMPLIANCE WITH AN EXEMPTION THEREFROM. ADDITIONALLY, THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE J.H. HEAFNER COMPANY, INC. 1997 RESTRICTED STOCK PLAN AND AN AGREEMENT BETWEEN J.H. HEAFNER COMPANY, INC. AND THE HOLDER OF RECORD OF THIS CERTIFICATE PURSUANT TO SUCH PLAN, AND NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN CONTRAVENTION OF SUCH PLAN OR SUCH AGREEMENT SHALL BE VALID OR EFFECTIVE. COPIES OF SUCH PLAN AND SUCH AGREEMENT MAY BE OBTAINED BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THE CERTIFICATE TO THE SECRETARY OF J.H. HEAFNER COMPANY, INC." (f) Death or Termination of Employment, Etc. Unless the Committee shall otherwise determine at the date of grant, if a Participant ceases to be an officer of, in the employ of, a director of, or maintain an independent contractor relationship with, the Company or any Subsidiary or Affiliate by reason of death, the Restricted Period covering all shares of Restricted Stock issued to such Participant under the Plan shall immediately lapse. Except as set forth in the immediately preceding sentence, unless the Committee shall otherwise determine at the date of grant, if a Participant ceases to be an officer of, in the employ of, a director of, or maintain an independent contractor relationship with, the Company or any Subsidiary or Affiliate for any reason other than for Cause, all shares of Restricted Stock issued to such Participant shall remain subject to the restrictions on transferability pursuant to Section 6(b) until the lapse of the Restricted Period pursuant to Section 6(d). (g) Termination for Cause. Unless the Committee shall otherwise determine at the date of grant, if a Participant's service as an officer, employee, director or independent contractor with the Company or any Subsidiary is terminated for Cause at any time prior to the date when the Restricted Period lapses, all shares of Restricted Stock owned by such Participant shall revert back to the Company upon the such termination. (h) Issuance of New Certificates. Upon the lapse of the Restricted Period with respect to any shares of Restricted Stock, such shares shall no longer be subject to the restrictions -5- 6 imposed under Section 6 and the Company shall issue or have issued new share certificates without the legend described in Section 6 in exchange for those previously issued. 7. General Provisions. (a) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Restricted Stock thereunder, and the other obligations of the Company under the Plan and any Restricted Stock Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock until completion of stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (b) No Right to Continued Employment, etc. Nothing in the Plan or in any Stock granted or Restricted Stock Agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue as an officer of, in the employ of, as a director of, or an independent contractor to, the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Restricted Stock Agreement or to interfere with or limit in any way the right of the Company or any Subsidiary to terminate such Participant's service with the Company, any Subsidiary or any Affiliate. (c) Taxes. The Company, or any Subsidiary is authorized to withhold from any payment relating to Restricted Stock under the Plan or any other payment to a Participant, amounts of withholding and other taxes due in connection with any transaction involving Restricted Stock, and to take such other action as the Committee may deem advisable to enable the Company and a Participant to satisfy obligations for the payment of withholding taxes and other tax obligations relating to Restricted Stock. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. (d) Amendment and Termination of the Plan. The Board or Committee may terminate the Plan, in whole or in part, may suspend the Plan, in whole or in part from time to time, and may amend the Plan from time to time, including the adoption of amendments deemed necessary or desirable to qualify the grants of Restricted Stock under the laws of various states (including tax laws), or to correct any defect or supply an omission or reconcile any inconsistency in the Plan or in any grant of Restricted Stock thereunder, without the approval of the shareholders of the Company; provided, however, that no action shall be taken without the approval of the shareholders of the Company to increase the number of shares of Stock that may be awarded hereunder, increase the benefits accruing to Participants under the Plan, change the requirements as to eligibility to participate in the Plan, withdraw administration from the Committee, or permit any person while a member of the Committee to be eligible to receive or -6- 7 hold a grant of Restricted Stock under the Plan. No amendment or termination or modification of the Plan shall in any manner affect grants of Restricted Stock without the consent of the Participants, unless the Committee has made a determination that an amendment or modification is in the best interest of all persons to whom grants have been made. The Plan shall terminate when all shares of Stock subject to awards of Restricted Stock under the Plan have been issued and are no longer subject to forfeiture under the terms hereof unless earlier terminated by the Board or the Committee. (e) No Rights to Stock. No Participant shall have any claim to be granted any Restricted Stock under the Plan, and there is no obligation for uniformity of treatment of Participants. (f) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of New York without giving effect to the conflict of laws principles thereof. (g) Effective Date. The Plan shall take effect upon its adoption by the Board (the "Effective Date"), but the Plan (and any grants of Restricted Stock made prior to the stockholder approval mentioned herein), shall be subject to the approval of the holder(s) of a majority of the issued and outstanding shares of voting securities of the Company entitled to vote, which approval must occur within twelve months of the Effective Date. In the absence of such approval, such grant of Restricted Stock shall be null and void. -7- EX-10.24 40 SECURITIES PURCHASE AND STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.24 SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT, dated as of May 28, 1997, among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and each management stockholder named on the signature pages hereto (a "Purchaser" and, collectively, the "Purchasers"). Introduction The Company desires to issue and sell to each Purchaser, and each Purchaser desires to purchase from the Company, that number of shares (the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), set forth in a letter dated May 20, 1997 (the "Letter") from the Company to such Purchaser. On May 7, 1997, (i) the Company and its wholly owned subsidiary, Oliver & Winston, Inc. ("Winston"), entered into a Loan and Security Agreement with BankBoston, N.A., pursuant to which up to $65.0 million in indebtedness may be extended to the Company and Winston (the "Senior Financing"), (ii) the Company issued senior subordinated notes in the principal amount of $16.0 million pursuant to a Senior Subordinated Note and Warrant Purchase Agreement with The 1818 Mezzanine Fund, L.P. (the "Senior Subordinated Financing"), (iii) the Company issued warrants (the "Warrants") in connection with the Senior Subordinated Financing exercisable for approximately 20% of the shares of Common Stock outstanding. and (iv) the Company issued shares of Series A Cumulative Redeemable Preferred Stock and shares of Series B Cumulative Redeemable Preferred Stock (collectively, the "Preferred Stock") to The Kelly-Springfield Tire Company. In addition to the terms of the issuance, sale and purchase of the Shares, the Company and the Purchasers desire to set forth herein certain matters regarding the continued ownership of the Shares by the Purchasers. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Purchase and Sale SECTION 1.1. Purchase and Sale of Common Stock. The Company hereby issues and sells to each Purchaser, and each Purchaser hereby acquires from the Company, on the date hereof, that number of Shares set forth in the Letter to such Purchaser for a purchase price of $1.10 per Share (the "Purchase Price"), in cash, payable by wire transfer of immediately available funds to an account heretofore designated to the Purchaser by the Company, by certified bank check or money order payable to the Company, or pursuant to the terms of a promissory note in the form attached to this Agreement as Exhibit A. The Shares shall have the respective rights and preferences of other shares of Common Stock as set forth in the Company's 2 Amended and Restated Articles of Incorporation, a copy of which is attached to this Agreement as Exhibit B. SECTION 1.2. Delivery of Certificates. The Company is hereby issuing and selling to each Purchaser such Purchaser's Shares by delivering to such Purchaser a duly executed certificate or certificates representing the Shares registered in the name of such Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of all security interests, liens, pledges, charges, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money ("Claims"), and the Purchaser is hereby purchasing the Shares for the Purchase Price applicable thereto. ARTICLE II Representations and Warranties of the Company The Company represents and warrants to the Purchasers as follows: SECTION 2.1. Organization Standing and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. SECTION 2.2. Authority; Binding Agreements. The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. SECTION 2.3. Conflicts; Consents. The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby and compliance by the Company with any of the provisions hereof do not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company is a party, or by which the Company or any of the Company's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of the Company's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Company's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby. 2 3 SECTION 2.4. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, 7,000 shares of Series A Cumulative Redeemable Preferred Stock, par value $.01 per share, and 4,500 shares of Series B Cumulative Redeemable Preferred Stock, par value $.01 per share, and as of the date hereof, all of such securities are issued and outstanding except for 6,304,000 shares of Common Stock authorized but not issued. All such shares of capital stock of the Company have been duly authorized and are fully paid and non-assessable. Except for (i) 977,590 shares of Common Stock reserved for issuance upon exercise of the Warrants and (ii) 265,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (the "Option Plan"), there are no shares of capital stock of the Company reserved for issuance. Except for options granted under the Option Plan and for the Warrants, there are no options, warrants or other rights to purchase shares of capital stock or other securities of the Company or Winston, nor is the Company or Winston obligated in any manner to issue shares of its capital stock or other securities. ARTICLE III Representations and Warranties of the Purchasers Each of the Purchasers severally represents and warrants to the Company as follows: SECTION 3.1. Capacity; Binding Agreements. Such Purchaser has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Purchaser, and constitutes the valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms. SECTION 3.2. Conflicts; Consents. The execution and delivery by such Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by such Purchaser with any of the provisions hereof do not and will not (i) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which such Purchaser is a party, or by which such Purchaser or any of such Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to such Purchaser or any of such Purchaser's properties or assets or (iii) result in the creation or imposition of any Claim upon any of such Purchaser's properties or assets. SECTION 3.3. Purchase for Own Account. (a) The Shares to be acquired by such Purchaser pursuant to this Agreement are being acquired for his own account and the Purchaser has no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state thereof. If such Purchaser should in the future decide to dispose of any of the Shares, such Purchaser understands and agrees that he may do so only in compliance with this 3 4 Agreement and with the Securities Act of 1933 (the "Securities Act") and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If such Purchaser should decide to dispose of any Shares, such Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at such Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law in connection with such disposition to the effect that the proposed disposition of the Shares will not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. (b) Such Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE IS FURTHER LIMITED BY THE PROVISIONS OF THE SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT AMONG THE J.H. HEAFNER COMPANY, INC. AND THE MANAGEMENT STOCKHOLDERS IDENTIFIED THEREIN, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICE OF THE COMPANY." SECTION 3.4. Nature of Purchaser. Such Purchaser acknowledges that the offer and sale of the Shares is intended to be exempt from registration under the Securities Act. Such Purchaser is (i) a director, president, vice president in charge of a principal business unit, division or function or other officer of the Company who performs a policy making function for the Company, (ii) an individual with a net worth, or joint net worth with such Purchaser's spouse, at the date hereof in excess of $1,000,000, (iii) an individual with an income in excess of $200,000 in each of the two most recent years or joint income with such Purchaser's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year or (iv) an individual who has appointed a "purchaser representative" as described in Section to act as such Purchaser's representative to assist such Purchaser in evaluating the purchase of the Shares. Such Purchaser has such knowledge and experience in financial and business matters so that he is capable of evaluating the relative merits and risks of purchasing the Shares. Such Purchaser has adequate means of providing for his current 4 5 economic needs and possible personal contingencies, has no need for liquidity in his investment in the Company and is able financially to bear the risks of such investment. SECTION 3.5. Information. All documents, records and books pertaining to the investment in the Shares and requested by such Purchaser or his purchaser representative, if any, have been made available or delivered to such Purchaser. Such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and to ask questions of and receive answers from the Company concerning such matters. All such questions, if any, have been answered to the full satisfaction of such Purchaser and his purchaser representative, if any, and such Purchaser has received all information about the Company which such Purchaser or his purchaser representative, if any, desires, including information which such Purchaser or representative deems necessary to verify the accuracy of information the Company has furnished to such Purchaser. ARTICLE IV Transferability of Shares SECTION 4.1. Stock Transfer Restrictions. None of the Purchasers shall sell, assign, pledge, give away or otherwise transfer (a "Transfer") any Shares except in accordance with the procedures set forth in this Agreement. Any attempted Transfer of Shares not permitted by this Agreement shall be null and void, and the Company shall not in any way give effect to any such Transfer. Any proposed Transfer of Shares shall be null and void, and the Company shall not in any way give effect to any such Transfer, unless the transferee of such Shares who is not, immediately prior to such Transfer, a Purchaser shall agree in writing to be bound by and comply with the provisions of this Agreement. SECTION 4.2. Termination of Employment. (a) Transfers upon Termination for Cause. If the Company shall terminate a Purchaser's employment for "Cause" or a Purchaser shall terminate his employment with the Company other than for "Good Reason" (as such terms are defined below), the Company shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to purchase all of such Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from making such repurchase to the full extent it would otherwise do so, the Company shall have the right to purchase such Shares until the expiration of 45 days after such first anniversary. For purposes of this Section 4.2, "Company" shall include Winston with respect to a Purchaser employed directly by Winston. For purposes of this Agreement, "Cause", with respect to any Purchaser, has the meaning set forth in the employment agreement, if any, then in effect between the Company and such Purchaser or, in the absence of such an agreement, shall mean (i) such Purchaser's conviction of, or plea of guilty or nolo contendere to a felony, (ii) such Purchaser's gross negligence in the performance of his employment services to the Company, which is not corrected within 15 business days after 5 6 written notice, (iii) such Purchaser's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of such services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) such Purchaser's other material breach of his obligations as an employee or officer of the Company which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. "Good Reason", with respect to any Purchaser, has the meaning set forth in the employment agreement, if any, then in effect between the Company and such Purchaser or, in the absence of such an agreement, shall mean (i) the failure of the Company to pay any undisputed amount due to such Purchaser in connection with his employment by the Company or a substantial diminution in benefits provided pursuant to such employment, (ii) a substantial diminution in the status, position and responsibilities of such Purchaser that is not instituted to all senior management of the Company or (iii) the Company 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 such Purchaser is currently assigned. "Repurchase Price" means, with respect to each Share owned by any Purchaser, the greater of (i) the Purchase Price applicable thereto and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of such Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plan and in-the-money Warrants). "Net Equity Value" means the sum of (x) 6 times the Company's EBITDA (as calculated in accordance with the Loan and Security Agreement dated May 7, 1997 among the Company, Winston, the financial institutions identified therein and BankBoston, N.A., as agent) for the 12 full calendar months immediately preceding the date on which such termination shall have occurred, plus (y) the aggregate exercise price of all options granted under the Option Plan and all Warrants, which exercise price at the date such termination shall have occurred does not exceed (on a per share basis) the per share market value of the Common Stock, less (z) the aggregate amount of principal of and interest on (in the case of debt) and liquidation value of (in the case of capital stock) the Senior Financing, Senior Subordinated Financing and Preferred Stock outstanding as of the date of such termination. (b) Termination other than for Cause. If the Company shall terminate a Purchaser's employment other than for Cause or a Purchaser shall terminate his employment with the Company for Good Reason, such Purchaser shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to require the Company to purchase all of such Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from purchasing such Shares to the extent so required by a Purchaser, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the option is not exercised, the Company shall have the right, commencing on the first anniversary and continuing until the 6 7 second anniversary thereof, to purchase all of such Purchaser's Shares at the Repurchase Price applicable thereto. (c) Termination or Repurchase upon Death. If a Purchaser's employment with the Company shall terminate due to such Purchaser's death, or, following any other termination of employment by the Company, a Purchaser shall die, the Company shall have the right to purchase, and such Purchaser's descendants shall have the right to require the Company to purchase, all of such Purchaser's Shares at the Repurchase Price applicable thereto, commencing on the date of death of such Purchaser and continuing until the first anniversary thereof; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement or note for borrowed money from purchasing such Shares to the extent so required by a Purchaser's descendants, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. (d) Delivery of Payment. The Company or the Purchaser, as the case may be, shall notify the other of such party's exercise of its rights under this Section 4.2 by giving written notice of such exercise at least 10 and not more than 30 days before the date established by such electing party for such purchase or sell, as the case may be. On the date so designated, the Company shall deliver the appropriate Repurchase Price to such Purchaser by certified check or money order and such Purchaser shall deliver the certificates evidencing the Shares being purchased, duly endorsed for transfer as the Company may direct, and free and clear of any Claim. If any Shares evidenced by a certificate so surrendered are not being purchased pursuant to the terms hereof, the Company shall promptly issue to such Purchaser a replacement certificate evidencing the Shares not so purchased. SECTION 4.3. Transfers Among Management or to Descendants. (a) Any Purchaser may, so long as any right has not been exercised with respect to such Shares pursuant to Section 4.2, Transfer any Shares to another Purchaser or other management employee of the Company or Winston who acquires shares of Common Stock after the date hereof pursuant to an exercise of any option under the Option Plan or pursuant to a purchase agreement substantially in the form of this Agreement (a "Management Employee"). Any Purchaser may Transfer by will or the laws of descent and distribution any Shares to such Purchaser's descendants. Such transfers shall be effective only if the transferee agrees to be bound by the terms of this Agreement. SECTION 4.4. Right of First Refusal. With respect to any Shares that the Company had the right to purchase pursuant to Section 4.2(a) or Section 4.2(c) but failed to so purchase prior to the expiration of the one-year period referred to therein (as the same may be extended due to the Company's inability to purchase such Shares as described therein), the following provisions shall apply. (a) If a Purchaser desires to Transfer any such Shares (other than pursuant to Section 4.3), such Purchaser shall deliver to the Company and the other Purchasers and Management Employees a written notice, which shall be irrevocable for a period of 45 days after 7 8 delivery, offering all of such Shares to the Company and the other Purchasers and Management Employees at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase all (but not part) of such Shares at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to such transferring Purchaser within such 30-day period. (b) If the Company fails to accept such offer, then upon the earlier of the expiration of such 30-day period or upon the receipt of a written rejection of such offer from the Company, the other Purchasers and Management Employees (as a group) shall have the second right and option, until 15 days after the expiration of the 30-day period, to purchase on a pro rata basis with all other Purchasers and Management Employees so electing all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the transferring Purchaser within the 15-day period. (c) If the Company and the other Purchasers and Management Employees do not elect to purchase the Shares so offered, then the transferring Purchaser may Transfer all (but not part) of such Shares at a price not less than the price, and on terms not more favorable to the transferee of such Shares than the terms, stated in the original written notice of intention to sell, at any time within 15 days after the expiration of the period in which the other Purchasers and Management Employees could elect to purchase such Shares. If such Shares are not sold by the transferring Purchaser during such 15-day period, the right of the transferring Purchaser to sell such Shares shall expire and the rights and obligations set forth in this Section 4.4 shall be reinstated with respect to such Shares. SECTION 4.5. Lock-up Agreements. If the Company proposes to register under the Securities Act any of its Common Stock for sale to the public, each Purchaser shall enter into such agreement (a "Lock-up Agreement") as may be requested by the underwriters of such registered offering, pursuant to which Lock-up Agreement such Purchaser shall refrain from selling any Shares during the period of distribution of Common Stock by such underwriters and for a period of up to 180 days following the effective date of such registration. ARTICLE V Miscellaneous SECTION 5.1. Option Shares; Dividends; Reclassifications. If, subsequent to the date hereof, any shares of Common Stock are issued to a Purchaser pursuant to the exercise of any option (including options granted under the Option Plan), warrant or other security convertible into or exercisable for shares of Common Stock, or any shares or other securities are issued with respect to, or in exchange for, any of the Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares of Common Stock and such other shares or securities shall be deemed to be Shares for all purposes of this Agreement. 8 9 SECTION 5.2. Survival of Provisions; Termination. (a) All of the representations, warranties and covenants made herein and each of the provisions of this Agreement shall, except as otherwise expressly set forth herein, survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchasers, the acceptance of the Shares and payment therefor or the termination of this Agreement. (b) This Agreement shall terminate upon the earliest to occur of the (i) issuance by the Company or sale by the shareholders of the Company to the public on a Form S-1 under the Securities Act of shares of Common Stock representing at least 40% of the Common Stock outstanding after such issuance or sale, (ii) tenth anniversary of the date of this Agreement and (iii) written consent of all of the Purchasers, the Management Employees and the Company. Upon such a termination, all rights and obligations shall terminate, except the Purchasers' obligations under Section 4.5 with respect to a Lock-up Agreement entered into in connection with a public offering referred to in the foregoing clause (i), if applicable. SECTION 5.3. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 5.3: (a) if to the Company: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, North Carolina 28093-0837 Attention: J. Michael Gaither Telecopier No.: (704) 732-6480 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 (b) if to a Purchaser, at the address set forth opposite such Purchaser's name on the signature pages hereof. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 9 10 SECTION 5.4. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The provisions of Article IV also shall inure to the benefit of and be enforceable by the Management Employees. A Purchaser may assign its rights hereunder only in conjunction with, and to a transferee of, a Transfer permitted pursuant to the terms of Article IV, and any such assignee shall be deemed to be a "Purchaser" for purposes of this Agreement. The Company may not assign any of its rights or obligations hereunder without the consent of Purchasers holding a majority of the Shares outstanding; provided that any successor by merger or consolidation of the Company or similar transaction shall be bound by and benefit from the terms hereof as if named as the Company hereunder. SECTION 5.5. Amendment and Waiver. No failure or delay on the part of the Company or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchasers from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof; provided that notice of any such waiver shall be given to each party hereto as set forth herein. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and Purchasers holding at least a majority of the Shares issued and outstanding; provided that the provisions of Section 5.2(b) and of this sentence shall not be amended or waived without the written consent of all of the Purchasers and the Company. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchasers from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchasers in any case shall entitle the Company or the Purchasers to any other or further notice or demand in similar or other circumstances. SECTION 5.6. Purchaser Representative. If the Purchaser has been represented by a purchaser representative in connection with his investment in the Shares, in evaluating the Purchaser's investment in the Shares the Purchaser has been advised by such purchaser representative as to the merits and risks of the investment in general and the suitability of the investment for the Purchaser in particular, and the purchaser representative has disclosed in writing any material relationship, actual or contemplated, between the purchaser representative and any entity connected to the transactions contemplated hereby, or affiliate of any such entity, and any compensation received or to be received as a result of such relationship. SECTION 5.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10 11 SECTION 5.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 5.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 5.10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. SECTION 5.11. Entire Agreement. This Agreement, together with the exhibits hereto and the terms of the Common Stock, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits hereto and the Common Stock, supersede all prior agreements and understandings among the parties with respect to such subject matter. SECTION 5.12. Expenses. Each party to this Agreement shall each bear its or his own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of lawyers, financial advisors and accountants. SECTION 5.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section or Exhibit is to the Article, Section or Exhibit of this Agreement. 11 12 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase and Stockholders' Agreement to be executed and delivered as of the date first above written. THE J. H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER ---------------------------- Name: William H. Gaither Title: President & CEO /s/ WILLIAM H. GAITHER ---------------------------- Address for Notices: Name: William H. Gaither PO Box 837 Lincolnton, NC 28092 /s/ THOMAS J. BONBURG ---------------------------- Address for Notices: Name: Thomas J. Bonburg /s/ DANIEL K. BROWN ---------------------------- Address for Notices: Name: Daniel K. Brown 17915 Jetton Rd. Cornelius, NC 28031 /s/ J. MICHAEL GAITHER ---------------------------- Address for Notices: Name: J. Michael Gaither 315 West 7th Street Newton, NC 28658 /s/ DONALD C. ROOF ---------------------------- Address for Notices: Name: Donald C. Roof 6618 Seton House Lane Charlotte, NC 28277 /s/ DWIGHT P. HANSEN --------------------------- Address for Notices: Name: Dwight P. Hansen 12 13 /s/ HERBERT P. STEVENS --------------------------- Address for Notices: Name: Herbert P. Stevens 7844 4th St. Downey, CA 90241 /s/ LARRY B. STODDARD --------------------------- Address for Notices: Name: Larry B. Stoddard /s/ ALAN WILSON --------------------------- Address for Notices: Name: Alan Wilson 82 Mollison Dr. Simi Valley, Ca 93065 -------------------------- Address for Notices: Name: William G. Morrison /s/ J. LEWIS McKNIGHT -------------------------- Address for Notices: Name: J. Lewis McKnight 8755 Harris Rd. Concord, NC 28027 13 EX-10.26 41 EMPLOYMENT AGREEMENT RE RICHARD P. JOHNSON 1 EXHIBIT 10.26 EMPLOYMENT AGREEMENT, dated as of May 20, 1998 (the "Agreement"), between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and Richard P. Johnson (the "Employee"). The Employer desires to retain the Employee to supply services to the Employer, and the Employee desires to provide such services to the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as President of the Southeastern Wholesale Division of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) 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 and prorated for the period commencing on the date of this Agreement and ending on December 31, 1998. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to additional discretionary increases (but not decreases) as determined by an annual review by the Board of Directors on or prior to each anniversary of the Effective Date. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee (i) annual fixed bonus payments (the "Fixed Bonus") in an amount equal to 15% of the Employee's Base Salary for such year, payable on or around February 1 of the following year and prorated for the period commencing on the date of this Agreement and ending on December 31, 1998 and (ii) 2 incentive compensation determined as set forth in the Company's Management Incentive Plan. Each Fixed Bonus payment is contingent upon Employee's being employed by the Company on the date that such Fixed Bonus payment is otherwise due. The Employee will be entitled to such additional incentive compensation as the Board of Directors of the Employer determines in its discretion to pay the Employee. The Employee acknowledges that the Employer may terminate or modify its management bonus and 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. (c) Restricted Stock and Stock Options. During the Employment Period, the Employee shall be eligible to participate in the J.H. Heafner Company 1997 Stock Option Plan (the "Stock Plan") and to receive grants of options to purchase Class A Common Stock of the Employer and on terms no less favorable than those granted to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time pursuant to the Stock Plan in the sole discretion of the Employer's Board of Directors. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans and company automobile perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level I Employee. (e) Other Benefits. The Employer will provide a vehicle of the Employee's choice for the Employee's use at a cost (including expenses and insurance) of up to $40,000. The Employee will be responsible for any costs in excess of $40,000. (f) Relocation Costs. The Employer will reimburse the Employee for reasonable costs and expenses incurred by the Employee for relocation to Charlotte, North Carolina, including without limitation the cost of any realtor's commission payable on sale of the Employee's principal residence and other relocation costs customarily covered under the Employer's relocation plan. (g) 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. 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 his duties 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 -2- 3 Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's 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. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement, (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. (e) Payments in the Event of Termination. Upon the termination of the Employment Period pursuant to this Section 3, the Employer shall pay to the Employee, or his estate, the Base Salary and Fixed Bonus earned to the date of death or termination for disability or Cause, as the case may be. Upon the termination of the Employment Period by the Employer without Cause or by the Employee for Good Reason, the -3- 4 Employer shall pay to the Employee or his estate an additional amount equal to (i) if such termination occurs prior to the first anniversary of the date of this Agreement, the Base Salary that would have been payable to the Employee for the twenty-four month period beginning on the date of such termination plus the target bonus (as defined in the Employer's Executive Bonus Plan) (the "Target Bonus") that would have been payable to the Employee for the twelve-month period beginning on the date of termination, (ii) if such termination occurs on or after the first anniversary of the date of this Agreement but prior to the second anniversary of the date of this Agreement, the Base Salary that would have been payable to the Employee for the eighteen-month period beginning on the date of such termination plus the Target Bonus that would have been payable to the Employee for the twelve-month period beginning on the date of termination, or (iii) if such termination occurs on or after the second anniversary of the date of this Agreement, the Base Salary and Target Bonus, in each case, that would have been payable to the Employee for the twelve-month period beginning on the date of such termination. The Employer, at its option, may make any payments due under this Section 3(e) either in a lump sum or as they would have been paid had the Employee not been terminated. (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 4 and 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. Confidentiality; Non-Disclosure. (a) (i) Except as provided in this Section 4(a), the Employee shall not disclose any confidential or proprietary information of the Employer or of its affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Employer, its subsidiaries, officers or employees, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Employee make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Employer. As used in this Section, the term "confidential or proprietary information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, -4- 5 purchases, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term "confidential or proprietary information" shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 4(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any patents, trademarks or copyrights thereon in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 5. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of confidential or proprietary information and acknowledges the highly competitive nature of the Business and accordingly agrees that, in consideration of the premises contained herein and in consideration for payment by the Employer of the purchase price of the Shares, he will not, during and for the period commencing on the Effective Date and ending on the date that is the later of one year after the termination of the Employment Period or the date of expiration of the Non- -5- 6 Compete Period (as defined in Section 3.6 of the Merger Agreement), for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, (i) directly or indirectly engage in the United States, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business; (ii) assist others in engaging in any competitive business in the manner described in clause (i); or (iii) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 5. SECTION 6. Change in Control Payment. (a) If the Employment Period is terminated (i) upon or prior to a Change in Control and the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of, such Change in Control or (ii) for the reasons set forth below occurring within one year after a Change in Control (as defined), by the company, then the Employee shall be entitled to a payment (the "Change in Control Payment") in an amount equal to the Base Salary that would have been payable to the Employee for the twenty-four month period beginning on the date of such termination plus the target bonus (as defined in the Employer's Executive Bonus Plan) (the "Target Bonus") that would have been payable to the Employee for the twelve-month period beginning on the date of termination. A substantial diminution in the status, position, compensation and responsibilities of the Employee or the requirement that the Employee relocate more than 50 miles, all within one year after a Change in Control shall be deemed termination by the company of the Employment Period for purposes of determining whether a Change in Control Payment is due under this Section 6(a). The Employer may elect to make any payments due under this Section 6(a) either in a lump sum or as they would have been paid had the Employment Period not been terminated. Notwithstanding the foregoing, any change in Control Payment due under this Section 6(a) shall be limited to the extent the Board (in its sole judgment) deems necessary to preserve the deductibility by the Company of such Change in Control Payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended, or any successor statute. (b) "Change in Control" means any of the following: (i) the sale of all or substantially all of the Company's assets to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, (ii) at any time prior to the consummation of an initial public offering of Class A 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 Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones owning, collectively, less than -6- 7 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company or (iii) at any time after the consummation of an initial public offering of Class A 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 not directly or indirectly controlled by the Company's stockholders of more than 35% of the Combined Voting Power of the then outstanding shares of capital stock of the Company. "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Company. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 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. If the restrictions on the Employee's activities contained in Sections 4 and 5 of this Agreement conflict with those contained in Section 3.6 of the Agreement and Plan of Merger, dated as of March 10, 1998, between the Employer, ITCO Merger Corporation, ITCO Logistics Corporation and the stockholders of ITCO Logistics Corporation (including the Employee) (other than with respect to duration), such Section 3.6 shall control to the extent of such conflict. (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 4 or 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 4 or Section 5 of this Agreement. -7- 8 (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Employee on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Assignment; Benefit. This Agreement is personal in its nature and neither party shall, without the prior written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder. The provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Employer, whether by merger, consolidation, transfer of all or substantially all of its shares or assets, or otherwise. (e) 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 Company, 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 Company and (iii) be subject to any limitations imposed from time to time under applicable law. (f) 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 a private judge 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 Employee shall have the right, in addition to any other relief granted by such arbitrator, to attorney's fees; provided however, that the Employer shall have the right, in addition to any other relief granted by such arbitrator, to reasonable attorney's 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 judgement by such arbitrator may be entered into any court with jurisdiction over the dispute. (g) Acknowledgment. Employee acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer on any of the terms of this agreement. -8- 9 (h) Amendments and Waivers. No modification, amendment or waiver of any provision of , or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: The J. H. Heafner Company, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Attention: J. Michael Gaither Facsimile: (704) 423-8987 with a copy to: Howard, Darby & Levin 1330 Avenue of the Americas New York, NY 10022 Attention: Scott F. Smith Facsimile: (212) 841-1010 If to the Employee: Richard P. Johnson 4229 Lomo Alto Court Dallas, TX 75219 Facsimile:__________________ 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. (g) 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. -9- 10 (h) 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. (i) 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 contains the entire agreement among the parties with respect to the transactions contemplated by this Agreement and supersedes all other agreements or understandings among the parties with respect to the Employee's employment by the Employer except as expressly provided in this Section 6(i). The Employment Agreement, dated as of February 1, 1997, between the Employee and ITCO Holding Company, Inc., is expressly superseded by this Agreement and shall have no further force and effect, provided, that all outstanding obligations of ITCO Holding Company, Inc. to make payments due for services rendered by the Employee prior to the date of this Agreement shall survive. The Stock Appreciation Rights Agreement (as amended, the "SAR Agreement"), by and among ITCO Holding Company, Inc., Wingate Partners II, L.P. and Richard P. Johnson, dated February 1, 1997, shall remain in full force and effect until terminated in accordance with its terms. The Amendment to the Management Agreements (the "Amendment"), between the Employee and ITCO Holding Company, Inc., dated February 27, 1998, is expressly superseded by this Agreement and shall have no further force and effect, provided, that insofar as any provision in the Amendment directly relates to or amends the SAR Agreement, such provision shall survive. (j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (k) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NORTH CAROLINA FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -10- 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. THE J. H. HEAFNER COMPANY, INC. By: /s/ WILLIAM H. GAITHER ------------------------------------- Name: Title: /s/ RICHARD P. JOHNSON --------------------------------------- Richard P. Johnson -11- EX-10.27 42 EMPLOYMENT AGREEMENT RE ARTHUR C. SOARES 1 Exhibit 10.27 EMPLOYMENT AGREEMENT dated as of May 20, 1998 (the "Agreement") by and between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and Arthur C. Soares (the "Executive"). ---------------------------------------------------------------- INTRODUCTION Executive was instrumental in the growth and development of Speed Merchant and its subsidiary and is expected to make significant future contributions to the profitability, growth and financial strength of the Company. Simultaneously with the execution of this Agreement, the Company, is purchasing 100% of the outstanding shares of capital stock of The Speed Merchant, Inc., a California corporation d/b/a the Speed Merchant and Competition Parts Warehouse ("Speed Merchant") pursuant to a Stock Purchase Agreement dated as of March 11, 1998 (the "Stock Purchase Agreement") among the Company and the stockholders of Speed Merchant (including the Executive). Executive and the Company have agreed that it is in their respective best interests to enter into an agreement providing for the Company's employment of Executive following the consummation of the transactions contemplated in the Stock Purchase Agreement, on the terms and subject to the conditions set forth herein. In consideration of (i) the purchase and sale of the shares of the Speed Merchant's outstanding capital stock from the Executive (ii) the Executive's agreement to provide the services set forth in this Agreement, and (iii) the mutual commitments contained in this Agreement, the Company and Executive agree as follows: 1. Effective Date. This Agreement shall be effective on the date hereof (the "Effective Date"). 2. Duties. The Company hereby agrees to employ Executive, and Executive hereby assumes such employment, as President, Western Wholesale Division of the Company for the "Term of Employment" (defined below). In this capacity, Executive shall perform such duties consistent with the duties of a senior executive of the Company as the Board of Directors of the Company (the "Board") shall from time to time determine, which duties shall, during the period beginning on the Effective Date and ending on the first-year anniversary of the Effective Date, be consistent with the intentions expressed in the Stock Purchase Agreement. The duties to be performed by Executive shall be performed primarily in California, subject to reasonable travel 2 requirements on behalf of the Company. Executive shall devote substantially all of his working time and attention to such duties. Executive in each of these capacities agrees to use his best efforts during the Term of Employment to protect, encourage and promote the interests of the Company and its affiliates and to aid in the integration of the Company's business and operations with those of the Company and its affiliates. Executive shall report to the Chief Executive Officer of the Company or such other person as the Board may designate from time to time. As used herein, the phrase "Term of Employment" shall mean the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. 3. Compensation. (a) Base Salary. During the Term of Employment, the Company agrees to pay to Executive a salary at the rate of $259,615 per annum, payable in bi-weekly installments or otherwise in accordance with the normal payroll procedures of the Company. Such annual salary shall be subject to annual review and may be adjusted upward from time to time in the sole discretion of the Board. The Executive's annual salary, including any periodic adjustments made from time to time, shall be referred to in this Agreement as "Base Salary." (b) Bonuses. (i) Executive shall be entitled to receive from the Company a bonus (the "Stay Put Bonus") in the amount of $2,000,000, payable in two installments as follows: $1,250,000 on the one-year anniversary of the Effective Date and $750,000 on the two-year anniversary of the Effective Date. The Company shall pay Executive interest on the unpaid balance of the Stay Put Bonus at a rate of 8% per annum for the period from and including the Effective Date to but excluding the date payment is made under this Section 3(b)(i). Such interest payments shall be made annually at the same time as the payment of the annual installment of the Stay Put Bonus and, for purposes of this Agreement, shall constitute a part of the Stay Put Bonus. (ii) Executive shall be entitled to participate in Heafner's annual executive bonus plan or any similar or successor annual bonus plan of Heafner and to receive an annual performance bonus (the "Performance Bonus") from Heafner in accordance with the terms thereof and as approved by the Board of Directors of Heafner. (iii) Executive shall be entitled to a bonus (the "Incentive Bonus") during the Term of Employment as follows: (A) The Incentive Bonus for the 12-month period ending on the first anniversary of the Effective Date shall be in an amount to be calculated by the Company based on the formula set forth in Exhibit A, provided, that in no event shall such Incentive Bonus be less than $278,506. In the event that the formula set forth in Exhibit A yields an amount in excess of $278,506, then any Synergy Bonus payable to the Executive shall be reduced by the amount of such excess. Such bonus shall be paid in quarterly installments commencing on the date three months after the Effective Date and ending on the first-year anniversary of the Effective Date. It is understood and agreed that, if the quarterly figures necessary -2- 3 to calculate the Executive's Incentive Bonus for the period in which the Effective Date falls or any prior period are not yet available as of the Effective Date, the Executive's Incentive Bonus for such period shall be calculated on the basis of estimated quarterly figures and subsequent Incentive Bonus payments shall be adjusted to the extent necessary based on actual quarterly figures for the period in question. (B) The Incentive Bonus for the 12-month period ending on the second anniversary of the Effective Date shall be in an amount determined pursuant to a formula agreed to in advance by the Board and Executive. Such bonus shall be paid in accordance with normal bonus practices adopted by the Company from time to time. (iv) On the one-year anniversary of the Effective Date, Executive may be entitled to an incentive bonus (the "Synergy Bonus") as more fully described in Exhibit B to this Agreement. Such bonus shall be paid in accordance with normal bonus payment practices adopted by the Company from time to time, but shall no in event be paid later than 30 days from and after the date of calculation. Any Synergy Bonus payable to the Executive shall be payable in cash or, at the election of the Executive, (x) in shares of common stock of Heafner having a fair market value equal to the amount of the Synergy Bonus or (y) options or warrants to acquire the number of shares of common stock of Heafner referred to in clause (x). (c) Equity Incentives. During the Term of Employment, Executive shall be eligible to participate in the J.H. Heafner Company 1997 Stock Option (the "Stock Plan") and to receive grants of options to purchase Class A Common Stock, par value $0.01 per share, of the Company. Such grants may be awarded from time to time pursuant to the Stock Plan in the sole discretion of the Compensation Committee of the Board of Directors of Heafner. 4. Benefits. Unless Executive's employment is terminated earlier pursuant to Section 5, during the Term of Employment: (a) Executive shall be eligible to participate in group health and welfare insurance programs available to senior executives of the Company with similar responsibilities from time to time. (b) Executive shall be eligible to participate in life and long-term disability insurance programs, pension and retirement programs, incentive compensation programs, and other fringe benefit programs, if any, available to senior executives of the Company with similar responsibilities from time to time. (c) Executive shall be entitled to four weeks vacation with pay, subject to such increases (but not decreases) as are adopted by the Company from time to time for senior executives of the Company with similar responsibilities. -3- 4 (d) The Company will reimburse Executive for reasonable business expenses incurred in performing Executive's duties and promoting the business of the Company and its affiliates, including, but not limited to, reasonable entertainment expenses, and travel and lodging expenses, following presentation of documentation in accordance with the Company's business expense policies. 5. Termination of Employment. (a) Termination Without Cause. Notwithstanding anything to the contrary in this Agreement, whether express or implied, the Company may at any time terminate Executive's employment for any reason other than Cause (defined below) by giving Executive at least 60 days' prior written notice of the effective date of termination. In the event of such termination, Executive shall be entitled to receive (i) his Base Salary through the last day of the Term of Employment, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, payable in accordance with Section 3(b)(i) above, (iii) his Incentive Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iii) above, (iv) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (v) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (b) Termination for Cause. The Company shall have the right to terminate Executive's employment at any time for Cause by giving Executive written notice of the effective date of termination (which effective date may be the date of such notice). For purposes of this Agreement, "Cause" shall mean (i) a proven or admitted act of fraud, misappropriation or embezzlement by the Executive that is detrimental to the Company or (ii) the Executive's conviction of or plea of guilty or nolo contendere to a felony. The Company shall have no further obligation hereunder from and after the effective date of termination for Cause (other than (i) to make payment of the Executive's Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (ii) to make payment of any accrued but unpaid Base Salary to the effective date of termination and accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years ending prior to the effective date of termination). The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (c) Termination on Account of Death. In the event of Executive's death while in the employ of the Company, Executive's employment by the Company shall be deemed to have been terminated as of the date of death, and the Company shall pay to the Executive's designated beneficiaries (i) his Base Salary through the date of Executive's death, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, (iii) his Synergy -4- 5 Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (iv) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. (d) Voluntary Termination by Executive. Executive shall have the right to terminate Executive's employment at any time for any reason upon 60 days' written notice to the Company. In the event that Executive's employment with the Company is voluntarily terminated by Executive, the Company shall have no further obligation hereunder from and after the effective date of termination of Executive's voluntary termination (other than (i) to make payment of the Executive's Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (ii) to make payment of any accrued but unpaid Base Salary to the effective date of termination and accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years ending prior to the effective date of termination). The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (e) Termination on Account of Disability. (i) During any period that Executive fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, he shall receive (1) all compensation payable to him under the Company's disability plan or program or other similar plan during such period until this Agreement is terminated as hereinafter provided in this Section 5(e), (2) that portion of his Base Salary equal to the positive difference between (A) his Base Salary at the rate in effect at the commencement of any such period and (B) the compensation payable to him under Section 5(e)(1) above, (3) his Stay Put Bonus, if any, payable during such period, (4) his Synergy Bonus, if any, payable during such period, and (5) payment of all accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years or periods ended prior to the commencement of any such period. (ii) If, as a result of Executive's incapacity due to physical or mental illness (as determined in good faith by a physician acceptable to the Company and the Executive), Executive shall have been unable to perform the essential functions of his position with the Company for 90 days during any twelve (12) month period or if a physician acceptable to the Company advises the Company that it is likely that Executive will be unable to perform the essential functions of his position for 90 days during the succeeding twelve (12) month period, his employment may be terminated for "Disability" on 20 days' prior written notice by the Company to the Executive. In the event that Executive's employment shall be so terminated, the Company shall pay to Executive or to the Executive's designated beneficiaries (1) his Stay Put Bonus through the last day of the Term of Employment, payable in accordance with Section 3(b)(i) above, (2) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (3) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. In addition, Executive shall be entitled to receive benefits under the Company's retirement, insurance, and other compensation and benefit plans and programs then in effect, in accordance with the terms of such programs. The -5- 6 Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (f) Termination by Executive for Good Reason. Executive shall have the right to terminate Executive's employment at any time for Good Reason by giving the Company 60 days advance written notice of the effective date of termination (which effective date may be the date of such notice). For purposes of this Agreement, "Good Reason" shall mean: (i) the material breach by the Company of a material term of this Agreement and, if such breach is capable of being cured, the failure to cure such breach within 30 days of receipt of notice of such breach; (ii) the Company's requiring Executive's ongoing and regular services to be performed at a location other than in Northern California, except for travel reasonably required in the performance of Executive's responsibilities; (iii) the reduction by the Company of the Executive's Base Salary during the Term of Employment; (iv) the modification of the position and responsibilities of the Executive in such a manner as would be inconsistent with those of a president or chief executive officer of a corporate division; or (v) the inability of the Executive and the Company to agree in good faith (no more than 30 days before the first-year anniversary of the Effective Date) on an Incentive Bonus arrangement for the twelve-month period commencing on the first-year anniversary of the Effective Date that is satisfactory to the Executive. In the event of such termination, Executive shall be entitled to receive (i) his Base Salary through the last day of the Term of Employment, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, payable in accordance with Section 3(b)(i) above, (iii) his Incentive Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iii) above, (iv) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (v) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). 6. Confidential Information; Non-Competition. (a) Confidential Information. (i) Executive recognizes and hereby acknowledges that, as a senior executive of the Company, he will learn of, and be -6- 7 exposed to, confidential business information concerning the Company Group's information, ideas, know how, trade secrets, processes, computer software, methods, practices, techniques, technical plans, customer lists, pricing techniques and information, marketing plans, financial information, and all other compilations of information that relate to the Company Group's business and its current and prospective customers ("Confidential Information"). Executive recognizes and hereby acknowledges that such Confidential Information is a valuable asset of the Company Group. Executive agrees to safeguard such Confidential Information for the exclusive benefit of the Company Group and agrees that he will not disclose, distribute or publish such Confidential Information to any person, company, business or corporation, provided that Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by Executive or by a person who received such information from Executive in violation of this Agreement). "Company Group" means the Company, and its subsidiaries and affiliates. (ii) Executive agrees that he will promptly and fully disclose to the Company all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by Executive (either solely or jointly with others) and all tangible work product derived therefrom (collectively, the "Ideas") during the period in which Executive is employed under this Agreement. Executive agrees that all such Ideas shall be and remain the sole and exclusive property of the Company. On the request of the Company, Executive shall, during and after the Term of Employment, without charge to the Company but at the expense of the Company, assist the Company in any reasonable way to vest in the Company title to all such Ideas, and to obtain any patents, trademarks or copyrights thereon in all countries throughout the world. In this regard, the parties shall executive and deliver any and all documents that the Company may reasonably request. (b) Use of Confidential Information for Another Employer. Executive acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of business of the Company Group. Accordingly, in order further to protect the Confidential Information of the Company Group from disclosure or use, Executive agrees that, during the period commencing on the Effective Date and ending on the later of (i) the second anniversary of the Effective Date and (ii) the one-year anniversary of the effective date of termination of Executive's employment with the Company (the "Covenant Period"), he will not, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal or another business or firm, (i) directly or indirectly engage in the States of Arizona, California, New Mexico, Nevada, Oregon, Utah and Washington in any Competing Business, or (ii) assist others in engaging in any Competing Business in the manner described in clause (i). "Competing Business" means any business that is competitive with the business of the members of the Company Group (including, without limitation, the wholesale or retail tires or automotive parts businesses). (c) Solicitation of Customers. Executive agrees that during the course of his employment with the Company, he will learn of and be exposed to confidential business information and trade secrets of the Company Group concerning the -7- 8 Company Group's customers. Executive further agrees that, should he seek to divert, take away, or solicit any of the customers of the Company Group with respect to which he has learned and/or been exposed to such confidential information, he will of necessity make use of or disclose such confidential information, to the irreparable detriment of the Company Group. Accordingly, Executive promises that, during the Covenant Period, he will not, directly or indirectly, either for himself or for any other person, firm, company or corporation, divert, take away or solicit, or attempt to divert, take away or solicit any businesses or individuals that were customers of the Company Group during the period in which Executive was employed by the Company. (d) Solicitation of Employees. Executive agrees and acknowledges that the Company Group has expended large sums in the recruitment, training and development of its employees and that the continued employment of such persons by the Company Group constitutes a substantial benefit to the Company Group. Executive further agrees and acknowledges that the business of the Company Group could be severely disrupted and injured in the event that another person, firm, company or corporation were to attempt to induce any or all of the Company Group's employees to terminate their employment with the Company Group. Accordingly, Executive promises and covenants that, during the Covenant Period, he will not, directly or indirectly, either for himself or for any other person, firm, company or corporation, contact or communicate with any employee of any member of the Company Group for the purpose of inducing or otherwise encouraging such employee to terminate his or her employment with the Company, provided, however, that this Section 6(d) shall not preclude the Executive from giving an employment reference at the request of a prospective employer of such employee. (e) Acknowledgment. Executive acknowledges that he is entering into the covenants contained in this Section 6, inter alia, due to his status as a signatory to the Stock Purchase Agreement and his position, prior to the Effective Date, as a stockholder of Speed Merchant. 7. Miscellaneous. This Agreement shall also be subject to the following provisions: (a) 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 Executive and the Company consider the restrictions contained in this Agreement to be reasonable for the purposes of preserving the Company Group'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 Company and Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable -8- 9 against Executive or Company, 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) The parties acknowledge that the Company's damages at law would be an inadequate remedy for the breach by Executive of any provision of Section 6, and agree in the event of such breach that the Company may obtain temporary and permanent injunctive relief restraining Executive 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 in this Agreement shall be construed as prohibiting the Company from pursuing other remedies available at law or equity for such breach or threatened breach of Section 6 of this Agreement. (c) Executive represents and warrants to the Company that he has the authorization, power and right to deliver, execute, and fully perform his obligations under this Agreement in accordance with its terms. The Company has the authorization, power and right to deliver, execute and fully perform its obligations under this Agreement in accordance with its terms. (d) This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by the Company; this Agreement supersedes all prior and existing negotiations and agreements concerning Executive's employment; and this Agreement can only be changed or modified pursuant to a written instrument duly executed by each of the parties hereto. (e) All compensation payable hereunder shall be subject to such withholding taxes and deductions as may be required by law. (f) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company, provided that the Company shall not assign this Agreement to any person or entity other than an affiliate of the Company without the prior written consent of Executive. Except as expressly provided herein, Executive may not sell, transfer, assign, or pledge any of his rights or interests pursuant to this Agreement. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third party, provided that the parties agree that Heafner shall be an intended third party beneficiary of all of the provisions of this Agreement, including, without limitation, the covenants contained in Section 6 and Section 7(h). (g) All notices, requests and other communications to the Company or the executive shall be in writing (including facsimile or similar writing) and shall be given, if to the Executive, to: Arthur C. Soares 16641 Harwood Road -9- 10 Los Gatos, CA 95032 Facsimile: ____________ with a copy to: Jackson Tufts Cole & Black, LLP 60 South Market Street, Suite 1000 San Jose, CA 95110 Attention: Richard Scudellari Facsimile: (408) 998-4889 if to the Company, to: The Speed Merchant, Inc. 1140 Campbell Avenue San Jose, California 95126 Facsimile: (408) 243-9900 Attention: _____________ with a copy to: The J.H. Heafner Company, Inc. 814 East Main Street P.O. Box 837 Lincolnton, North Carolina 28093-0837 Facsimile: (704) 732-6480 Attention: General Counsel or such other address or telecopy as such party may specify for the purpose by notice to the other parties. Each such notice, request or other communication shall be effective (i) if given by facsimile, when such facsimile is transmitted to the telecopy number specified in this Section 7(g) and the appropriate facsimile confirmation is received or (ii) if given by any other means, when delivered at the address specified in this Section 7(g). (h) Executive acknowledges and agrees that the Company shall be entitled, to the extent that the Company's rights of set-off contained in the Stock Purchase Agreement would be ineffective to grant to the Company the practical realization of the benefits intended to be granted thereby, to set off or to apply all or a portion of the unpaid Synergy Bonus (to the extent any remains unpaid) and then the unpaid Stay-Put Bonus against any obligations of Executive to the Company or its affiliates now or hereafter existing under Article V of the Stock Purchase Agreement as set forth therein. In the event the Company intends to set-off any amount payable to the Executive in respect of the Synergy Bonus against any such obligations, the Company shall notify the Executive no later than the date on which such amount is payable. -10- 11 (i) (i) No provision of this Agreement may be waived unless such waiver is in writing and signed by the party against whom the waiver is to be effective. (ii) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (j) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. (k) EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN EXHIBIT C TO THIS AGREEMENT. EACH OF EXECUTIVE AND THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT IN SAN JOSE OR THE SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF SANTA CLARA FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARE NOT GOVERNED BY EXHIBIT B AND WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT, AND EACH OF EXECUTIVE AND THE COMPANY AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF EXECUTIVE AND THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT OR ANY CLAIM THAT A LEGAL PROCEEDING COMMENCED IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (Signature page follows.) -11- 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on its date. EXECUTIVE: THE J. H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ---------------------------------- /s/ ARTHUR C. SOARES Name: - -------------------------------- Title: Arthur C. Soares -12- 13 Exhibit A to Employment Agreement
Executive Incentive Bonus Formula(1) Fiscal 1997 Total Compensation - --------- ------------------------ ------------------------------ Arthur C. Soares 8.5% of Net Income $528,506 Ray C. Barney 1.5% of Net Income $243,678 Elizabeth Roberts 5% of Net Income (pre-tax) $344,180
(1) Bonuses are paid within 45 days after the end of each fiscal quarter. -13- 14 Exhibit B to Employment Agreement SYNERGY BONUS PLAN Executive shall be entitled to be paid a Synergy Bonus pursuant to the terms set forth in this Exhibit B. For purposes of calculating Executive's Synergy Bonus, if any, targeted EBITDA of the Company shall be $6,400,000 for the 12-month period ending on the one-year anniversary of the Effective Date (the "Target Period"). The actual EBITDA calculations shall be made on a pro forma basis without giving effect to any acquisitions or dispositions of assets, stock or businesses by the Company occurring during the Target Period or to the acquisition by Phoenix of the Arizona Business (as defined in the Stock Purchase Agreement), and shall be adjusted to the extent necessary in accordance with Section 3.11(a) of the Stock Purchase Agreement. These pro forma actual EBITDA calculations shall be subject to the approval of the Board acting in good faith. The Company shall pay to Executive the amount, if any, due to Executive as Synergy Bonus promptly upon the Company's receipt of the Company's accountant's opinion with respect to the Company's financial statements for the Target Period (but in no event later than 120 days after the end of such Target Period). The amount of the Synergy Bonus, if any, shall be equal to (i) the sum of (A) 85 percent of 50 percent of the excess of actual EBITDA during the Target Period over targeted EBITDA plus (B) 85 percent of 50 percent of the amount of any net cost savings achieved with respect to members of the Company Group (other than the Company) during the Target Period (1) that are the identifiable result of any potential cost savings described on Schedule I attached to this Exhibit B and (2) that otherwise result from the transactions contemplated by the Stock Purchase Agreement (as determined in good faith by the Board of Directors of Heafner, which determination shall be open to good faith dispute by the Executive in accordance with the arbitration provisions contained in Exhibit C) minus (ii) the amount of any reductions made in accordance with Section 3(b)(iii)(A). For purposes of calculating the Synergy Bonus, (x) the Company shall be accounted for on a stand-alone basis using the accounting principles applied in preparing the Closing Date Balance Sheet (as defined in the Stock Purchase Agreement) and (y) no corporate-level overhead costs incurred by Heafner shall be allocated to the Company. "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization. 15 Schedule I to Synergy Bonus Plan List of Quantifiable Synergies: Distribution Synergy 1/wk vs daily delivery for Winston Reduction of Winston Inventory - Cost of Money Elimination of Winston Distribution Centers Elimination of Winston Wholesale Division Purchasing Synergy Tires, Wheels, Auto Parts, Equipment Other Synergy Performance Software Opportunities (Wheel Wizard) 16 EXHIBIT C TO EMPLOYMENT AGREEMENT DISPUTE RESOLUTION PROCEDURE 1. Scope of Arbitration. The parties to the Employment Agreement will submit to final and binding arbitration as the sole and exclusive remedy for all claims for damages arising out of, involving, or relating to (a) the Employment Agreement or any amendment thereto or (b) the events giving rise to the Employment Agreement, including any and all non-contractual claims for damages related to the Employment Agreement or the events giving rise to it (including claims for fraudulent inducement of contract). Notwithstanding the foregoing, the dispute resolution procedure set forth in this Exhibit B does not apply to claims for injunctive or other equitable relief pursuant to the express terms of the Employment Agreement or any other agreement entered into in connection with the Employment Agreement. 2. Notice of Dispute. Any party shall give the other parties written notice of the existence and nature of any dispute proposed to be arbitrated pursuant to this Exhibit B (the "Written Notice"). Such Written Notice must be served on the other parties as described below. The party serving Written Notice shall be referred to as the "Claiming Party." The party to whom the claims are directed shall be referred to as the "Responding Party." 3. Appointment of Arbitrators. Each party shall appoint one person to serve as an arbitrator within seven days of receipt of the Written Notice. The two arbitrators thus appointed shall within seven days of their appointment together select a third arbitrator with such knowledge and expertise as necessary to serve as chairman of the panel of arbitrators, and this person shall serve as chairman. The three arbitrators shall determine all matters, including the panel's final decision with respect to the claims presented in the arbitration, by majority vote. If the two arbitrators selected by the parties are unable to agree upon the appointment of the third arbitrator within seven days of their appointment, both shall give written notice of such failure to agree to the parties, and if the parties fail to agree upon the selection of such third arbitrator within five days thereafter, such third arbitrator shall be appointed from, and pursuant to the rules for commercial arbitration of, the American Arbitration Association. Prior to appointment, each arbitrator shall agree to conduct such arbitration in strict accordance with the terms of this Exhibit B. 4. Initial Meeting of the Arbitrators. Within seven days of the selection of the third arbitrator, the arbitrators shall conduct an initial meeting with the parties (the "Initial Meeting"). All meetings between the arbitrators, or between the arbitrators and the parties, including the Initial Meeting, may be conducted by telephone, with the exception of the arbitration hearing at which evidence is presented. At the Initial Meeting, the parties and the arbitrators shall agree upon a schedule for the arbitration proceedings, with dates no later than the deadlines provided in Section 7 below. The 17 statement of claim, the response to the statement of claim and counterclaims (if any), and the response to the counterclaims (if any) (collectively, the "Pleadings") shall be submitted to each arbitrator on the date they are served, unless service occurs prior to appointment of all three arbitrators. If service of any of the Pleadings occurs prior to the appointment of any of the arbitrators, copies of any such Pleadings shall be submitted to such arbitrator promptly after such arbitrator's appointment. 5. Conduct of the Arbitration. No more than eleven months shall pass between the selection of the third arbitrator and the release of a decision by the arbitration panel. Any arbitration held pursuant to this Exhibit B shall take place in New York City, New York. The law of the State of New York shall supply the substantive law of the arbitration proceedings, and any claims or counterclaims alleged pursuant to federal law shall be adjudicated as if pled in a federal court in New York. All proceedings, including discovery, depositions, and the arbitration hearings shall be governed by the Federal Rules of Civil Procedure and the Civil Rules of the United States District Court for the Southern District of New York, unless such rules conflict with the provisions of this Exhibit B, in which case the provisions of this Exhibit B control. 6. Motions. The parties may make applications to the panel of arbitrators regarding issues of discovery, procedure and privilege. Any such motions shall be made to and resolved by the arbitrators as soon as practicable. No party shall be permitted to file any motions for dismissal of claims (including dismissal based upon failure to join an indispensable party), or for summary judgment, concerning the claims or counterclaims asserted in any arbitration under this Exhibit B. 7. Schedule of Arbitration Proceedings. At the Initial Meeting, the parties and the arbitrators shall agree to a schedule that conforms with the following deadlines:
Event Deadline Not Later Than ----- ----------------------- Service of a statement of Seven days after service of the Written claim by the Claiming Party Notice Service of response to the 14 days after receipt of the statement of statement of claim and claim counterclaims (if any) by the Responding Party Service of response to Seven days after receipt of counterclaims counterclaims (if any) by (if any) the Claiming Party
18 Commencement of document One day after service of response to the discovery statement of claim Commencement of deposition 75 days after service of the statement of discovery claim Completion of all discovery 200 days after service of the statement of claim Commencement of the 28 days after completion of discovery arbitration hearing Issuance of a decision by 14 days after receipt of the last hearing the arbitrators transcript by the arbitrators. All sessions of the arbitration hearings shall be promptly transcribed and transcripts shall be promptly provided to the parties and the arbitrators.
8. Decision Binding on the Parties. Unless the parties agree otherwise in writing, the arbitrators' decision shall become binding on the parties at such time as the decision is confirmed by order of the Supreme Court of the State of New York, County of New York. The parties hereby irrevocably and unconditionally submit to the jurisdiction of such court for any and all proceedings relating to such confirmation. Any award ordered shall be paid within 10 days of confirmation of the arbitrators' decision. 9. Cost of Arbitration Proceeding. Except as provided herein, the costs incurred by the parties in conjunction with an arbitration proceeding pursuant to this Exhibit B, including attorney's fees, fees paid to experts, and fees for obtaining transcripts shall be paid or reimbursed in accordance with the provisions of Article V of the Employment Agreement. In the event that the arbitrators determine that no party is entitled to indemnification by any other party, then (a) each party shall pay its own expenses, including attorney's fees, fees paid to experts, fees for obtaining transcripts, expenses of witnesses called solely by that party, and all fees charged by the arbitrator appointed by such party and (b) the parties shall each pay fifty percent of all remaining expenses of the arbitration proceeding. 10. Extensions of Time. The parties may jointly agree, in writing, to extend any of the deadlines set forth in Section 7 above. 11. Service of Documents. Any process, notice, memorandum, motion, demand, or other paper or communication, or application to the panel of arbitrators shall be deemed to have been sufficiently served or submitted if (a) personally delivered, or (b) sent by a nationally recognized overnight courier service. EX-10.28 43 EMPLOYMENT AGREEMENT RE RAY C. BARNEY 1 Exhibit 10.28 EMPLOYMENT AGREEMENT dated as of May 20, 1998 (the "Agreement") by and between The Speed Merchant, Inc., a California corporation d/b/a the Speed Merchant and Competition Parts Warehouse (the "Company"), and Ray C. Barney (the "Executive"). INTRODUCTION Executive was instrumental in the growth and development of the Company and is expected to make significant future contributions to the profitability, growth and financial strength of the Company. Simultaneously with the execution of this Agreement, The J.H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), is purchasing 100% of the outstanding shares of capital stock of the Company pursuant to a Stock Purchase Agreement dated as of March 11, 1998 (the "Stock Purchase Agreement") among Heafner and the Company's stockholders. Executive and the Company have agreed that it is in their respective best interests to enter into an agreement providing for the Company's employment of Executive following the consummation of the transactions contemplated in the Stock Purchase Agreement, on the terms and subject to the conditions set forth herein. In consideration of (i) the purchase and sale of the shares of the Company's outstanding capital stock, (ii) the Executive's agreement to provide the services set forth in this Agreement, and (iii) the mutual commitments contained in this Agreement, the Company and Executive agree as follows: 1. Effective Date. This Agreement shall be effective on the date hereof (the "Effective Date"). 2. Duties. The Company hereby agrees to employ Executive, and Executive hereby assumes such employment, as chief operating officer of the Company (with duties equivalent to a Heafner division chief operating officer) for the "Term of Employment" (defined below). In this capacity, Executive shall perform such duties consistent with the duties of a senior executive of the Company as the Board of Directors of the Company (the "Board") shall from time to time determine, which duties shall, during the period beginning on the Effective Date and ending on the first-year anniversary of the Effective Date, be consistent with the intentions expressed in the Stock 2 Purchase Agreement. The duties to be performed by Executive shall be performed primarily in California, subject to reasonable travel requirements on behalf of the Company. Executive shall devote substantially all of his working time and attention to such duties. Executive in each of these capacities agrees to use his best efforts during the Term of Employment to protect, encourage and promote the interests of the Company and its affiliates and to aid in the integration of the Company's business and operations with those of Heafner and its affiliates. Executive shall report to the Chief Executive Officer of Heafner or such other person as the Board may designate from time to time. As used herein, the phrase "Term of Employment" shall mean the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. 3. Compensation. (a) Base Salary. During the Term of Employment, the Company agrees to pay to Executive a salary at the rate of $145,385 per annum, payable in bi-weekly installments or otherwise in accordance with the normal payroll procedures of the Company. Such annual salary shall be subject to annual review and may be adjusted upward from time to time in the sole discretion of the Board. The Executive's annual salary, including any periodic adjustments made from time to time, shall be referred to in this Agreement as "Base Salary." (b) Bonuses. (i) Executive shall be entitled to receive from the Company a bonus (the "Stay Put Bonus") in the amount of $600,000, payable in two installments as follows: $300,000 on the one-year anniversary of the Effective Date, $200,000 on the two-year anniversary of the Effective Date and $100,000 on the three-year anniversary of the Effective Date. The Company shall pay Executive interest on the unpaid balance of the Stay Put Bonus at a rate of 8% per annum for the period from and including the Effective Date to but excluding the date payment is made under this Section 3(b)(i). Such interest payments shall be made annually at the same time as the payment of the annual installment of the Stay Put Bonus and, for purposes of this Agreement, shall constitute a part of the Stay Put Bonus. (ii) Executive shall be entitled to participate in Heafner's annual executive bonus plan or any similar or successor annual bonus plan of Heafner and to receive an annual performance bonus (the "Performance Bonus") from Heafner in accordance with the terms thereof and as approved by the Board of Directors of Heafner. (iii) Executive shall be entitled to a bonus (the "Incentive Bonus") during the Term of Employment as follows: (A) The Incentive Bonus for the 12-month period ending on the first anniversary of the Effective Date shall be in an amount to be calculated by the Company based on the formula set forth in Exhibit A, provided, that in no event shall such Incentive Bonus be less than $103,678. In the event that the formula set forth in Exhibit A yields an amount in excess of $103,678, then any Synergy -2- 3 Bonus payable to the Executive shall be reduced by the amount of such excess. Such bonus shall be paid in quarterly installments commencing on the date three months after the Effective Date and ending on the first-year anniversary of the Effective Date. It is understood and agreed that, if the quarterly figures necessary to calculate the Executive's Incentive Bonus for the period in which the Effective Date falls or any prior period are not yet available as of the Effective Date, the Executive's Incentive Bonus for such period shall be calculated on the basis of estimated quarterly figures and subsequent Incentive Bonus payments shall be adjusted to the extent necessary based on actual quarterly figures for the period in question. (B) The Incentive Bonus for the 12-month period ending on the second anniversary of the Effective Date shall be in an amount determined pursuant to a formula agreed to in advance by the Board and Executive. Such bonus shall be paid in accordance with normal bonus practices adopted by the Company from time to time. (iv) On the one-year anniversary of the Effective Date, Executive may be entitled to an incentive bonus (the "Synergy Bonus") as more fully described in Exhibit B to this Agreement. Such bonus shall be paid in accordance with normal bonus payment practices adopted by the Company from time to time, but shall no in event be paid later than 30 days from and after the date of calculation. Any Synergy Bonus payable to the Executive shall be payable in cash or, at the election of the Executive, (x) in shares of common stock of Heafner having a fair market value equal to the amount of the Synergy Bonus or (y) options or warrants to acquire the number of shares of common stock of Heafner referred to in clause (x). (c) Equity Incentives. During the Term of Employment, Executive shall be eligible to participate in the J.H. Heafner Company 1997 Stock Option (the "Stock Plan") and to receive grants of options to purchase common stock, par value $0.01 per share, of Heafner. Such grants may be awarded from time to time pursuant to the Stock Plan in the sole discretion of the Compensation Committee of the Board of Directors of Heafner. 4. Benefits. Unless Executive's employment is terminated earlier pursuant to Section 5, during the Term of Employment: (a) Executive shall be eligible to participate in group health and welfare insurance programs available to senior executives of Heafner with similar responsibilities from time to time. (b) Executive shall be eligible to participate in life and long-term disability insurance programs, pension and retirement programs, incentive -3- 4 compensation programs, and other fringe benefit programs, if any, available to senior executives of Heafner with similar responsibilities from time to time. (c) Executive shall be entitled to four weeks vacation with pay, subject to such increases (but not decreases) as are adopted by the Company from time to time for senior executives of Heafner with similar responsibilities. (d) The Company will reimburse Executive for reasonable business expenses incurred in performing Executive's duties and promoting the business of the Company and its affiliates, including, but not limited to, reasonable entertainment expenses, and travel and lodging expenses, following presentation of documentation in accordance with Heafner's business expense policies. 5. Termination of Employment. (a) Termination Without Cause. Notwithstanding anything to the contrary in this Agreement, whether express or implied, the Company may at any time terminate Executive's employment for any reason other than Cause (defined below) by giving Executive at least 60 days' prior written notice of the effective date of termination. In the event of such termination, Executive shall be entitled to receive (i) his Base Salary through the last day of the Term of Employment, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, payable in accordance with Section 3(b)(i) above, (iii) his Incentive Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iii) above, (iv) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (v) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (b) Termination for Cause. The Company shall have the right to terminate Executive's employment at any time for Cause by giving Executive written notice of the effective date of termination (which effective date may be the date of such notice). For purposes of this Agreement, "Cause" shall mean (i) a proven or admitted act of fraud, misappropriation or embezzlement by the Executive that is detrimental to the Company or (ii) the Executive's conviction of or plea of guilty or nolo contendere to a felony. The Company shall have no further obligation hereunder from and after the effective date of termination for Cause (other than (i) to make payment of the Executive's Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (ii) to make payment of any accrued but unpaid Base Salary to the effective date of termination and accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years ending prior to the effective date of termination). The Executive shall continue to be -4- 5 bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (c) Termination on Account of Death. In the event of Executive's death while in the employ of the Company, Executive's employment by the Company shall be deemed to have been terminated as of the date of death, and the Company shall pay to the Executive's designated beneficiaries (i) his Base Salary through the date of Executive's death, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, (iii) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (iv) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. (d) Voluntary Termination by Executive. Executive shall have the right to terminate Executive's employment at any time for any reason upon 60 days' written notice to the Company. In the event that Executive's employment with the Company is voluntarily terminated by Executive, the Company shall have no further obligation hereunder from and after the effective date of termination of Executive's voluntary termination (other than (i) to make payment of the Executive's Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (ii) to make payment of any accrued but unpaid Base Salary to the effective date of termination and accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years ending prior to the effective date of termination). The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (e) Termination on Account of Disability. (i) During any period that Executive fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, he shall receive (1) all compensation payable to him under the Company's disability plan or program or other similar plan during such period until this Agreement is terminated as hereinafter provided in this Section 5(e), (2) that portion of his Base Salary equal to the positive difference between (A) his Base Salary at the rate in effect at the commencement of any such period and (B) the compensation payable to him under Section 5(e)(1) above, (3) his Stay Put Bonus, if any, payable during such period, (4) his Synergy Bonus, if any, payable during such period, and (5) payment of all accrued but unpaid Performance Bonus or Incentive Bonus in respect of fiscal years or periods ended prior to the commencement of any such period. (ii) If, as a result of Executive's incapacity due to physical or mental illness (as determined in good faith by a physician acceptable to the Company and the Executive), Executive shall have been unable to perform the essential functions of his position with the Company for 90 days during any twelve (12) month period or if a physician acceptable to the Company advises the Company that it is likely that Executive will be unable to perform the essential functions of his position for 90 days during the -5- 6 succeeding twelve (12) month period, his employment may be terminated for "Disability" on 20 days' prior written notice by the Company to the Executive. In the event that Executive's employment shall be so terminated, the Company shall pay to Executive or to the Executive's designated beneficiaries (1) his Stay Put Bonus through the last day of the Term of Employment, payable in accordance with Section 3(b)(i) above, (2) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (3) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. In addition, Executive shall be entitled to receive benefits under the Company's retirement, insurance, and other compensation and benefit plans and programs then in effect, in accordance with the terms of such programs. The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). (f) Termination by Executive for Good Reason. Executive shall have the right to terminate Executive's employment at any time for Good Reason by giving the Company 60 days advance written notice of the effective date of termination (which effective date may be the date of such notice). For purposes of this Agreement, "Good Reason" shall mean: (i) the material breach by the Company of a material term of this Agreement and, if such breach is capable of being cured, the failure to cure such breach within 30 days of receipt of notice of such breach; (ii) the Company's requiring Executive's ongoing and regular services to be performed at a location other than in Northern California, except for travel reasonably required in the performance of Executive's responsibilities; (iii) the reduction by the Company of the Executive's Base Salary during the Term of Employment; (iv) the modification of the position and responsibilities of the Executive in such a manner as would be inconsistent with those of a president or chief executive officer of a corporate division; or (v) the inability of the Executive and the Company to agree in good faith (no more than 30 days before the first-year anniversary of the Effective Date) on an Incentive Bonus arrangement for the twelve-month period commencing on the first-year anniversary of the Effective Date that is satisfactory to the Executive. In the event of such termination, Executive shall be entitled to receive (i) his Base Salary through the last day of the Term of Employment, payable in accordance with Section 3(a) above, (ii) his Stay Put Bonus through the last day of the Term of Employment, payable -6- 7 in accordance with Section 3(b)(i) above, (iii) his Incentive Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iii) above, (iv) his Synergy Bonus through the 12-month period ending on the first-year anniversary of the Effective Date, payable in accordance with Section 3(b)(iv) above, and (v) any accrued but unpaid Performance Bonus or Incentive Bonus in respect of a fiscal year ended prior to the effective date of termination. The Executive shall continue to be bound by provisions of Section 6 at all times during the Covenant Period (as defined in Section 6). 6. Confidential Information; Non-Competition. (a) Confidential Information. (i) Executive recognizes and hereby acknowledges that, as a senior executive of the Company, he will learn of, and be exposed to, confidential business information concerning the Company Group's information, ideas, know how, trade secrets, processes, computer software, methods, practices, techniques, technical plans, customer lists, pricing techniques and information, marketing plans, financial information, and all other compilations of information that relate to the Company Group's business and its current and prospective customers ("Confidential Information"). Executive recognizes and hereby acknowledges that such Confidential Information is a valuable asset of the Company Group. Executive agrees to safeguard such Confidential Information for the exclusive benefit of the Company Group and agrees that he will not disclose, distribute or publish such Confidential Information to any person, company, business or corporation, provided that Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by Executive or by a person who received such information from Executive in violation of this Agreement). "Company Group" means the Company, Heafner and their respective subsidiaries and affiliates. (ii) Executive agrees that he will promptly and fully disclose to the Company all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by Executive (either solely or jointly with others) and all tangible work product derived therefrom (collectively, the "Ideas") during the period in which Executive is employed under this Agreement. Executive agrees that all such Ideas shall be and remain the sole and exclusive property of the Company. On the request of the Company, Executive shall, during and after the Term of Employment, without charge to the Company but at the expense of the Company, assist the Company in any reasonable way to vest in the Company title to all such Ideas, and to obtain any patents, trademarks or copyrights thereon in all countries throughout the world. In this regard, the parties shall executive and deliver any and all documents that the Company may reasonably request. (b) Use of Confidential Information for Another Employer. Executive acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of business of the Company Group. -7- 8 Accordingly, in order further to protect the Confidential Information of the Company Group from disclosure or use, Executive agrees that, during the period commencing on the Effective Date and ending on the later of (i) the third anniversary of the Effective Date and (ii) the one-year anniversary of the effective date of termination of Executive's employment with the Company (the "Covenant Period"), he will not, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal or another business or firm, (i) directly or indirectly engage in the States of Arizona, California, New Mexico, Nevada, Oregon, Utah and Washington in any Competing Business, or (ii) assist others in engaging in any Competing Business in the manner described in clause (i). "Competing Business" means any business that is competitive with the business of the members of the Company Group (including, without limitation, the wholesale or retail tires or automotive parts businesses). (c) Solicitation of Customers. Executive agrees that during the course of his employment with the Company, he will learn of and be exposed to confidential business information and trade secrets of the Company Group concerning the Company Group's customers. Executive further agrees that, should he seek to divert, take away, or solicit any of the customers of the Company Group with respect to which he has learned and/or been exposed to such confidential information, he will of necessity make use of or disclose such confidential information, to the irreparable detriment of the Company Group. Accordingly, Executive promises that, during the Covenant Period, he will not, directly or indirectly, either for himself or for any other person, firm, company or corporation, divert, take away or solicit, or attempt to divert, take away or solicit any businesses or individuals that were customers of the Company Group during the period in which Executive was employed by the Company. (d) Solicitation of Employees. Executive agrees and acknowledges that the Company Group has expended large sums in the recruitment, training and development of its employees and that the continued employment of such persons by the Company Group constitutes a substantial benefit to the Company Group. Executive further agrees and acknowledges that the business of the Company Group could be severely disrupted and injured in the event that another person, firm, company or corporation were to attempt to induce any or all of the Company Group's employees to terminate their employment with the Company Group. Accordingly, Executive promises and covenants that, during the Covenant Period, he will not, directly or indirectly, either for himself or for any other person, firm, company or corporation, contact or communicate with any employee of any member of the Company Group for the purpose of inducing or otherwise encouraging such employee to terminate his or her employment with the Company, provided, however, that this Section 6(d) shall not preclude the Executive from giving an employment reference at the request of a prospective employer of such employee. (e) Acknowledgment. Executive acknowledges that he is entering into the covenants contained in this Section 6, inter alia, due to his status as a -8- 9 signatory to the Stock Purchase Agreement and his position, prior to the Effective Date, as a stockholder of the Company. 7. Miscellaneous. This Agreement shall also be subject to the following provisions: (a) 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 Executive and the Company consider the restrictions contained in this Agreement to be reasonable for the purposes of preserving the Company Group'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 Company and Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against Executive or Company, 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) The parties acknowledge that the Company's damages at law would be an inadequate remedy for the breach by Executive of any provision of Section 6, and agree in the event of such breach that the Company may obtain temporary and permanent injunctive relief restraining Executive 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 in this Agreement shall be construed as prohibiting the Company from pursuing other remedies available at law or equity for such breach or threatened breach of Section 6 of this Agreement. (c) Executive represents and warrants to the Company that he has the authorization, power and right to deliver, execute, and fully perform his obligations under this Agreement in accordance with its terms. The Company has the authorization, power and right to deliver, execute and fully perform its obligations under this Agreement in accordance with its terms. (d) This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by the Company; this Agreement supersedes all prior and existing negotiations and agreements concerning Executive's employment; and this Agreement can only be changed or modified pursuant to a written instrument duly executed by each of the parties hereto. -9- 10 (e) All compensation payable hereunder shall be subject to such withholding taxes and deductions as may be required by law. (f) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company, provided that the Company shall not assign this Agreement to any person or entity other than an affiliate of the Company without the prior written consent of Executive. Except as expressly provided herein, Executive may not sell, transfer, assign, or pledge any of his rights or interests pursuant to this Agreement. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third party, provided that the parties agree that Heafner shall be an intended third party beneficiary of all of the provisions of this Agreement, including, without limitation, the covenants contained in Section 6 and Section 7(h). (g) All notices, requests and other communications to the Company or the executive shall be in writing (including facsimile or similar writing) and shall be given, if to the Executive, to: Ray C. Barney 216 Fieldcrest Court Danville, CA 94506 Facsimile: ____________ with a copy to: Jackson Tufts Cole & Black, LLP 60 South Market Street, Suite 1000 San Jose, CA 95110 Attention: Richard Scudellari Facsimile: (408) 998-4889 if to the Company, to: The Speed Merchant, Inc. 1140 Campbell Avenue San Jose, California 95126 Facsimile: _____________ Attention: _____________ with a copy to: The J.H. Heafner Company, Inc. 814 East Main Street -10- 11 P.O. Box 837 Lincolnton, North Carolina 28093-0837 Facsimile: (704) 732-6480 Attention: General Counsel or such other address or telecopy as such party may specify for the purpose by notice to the other parties. Each such notice, request or other communication shall be effective (i) if given by facsimile, when such facsimile is transmitted to the telecopy number specified in this Section 7(g) and the appropriate facsimile confirmation is received or (ii) if given by any other means, when delivered at the address specified in this Section 7(g). (h) Executive acknowledges and agrees that the Company shall be entitled, at Heafner's request and to the extent that Heafner's rights of set-off contained in the Stock Purchase Agreement would be ineffective to grant to Heafner the practical realization of the benefits intended to be granted thereby, to set off or to apply all or a portion of the unpaid Synergy Bonus (to the extent any remains unpaid) and then the unpaid Stay-Put Bonus against any obligations of Executive to Heafner or its affiliates now or hereafter existing under Article V of the Stock Purchase Agreement as set forth therein. In the event the Company intends to set-off any amount payable to the Executive in respect of the Synergy Bonus against any such obligations, the Company shall notify the Executive no later than the date on which such amount is payable. (i) (i) No provision of this Agreement may be waived unless such waiver is in writing and signed by the party against whom the waiver is to be effective. (ii) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (j) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. (k) EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN EXHIBIT C TO THIS AGREEMENT. EACH OF EXECUTIVE AND THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT IN SAN JOSE OR THE SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF SANTA CLARA FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARE NOT GOVERNED BY EXHIBIT B AND WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT, AND EACH OF EXECUTIVE AND THE COMPANY AGREES NOT TO COMMENCE ANY -11- 12 LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF EXECUTIVE AND THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT OR ANY CLAIM THAT A LEGAL PROCEEDING COMMENCED IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (Signature page follows.) -12- 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on its date. EXECUTIVE: THE SPEED MERCHANT, INC. By: /s/ J. MICHAEL GAITHER ------------------------------ /s/ RAY C. BARNEY Name: - ----------------------------- Title: Ray C. Barney -13- 14 Exhibit A to Employment Agreement
Executive Incentive BonusFormula(1) Fiscal 1997 Total Compensation - --------- ----------------------- ------------------------------ Arthur C. Soares 8.5% of Net Income $528,506 Ray C. Barney 1.5% of Net Income $243,678 Elizabeth Roberts 5% of Net Income (pre-tax) $344,180
(1) Bonuses are paid within 45 days after the end of each fiscal quarter. -14- 15 Exhibit B to Employment Agreement SYNERGY BONUS PLAN Executive shall be entitled to be paid a Synergy Bonus pursuant to the terms set forth in this Exhibit B. For purposes of calculating Executive's Synergy Bonus, if any, targeted EBITDA of the Company shall be $6,400,000 for the 12-month period ending on the one-year anniversary of the Effective Date (the "Target Period"). The actual EBITDA calculations shall be made on a pro forma basis without giving effect to any acquisitions or dispositions of assets, stock or businesses by the Company occurring during the Target Period or to the acquisition by Phoenix of the Arizona Business (as defined in the Stock Purchase Agreement), and shall be adjusted to the extent necessary in accordance with Section 3.11(a) of the Stock Purchase Agreement. These pro forma actual EBITDA calculations shall be subject to the approval of the Board acting in good faith. The Company shall pay to Executive the amount, if any, due to Executive as Synergy Bonus promptly upon the Company's receipt of the Company's accountant's opinion with respect to the Company's financial statements for the Target Period (but in no event later than 120 days after the end of such Target Period). The amount of the Synergy Bonus, if any, shall be equal to (i) the sum of (A) 85 percent of 50 percent of the excess of actual EBITDA during the Target Period over targeted EBITDA plus (B) 85 percent of 50 percent of the amount of any net cost savings achieved with respect to members of the Company Group (other than the Company) during the Target Period (1) that are the identifiable result of any potential cost savings described on Schedule I attached to this Exhibit B and (2) that otherwise result from the transactions contemplated by the Stock Purchase Agreement (as determined in good faith by the Board of Directors of Heafner, which determination shall be open to good faith dispute by the Executive in accordance with the arbitration provisions contained in Exhibit C) minus (ii) the amount of any reductions made in accordance with Section 3(b)(iii)(A). For purposes of calculating the Synergy Bonus, (x) the Company shall be accounted for on a stand-alone basis using the accounting principles applied in preparing the Closing Date Balance Sheet (as defined in the Stock Purchase Agreement) and (y) no corporate-level overhead costs incurred by Heafner shall be allocated to the Company. "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization. 16 Schedule I to Synergy Bonus Plan List of Quantifiable Synergies: Distribution Synergy 1/wk vs daily delivery for Winston Reduction of Winston Inventory - Cost of Money Elimination of Winston Distribution Centers Elimination of Winston Wholesale Division Purchasing Synergy Tires, Wheels, Auto Parts, Equipment Other Synergy Performance Software Opportunities (Wheel Wizard) 17 EXHIBIT C TO EMPLOYMENT AGREEMENT DISPUTE RESOLUTION PROCEDURE 1. Scope of Arbitration. The parties to the Employment Agreement will submit to final and binding arbitration as the sole and exclusive remedy for all claims for damages arising out of, involving, or relating to (a) the Employment Agreement or any amendment thereto or (b) the events giving rise to the Employment Agreement, including any and all non-contractual claims for damages related to the Employment Agreement or the events giving rise to it (including claims for fraudulent inducement of contract). Notwithstanding the foregoing, the dispute resolution procedure set forth in this Exhibit B does not apply to claims for injunctive or other equitable relief pursuant to the express terms of the Employment Agreement or any other agreement entered into in connection with the Employment Agreement. 2. Notice of Dispute. Any party shall give the other parties written notice of the existence and nature of any dispute proposed to be arbitrated pursuant to this Exhibit B (the "Written Notice"). Such Written Notice must be served on the other parties as described below. The party serving Written Notice shall be referred to as the "Claiming Party." The party to whom the claims are directed shall be referred to as the "Responding Party." 3. Appointment of Arbitrators. Each party shall appoint one person to serve as an arbitrator within seven days of receipt of the Written Notice. The two arbitrators thus appointed shall within seven days of their appointment together select a third arbitrator with such knowledge and expertise as necessary to serve as chairman of the panel of arbitrators, and this person shall serve as chairman. The three arbitrators shall determine all matters, including the panel's final decision with respect to the claims presented in the arbitration, by majority vote. If the two arbitrators selected by the parties are unable to agree upon the appointment of the third arbitrator within seven days of their appointment, both shall give written notice of such failure to agree to the parties, and if the parties fail to agree upon the selection of such third arbitrator within five days thereafter, such third arbitrator shall be appointed from, and pursuant to the rules for commercial arbitration of, the American Arbitration Association. Prior to appointment, each arbitrator shall agree to conduct such arbitration in strict accordance with the terms of this Exhibit B. 4. Initial Meeting of the Arbitrators. Within seven days of the selection of the third arbitrator, the arbitrators shall conduct an initial meeting with the parties (the "Initial Meeting"). All meetings between the arbitrators, or between the arbitrators and the parties, including the Initial Meeting, may be conducted by telephone, with the exception of the arbitration hearing at which evidence is presented. At the Initial Meeting, the parties and the arbitrators shall agree upon a schedule for the arbitration proceedings, with dates no later than the deadlines provided in Section 7 below. The 18 statement of claim, the response to the statement of claim and counterclaims (if any), and the response to the counterclaims (if any) (collectively, the "Pleadings") shall be submitted to each arbitrator on the date they are served, unless service occurs prior to appointment of all three arbitrators. If service of any of the Pleadings occurs prior to the appointment of any of the arbitrators, copies of any such Pleadings shall be submitted to such arbitrator promptly after such arbitrator's appointment. 5. Conduct of the Arbitration. No more than eleven months shall pass between the selection of the third arbitrator and the release of a decision by the arbitration panel. Any arbitration held pursuant to this Exhibit B shall take place in New York City, New York. The law of the State of New York shall supply the substantive law of the arbitration proceedings, and any claims or counterclaims alleged pursuant to federal law shall be adjudicated as if pled in a federal court in New York. All proceedings, including discovery, depositions, and the arbitration hearings shall be governed by the Federal Rules of Civil Procedure and the Civil Rules of the United States District Court for the Southern District of New York, unless such rules conflict with the provisions of this Exhibit B, in which case the provisions of this Exhibit B control. 6. Motions. The parties may make applications to the panel of arbitrators regarding issues of discovery, procedure and privilege. Any such motions shall be made to and resolved by the arbitrators as soon as practicable. No party shall be permitted to file any motions for dismissal of claims (including dismissal based upon failure to join an indispensable party), or for summary judgment, concerning the claims or counterclaims asserted in any arbitration under this Exhibit B. 7. Schedule of Arbitration Proceedings. At the Initial Meeting, the parties and the arbitrators shall agree to a schedule that conforms with the following deadlines:
Event Deadline Not Later Than ----- ----------------------- Service of a statement of Seven days after service of the Written Notice claim by the Claiming Party Service of response to the 14 days after receipt of the statement of statement of claim and claim counterclaims (if any) by the Responding Party Service of response to Seven days after receipt of counterclaims (if counterclaims (if any) by any) the Claiming Party
19 Commencement of document One day after service of response to the discovery statement of claim Commencement of deposition 75 days after service of the statement of discovery claim Completion of all discovery 200 days after service of the statement of claim Commencement of the 28 days after completion of discovery arbitration hearing Issuance of a decision by 14 days after receipt of the last hearing the arbitrators transcript by the arbitrators. All sessions of the arbitration hearings shall be promptly transcribed and transcripts shall be promptly provided to the parties and the arbitrators.
8. Decision Binding on the Parties. Unless the parties agree otherwise in writing, the arbitrators' decision shall become binding on the parties at such time as the decision is confirmed by order of the Supreme Court of the State of New York, County of New York. The parties hereby irrevocably and unconditionally submit to the jurisdiction of such court for any and all proceedings relating to such confirmation. Any award ordered shall be paid within 10 days of confirmation of the arbitrators' decision. 9. Cost of Arbitration Proceeding. Except as provided herein, the costs incurred by the parties in conjunction with an arbitration proceeding pursuant to this Exhibit B, including attorney's fees, fees paid to experts, and fees for obtaining transcripts shall be paid or reimbursed in accordance with the provisions of Article V of the Employment Agreement. In the event that the arbitrators determine that no party is entitled to indemnification by any other party, then (a) each party shall pay its own expenses, including attorney's fees, fees paid to experts, fees for obtaining transcripts, expenses of witnesses called solely by that party, and all fees charged by the arbitrator appointed by such party and (b) the parties shall each pay fifty percent of all remaining expenses of the arbitration proceeding. 10. Extensions of Time. The parties may jointly agree, in writing, to extend any of the deadlines set forth in Section 7 above. 11. Service of Documents. Any process, notice, memorandum, motion, demand, or other paper or communication, or application to the panel of arbitrators shall be deemed to have been sufficiently served or submitted if (a) personally delivered, or (b) sent by a nationally recognized overnight courier service. EX-10.29 44 LEASE AGREEMENT AS AMENDED 1 EXHIBIT 10.29 [J.H. HEAFNER LETTERHEAD] August 1, 1997 Albert C. Gaither Ann H. Gaither 841 Woodson Road Newton, NC 28658 RE: Lease dated October 1, 1992 by and between Carolyn Heafner, Ann H. Gaither and Albert C. Gaither and The J.H. Heafner Company, Inc. Dear Mr. & Mrs. Gaither: As you know the above-referenced Lease for the main offices of the company expires on September 30th. Pursuant to paragraph 2 of the lease, the company would like to extend the term for another five years. The expiration date of the lease is now September 30, 2002. Sincerely, /s/ J. Michael Gaither ---------------------- J. Michael Gaither Sr. Vice President & General Counsel JMG/abw 2 [J.H.HEAFNER LETTERHEAD] August 1, 1997 Carolyn Heafner Williams 380 Broad Ave., Unit 2-G Englewood, NJ 07631 RE: Lease dated October 1, 1992 by and between Carolyn Heafner, Ann H. Gaither and Albert C. Gaither and The J.H. Heafner Company, Inc. Dear Mrs. Williams: As you know the above-referenced Lease for the main offices of the company expires on September 30th. Pursuant to paragraph 2 of the lease, the company would like to extend the term for another five years. The expiration date of the lease is now September 30, 2002. Sincerely, /s/ J. Michael Gaither ---------------------- J. Michael Gaither Sr. Vice President & General Counsel JMG/abw 3 STATE OF NORTH CAROLINA) ) LEASE AGREEMENT CITY OF LINCOLN ) THIS LEASE, made and entered into this the 1st day of October, 1992, by and between CAROLYN HEAFNER, ANN H. GAITHER, and Husband, ALBERT C. GAITHER, hereinafter referred to as "Lessors", and THE J. H. HEAFNER COMPANY, INC., a North Carolina corporation, having its principal place of business in Lincoln County, North Carolina, hereinafter referred to as "Lessee": W I T N E S S E T H: Subject to the terms and conditions hereinafter set forth, said Lessor does hereby let and lease unto said Lessee and said Lessee does hereby accept from said Lessor a certain parcel of land together with buildings and other improvements thereon situated and lying and being in the City of Lincolnton, State of North Carolina, and more particularly described on attached Schedule A, attached hereto. The terms and conditions referred to are as follows: 1. This lease shall begin as of the 1st day of October, 1992 and unless sooner terminated as herein provided, shall exist and continue until the 30th day of September, 1997. 2. Provided all installments of rental theretofore due have been paid and all other conditions of this lease have been properly complied with by the Lessee, the Lessee may, at is option, extend this lease for an additional three (3) terms of five (5) years each by giving the Lessor written notice of its intention to do so not later than sixty (60) days prior to the end of the initial term and prior to the end of each extension thereafter. In the event of such extension, all of the terms and conditions as herein set out shall continue in full force and effect during said extension. 3. The Lessee shall pay the sum of Eighty-seven Thousand and No/100 Dollars ($87,000.00) per year as rental for the demised premises which rental shall be hereinafter referred to as "minimum rent" and shall be payable in twelve (12) equal and consecutive monthly installments of Seven Thousand Two Hundred Fifty and No/100 Dollars ($7,250.00) due and payable on the first day of each calendar month, commencing with the first day of October, 1992. From and after the first year of the lease, the rental shall be adjusted as follows: The rental shall be the minimum rent plus a cost of living increase thereon determined by multiplying the minimum rent by a fraction, the denominator of which is the Consumer Price 1 4 Index for Urban Wage Earners and Clerical Workers in U.S. Cities Average, all items as published by the Bureau of Labor Statistics, U.S. Department of Labor, for September, 1987, and the numerator of which is the said Consumer Price Index for the month of September of the next succeeding annual lease period. The Lessor shall notify the Lessee of the amount of the cost of living adjustment and the total rent due for each annual lease period. Under no circumstances shall the total rent be less than the minimum rent as set forth above. All rents shall be absolutely net to the Lessor, so that this Lease, shall, except as hereinafter provided to the contrary, yield net to the Lessor the rent to be paid in each year during the term of the Lease. Accordingly, all costs, expenses, and obligations of every kind or nature whatsoever relating to the demised premises, or any improvements thereon, which may arise or become due during the term of this Lease, shall be paid by the Lessee, and the Lessor shall be indemnified and saved harmless by the Lessee from and against same. 4. The Lessee shall pay, before any fine, penalty, interest, or costs may be added, or become due or be imposed for non-payment thereof, all taxes, assessments, water and sewer rents, rates and charges, transit taxes, charges for public utilities, excises, levies, licenses, and permit fees and other governmental charges, general and special, ordinary and extraordinary, unforeseen and foreseen, or any kind and nature, whatsoever, which at any time during the term of this Lease may be assessed, levied, confirmed, imposed upon, or grow and become due and payable out of or in respect of, or become a lien on the demised premises, or any improvements thereon, or any part thereof or any appurtenances thereto, or otherwise arising out of the rent and income received by the Lessees from sub-tenants, any use or occupation of the demised premises and franchises as may be appurtenant to the use of the demised premises, or any document (to which the Lessee is a party) creating or transferring an interest or estate in the demised premises. 5. The Lessee shall pay the taxes and other charges as enumerated in this article and should deliver official receipts evidencing such payment to the Lessors, which payment of taxes shall be made and the receipts delivered at least thirty (30) days before the tax itself would become delinquent, in accordance with the law then in force governing the payment of such tax or taxes. If however, the Lessee desires to contest the validity of any tax or tax claim, the Lessee may do so without being in default hereunder, provided the Lessee gives the Lessor notice of the Lessee's intention to do so and furnishes the Lessor with a surety made by a surety company qualified to do business in the State of 2 5 North Carolina. If the Lessee shall fail, refuse, or neglect to make any of the payments required in this article, then the Lessor may pay the same, and the amount or amounts of money so paid, including reasonable attorney fees and expenses which might have been reasonably incurred because of or in connection with those payments, together with interest on all such amounts at the rate of ten percent (10%) per annum, shall be repaid by the Lessee to the Lessor, upon the demand of the Lessor and the payment thereof may be collected or enforced by the Lessor in the same manner as though such amount was an installment of rent specifically required by the term of this Lease to be paid by the Lessee to the Lessor, upon the day when the Lessor demands repayment thereof or reimbursement therefore of and from the Lessee; but the election of the Lessor to pay such taxes shall not waive the default thus committed by the Lessee. 6. During the entire term of this Lease, the Lessee will indemnify and save harmless the Lessor against any and all claims, debts, demands, or obligations which may be made against the Lessor or against the Lessor's title and the premises, arising out of or in connection with any alleged act or admission of the Lessee or any person claiming under, by or through the Lessee; and if it becomes necessary for the Lessor to defend any actions seeking to impose such liability, the Lessee will pay the Lessor all costs of court and attorneys fees incurred by the Lessor in effecting such defense in addition to any other sums which the Lessor may be called upon to pay by reason of the entry of a Judgment against the Lessor in the litigation which such claim is asserted. 7. From and after the time when the Lease commences, the Lessee will keep insured all buildings and improvements upon said premises against all loss or damage by fire and windstorm, together with extended coverage which said insurance will be maintained in an amount which will be sufficient to prevent any party in interest from being or becoming a co-insurer on any part of the risk which amounts shall not be less than eighty percent (80%) of the full insurable value and all of such policies of insurance shall include the name of the Lessor as one of the parties insured and shall fully protect both the Lessor and the Lessee as their respective interests may appear. The Lessee shall provide such coverage for the Lessor's interest that shall not fail, in any case, below the sum of FOUR HUNDRED THOUSAND DOLLARS ($400,000.00). The originals of all such policies shall be delivered to the Lessor by the Lessee along with receipted bills evidencing the fact that the premiums therefore are paid. The Lessor assumes no obligation whatsoever to repair or replace any building on the demised premises which is damaged or destroyed by fire or other casualty, but the Lessee may at its own option and expense, cause said building to be insured and in case of damage or destruction use all sums collected from such insurance in repairing or replacing said buildings. This coverage shall be in addition to said coverage for the Lessor as set forth above. 3 6 8. It is understood and agreed that the Lessee accepts said premises in the physical condition in which the same now are and further that during the continuance of this Lease the Lessee will keep in good state of repair and in first class condition any and all buildings, furnishing, fixtures, and equipment which are brought or constructed or placed upon the demised premises by the Lessee nor will the Lessee sell or permit any strip, waste or neglect of any building or other property to be committed, and the Lessee will repair or replace any renovate such property as often as it may be necessary to keep the buildings and other property which is the subject matter of this Lease in first class repair and condition. Further, it is understood and agreed that the Lessor shall be under no obligation whatsoever to make any repair or replacement to said premises during the terms of this Lease. In the event any governing body should require alternations to the demised premises to comply with local, state, or federal law or regulations, the Lessee shall see that such alterations are made at its own expense, holding Lessor harmless from such expense. If, at any time, activities by the Lessee shall place the demised premises in violation of any local, state, or federal laws, ordinances, statutes, or regulations, then the Lessee shall take such steps to bring the use of the premises into full conformity within thirty (30) days of notification or be in default under this Lease. 9. If at any time a default should be made by the Lessee in the payment of any rent upon any day such rent becomes due and payable, or if the Lessee shall fail to perform any of the other covenants of this Lease by it to be kept and performed, then in any such event, it shall be lawful for the Lessor, upon election, to declare the lease term ended and to re-enter upon the premises and the building or buildings and improvements situated thereon, or any part thereof or thereon, either with or without process of law, the Lessee waiving any demand for possession of such premises any and all buildings and improvements then situated thereon, or the Lessor may have such other remedy as the law and this instrument may afford. Upon the termination of the lease term, at such election of the Lessor or in any other way, the Lessee shall surrender and deliver up the demised premises and property (real and pursuable) peaceably to the Lessor, or the agent or attorney of the Lessor, immediately upon the termination of the lease terms; and if the Lessee, its agent, attorney, tenants, shall hold such premises, or any part thereof, one day after the same shall be surrendered according to the term of this lease, he shall be deemed guilty of forcible detainer of the premises under the statutes and shall be subject to eviction or removal, forcibly or otherwise, with or without process of law. The relationship between the parties that of Landlord and Tenant, and that the Lessee specifically acknowledges that all statutory proceedings to the relationship of Landlord and Tenant respecting rent and the possession of the premises accrued to the Landlord. 4 7 Nothing herein shall be construed as authorizing the Lessor to declare this Lease in default, however, where the default consists in the non-payment of rent, security, insurance, premiums, or taxes until such non-payment, in violation with the terms of this Lease, shall continue for thirty (30) days after the respective due dates for payment of such taxes, security, insurance premiums, and rent, and where the alleged default consists of some violation other than non-payment of rent, security, insurance premiums, or taxes, the Lessor may not declare this Lease in default until such violation shall have continued for thirty (30) days after the Lessor shall have given the Lessee written notice of such violation, provided however, that nothing contained herein shall be construed as precluding the Lessor from having such remedy as be and become necessary in order to preserve the Lessor's right and interest of the Lessor in the premises and this Lease, even before the expiration of the grace or notice periods provided for in this section; if, under particular circumstances then existing, the allowance of such grace, and the giving of such notice will prejudice or endanger the rights of the estates of the Lessor in this Lease and in the demised premises. All default and grace periods shall be deemed to run concurrently and not consecutively. Subject to the rights of the holder of any first mortgage to which this Lease has been subordinated, the Lessee pledged with and assigns to the Lessor, all of the rents, issues, and profits which might otherwise accrue to the Lessee for the use, enjoyment, and operation of the demised premises and in connection with such pledging of the rents, the Lessee covenants and agrees with the Lessor that if the Lessor, upon default of the Lessee, elects to file suit in chancery to enforce the Lease and protect the Lessor's rights, then the Lessor may, an ancillary to such suit, apply to any court having jurisdiction thereof for the appointment of a receiver of all and singular the demised premises, the improvements, buildings located thereon and thereupon, it is expressly covenanted and agreed that the court shall forthwith appoint a receiver with the usual powers and duties of the receivers in like cases, such appointments shall be made by such court as a matter of strict right to the Lessor and without reference to the adequacy or inadequacy of the value of the property which is the subject to the Landlord's lien, or to the solvency of the Lessee and without reference to the commission of waste. Nothing in this section shall be construed as empowering the Lessor to collect rents accruing from the premises unless or until the Lessee is in default. It is expressly agreed that if any time during the term of this Lease, the Lessee shall be adjudged bankrupt or insolvent by any federal or state court, or competent jurisdiction, the Lessor may at its option declare the Lease terminated and canceled and take possession of said premises. 10. The Lessee shall not assign this Lease or sub-let any part of the demised premises without the written consent of the Lessor, which consent shall not be unreasonably withheld. 5 8 11. At the termination of this Lease, the Lessee will peaceably and quietly deliver possession of the premises and all improvements, including any furnishings, fixtures, and equipment which the Lessee may have brought, placed or constructed upon the premises pursuant to the provisions of this Lease to the Lessor. 12. If, at any time, the Lessor is required to enforce this Lease or to defend any action arising out of the facts connecting with or caused by reason of ownership by the Lessee of this Lease or the occupancy of the premises pursuant hereto, the Lessee will owe and will pay to the Lessor all costs of court and reasonable attorneys fees incurred or expended by them in conducting such defense or enforcing the terms of this Lease. The amount of such costs and fees may, at the option of the Lessor, be collected just as though such amount were an amount of rent maturing and coming due. 13. The Lessor covenants and agrees with the Lessee that so long as the Lessee keeps and performs all of the covenants and conditions of this Lease, the Lessee shall have quiet, undisturbed and continued possession of the premises, free from any claim against the Lessor and all persons claiming under, by and through the Lessor. 14. The Lessor and their agent shall have the right to enter upon the premises at all reasonable times to examine the condition and use thereof, provided only that such rights shall be exercised in such manner as not to interfere with the Lessee in the conduct of the Lessee's business on such premises, and if the premises are damaged by fire, windstorm, or by other casualty which cause the premises to be exposed to the elements, then the Lessor may enter upon the premises to make emergency repairs, such act or acts shall not be deemed to excuse the Lessee from his obligations to keep the premises in repair and the Lessee shall, upon demand of the Lessor, immediately reimburse the Lessor for the costs and expenses of such emergency repairs. IN TESTIMONY WHEREOF, said Lessor has hereunto fixed his hand and seal and said Lessee has caused these presents to be signed in its corporate name by its President and attested by its Secretary and its corporate seal to be hereunto affixed and the said Secretary has hereunto set his hand and seal, this Lease being executed in duplicate originals, one of which is retained by each party. 6 9 Schedule A BEGINNING at an iron pin in the center of Seaboard Railroad, said BEGINNING point being located South 19 deg. 30 min. East 362.63 feet from a nail in the Southern edge of the right-of-way for East Main Street; running thence from said BEGINNING point a line with S. M. Roper property North 19 deg. 30 min. West 212.63 feet to point in S. M. Roper's Eastern line; running thence North 70 deg. 30 min. East 300 feet; running thence South 19 deg. 30 min. East 239.4 feet to point in the center of Seaboard Railroad; running thence with the center of Seaboard Railroad three lines as follows: South 77 deg. 18 min. 40 sec. West 101.4 feet to an iron pin; South 75 deg. 40 min. 50 sec. West 100 feet to an iron pin and South 73 deg. 46 min. 30 sec. West 100 feet to an iron pin, the point of BEGINNING, in accordance with the plat prepared by Ronnie Dedmon, Registered Surveyor, dated October 21, 1972. ALSO two twenty-five (25) foot wide easements running from the Southern edge of East Main Street South into the above property; the first easement being described as follows: BEGINNING at a nail located North 70 deg. 30 min. East 144 feet from a nail at the Northeast corner of S. M. Roper's property: running thence from said BEGINNING point three lines with property of J. H. Heafner as follows: South 19 deg. 30 min. East 150 feet, North 70 deg. 30 min. East 25 feet, North 19 deg. 30 min. West 150 feet, South 30 deg. West 25 feet, second easement being described as follows: BEGINNING at a nail located North 70 deg. 30 min. East 272 feet from a nail in the Southern edge of the right-of-way for East Main Street, the Northeast corner of S. M. Roper's property; running thence from said BEGINNING nail South 19 deg. 30 min. East 150 feet, North 70 deg. 30 min. East 25 feet, North 19 deg. 30 min. West 150 feet, and South 70 deg. 30 min. West 25 feet. TITLE REFERENCE: Being the same land conveyed by deed of J. H. Heafner and wife, Evangeline H. Heafner to Carolyn Heafner and Ann H. Gaither, dated August 1, 1972, recorded in Book 497, Page 69, Lincoln County Public Registry. 10 LESSORS: /s/ Carolyn Heafner (Williams) (SEAL) - ----------------------------- Carolyn Heafner (Williams) /s/ Ann H. Gaither (SEAL) - ----------------------------- Ann H. Gaither /s/ Albert C. Gaither (SEAL) - ----------------------------- Albert C. Gaither THE J. H. HEAFNER COMPANY, INC. (LESSEE) By: /s/ William H. Gaither ---------------------------- William H. Gaither President ATTESTED: /s/ J. Michael Gaither - ------------------------------ J. Michael Gaither, Secretary (Corporate Seal) 7 11 STATE OF NORTH CAROLINA COUNTY OF_____________________________ I,___________________________________, a Notary Public in and for said County and State, do hereby certify that ANN H. GAITHER, personally appeared before me this day and acknowledged the due execution of the foregoing Lease. WITNESS my hand and notarial seal, this the______day of October, 1992. ______________________________ Notary Public My Commission Expires: ______________________ STATE OF NORTH CAROLINA COUNTY OF_____________________________ I,___________________________________, a Notary Public in and for said County and State, do hereby certify that ALBERT C. GAITHER personally appeared before me this day and acknowledged the due execution of the foregoing Lease. WITNESS my hand and notarial seal, this the______day of October, 1992. _______________________________ Notary Public My Commission Expires: ______________________ 8 12 STATE OF NORTH CAROLINA COUNTY OF CATAWBA I, Paige E. Pope, a Notary Public of the County and State aforesaid, certify that J. MICHAEL GAITHER, personally came before me this day and acknowledged that he is the Secretary of THE J. H. HEAFNER COMPANY, INC., a North Carolina corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed by its President, sealed with its corporate seal and attested by him as its Secretary. WITNESS my hand and notarial seal, this the 1st day of October, 1992. /s/ Paige E. Pope --------------------- Notary Public My Commission Expires: [NOTARY SEAL] 11/30/94 - ---------------------- 9 13 STATE OF NEW JERSEY COUNTY OF BERGEN I, Jean Poe, a Notary Public in and for said State and County, do hereby certify that CAROLYN HEAFNER WILLIAMS personally appeared before me this day and acknowledged the due execution of the foregoing Lease. WITNESS my hand and notarial seal, this the 7th day of December 1992. /s/ Jean Poe ------------------------------- Notary Public for New Jersey My Commission Expires: NOTARY PUBLIC OF NEW JERSEY MY COMMISSION EXPIRES 6/1/1995 EX-10.30 45 LEASE AS AMENDED 1 EXHIBIT 10.30 [J.H.HEAFNER LETTERHEAD] July 1, 1993 Ann H. Gaither 841 Woodson Road Newton, NC 28658 RE: Lease dated August 1, 1988 by and between Ann H. Gaither and The J.H. Heafner Company, Inc. Dear Ms. Gaither: As you know the above-referenced Lease for the Winston-Salem Distribution Center expires on August 1. Pursuant to paragraph 2 of the lease, the company would like to extend the term for five years. The expiration date of the lease is now August 1, 1998. Sincerely, /s/ J. Michael Gaither -------------------------------- J. Michael Gaither Sr. Vice President & General Counsel 2 STATE OF NORTH CAROLINA ) ) LEASE COUNTY OF FORSYTH ) THIS LEASE, made and entered into this the First day of August, 1988, by and between ANN HEAFNER GAITHER, of Catawba County, North Carolina, hereinafter called "Lessor" and THE J. H. HEAFNER COMPANY, INC., a North Carolina Corporation, having its principal place of business in Lincoln County, North Carolina, hereinafter called "Lessee"; WITNESSETH: Subject to the terms and conditions hereinafter set forth said Lessor does hereby let and lease unto said Lessee and said Lessee does hereby accept from said Lessor a certain parcel of land together with buildings and other improvements thereon situated, and lying and being in Forsyth County, North Carolina and more particularly described on attached Schedule A. The terms and conditions referred to are as follows: 1. This lease shall begin as of the First day of September, 1988, and unless sooner terminated as herein provided, shall exist and continue until the First day of August, 1993. 2. Provided all installments of rental theretofore due have been paid and all other conditions of this lease have been properly complied with by the Lessee may. The Lessee at its option, extend this lease for an additional three (3) terms of five (5) years each by giving the Lessor written notice of its intention to do so not later than sixty (60) days prior to the end of the initial term and prior to the end of each extension thereafter. In the event of such extension, all of the terms and conditions as herein set out shall continue in full force and effect during said extension. 3. The Lessee shall pay the sum of Fifty-Five Thousand Two Hundred and no/100 Dollars ($55,200.00) per year as rental for the demised premises which rental shall be hereinafter referred to as "minimum rent" and shall be payable in twelve equal and consecutive monthly installments of Four Thousand Six Hundred and no/100 Dollars ($4,600.00) due and payable on the first day of each calendar month, commencing with the First day of September, 1988. From and after the first year of the lease, the rental shall be adjusted as follows: The rental shall be the minimum rent plus a cost of living increase thereon determined by multiplying the minimum rent by a fraction, the denominator of which is the consumer price index for urban wage earners and clerical workers in U.S. cities average, all items as published by the Bureau of Labor Statistics, U.S. Department of Labor, for May 1987 and 3 the numerator of which is the said consumer price index for the month of May of the next succeeding annual lease period. The Lessor shall notify the Lessee of the amount of the cost of living adjustment and the total rent due for each annual lease period. Under no circumstances shall the total rent be less than the minimum rent as set forth above. All rents shall be absolutely net to the Lessor, so that this lease, shall, except as hereinafter provided to the contrary, yield net to the Lessor the rent to be paid in each year during the term of the lease. Accordingly, all costs, expenses, and obligations of every kind or nature whatsoever, relating to the demised premises, or any improvements thereon, which may arise or become due during the term of this lease, shall be paid by the Lessee, and the Lessor shall be indemnified and saved harmless by the Lessee from and against the same. 4. The Lessee shall pay, before any fine, penalty, interest, or costs may be added, or become due or be imposed for nonpayment thereof, all taxes, assessments, water and sewer rents, rates and charges, transit taxes, charges for public utilities, excises, levies, licenses, and permit fees and other governmental charges, general and special, ordinary and extraordinary, unforeseen and foreseen, of any kind and nature, whatsoever, which at any time during the term of this lease may be assessed, levied, confirmed, imposed upon, or grow and become due and payable out of or in respect of, or become a lien on the demised premises, or any improvements thereon, or any part thereof or any appurtenances thereto, or otherwise arising out of the rent and income received by the Lessees from subtenants, any use or occupation of the demised premises and franchises as may be appurtenant to the use of the demised premises, or any document (to which the Lessee is a party) creating or transferring an interest or estate in the demised premises. The Lessee shall pay the taxes and other charges as enumerated in this article and should deliver official receipts evidencing such payment to the Lessors, which payment of taxes shall be made and the receipts delivered at least thirty (30) days before the tax, itself would become delinquent in accordance with the law then in force governing the payment of such tax or taxes. If however, the Lessee desires to contest the validity of any tax or tax claim, the Lessee may do so without being in default hereunder, provided the Lessee gives the Lessor notice of the Lessee's intention to do so and furnishes the Lessor with a surety made by a surety company qualified to do business in the State of Alabama. If the Lessee shall fail, refuse, or neglect to make any of the payments required in this article, then the Lessor may pay the same, and the amount or amounts of money so paid, including reasonable attorney fees and expenses which might have been reasonably incurred because of or in connection with those payments, together with interest on all such amounts, at the rate of ten per cent (10%) per annum, shall be repaid by the Lessee to the Lessor, upon the demand of the Lessor and the 4 payment thereof may be collected or enforced by the Lessor in the same manner as though such amount was an installment of rent specifically required by the term of this lease to be paid by the Lessee to the Lessor, upon the day when the Lessor demand repayment thereof or reimbursement therefore of and from the Lessee; but the election of the Lessor to pay such taxes shall not waive the default thus committed by the Lessees. 5. During the entire term of this lease, the Lessee will indemnify and save harmless the Lessor against any and all claims, debts, demands, or obligations which may be made against the Lessor or against the Lessor's title and the premises, arising out of, or in connection with any alleged act or admission of the Lessee or any person claiming under, by, or through the Lessee; and if it becomes necessary for the Lessor to defend any actions seeking to impose such liability, the Lessee will pay the Lessor all costs of court and attorneys fees incurred by the Lessor in effecting such defense in addition to any other sums which the Lessor may be called upon to pay by reason of the entry of a Judgment against the Lessor in the litigation which such claim is asserted. 6. From and after the time when the lease commences, the Lessee will keep insured all buildings and improvements upon said premises against all loss or damage by fire and windstorm, together with extended coverage "which said insurance will be maintained in an amount which will be sufficient to prevent any party in interest from being or becoming a co-insurer on any part of the risk which amounts shall not be less than eighty per cent (80%) of the full insurable value, and all of such policies of insurance shall include the name of the Lessor as one of the parties insured and shall fully protect both the Lessor and the Lessee as their respective interests may appear. The Lessee shall provide such coverage for the Lessor's interest that shall not fail, in any case, below the sum of ($). The originals of all such policies shall be delivered to the Lessor by the Lessee along with receipted bills evidencing the fact that the premiums therefore are paid. The Lessor assumes no obligation whatsoever to repair or replace any building on the demised premises which is damaged or destroyed by fire or other casualty; but the Lessee may at its own option and expense, cause said building to be insured and in case of damage or destruction use all sums collected from such insurance in repairing or replacing said buildings. This coverage shall be in addition to said coverage for the Lessor as set forth above. 7. It is understood and agreed that the Lessee accepts said premises in the physical condition in which the same now are and further that during the continuance of this lease the Lessee will keep in good state of repair and in first class condition any and all buildings, furnishings, fixtures and equipment which are brought or constructed or placed upon the demised premises by the Lessee nor will the Lessee sell or permit any strip, waste or 5 neglect of any building or other property to be committed, and the Lessee will repair or replace and renovate such property as often as it may be necessary to keep the buildings and other property which is the subject matter of this lease in first class repair and condition. Further, it is understood and agreed that the Lessor shall be under no obligation whatsoever to make any repair or replacement to said premises during the terms of this lease. In the event any governing body should require alterations to the demised premises to comply with Local, State, or Federal law or regulations, the Lessee shall see that such alterations are made at its own expense holding Lessor harmless from such expense. If, at anytime, activities by the Lessee shall place the demised premises in violation of any Local, State, or Federal ordinance, statute, or regulation then the Lessee shall take such steps to bring the use of the premises into conformity within thirty (30) days of notification or be in default under this lease. 8. If at any time a default should be made by the Lessee in the payment of any rent upon any day such rent becomes due and payable, or if the Lessee shall fail to perform any of the other covenants of this lease by it to be kept and performed, then, in any such event, it shall be lawful for the Lessor, upon election, to declare the lease term ended and to re-enter upon the premises and the building or buildings and improvements situated thereon, or any part thereof or thereon, either with or without process of law, the Lessee waiving any demand for possession of such premises any and all buildings and improvements then situated thereon, or the Lessor may have such other remedy as the law and this instrument may afford. Upon the termination of the lease term, at such election of the Lessor or in any other way, the Lessee shall surrender and deliver up the demised premises and property (real and pursuable) peaceably to the Lessor, or the agent or attorney of the Lessor, immediately upon the termination of the lease term; and if the Lessee, its agent, attorney, tenants shall hold such premises, or any part thereof, one day after the same shall be surrendered according to the term of this lease, he shall be deemed guilty of forcible detainer of the premises under the statutes and shall be subject to eviction or removal, forcibly or otherwise, with or without process of law. The relationship between the parties that of landlord and tenant, and that the Lessee specifically acknowledges that all statutory proceedings to the relationship of landlord and tenant respecting rent and the possession of the premises accrued to the landlord. Nothing herein shall be construed as authorizing the Lessor to declare this lease in default, however, where the default consists in the non-payment of rent, security, insurance premiums, or taxes until such non-payment, in violation with the terms of this lease, shall continue for thirty (30) days after the respective due dates for payment of such taxes, security, insurance premiums, and rent, and where the alleged default 6 consists of some violation other than non-payment of rent, security, insurance premiums, or taxes, the Lessor may not declare this lease in default until such violation shall have continued for thirty (30) days after the Lessor shall have given the Lessee written notice of such violation, provided however, that nothing contained herein shall be construed as precluding the Lessor from having such remedy as be and become necessary in order to preserve the Lessor's right and interest of the Lessor in the premises and this lease, even before the expiration of the grace or notice periods provided for in this section; if, under particular circumstances then existing the allowance of such grace, and the giving of such notice will prejudice or endanger the rights of the estates of the Lessor in this lease and in the demised premises. All default and grace periods shall be deemed to run concurrently and not consecutively. Subject to the rights of the holder of any first mortgage to which this lease has been subordinated, the Lessee pledged with and assign to the Lessor, all of the rents, issues, and profits which might otherwise accrue to the Lessee for the use, enjoyment, and operation of the demised premises and in connection with such pledging of the rents, the Lessee covenants and agrees with the Lessor that if the Lessor upon default of the Lessee elects to file suit in chancery to enforce the lease and protect the Lessor's rights, then the Lessor may, as ancillary to such suit, apply to any court having jurisdiction thereof for the appointment of a receiver of all and singular the demised premises, the improvements, buildings located thereon; and, thereupon, it is expressly covenanted and agreed that the court shall forthwith, appoint a receiver with the usual powers and duties of the receivers in like cases, such appointments shall be made by such court as a matter of strict right to the Lessor and without reference to the adequacy or inadequacy of the value of the property which is subject to the landlord's lien, or to the solvency of the Lessee and without reference to the commission of waste. Nothing in this section shall be construed as empowering the Lessor to collect rents accruing from the premises unless or until the Lessee are in default. It is expressly agreed that if anytime during the term of this lease the Lessee shall be adjudged bankrupt or insolvent by any Federal or State Court or competent jurisdiction, the Lessor may at its option declare the lease terminated and cancelled and take possession of said premises. 9. The Lessee shall not assign this lease or sublet any part of the demised premises without the written consent of the Lessor, which consent shall not be unreasonably withheld. 10. At the termination of this lease the Lessee will peaceably and quietly deliver possession of the premises and all improvements, including any furnishings, fixtures, and equipment which the Lessee may have brought, placed or constructed upon the premises pursuant to the provisions of this lease to the Lessor. 7 11. If, at any time, the Lessor is required to enforce this lease or to defend any action arising out of the facts connecting with or caused by reason of the ownership by the Lessee of this lease or the occupancy of the premises pursuant hereto, the Lessee will owe and will pay to the Lessor all costs of court and reasonable attorneys fees incurred or expended by them in conducting such defense or enforcing the terms of this lease. The amount of such costs and fees may, at the option of the Lessor, be collected just as though such amount were an amount of rent maturing and coming due. 12. The Lessor covenants and agrees with the Lessee that so long as the Lessee keeps and performs all of the covenants and conditions of this lease, the Lessee shall have quiet, undisturbed and continued possession of the premises, free from any claim against the Lessor and all persons claiming under by and through the Lessor. 13. The Lessor and their agent shall have the right to enter upon the premises at all reasonable times to examine the condition and use thereof, provided only that such rights shall be exercised in such manner as not to interfere with the Lessee in the conduct of the Lessee's business on such premises; and if the premises are damaged by fire, windstorm, or by other casualty which cause the premises to be exposed to the elements, then the Lessor may enter upon the premises to make emergency repairs, such act or acts shall not be deemed to excuse the Lessee from his obligations to keep the premises in repair and the Lessee shall upon demand of the Lessor, immediately reimburse the Lessor for the costs and expenses of such emergency repairs. IN TESTIMONY WHEREOF, said Lessor has hereunto fixed his hand and seal and said Lessee has caused these presents to be signed in its corporate name by its President and attested by its Secretary and its corporate seal to be hereunto affixed and the said Secretary has hereunto set his hand and seal; this contract being executed in duplicate originals, one of which is retained by each party. /s/ Ann H. Gaither (SEAL) - ----------------------- LESSOR LESSEE: By /s/ Ann H. Gaither - ----------------------- PRESIDENT ATTESTED: /s/ J. Michael Gaither - ------------------------ SECRETARY 8 STATE OF NORTH CAROLINA COUNTY OF LINCOLN I, Judy S. Caldwell, a Notary Public, in and for said County and State, do hereby certify that Ann Heafner Gaither personally appeared before me this day and acknowledged the due execution of the foregoing Lease. WITNESS my hand and notarial seal, this the 6th day of October, 1988. /s/ Judy S. Caldwell ---------------------- NOTARY PUBLIC My Commission Expires: 5/24/93 [SEAL] STATE OF NORTH CAROLINA COUNTY OF LINCOLN I, Judy S. Caldwell, a Notary Public of the County and State aforesaid, certify that J. Michael Gaither personally came before me this day and acknowledged that he is Secretary of The J.H.Heafner Company, Inc., a North Carolina corporation, and that by authority duly given and as the act of the corporation, and that by authority duly given and as the act of the corporation the foregoing instrument was signed by its President, sealed with its corporate seal and attested by her/him as its Secretary. WITNESS my hand and notarial seal, this the 6th day of October, 1988. /s/ Judy S. Caldwell ---------------------- NOTARY PUBLIC My Commission Expires: 5/24/93 [SEAL] EX-12.1 46 STATEMENT RE: COMPUNTATION OF RATIOS 1 EXHIBIT 12.1 The J. H. Heafner Company, Inc. Statement regarding: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends:
SIX MONTHS ENDED PRO FORMA PRO FORMA JUNE 30, SIX MONTHS ENDED YEAR ENDED ------------------ JUNE 30,1998 DECEMBER 31,1997 1998 1997 ----------------- ---------------- ------------------ Consolidated pretax income (loss) from continuing operations (126) (3,668) (2,113) (115) Interest 8,292 14,767 4,286 1,672 Increase in value of warrants -- -- 9,906 -- Interest portion of rent expense -- -- 2,240 926 Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------- ------- ------- ----- EARNINGS 8,166 11,099 14,318 2,483 ======= ======= ======= ===== Interest 8,292 14,767 4,286 1,672 Increase in value of warrants -- -- 9,906 -- Interest capitalized -- -- -- -- Interest portion of rent expense -- -- 2,240 926 Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------- ------- ------- ----- FIXED CHARGES 8,292 14,767 16,431 2,598 ======= ======= ======= ===== RATIO OF EARNINGS TO FIXED CHARGES -- -- -- -- ======= ======= ======= =====
Years Ended December 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- Consolidated pretax income (loss) from continuing operations (253) 1051 690 1221 1155 Interest 4842 1465 1308 899 781 Increase in value of warrants 0 0 0 0 0 Interest portion of rent expense 2985 795 661 520 450 Preferred stock dividend requirements of majority-owned subsidiaries 0 0 0 0 0 ----- ----- ----- ----- ----- EARNINGS 7,574 3,311 2,659 2,640 2,386 ===== ===== ===== ===== ===== Interest 4842 1465 1308 899 781 Increase in value of warrants 0 0 0 0 0 Interest capitalized Interest portion of rent expense 2985 795 661 520 450 Preferred stock dividend requirements of majority-owned subsidiaries 0 0 0 0 0 ----- ----- ----- ----- ----- FIXED CHARGES 7827 2260 1969 1419 1231 ===== ===== ===== ===== ===== RATIO OF EARNINGS TO FIXED CHARGES -- 1.5 1.4 1.9 1.9 ===== ===== ===== ===== =====
EX-21.1 47 CHART OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 ---------------------------------------- | The J. H. Heafner Company, Inc.+ | | NC | ---------------------------------------- | ------------------------------------------------------------------------------------------ | | | - ---------------------------------------- ---------------------------------------- ---------------------------------------- | The Speed Merchant, Inc. | | ITCO Logistics Corporation | | Oliver & Winston, Inc. | | CA | | DE | | CA | - ---------------------------------------- ---------------------------------------- ---------------------------------------- | | | | | | - ---------------------------------------- ---------------------------------------- | Phoenix Racing Inc. | | ITCO Holding Company, Inc. | | CA | | NC | - ---------------------------------------- ---------------------------------------- | ----------------------------------------------------------------------------------------- | | | - ---------------------------------------- ---------------------------------------- ---------------------------------------- | ITCO Tire Company | | ITCO Tire Company of Georgia | | L&N Leasing Corporation* | | NC | | VA | | NC | - ---------------------------------------- ---------------------------------------- ---------------------------------------- | | ------------------------------ | Doug Duggan, Inc.* | | GA | ------------------------------
*=inactive entities + All subsidiaries are wholly-owned, directly or indirectly, by The J.H. Heafner Company, Inc. EX-23.1 48 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of The J.H. Heafner Company, Inc. on Form S-4 of our report dated January 15, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Historical Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Los Angeles, California August 18, 1998 EX-23.2 49 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of The J.H. Heafner Company, Inc. on Form S-4 of our report dated December 7, 1995, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Historical Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Raleigh, North Carolina August 18, 1998 EX-23.3 50 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.3 CONSENT OF ERNST & YOUNG LLP We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 31, 1997 (except for Note 13, as to which the date is January 14, 1998) with respect to the consolidated financial statements of ITCO Logistics Corporation and subsidiaries included in the Registration Statement (Form S-4) and related Prospectus of J.H. Heafner Company, Inc. for the registration of the $100,000,000 10% Senior Notes Due 2008. /s/ ERNST & YOUNG LLP Raleigh, North Carolina August 17, 1998 EX-23.4 51 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.4 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Speed Merchant, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Mountain View, California August 18, 1998 EX-23.5 52 CONSENT OF ARTHUR ANDERSEN LLP 1 ARTHUR ANDERSEN LLP EXHIBIT 23.5 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP Charlotte, North Carolina, August 18, 1998 EX-25.1 53 STATEMENT OF ELIGIBILITY OF TRUSTEE ON FORM T-1 1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM T-1 ---------- STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ---------- FIRST UNION NATIONAL BANK (Exact name of trustee as specified in its charter) United States National Bank 22-1147033 (State of incorporation if (I.R.S. employer not a national bank) identification no.) First Union National Bank 230 South Tryon Street, 9th Floor Charlotte, North Carolina 28288-1179 (Address of principal (Zip Code) executive offices) Same as above (Name, address and telephone number, including area code, of trustee's agent for service) The J.H. Heafner Company, Inc. (Exact name of obliger as specified in its charter) North Carolina (State or other jurisdiction of incorporation or organization) 56-0754594 (I.R.S. employer identification no.) William H. Gaither Director, Chief Executive Officer and President 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 (704) 423-8989 (Address, including zip code, of principal executive offices) -------------------- Senior Notes (Title of the indenture securities) ------------------------------------------------ 2 1. General information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject - -------------------------------------------------------------------------------- Name Address - -------------------------------------------------------------------------------- Federal Reserve Bank of Richmond, VA Richmond, VA Comptroller of the Currency Washington, D.C. Securities and Exchange Commission Division of Market Regulation Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. Affiliations with obligor and underwriters. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. None. (See Note 1 on Page 4.) Because the obligor is not in default on any securities issued under indentures under which the applicant is trustee, Items 3 through 15 are not required herein. 16. List of Exhibits. All exhibits identified below are filed as a part of this statement of eligibility. 1. A copy of the Articles of Association of First Union National Bank as now in effect, which contain the authority to commence business and a grant of powers to exercise corporate trust powers. 2 3 2. A copy of the certificate of authority of the trustee to commence business, if not contained in the Articles of Association. 3. A copy of the authorization of the trustee to exercise corporate trust powers, if such authorization is not contained in the documents specified in exhibits (1) or (2) above. 4. A copy of the existing By-laws of First Union National Bank, or instruments corresponding thereto. 5. Inapplicable. 6. The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939 is included at Page 4 of this Form T-1 Statement. 7. A copy of the latest report of condition of the trustee published pursuant to law or to the requirements of its supervising or examining authority is attached hereto. 8. Inapplicable. 9. Inapplicable. 3 4 NOTE Note 1: Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of all facts on which to base a responsive answer to Item 2, the answer to said Item is based on incomplete information. Item 2 may, however, be considered correct unless amended by an amendment to this Form T-1. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, First Union National Bank, a national association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Charlotte, and State of North Carolina, on the 17th day of August, 1998. FIRST UNION NATIONAL BANK (trustee) By: /s/ Shannon Schwartz Its: Asst. Vice President CONSENT OF TRUSTEE Under section 321(b) of the Trust Indenture Act of 1939, as amended, and in connection with the proposed issuance by The J.H. Heafner Company of its Senior Notes, First Union National Bank as the trustee herein named, hereby consents that reports of examinations of said Trustee by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon requests therefor. FIRST UNION NATIONAL BANK By: /s/ Shannon Schwartz Name: Shannon Schwartz Title: Asst. Vice President Dated: August 17, 1998 4 5 Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031 Address: Two First Union Center Page RC-1 City, State, Zip: Charlotte, NC 28288-0201 FDIC Certificate #: 04885
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31, 1998 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC--BALANCE SHEET
C400 Dollar Amount in Thousands RCFD Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------------- ASSETS ///////////////////////// 1. Cash and balances due from depository institutions (from Schedule RC-A): ///////////////////////// a. Noninterest-bearing balances and currency and coin (1)........................... 0081 7,346,667 1.a. b. Interest-bearing balances (2).................................................... 0071 12,481 1.b. 2. Securities: ///////////////////////// a. Held-to-maturity securities (from Schedule RC-B, column A)....................... 1754 1,937,159 2.a. b. Available-for-sale securities (from Schedule RC-B, column D)..................... 1773 31,508,601 2.b. 3. Federal funds sold and securities purchased under agreements to resell............... 1350 4,501,133 3. 4. Loans and lease financing receivables ///////////////////////// a. Loans and leases, net of unearned income (from Schedule RC-C)RCFD 2122 83,315,758 ///////////////////////// 4.a. b. LESS: Allowance for loan and lease losses................. RCFD 3123 1,005,217 ///////////////////////// 4.b. c. LESS: Allocated transfer risk reserve..................... RCFD 3128 0 ///////////////////////// 4.c. d. Loans and leases, net of unearned income, ///////////////////////// allowance, and reserve (item 4.a minus 4.b and 4.c).............................. 2126 96,830,110 4.d. 5. Trading assets (from Schedule RC-D).................................................. 3545 3,818,431 5. 6. Premises and fixed assets (including capitalized leases)............................. 2145 2,660,908 6. 7. Other real estate owned (from Schedule RC-M)......................................... 2150 112,869 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ............................................................ 2180 269,234 8. 9. Customers' liability to this bank on acceptances outstanding......................... 2155 575,447 9. 10. Intangible assets (from Schedule RC-M)............................................... 2143 2,896,263 10. 11. Other assets (from Schedule RC-F).................................................... 2160 7,274,331 11. 12. Total assets (sum of items 1 through 11)............................................. 2170 159,743,634 12.
- ---------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. 5 6 Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031 Address: Two First Union Center Page RC-1 City, State, Zip: Charlotte, NC 28288-0201 FDIC Certificate #: 04885
Schedule RC--Continued
Dollar Amount in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES //////////////////////////////// 13. Deposits: //////////////////////////////// a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, //////////////////////////////// part I) .................................................................... RCON 2200 101,438,219 13.a. (1) Noninterest-bearing (1) ................. RCON 6631 19,061,893 //////////////////////////////// 13.a.(1) (2) Interest-bearing ........................ RCON 6636 82,376,326 //////////////////////////////// 13.a.(2) b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E, part II) /////////////////////////////// RCFN 2200 5,487,257 13.b. (1) Noninterest-bearing ..................... RCFN 6631 29,619 //////////////////////////////// 13.b.(1) (2) Interest-bearing ........................ RCFN 6636 5,457,638 //////////////////////////////// 13.b.(2) 14. Federal funds purchased and securities sold under agreements to repurchase...... RCFD 2800 24,525,123 14. 15. a. Demand notes issued to the U.S. Treasury.................................... RCON 2840 426,758 15.a. b. Trading liabilities (from Schedule RC-D).................................... RCFD 3548 4,547,787 15.b. 16. Other borrowed money (includes mortgage indebtedness and obligations under //////////////////////////////// capitalized leases):............................................................ //////////////////////////////// a. With a remaining maturity of one year or less............................... RCFD 2332 3,391,194 16.a. b. With a remaining maturity of more than one year through three years......... RCFD A547 635,109 16.b. c. With a remaining maturity of more than three years.......................... RCFD A548 416,618 16.c. 17. Not applicable.................................................................. //////////////////////////////// 18. Bank's liability on acceptances executed and outstanding........................ RCFD 2920 575,222 18. 19. Subordinated notes and debentures (2)........................................... RCFD 3200 2,797,773 19. 20. Other liabilities (from Schedule RC-G).......................................... RCFD 2930 3,662,892 20. 21. Total liabilities (sum of items 13 through 20).................................. RCFD 2948 147,903,952 21. 22. Not applicable.................................................................. /////////////////////////////// EQUITY CAPITAL /////////////////////////////// 23. Perpetual preferred stock and related surplus................................... RCFD 3838 160,540 23. 24. Common stock.................................................................... RCFD 3230 82,795 24. 25. Surplus (exclude all surplus related to preferred stock)........................ RCFD 3839 8,532,323 25. 26. a. Undivided profits and capital reserves...................................... RCFD 3632 2,823,904 26.a. b. Net unrealized holding gains (losses) on available-for-sale securities...... RCFD 8434 204,120 26.b. 27. Cumulative foreign currency translation adjustments............................. RCFD 3284 0 27. 28. Total equity capital (sum of items 23 through 27)............................... RCFD 3210 11,839,682 28. 29. Total liabilities and equity capital (sum of items 21 and 28)................... RCFD 3300 159,743,634 29.
Memorandum To be reported only with the March Report of Condition. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external Number auditors as of any date during 1996............................................ RCFD 6724 N/A M.1.
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 4 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 5 = Review of the bank's financial statements by external auditors 6 = Compilation of the bank's financial statements by external auditors 7 = Other audit procedures (excluding tax preparation work) 8 = No external audit work - ---------- (1) Includes total demand deposits and noninterest-bearing time and savings deposit. (2) Includes limited-life preferred stock and related surplus. 6 7 Charter No. 22693 FIRST UNION NATIONAL BANK ARTICLES OF ASSOCIATION (as restated effective February 26, 1998) For the purpose of organizing an Association to carry on the business of banking under the laws of the United States, the undersigned do enter into the following Articles of Association: FIRST. The title of this Association shall be FIRST UNION NATIONAL BANK. SECOND. The main office of the Association shall be in Charlotte, County of Mecklenburg, State of North Carolina. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five directors, the exact number of directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH. The annual meeting of the shareholders for the election of directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the Board of Directors may designate, on the day of each year specified therefor in the ByLaws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the bank entitled to vote for election of directors. Nominations, other than those made by or on behalf of the existing management of the bank, shall be made in writing and shall be delivered or mailed to the President of the bank and to the Comptroller of the Currency, Washington, D.C., not less than 14 8 days nor more than 50 days prior to any meeting of stockholders called for the election of directors, provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Bank and to the Comptroller of the Currency not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the bank that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the bank owned by the notifying shareholder. Nominations not made in accordance herewith may, in his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the vote tellers may disregard all votes cast for each such nominee. FIFTH. (a) General. The amount of capital stock of this Association shall be (I) 25,000,000 shares of common stock of the par value of twenty dollars ($20.00) each (the "Common Stock") and (ii) 160,540 shares of preferred stock of the par value of one dollar ($ 1. 00) each (the "Non-Cumulative Preferred Stock"), having the rights, privileges and preferences set forth below, but said capital stock may be increased or decreased from time to time in accordance with the provisions of the laws of the United States. (b) Terms of the Non-Cumulative Preferred Stock. 1. General. Each share of Non-Cumulative Preferred Stock shall be identical in all respects with the other shares of Non-Cumulative Preferred Stock. The authorized number of shares of Non-Cumulative Preferred Stock may from time to time be increased or decreased (but not below the number then outstanding) by the Board of Directors. Shares of Non-Cumulative Preferred Stock redeemed by the Association shall be canceled and shall revert to authorized but unissued shares of Non-Cumulative Preferred Stock. 2. Dividends. (a) General. The holders of Non-Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, but only out of funds legally available therefor, non-cumulative cash dividends at the annual rate of $83.75 per share, and no more, payable quarterly on the first days of December, March, June and September, respectively, in 2 9 each year with respect to the quarterly dividend period (or portion thereof) ending on the day preceding such respective dividend payment date, to shareholders of record on the respective date, not exceeding fifty days preceding such dividend payment date, fixed for that purpose by the Board of Directors in advance of payment of each particular dividend. Notwithstanding the foregoing, the cash dividend to be paid on the first dividend payment date after the initial issuance of Non-Cumulative Preferred Stock and on any dividend payment date with respect to a partial dividend period shall be $83.75 per share multiplied by the fraction produced by dividing the number of days since such initial issuance or in such partial dividend period, as the case may be, by 360. (b) Non-cumulative Dividends. Dividends on the shares of Non-cumulative Stock shall not be cumulative and no rights shall accrue to the holders of shares of NonCumulative Preferred Stock by reason of the fact that the Association may fail to declare or pay dividends on the shares of Non-Cumulative Preferred Stock in any amount in any quarterly dividend period, whether or not the earnings of the Association in any quarterly dividend period were sufficient to pay such dividends in whole or in part, and the Association shall have no obligation at any time to pay any such dividend. (c) Payment of Dividends. So long as any share of Non-Cumulative Preferred Stock remains outstanding, no dividend whatsoever shall be paid or declared and no distribution made on any junior stock other than a dividend payable in junior stock, and no shares of junior stock shall be purchased, redeemed or otherwise acquired for consideration by the Association, directly or indirectly (other than as a result of a reclassification of junior stock, or the exchange or conversion of one junior stock for or into another junior stock, or other than through the use of the proceeds of a substantially contemporaneous sale of other junior stock), unless all dividends on all shares of non-cumulative Preferred Stock and non-cumulative Preferred Stock ranking on a parity as to dividends with the shares of Non-Cumulative Preferred Stock for the most recent dividend period ended prior to the date of such payment or declaration shall have been paid in full and all dividends on all shares of cumulative Preferred Stock ranking on a parity as to dividends with the shares of Non-Cumulative Stock (notwithstanding that dividends on such stock are cumulative) for all past dividend periods shall have been paid in full. Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on any junior stock from time to time out of any funds legally available therefor, and the Non-Cumulative Preferred 3 10 Stock shall not be entitled to participate in any such dividends, whether payable in cash, stock or otherwise. No dividends shall be paid or declared upon any shares of any class or series of stock of the Association ranking on a parity (whether dividends on such stock are cumulative or non-cumulative) with the Non-Cumulative Preferred Stock in the payment of dividends for any period unless at or prior to the time of such payment or declaration all dividends payable on the Non-cumulative Preferred Stock for the most recent dividend period ended prior to the date of such payment or declaration shall have been paid in full. When dividends are not paid in full, as aforesaid, upon the Non-Cumulative Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends (whether dividends on such stock are cumulative or non-cumulative) with the Non-Cumulative Preferred Stock, all dividends declared upon the NonCumulative Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with the Non-Cumulative Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Non-cumulative Preferred Stock and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Non-Cumulative Preferred Stock (but without any accumulation in respect of any unpaid dividends for prior dividend periods on the shares of Non-Cumulative Stock) and such other Preferred Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Non-Cumulative Preferred Stock which may be in arrears. 3. Voting. The holders of Non-Cumulative Preferred Stock shall not have any right to vote for the election of directors or for any other purpose. 4. Redemption. (a) Optional Redemption. The Association, at the option of the Board of Directors, may redeem the whole or any part of the shares of Non-Cumulative Preferred Stock at the time outstanding, at any time or from time to time after the fifth anniversary of the date of original issuance of the Non-Cumulative Preferred Stock, upon notice given as hereinafter specified, at the redemption price per share equal to $1,000 plus an amount equal to the amount of accrued and unpaid dividends from the immediately preceding dividend payment date (but without any accumulation for unpaid dividends for prior dividend periods on the shares of NonCumulative Preferred Stock) to the redemption date. (b) Procedures. Notice of every redemption of shares of Non-Cumulative Preferred Stock shall be mailed by first class mail, postage prepaid, 4 11 addressed to the holders of record of the shares to be redeemed at their respective last addresses as they shall appear on the books of the Association. Such mailing shall be at least 10 days and not more than 60 days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the shareholder receives such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of shares of Non-Cumulative Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of NonCumulative Preferred Stock. In case of redemption of a part only of the shares of Non-Cumulative Preferred Stock at the time outstanding the redemption may be either pro rata or by lot or by such other means as the Board of Directors of the Association in its discretion shall determine. The Board of Directors shall have full power and authority, subject to the provisions herein contained, to prescribe the terms and conditions upon which shares of the Non-Cumulative Preferred Stock shall be redeemed from time to time. If notice of redemption shall have been duly given, and, if on or before the redemption date specified therein, all funds necessary for such redemption shall have been set aside by the Association, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, all shares so called for redemption shall no longer be deemed outstanding on and after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to, receive the amount payable on redemption thereof, without interest. If such notice of redemption shall have been duly given or if the Association shall have given to the bank or trust company hereinafter referred to irrevocable authorization promptly to give such notice, and, if on or before the redemption date specified therein, the funds necessary for such redemption shall have been deposited by the Association with such bank or trust company in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except 5 12 only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or any state thereof, shall have capital, surplus and undivided profits aggregating at least $50,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any interest accrued on such funds shall be paid to the Association from time to time. In case fewer than all the shares of Non-Cumulative Preferred Stock represented by a stock certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of the relevant escheat period under applicable state law from such redemption date shall, to the extent permitted by law, be released or repaid to the Association, after which repayment the holders of the shares so called for redemption shall look only to the Association for payment thereof. 5. Liquidation. (a) Liquidation Preference. In the event of any voluntary liquidation, dissolution or winding up of the affairs of the Association, the holders of Non-cumulative Preferred Stock shall be entitled, before any distribution or payment is made to the holders of any junior stock, to be paid in full an amount per share equal to an amount equal to $1,000 plus an amount equal to the amount of accrued and unpaid dividends per share from the immediately preceding dividend payment date (but without any accumulation for unpaid dividends for prior dividend periods on the shares of Non-cumulative Preferred Stock) per share to such distribution or payment date (the "liquidation amount"). In the event of any involuntary liquidation, dissolution or winding up of the affairs of the Association, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Non-Cumulative Preferred Stock shall be entitled to be paid in full an amount per share equal to the liquidation amount. If such payment shall have been made in full to all holders of shares of NonCumulative Preferred Stock, the remaining assets of the Association shall be distributed among the holders of junior stock, according to their 6 13 respective rights and preferences and in each case according to their respective numbers of shares. (b) Insufficient Assets. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Association are insufficient to pay such liquidation amount on all outstanding shares of Noncumulative Preferred Stock, then the holders of Non-Cumulative Preferred Stock shall share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. (c) Interpretation. For the purposes of this paragraph 5, the consolidation or merger of the Association with any other corporation or association shall not be deemed to constitute a liquidation, dissolution or winding up of the Association. 6. Preemptive Rights. The Non-Cumulative Preferred Stock is not entitled to any preemptive, subscription, conversion or exchange rights in respect of any securities of the Association. 7. Definitions. As used herein with respect to the Non-Cumulative Preferred Stock, the following terms shall have the following meanings: (a) The term "junior stock" shall mean the Common Stock and any other class or series of shares of the Association hereafter authorized over which the NonCumulative Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Association. (b) The term "accrued dividends", with respect to any share of any class or series, shall mean an amount computed at the annual dividend rate for the class or series of which the particular share is a part, from, if such share is cumulative, the date on which dividends on such share became cumulative to and including the date to which such dividends are to be accrued, less the aggregate amount of all dividends theretofore paid thereon and, if such share is noncumulative, the relevant date designated to and including the date to which such dividends are accrued, less the aggregate amount of all dividends theretofore paid with respect to such period. (c) The term "Preferred Stock" shall mean all outstanding shares of all series of preferred stock of the Association as defined in this Article Fifth of the Articles of Association, as amended, of the Association. 7 14 8. Restriction on Transfer. No shares of Non-Cumulative Preferred Stock, or any interest therein, may be sold, pledged, transferred or otherwise disposed of without the prior written consent of the Association. The foregoing restriction shall be stated on any certificate for any shares of Non-Cumulative Preferred Stock. 9. Additional Rights. The shares of Non-Cumulative Preferred Stock shall not have any relative, participating, optional or other special rights and powers other than as set forth herein. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board of Directors shall have the power to appoint one or more Vice Presidents; and to appoint a cashier or such other officers and employees as may be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association, to fix the salaries to be paid to them; to dismiss them, to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of Charlotte, North Carolina, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of the Association to any other location, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than 10 percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the 8 15 date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. Each director and executive officer of this Association shall be indemnified by the association against liability in any proceeding (including without limitation a proceeding brought by or on behalf of the Association itself) arising out of his status as such or his activities in either of the foregoing capacities, except for any liability incurred on account of activities which were at the time taken known or believed by such person to be clearly in conflict with the best interests of the Association. Liabilities incurred by a director or executive officer of the Association in defending a proceeding shall be paid by the Association in advance of the final disposition of such proceeding upon receipt of an undertaking by the director or executive officer to repay such amount if it shall be determined, as provided in the last paragraph of this Article Tenth, that he is not entitled to be indemnified by the Association against such liabilities. The indemnity against liability in the preceding paragraph of this Article Tenth, including liabilities incurred in defending a proceeding, shall be automatic and self-operative. Any director, officer or employee of this Association who serves at the request of the Association as a director, officer, employee or agent of a charitable, not-for-profit, religious, educational or hospital corporation, partnership, joint venture, trust or other enterprise, or a trade association, or as a trustee or administrator under an employee benefit plan, or who serves at the request of the Association as a director, officer or employee of a business corporation in connection with the administration of an estate or trust by the Association, shall have the right to be indemnified by the Association, subject to the provisions set forth in the following paragraph of this Article Tenth, against liabilities in any manner arising out of or attributable to such status or activities in any such capacity, except for any liability incurred on account of activities which were at the time taken known or believed by such person to be clearly in conflict with the best interests of the Association, or of the corporation, partnership, joint venture, trust, enterprise, Association or plan being served by such person. In the case of all persons except the directors and executive officers of the Association, the determination of whether a person is entitled to indemnification under the preceding paragraph of this Article Tenth shall be made by and in the sole discretion of the Chief Executive Officer of the Association. In the case of the directors and executive officers of the Association, the indemnity against 9 16 liability in the preceding paragraph of this Article Tenth shall be automatic and self-operative. For purposes of this Article Tenth of these Articles of Association only, the following terms shall have the meanings indicated: (a) "Association" means First Union National Bank and its direct and indirect wholly-owned subsidiaries. (b) "Director" means an individual who is or was a director of the Association. (c) "Executive officer" means an officer of the Association who by resolution of the Board of Directors of the Association has been determined to be an executive officer of the Association for purposes of Regulation O of the Federal Reserve Board. (d) "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses, including counsel fees and expenses, incurred with respect to a proceeding. (e) "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. (f) "Proceeding" means any threatened, pending, or completed claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. The Association shall have no obligation to indemnify any person for an amount paid in settlement of a proceeding unless the Association consents in writing to such settlement. The right to indemnification herein provided for shall apply to persons who are directors, officers, or employees of banks or other entities that are hereafter merged or otherwise combined with the Association only after the effective date of such merger or other combination and only as to their status and activities after such date. The right to indemnification herein provided for shall inure to the benefit of the heirs and legal representatives of any person entitled to such right. 10 17 No revocation of, change in, or adoption of any resolution or provision in the Articles of Association or By-laws of the Association inconsistent with, this Article Tenth shall adversely affect the rights of any director, officer, or employee of the Association with respect to (i) any proceeding commenced or threatened prior to such revocation, change, or adoption, or (ii) any proceeding arising out of any act or omission occurring prior to such revocation, change, or adoption, in either case, without the written consent of such director, officer, or employee. The rights hereunder shall be in addition to and not exclusive of any other rights to which a director, officer, or employee of the Association may be entitled under any statute, agreement, insurance policy, or otherwise. The Association shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, or employee of the Association, or is or was serving at the request of the Association as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, trade association, employee benefit plan, or other enterprise, against any liability asserted against such director, officer, or employee in any such capacity, or arising out of their status as such, whether or not the Association would have the power to indemnify such director, officer, or employee against such liability, excluding insurance coverage for a formal order assessing civil money penalties against an Association director or employee. Notwithstanding anything to the contrary provided herein, no person shall have a right to indemnification with respect to any liability (i) incurred in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Association, (ii) to the extent such person is entitled to receive payment therefor under any insurance policy or from any corporation, partnership, joint venture, trust, trade association, employee benefit plan, or other enterprise other than the Association, or (iii) to the extent that a court of competent jurisdiction determines that such indemnification is void or prohibited under state or federal law. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of holders of a greater amount of stock is required by law, and in that case, by the vote of the holders of such greater amount. 11 18 BY-LAWS OF FIRST UNION NATIONAL BANK Charter No. 22693 As Restated Effective February 26, 1998 19 BY-LAWS OF FIRST UNION NATIONAL BANK ARTICLE I Meetings of Shareholders Section 1.1 Annual Meeting. The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the third Tuesday of April in each year, commencing with the year 1998, except that the Board of Directors may, from time to time and upon passage of a resolution specifically setting forth its reasons, set such other date for such meeting during the month of April as the Board of Directors may deem necessary or appropriate; provided, however, that if an annual meeting would otherwise fall on a legal holiday, then such annual meeting shall be held on the second business day following such legal holiday. The holders of a majority of the outstanding shares entitled to vote which are represented at any meeting of the shareholders may choose persons to act as Chairman and as Secretary of the meeting. Section 1.2 Special Meetings. Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than ten percent of the stock of the Association. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than ten days prior to the date fixed for such meeting, to each shareholder at his address appearing on the books of the Association, a notice stating the purpose of the meeting. Section 1.3 Nominations for Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the bank entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of the bank, shall be made in writing and shall be delivered or mailed to the President of the Bank and to the Comptroller of the Currency, Washington, D. C., not less than 14 days nor more than 50 days prior to any meeting of stockholders called for the election of directors, provided however, that if less than 21 days' notice of such meeting is given to 2 20 shareholders, such nomination shall be mailed or delivered to the President of the Bank and to the Comptroller of the Currency not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the bank that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the bank owned by the notifying shareholder. Nominations not made in accordance herewith may, in his discretion, be disregarded by the chairman of the meeting, and upon his instructions, the vote tellers may disregard all votes cast for each such nominee. Section 1.4 Judges of Election. The Board may at any time appoint from among the shareholders three or more persons to serve as Judges of Election at any meeting of shareholders; to act as judges and tellers with respect to all votes by ballot at such meeting and to file with the Secretary of the meeting a Certificate under their hands, certifying the result thereof. Section 1.5 Proxies. Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this Association shall act as proxy. Proxies shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. Proxies shall be dated and shall be filed with the records of the meeting. Section 1.6 Quorum. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law; but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. ARTICLE II Directors Section 2.1 Board of Directors. The Board of Directors (hereinafter referred to as the "Board"), shall have power to manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by said Board. 3 21 Section 2.2 Number. The Board shall consist of not less than five nor more than twenty-five directors, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which, (1) exceeds by more than two the number of directors last elected by shareholders where such number was fifteen or less, and (2) to a number which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more, but in no event shall the number of directors exceed twenty-five. Section 2.3 Organization Meeting. The Secretary of the meeting upon receiving the certificate of the judges, of the result of any election, shall notify the directors-elect of their election and of the time at which they are required to meet at the Main Office of the Association for the purpose of organizing the new Board and electing and appointing officers of the Association for the succeeding year. Such meeting shall be held as soon thereafter as practicable. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting from time to time, until a quorum is obtained. Section 2.4 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place and time as may be designated by resolution of the Board of Directors. Upon adoption of such resolution, no further notice of such meeting dates or the places or times thereof shall be required. Upon the failure of the Board of Directors to adopt such a resolution, regular meetings of the Board of Directors shall be held, without notice, on the third Tuesday in February, April, June, August, October and December, commencing with the year 1997, at the main office or at such other place and time as may be designated by the Board of Directors. When any regular meeting of the Board would otherwise fall on a holiday, the meeting shall be held on the next business day unless the Board shall designate some other day. Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by the President of the Association, or at the request of three (3) or more directors. Each member of the Board of Directors shall be given notice stating the time and place, by telegram, letter, or in person, of each such special meeting. Section 2.6 Quorum. A majority of the directors shall constitute a quorum at any meeting, except when otherwise provided by law; but a less 4 22 number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. Section 2.7 Vacancies. When any vacancy occurs among the directors, the remaining members of the Board, in accordance with the laws of the United States, may appoint a director to fill such vacancy at any regular meeting of the Board, or at a special meeting called for that purpose. Section 2.8 Advisory Boards. The Board of Directors may appoint Advisory Boards for each of the states in which the Association conducts operations. Each such Advisory Board shall consist of as many persons as the Board of Directors may determine. The duties of each Advisory Board shall be to consult and advise with the Board of Directors and senior officers of the Association in such state with regard to the best interests of the Association and to perform such other duties as the Board of Directors may lawfully delegate. The senior officer in such state, or such officers as directed by such senior officer, may appoint advisory boards for geographic regions within such state and may consult with the State Advisory Boards prior to such appointments. ARTICLE III Committees of the Board Section 3.1 The Board of Directors, by resolution adopted by a majority of the number of directors fixed by these By-Laws, may designate two or more directors to constitute an Executive Committee and other committees, each of which, to the extent authorized by law and provided in such resolution, shall have and may exercise all of the authority of the Board of Directors and the management of the Association. The designation of any committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility or liability imposed upon it or any member of the Board of Directors by law. The Board of Directors reserves to itself alone the power to act on (1) dissolution, merger or consolidation, or disposition of substantially all corporate property, (2) designation of committees or filling vacancies on the Board of Directors or on a committee of the Board (except as hereinafter provided), (3) adoption, amendment or repeal of By-laws, (4) amendment or repeal of any resolution of the Board which by its terms is not so amendable or repealable, and (5) declaration of dividends, issuance of stock, or recommendations to stockholders of any action requiring stockholder approval. The Board of Directors or the Chairman of the Board of Directors of the Association may change the membership of any committee at any time, fill 5 23 vacancies therein, discharge any committee or member thereof either with or without cause at any time, and change at any time the authority and responsibility of any such committee. A majority of the members of any committee of the Board of Directors may fix such committee's rules of procedure. All action by any committee shall be reported to the Board of Directors at a meeting succeeding such action, except such actions as the Board may not require to be reported to it in the resolution creating any such committee. Any action by any committee shall be subject to revision, alteration, and approval by the Board of Directors, except to the extent otherwise provided in the resolution creating such committee; provided, however, that no rights or acts of third parties shall be affected by any such revision or alteration. ARTICLE IV Officers and Employees Section 4.1 Officers. The officers of the Association may be a Chairman of the Board, a Vice Chairman of the Board, one or more Chairmen or Vice Chairmen (who shall not be required to be directors of the Association), a President, one or more Vice Presidents, a Secretary, a Cashier or Treasurer, and such other officers, including officers holding similar or equivalent titles to the above in regions, divisions or functional units of the Association, as may be appointed by the Board of Directors. The Chairman of the Board and the President shall be members of the Board of Directors. Any two or more offices may be held by one person, but no officer shall sign or execute any document in more than one capacity. Section 4.2 Election, Term of Office, and Qualification. Each officer shall be chosen by the Board of Directors and shall hold office until the annual meeting of the Board of Directors held next after his election or until his successor shall have been duly chosen and qualified, or until his death, or until he shall resign, or shall have been disqualified, or shall have been removed from office. Section 4.2(a) Officers Acting as Assistant Secretary. Notwithstanding Section 1 of these By-laws, any Senior Vice President, Vice President, or Assistant Vice President shall have, by virtue of his office, and by authority of the By-laws, the authority from time to time to act as an Assistant Secretary of the Bank, and to such extent, said officers are appointed to the office of Assistant Secretary. 6 24 Section 4.3 Chief Executive Officer. The Board of Directors shall designate one of its members to be the President of this Association, and the officer so designated shall be an ex officio member of all committees of the Association except the Examining Committee, and its Chief Executive Officer unless some other officer is so designated by the Board of Directors. Section 4.4 Duties of Officers. The duties of all officers shall be prescribed by the Board of Directors. Nevertheless, the Board of Directors may delegate to the Chief Executive Officer the authority to prescribe the duties of other officers of the corporation not inconsistent with law, the charter, and these By-laws, and to appoint other employees, prescribe their duties, and to dismiss them. Notwithstanding such delegation of authority, any officer or employee also may be dismissed at any time by the Board of Directors. Section 4.5 Other Employees. The Board of Directors may appoint from time to time such tellers, vault custodians, bookkeepers, and other clerks, agents, and employees as it may deem advisable for the prompt and orderly transaction of the business of the Association, define their duties, fix the salary to be paid them, and dismiss them. Subject to the authority of the Board of Directors, the Chief Executive Officer or any other officer of the Association authorized by him, may appoint and dismiss all such tellers, vault custodians, bookkeepers and other clerks, agents, and employees, prescribe their duties and the conditions of their employment, and from time to time fix their compensation. Section 4.6 Removal and Resignation. Any officer or employee of the Association may be removed either with or without cause by the Board of Directors. Any employee other than an officer elected by the Board of Directors may be dismissed in accordance with the provisions of the preceding Section 4.5. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chief Executive Officer of the Association. Any such resignation shall become effective upon its being accepted by the Board of Directors, or the Chief Executive Officer. ARTICLE V Fiduciary Powers Section 5.1 Capital Management Group. There shall be an area of this Association known as the Capital Management Group which shall be responsible for the exercise of the fiduciary powers of this Association. The Capital Management Group shall consist of four service areas: Fiduciary Services, Retail Services, Investments and Marketing. The Fiduciary Services unit shall consist of 7 25 personal trust, employee benefits, corporate trust and operations. The General Office for the Fiduciary Services unit shall be located in Charlotte, N.C., with City Trust Offices located in such cities within the State of North Carolina as designated by the Board of Directors. Section 5.2 Trust Officers. There shall be a General Trust Officer of this Association whose duties shall be to manage, supervise and direct all the activities of the Capital Management Group. Further, there shall be one or more Senior Trust Officers designated to assist the General Trust Officer in the performance of his duties. They shall do or cause to be done all things necessary or proper in carrying out the business of the Capital Management Group in accordance with provisions of applicable law and regulation. Section 5.3 Capital Management/General Trust Committee. There shall be a Capital Management/General Trust Committee composed of not less than four (4) members of the Board of Directors or officers of this Association who shall be appointed annually or from time to time by the Board of Directors of the Association. The General Trust Officer shall serve as an ex-officio member of the Committee. Each member shall serve until his successor is appointed. The Board of Directors or the Chairman of the Board may change the membership of the Capital Management/General Trust Committee at any time, fill vacancies therein, or discharge any member thereof with or without cause at any time. The Committee shall counsel and advise on all matters relating to the business or affairs of the Capital Management Group and shall adopt overall policies for the conduct of the business of the Capital Management Group including but not limited to: general administration, investment policies, new business development, and review for approval of major assignments of functional responsibilities. The Committee shall meet at least quarterly or as called for by its Chairman or any three (3) members of the Committee. A quorum shall consist of three (3) members. In carrying out its responsibilities, the Capital Management/General Trust Committee shall review the actions of all officers, employees and committees utilized by this Association in connection with the activities of the Capital Management Group and may assign the administration and performance of any fiduciary powers or duties to any of such officers or employees or to the Investment Policy Committee, Personal Trust Administration Committee, Account Review Committee, Corporate and Institutional Accounts Committee, or any other committees it shall designate. One of the methods to be used in the review process will be the thorough scrutiny of the Report of Examination by the Office of the Comptroller of the Currency and the reports of the Audit Division of First Union Corporation, as they relate to the activities of the Capital Management Group. These reviews shall be in addition to reviews of such reports by the Audit Committee of the Board of Directors. The Chairman of the Capital Management/ General Trust 8 26 Committee shall be appointed by the Chairman of the Board of Directors. He shall cause to be recorded in appropriate minutes all actions taken by the Committee. The minutes shall be signed by its Secretary and approved by its Chairman. Further, the Committee shall summarize all actions taken by it and shall submit a report of its proceedings to the Board of Directors at its next regularly scheduled meeting following a meeting of the Capital Management/General Trust Committee. As required by Section 9.7 of Regulation 9 of the Comptroller of the Currency, the Board of Directors retains responsibility for the proper exercise of the fiduciary powers of this Association. The Fiduciary Services unit of the Capital Management Group will maintain a list of securities approved for investment in fiduciary accounts and will from time to time provide the Capital Management/General Trust Committee with current information relative to such list and also with respect to transactions in other securities not on such list. It is the policy of this Association that members of the Capital Management/General Trust Committee should not buy, sell or trade in securities which are on such approved list or in any other securities in which the Fiduciary Services unit has taken, or intends to take, a position in fiduciary accounts in any circumstances in which any such transaction could be viewed as a possible conflict of interest or could constitute a violation of applicable law or regulation. Accordingly, if any such securities are owned by any member of the Capital Management/General Trust Committee at the time of appointment to such Committee, the Capital Management Group shall be promptly so informed in writing. If any member of the Capital Management/General Trust Committee intends to buy, sell, or trade in any such securities while serving as a member of the Committee, he should first notify the Capital Management Group in order to make certain that any proposed transaction will not constitute a violation of this policy or of applicable law or regulation. Section 5.4 Investment Policy Committee. There shall be an Investment Policy Committee composed of not less than seven (7) officers and/or employees of this Association who shall be appointed annually or from time to time by the Board of Directors. Each member shall serve until his successor is appointed. Meetings shall be called by the Chairman or any two (2) members of the Committee. A quorum shall consist of five (5) members. The Investment Policy Committee shall exercise such fiduciary powers and perform such duties as may be assigned to it by the Capital Management/General Trust Committee. All actions taken by the Investment Policy Committee shall be recorded in appropriate minutes, signed by the Secretary thereof, approved by its Chairman and submitted to the Capital Management/General Trust Committee at its next ensuing regular meeting for its review and approval. 9 27 Section 5.5 Personal Trust Administration Committee. There shall be a Personal Trust Administration Committee composed of not less than five (5) officers, who shall be appointed annually or from time to time by the Board of Directors. Each member shall serve until his successor is appointed. Meetings shall be called by the Chairman or any three (3) members of the Committee. A quorum shall consist of three (3) members. The Personal Trust Administration Committee shall exercise such fiduciary powers and perform such duties as may be assigned to it by the Capital Management/General Trust Committee. All action taken by the Personal Trust Administration Committee shall be recorded in appropriate minutes signed by the Secretary thereof, approved by its Chairman, and submitted to the Capital Management/General Trust Committee at its next ensuing regular meeting for its review and approval. Section 5.6 Account Review Committee. There shall be an Account Review Committee composed of not less than four (4) officers and/or employees of this Association, who shall be appointed annually or from time to time by the Board of Directors. Each member shall serve until his successor is appointed. Meetings shall be called by the Chairman or any two (2) members of the Committee. A quorum shall consist of three (3) members. The Account Review Committee shall exercise such fiduciary powers and perform such duties as may be assigned to it by the Capital Management/General Trust Committee. All actions taken by the Account Review Committee shall be recorded in appropriate minutes, signed by the Secretary thereof, approved by its Chairman and submitted to the Capital Management/ General Trust Committee at its next ensuing regular meeting for its review and approval. Section 5.7 Corporate and Institutional Accounts Committee. There shall be a Corporate and Institutional Accounts Committee composed of not less than five (5) officers and/or employees of this Association, who shall be appointed annually, or from time to time, by the Capital Management/General Trust Committee and approved by the Board of Directors. Meetings may be called by the Chairman or any two (2) members of the Committee. A quorum shall consist of three (3) members. The Corporate and Institutional Accounts Committee shall exercise such fiduciary powers and duties as may be assigned to it by the General Trust Committee. All actions taken by the Corporate and Institutional Accounts Committee shall be recorded in appropriate minutes, signed by the Secretary thereof, approved by its Chairman and made available to the General Trust Committee at its next ensuing regular meeting for its review and approval. 10 28 ARTICLE VI Stock and Stock Certificates Section 6.1 Transfers. Shares of stock shall be transferable on the books of the Association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all rights and liabilities of the prior holder of such shares. Section 6.2 Stock Certificates. Certificates of stock shall bear the signature of the Chairman, the Vice Chairman, the President, or a Vice President (which may be engraved, printed, or impressed), and shall be signed manually or by facsimile process by the Secretary, Assistant Secretary, Cashier, Assistant Cashier, or any other officer appointed by the Board of Directors for that purpose, to be known as an Authorized Officer, and the seal of the Association shall be engraved thereon. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the Association properly endorsed. ARTICLE VII Corporate Seal Section 7.1 The President, the Cashier, the Secretary, or any Assistant Cashier, or Assistant Secretary, or other officer thereunto designated by the Board of Directors shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form. ARTICLE VIII Miscellaneous Provisions Section 8.1 Fiscal Year. The fiscal year of the Association shall be the calendar year. Section 8.2 Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, notices, applications, schedules, accounts, affidavits, bonds, undertakings, proxies, and other 11 29 instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted in behalf of the Association by the Chairman of the Board, the Vice Chairman of the Board, any Chairman or Vice Chairman, the President, any Vice President or Assistant Vice President, the Secretary or any Assistant Secretary, the Cashier or Treasurer or any Assistant Cashier or Assistant Treasurer, or any officer holding similar or equivalent titles to the above in any regions, divisions or functional units of the Association, or, if in connection with the exercise of fiduciary powers of the Association, by any of said officers or by any Trust Officer or Assistant Trust Officer (or equivalent titles); provided, however, that where required, any such instrument shall be attested by one of said officers other than the officer executing such instrument. Any such instruments may also be executed, acknowledged, verified, delivered or accepted in behalf of the Association in such other manner and by such other officers as the Board of Directors may from time to time direct. The provisions of this Section 8.2 are supplementary to any other provision of these By-laws. Section 8.3 Records. The Articles of Association, the By-laws, and the proceedings of all meetings of the shareholders, the Board of Directors, standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary, Cashier, or other officer appointed to act as Secretary of the meeting. ARTICLE IX By-laws Section 9.1 Inspection. A copy of the By-laws, with all amendments thereto, shall at all times be kept in a convenient place at the Head Office of the Association, and shall be open for inspection to all shareholders, during banking hours. Section 9.2 Amendments. The By-laws may be amended, altered or repealed, at any regular or special meeting of the Board of Directors, by a vote of a majority of the whole number of Directors. 12 30 Exhibit A First Union National Bank Article X Emergency By-laws In the event of an emergency declared by the President of the United States or the person performing his functions, the officers and employees of this Association will continue to conduct the affairs of the Association under such guidance from the directors or the Executive Committee as may be available except as to matters which by statute require specific approval of the Board of Directors and subject to conformance with any applicable governmental directives during the emergency. OFFICERS PRO TEMPORE AND DISASTER Section 1. The surviving members of the Board of Directors or the Executive Committee shall have the power, in the absence or disability of any officer, or upon the refusal of any officer to act, to delegate and prescribe such officer's powers and duties to any other officer, or to any director, for the time being. Section 2. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of this Association by its directors and officers as contemplated by these By-laws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Association in accordance with the provisions of Article II of these By-laws; and in addition, such Committee shall be empowered to exercise all of the powers reserved to the General Trust Committee under Section 5.3 of Article V hereof. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, any three available directors shall constitute the Executive Committee for the full conduct and management of the affairs and business of the Association in accordance with the foregoing provisions of this section. This By-law shall be subject to implementation by resolutions of the Board of Directors passed from time to time for that purpose, and any provisions of these By-laws (other than this section) and any resolutions which are contrary to the provisions of this section or to the provisions of any such implementary 13 31 resolutions shall be suspended until it shall be determined by an interim Executive Committee acting under this section that it shall be to the advantage of this Association to resume the conduct and management of its affairs and business under all of the other provisions of these By-laws. Officer Succession BE IT RESOLVED, that if consequent upon war or warlike damage or disaster, the Chief Executive Officer of this Association cannot be located by the then acting Head Officer or is unable to assume or to continue normal executive duties, then the authority and duties of the Chief Executive Officer shall, without further action of the Board of Directors, be automatically assumed by one of the following persons in the order designated: Chairman President Division Head/Area Administrator - Within this officer class, officers shall take seniority on the basis of length of service in such office or, in the event of equality, length of service as an officer of the Association. Any one of the above persons who in accordance with this resolution assumes the authority and duties of the Chief Executive Officer shall continue to serve until he resigns or until five-sixths of the other officers who are attached to the then acting Head Office decide in writing he is unable to perform said duties or until the elected Chief Executive Officer of this Association, or a person higher on the above list, shall become available to perform the duties of Chief Executive Officer of the Association. BE IT FURTHER RESOLVED, that anyone dealing with this Association may accept a certification by any three officers that a specified individual is acting as Chief Executive Officer in accordance with this resolution; and that anyone accepting such certification may continue to consider it in force until notified in writing of a change, said notice of change to carry the signatures of three officers of the Association. Alternate Locations The offices of the Association at which its business shall be conducted shall be the main office thereof in each city which is designated as a City Office (and branches, if any), and any other legally authorized location which may be leased or acquired by this Association to carry on its business. During an emergency resulting in any authorized place of business of this Association being unable to function, the business ordinarily conducted at such location shall be relocated 14 32 elsewhere in suitable quarters, in addition to or in lieu of the locations heretofore mentioned, as may be designated by the Board of Directors or by the Executive Committee or by such persons as are then, in accordance with resolutions adopted from time to time by the Board of Directors dealing with the exercise of authority in the time of such emergency, conducting the affairs of this Association. Any temporarily relocated place of business of this Association shall be returned to its legally authorized location as soon as practicable and such temporary place of business shall then be discontinued. Acting Head Offices BE IT RESOLVED, that in case of and provided because of war or warlike damage or disaster, the General Office of this Association, located in Charlotte, North Carolina, is unable temporarily to continue its functions, the Raleigh office, located in Raleigh, North Carolina, shall automatically and without further action of this Board of Directors, become the "Acting Head Office of this Association"; BE IT FURTHER RESOLVED, that if by reason of said war or warlike damage or disaster, both the General Office of this Association and the said Raleigh Office of this Association are unable to carry on their functions, then and in such case, the Asheville Office of this Association, located in Asheville, North Carolina, shall, without further action of this Board of Directors, become the "Acting Head Office of this Association"; and if neither the Raleigh Office nor the Asheville Office can carry on their functions, then the Greensboro Office of this Association, located in Greensboro, North Carolina, shall, without further action of this Board of Directors, become the "Acting Head Office of this Association"; and if neither the Raleigh Office, the Asheville Office, nor the Greensboro Office can carry on their functions, then the Lumberton Office of this Association, located in Lumberton, North Carolina, shall, without further action of this Board of Directors, become the "Acting Head Office of this Association". The Head Office shall resume its functions at its legally authorized location as soon as practicable. 15 EX-99.1 54 FORM OF LETTER OF TRANSMITTAL 1 EX. 99.1 LETTER OF TRANSMITTAL THE J.H. HEAFNER COMPANY, INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 10% SENIOR NOTES DUE 2008 FOR UP TO $100,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS 10% SENIOR NOTES DUE 2008 PURSUANT TO THE PROSPECTUS DATED [ ], 1998 - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ], 1998 UNLESS EXTENDED OR TERMINATED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- The Exchange Agent for the Exchange Offer is: THE CHASE MANHATTAN BANK By Mail, Hand or Overnight Courier: Facsimile Transmission Number 55 Water Street (Eligible Institutions only): Room 234, North Building (212) 638-7375 or New York, New York 10041 (212) 344-9367 Attention: Carlos Esteves To Confirm Facsimile (IF BY MAIL, REGISTERED OR or for Information Call CERTIFIED MAIL RECOMMENDED) (212) 638-0828 DELIVERY OF THIS LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL") TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE TO A NUMBER, OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID TENDER OF THE J.H. HEAFNER COMPANY, INC. 10% SENIOR NOTES DUE 2008 (THE "INITIAL NOTES"). THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED AND SIGNED. All capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Prospectus (as defined below). This Letter of Transmittal is to be used by registered holders of Initial Notes ("Holders") if: (i) certificates representing Initial Notes are to be physically delivered to the Exchange Agent by such Holders; (ii) tender of Initial Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC" or the "Book-Entry Transfer Facility") pursuant to the procedures set forth in the Prospectus, dated [ ], 1998 (as the same may be amended from time to time, the "Prospectus") under the caption "The Exchange Offer -- Book-Entry Transfer" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Initial Notes or (iii) delivery of Initial Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures," and, in each case, instructions are not being transmitted through the DTC. Automated Tender Program ("ATOP"). DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. 2 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: By execution hereof, the undersigned acknowledges receipt of the Prospectus, dated [ ], 1998 (as the same may be amended from time to time, the "Prospectus"), of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and this Letter of Transmittal and the instructions hereto, which together constitute Company's offer to exchange (the "Exchange Offer") $1,000 principal amount of its 10% Senior Notes due 2008 (the "Exchange Notes") of the Company, upon the terms and subject to the conditions set forth in the Exchange Offer, for each $1,000 principal amount of its outstanding 10% Senior Notes due 2008 (the "Initial Notes"). Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Initial Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Initial Notes tendered herewith, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Initial Notes. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to such Initial Notes with full power of substitution (such power-of-attorney being deemed to be an irrevocable power coupled with an interest) to (i) present such Initial Notes and all evidences of transfer and authenticity to, or transfer ownership of, such Initial Notes on the account books maintained by the Book-Entry Transfer Facility to, or upon the order of, the Company, (ii) present such Initial Notes for transfer of ownership on the books of the Company or the trustee under the Indenture (the "Trustee") and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Initial Notes, all in accordance with the terms and conditions of the Exchange Offer as described in the Prospectus. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Initial Notes tendered hereby and to acquire Exchange Notes issuable upon the exchange of such tendered Initial Notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Initial Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim or right. The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of the Initial Notes tendered hereby or transfer ownership of such Initial Notes on the account books maintained by the book-entry transfer facility. The Exchange Offer is subject to certain conditions as set forth in the Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned recognizes that as a result of these conditions (which may be waived by the Company, in whole or in part, in the reasonable discretion of the Company), as more particularly set forth in the Prospectus, the Company may not be required to exchange any of the Initial Notes tendered hereby and, in such event, the Initial Notes not exchanged will be returned to the undersigned at the address shown above. THE EXCHANGE OFFER IS NOT BEING MADE TO ANY BROKER-DEALER WHO PURCHASED INITIAL NOTES DIRECTLY FROM THE COMPANY FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT OR ANY PERSON THAT IS AN "AFFILIATE" OF THE COMPANY WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES ACT. THE -2- 3 UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED INITIAL NOTES FROM ANY TENDERING HOLDER IF THE COMPANY DETERMINES, IN ITS REASONABLE DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS. The undersigned, if the undersigned is a beneficial holder, represents (or, if the undersigned is a broker, dealer, commercial bank, trust company or other nominee, represents that it has received representations from the beneficial owners of the Initial Notes (the "Beneficial Owner") stating) that, (i) the Exchange Notes to be acquired in connection with the Exchange Offer by the Holder and each Beneficial Owner of the Initial Notes are being acquired by the Holder and each such Beneficial Owner in the ordinary course of their business, (ii) the Holder and each such Beneficial Owner are not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes, (iii) the Holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the Exchange Notes cannot rely on the interpretations of the staff of the Commission discussed in the Prospectus under the caption "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and may only sell the Exchange Notes acquired by such person pursuant to a registration statement containing the selling security holder information required by Item 507 of Regulation S-K under the Securities Act, (iv) if the Holder is a broker-dealer that acquired Initial Notes as a result of market-making activities or other trading activities, it will deliver a prospectus in connection with any resale of Exchange Notes acquired in the Exchange Offer (but by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act) and (v) neither the Holder nor any such Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or of Parent or is a broker-dealer who purchased Initial Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act. EACH BROKER-DEALER WHO ACQUIRED INITIAL NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF EXCHANGE NOTES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE MAY BE. EACH PARTICIPATING BROKER-DEALER SHOULD CHECK THE BOX HEREIN UNDER THE CAPTION "FOR PARTICIPATING BROKER-DEALERS ONLY" IN ORDER TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS, AND ANY AMENDMENTS AND SUPPLEMENTS THERETO, FOR USE IN CONNECTION WITH RESALES OF THE EXCHANGE NOTES, AS -3- 4 WELL AS ANY NOTICES FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. IF NO PARTICIPATING BROKER- DEALERS CHECK SUCH BOX, OR IF ALL PARTICIPATING BROKER-DEALERS WHO HAVE CHECKED SUCH BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY HOLDERS WITH ANY NOTICES TO SUSPEND OR RESUME USE OF THE PROSPECTUS. The undersigned understands that tenders of the Initial Notes pursuant to any one of the procedures described under "The Exchange Offer -- Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company in accordance with the terms and subject to the conditions of the Exchange Offer. All authority herein conferred or agreed to be conferred by this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the heirs, legal representatives, successors and assigns, executors, administrators and trustees in bankruptcy of the undersigned and shall survive the death or incapacity of the undersigned. Tendered Initial Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date in accordance with the terms of the Exchange Offer. The undersigned understands that by tendering Initial Notes pursuant to one of the procedures described under "The Exchange Offer -- Procedures for Tendering" in the Prospectus and the instructions hereto, the tendering Holder will be deemed to have waived the right to receive any payment in respect of interest on the Initial Notes accrued up to the date of issuance of the Exchange Notes. The undersigned also understands and acknowledges that the Company reserves the right in its sole discretion to purchase or make offers for any Initial Notes that remain outstanding subsequent to the Expiration Date in the open market, in privately negotiated transactions, through subsequent exchange offers or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. The undersigned understands that the delivery and surrender of the Initial Notes is not effective, and the risk of loss of the Initial Notes does not pass to the Exchange Agent, until receipt by the Exchange Agent of this Letter of Transmittal, or a manually signed facsimile hereof, properly completed and duly executed, with any required signature guarantees, together with all accompanying evidences of authority and any other required documents in form satisfactory to the Company. All questions as to form of all documents and the validity (including time of receipt) and acceptance of tenders and withdrawals of Initial Notes will be determined by the Company, in its sole discretion, which determination shall be final and binding. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions," the undersigned hereby requests that any Initial Notes representing principal amounts not tendered or not accepted for exchange be issued in the name(s) of the undersigned and that Exchange Notes be issued in the name(s) of the undersigned (or, in the case of Initial Notes delivered by book-entry transfer, by credit to the account at the Book-Entry Transfer Facility). Similarly, unless otherwise indicated herein in the box entitled "Special Delivery Instructions," the undersigned hereby requests that any Initial Notes representing principal amounts not tendered or not accepted for exchange and Exchange Notes be delivered to the -4- 5 undersigned at the address(es) shown above. The undersigned recognizes that the Company has no obligation pursuant to the "Special Issuance Instructions" box or "Special Delivery Instructions" box to transfer any Initial Notes from the name of the registered Holder(s) thereof if the Company does not accept for exchange any of the principal amount of such Initial Notes so tendered. In order to properly complete this Letter of Transmittal, a Holder must (i) complete the box entitled "Method of Delivery" by checking one of the three boxes therein and supplying the appropriate information, (ii) complete the box entitled "Description of Initial Notes," (iii) if such Holder is a Participating Broker-Dealer (as defined below) and wishes to receive additional copies of the Prospectus for delivery in connection with resales of Exchange Notes (as defined below), check the applicable box, (iv) sign this Letter of Transmittal by completing the box entitled "Please Sign Here," (v) if appropriate, check and complete the boxes relating to the "Special Issuance Instructions" and "Special Delivery Instructions" and (vi) complete the Substitute Form W-9. Each Holder should carefully read the detailed Instructions below prior to the completing this Letter of Transmittal. See "The Exchange Offer -- Procedures For Tendering" in the Prospectus. Holders of Initial Notes that are tendering by book-entry transfer to the Exchange Agent's account at DTC can execute the tender through ATOP, for which the transaction will be eligible. DTC participants that are accepting the Exchange Offer should transmit their acceptance to DTC, which will edit and verify the acceptance and execute a book-entry delivery to the Exchange Agent's account at DTC. DTC will then send an Agent's message to the Exchange Agent for its acceptance. Delivery of the Agent's Message by DTC will satisfy the terms of the Exchange Offer as to execution and delivery of a Letter of Transmittal by the participant identified in the Agent's Message. DTC participants may also accept the Exchange Offer by submitting a Notice of Guaranteed Delivery through ATOP. If Holders desire to tender Initial Notes pursuant to the Exchange Offer and (i) certificates representing such Initial Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Holder's Initial Notes and all other required documents to reach the Exchange Agent prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date, such Holders may effect a tender of such Initial Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2 below. A Holder having Initial Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contract such broker, dealer, commercial bank, trust company or other nominee if they desire to accept the Exchange Offer with respect to the Initial Notes so registered. THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF INITIAL NOTES BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. Your bank or broker can assist you in completing this form. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Exchange Agent, whose address and telephone number appear on the front cover of this Letter of Transmittal. See Instruction 11 below. -5- 6 - -------------------------------------------------------------------------------- METHOD OF DELIVERY - -------------------------------------------------------------------------------- / / CHECK HERE IF CERTIFICATES FOR TENDERED INITIAL NOTES ARE BEING DELIVERED HEREWITH. / / CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution:________________________________________ Account Number: ________________ Transaction Code Number: __________ / / CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT PURSUANT TO INSTRUCTION 2 BELOW AND COMPLETE THE FOLLOWING: Name of Registered Holder(s): ________________________________________ Window ticket No. (if any): __________________________________________ Date of Execution of Notice of Guaranteed Delivery: __________________ Name of Eligible Institution that Guaranteed Delivery: _______________ If Delivered by Book-Entry Transfer (yes or no): _____________________ Account Number: ________________ Transaction Code Number: __________ - -------------------------------------------------------------------------------- List below the Initial Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately signed schedule and affix the schedule to this Letter of Transmittal.
- ------------------------------------------------------------------------------------------------------------------------ DESCRIPTION OF INITIAL NOTES - ------------------------------------------------------------------------------------------------------------------------ NAME(S) AND ADDRESS(ES) OF HOLDER(S) (PLEASE FILL IN, IF CERTIFICATE AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL BLANK) NUMBER(S) AMOUNT REPRESENTED AMOUNT TENDERED - ------------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- TOTAL - ------------------------------------------------------------------------------------------------------------------------------
-6- 7 - ------------------------------------------------------------------------------- FOR PARTICIPATING BROKER-DEALERS ONLY - ------------------------------------------------------------------------------- / / CHECK HERE AND PROVIDE THE INFORMATION REQUESTED BELOW IF YOU ARE A PARTICIPATING BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND, DURING THE NINE-MONTH PERIOD FOLLOWING THE CONSUMMATION OF THE EXCHANGE OFFER, 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO, AS WELL AS ANY NOTICES FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. (IF NO PARTICIPATING BROKER-DEALERS CHECK THIS BOX, OR IF ALL PARTICIPATING BROKER-DEALERS WHO HAVE CHECKED THIS BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY NOTICES TO ANY HOLDERS TO SUSPEND OR RESUME USE OF THE PROSPECTUS.) PROVIDE THE NAME OF THE INDIVIDUAL WHO SHOULD RECEIVE, ON BEHALF OF THE HOLDER, ADDITIONAL COPIES OF THE PROSPECTUS, AND AMENDMENTS AND SUPPLEMENTS THERETO, AND ANY NOTICES TO SUSPEND AND RESUME USE OF THE PROSPECTUS: NAME:__________________________________________________________________________ ADDRESS:_______________________________________________________________________ TELEPHONE NO.:_________________________________________________________________ FACSIMILE NO.:_________________________________________________________________ - -------------------------------------------------------------------------------- -7- 8 PLEASE SIGN HERE (TO BE COMPLETED BY ALL HOLDERS OF INITIAL NOTES REGARDLESS OF WHETHER INITIAL NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH) This Letter of Transmittal must be signed by the Holder(s) of Initial Notes exactly as their name(s) appear(s) on certificate(s) for Initial Notes or, if delivered by a participant in the Book-Entry Transfer Facility, exactly as such participant's name appears on a security position listing as the owner of Initial Notes, or by person(s) authorized to become Holder(s) by endorsements and documents transmitted with this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below under "Capacity" and submit evidence satisfactory to the Company of such person's authority to so act. See Instruction 4 below. If the signature appearing below is not of the record holder(s) of the Initial Notes, then the record holder(s) must sign a valid bond power. X __________________________________________________________________________ X __________________________________________________________________________ SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY DATE: ______________________________________________________________________ NAME: ______________________________________________________________________ CAPACITY: __________________________________________________________________ ADDRESS: ___________________________________________________________________ ___________________________________________________________________ (INCLUDING ZIP CODE) AREA CODE AND TELEPHONE NO.: _______________________________________________ PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN - ------------------------------------------------------------------------------- / / CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. NAME: ________________________________________________________________________ ADDRESS: _____________________________________________________________________ -8- 9 MEDALLION SIGNATURE GUARANTEE (SEE INSTRUCTION 4 BELOW) (CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION) _______________________________________________________________________________ NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES _______________________________________________________________________________ ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF FIRM _______________________________________________________________________________ AUTHORIZED SIGNATURE _______________________________________________________________________________ PRINTED NAME _______________________________________________________________________________ TITLE DATE:__________________________________________________________________________ -9- 10 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3, 4, 5 and 7) To be completed ONLY if Initial Notes in a principal amount not tendered or not accepted for exchange are to be issued in the name of, or Exchange Notes are to be issued in the name of, someone other than the person or persons whose signature(s) appear(s) within this Letter of Transmittal. Issue / / Initial Notes / / Exchange Notes (check as applicable) Name __________________________________________________________________________ (Please Print) Address________________________________________________________________________ _______________________________________________________________________________ (Include Zip Code) _______________________________________________________________________________ (Tax Identification or Social Security Number) (SEE SUBSTITUTE FORM W-9 HEREIN) Credit Initial Notes not tendered or not exchanged by book-entry transfer to the Book- Entry Transfer Facility account set below: _______________________________________________________________________________ (Book-Entry Transfer Facility Account Number) Credit Exchange Notes to the Book-Entry Transfer Facility account set below: _______________________________________________________________________________ (Book-Entry Transfer Facility Account Number) - ------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 9) To be completed ONLY if Initial Notes in a principal amount not tendered or not accepted for exchange or Exchange Notes are to be sent to someone other than the persons whose signature(s) appear(s) within this letter of transmittal or to an address different from that shown in the box entitled "Description of Initial Notes" within this Letter of Transmittal. Issue / / Initial Notes / / Exchange Notes (check as applicable) Name___________________________________________________________________________ (Please Print) Address________________________________________________________________________ _______________________________________________________________________________ (Include Zip Code) -10- 11 INSTRUCTIONS TO LETTER OF TRANSMITTAL FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR INITIAL NOTES OR BOOK-ENTRY CONFIRMATION; WITHDRAWAL OF TENDERS. To tender Initial Notes in the Exchange Offer, physical delivery of certificates for Initial Notes or confirmation of a book-entry transfer into the Exchange Agent's account with a Book-Entry Transfer Facility of Initial Notes tendered electronically, as well as a properly completed and duly executed copy or manually signed facsimile of this Letter of Transmittal, or in the case of a book-entry transfer, an Agent's Message, and any other Documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m. New York time on the Expiration Date. Tenders of Initial Notes in the Exchange Offer may be made prior to the Expiration Date in the manner described in the preceding sentence and otherwise in compliance with this Letter of Transmittal. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, CERTIFICATES FOR INITIAL NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING DELIVERY THROUGH DTC AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE HOLDER TENDERING INITIAL NOTES. IF SUCH DELIVERY IS MADE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED AND THAT SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF INITIAL NOTES WILL BE ACCEPTED. Except as otherwise provided below, the delivery will be made when actually received by the Exchange Agent. THIS LETTER OF TRANSMITTAL, CERTIFICATES FOR THE INITIAL NOTES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, NOT TO THE COMPANY, THE TRUSTEE OR DTC. Initial Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m. New York time on the Expiration Date. In order to be valid, notice of withdrawal of tendered Initial Notes must comply with the requirements set forth in the Prospectus under the caption "The Exchange Offer - -- Withdrawal of Tenders." 2. GUARANTEED DELIVERY PROCEDURES. If Holders desire to tender Initial Notes pursuant to the Exchange Offer and (i) certificates representing such Initial Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Holder's Initial Notes and all other required documents to reach the Exchange Agent prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date, such Holders may effect a tender of Initial Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." Pursuant to the guaranteed delivery procedures: (i) such tender must be made by or through an Eligible Institution; (ii) prior to the Expiration Date the Exchange Agent must have received from such Eligible Institution at one of the addresses set forth on the cover of this Letter of Transmittal a properly completed and validly executed Notice of Guaranteed Delivery (by manually signed facsimile transmission, mail or hand delivery) in substantially the form provided with the Prospectus, setting -11- 12 forth the name(s) and address(es) of the registered Holder(s) and the principal amount of Initial Notes being tendered and stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange ("NYSE") trading days from the date of the Notice of Guaranteed Delivery, the Letter of Transmittal (or a manually signed facsimile thereof) properly completed and duly executed, or, in the case of a book-entry transfer an Agent's Message together with certificates representing the Initial Notes (or confirmation of book-entry transfer of such Initial Notes into the Exchange Agent's account at a Book-Entry Transfer Facility), and any other documents required by this Letter of Transmittal and the instructions thereto, will be deposited by such Eligible Institution with the Exchange Agent; and (iii) this Letter of Transmittal (or a manually signed facsimile thereof), properly completed and validly executed with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, together with certificates for all Initial Notes in proper form for transfer (or a Book- Entry Confirmation with respect to all tendered Initial Notes), and any other required documents must be received by the Exchange Agent within three NYSE trading days after the date of such Notice of Guaranteed Delivery. 3. PARTIAL TENDERS. If less than the entire principal amount of any Initial Notes evidenced by a submitted certificate is tendered, the tendering Holder must fill in the principal amount tendered in the last column of the box entitled "Description of Initial Notes" herein. The entire principal amount represented by the certificates for all Initial Notes delivered to the Exchange Agent will be deemed to have been tendered, unless otherwise indicated. The entire principal amount of all Initial Notes not tendered or not accepted for exchange will be sent (or, if tendered by book-entry transfer, returned by credit to the account at the Book-Entry Transfer Facility designated herein) to the Holder unless otherwise provided in the "Special Issuance Instructions" or "Special Delivery Instructions" boxes of this Letter of Transmittal. 4. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the Holder(s) of the Initial Notes tendered hereby the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If this Letter of Transmittal is signed by a participant in one of the Book-Entry Transfer Facilities whose name is shown as the owner of the Initial Notes tendered hereby, the signature must correspond with the name shown on the security position listing as the owner of the Initial Notes. If any of the Initial Notes tendered hereby are registered in the name of two or more Holders, all such Holders must sign this Letter of Transmittal. If any tendered Initial Notes are registered in client names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary accompanying documents as there are different names in which certificates are held. If this Letter of Transmittal or any certificates for Initial Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority so to act must be submitted with this Letter of Transmittal. -12- 13 IF THIS LETTER OF TRANSMITTAL IS EXECUTED BY A PERSON OR ENTITY WHO IS NOT THE REGISTERED HOLDER, THEN THE REGISTERED HOLDER MUST SIGN A VALID BOND POWER WITH THE SIGNATURE OF SUCH REGISTERED HOLDER GUARANTEED BY A PARTICIPANT IN A RECOGNIZED MEDALLION SIGNATURE PROGRAM (A "MEDALLION SIGNATURE GUARANTOR"). No signature guarantee is required if (i) this Letter of Transmittal is signed by the registered Holder(s) of the Initial Notes tendered herewith (or by a participant in one of the Book-Entry Transfer Facilities whose name appears on a security position listing as the owner of Initial Notes) and certificates for Exchange Notes or for any Initial Notes for principal amounts not tendered or not accepted for exchange are to be issued directly to such Holder(s) or, if tendered by a participant in one of the Book-Entry Transfer Facilities, any Initial Notes for principal amounts not tendered or not accepted for exchange are to be credited to such participant's account at such Book-Entry Transfer Facility and neither the "Special Issuance Instructions" box nor the "Special Delivery Instructions" box of this Letter of Transmittal has been completed or (ii) such Initial Notes are tendered for the account of an Eligible Institution. IN ALL OTHER CASES ALL SIGNATURES ON LETTERS OF TRANSMITTAL ACCOMPANYING INITIAL NOTES MUST BE GUARANTEED BY A MEDALLION SIGNATURE GUARANTOR. In all such other cases (including if this Letter of Transmittal is not signed by the Holder), the Holder must either properly endorse the certificates for Initial Notes tendered or transmit a separate, properly completed bond power with this Letter of Transmittal (in either case, executed exactly as the name(s) of the registered Holder(s) appear(s) on such Initial Notes, and, with respect to a participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Initial Notes, exactly as the name(s) of the participant(s) appear(s) on such security position listing), with the signature on the endorsement or bond power guaranteed by a Medallion Signature Guarantor, unless such certificates or bond powers are executed by an Eligible Institution. Endorsements on certificates for Initial Notes and signatures on bond powers provided in accordance with this Instruction 4 by registered Holders not executing this Letter of Transmittal must be guaranteed by a Medallion Signature Guarantor 5. SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS. Tendering Holders should indicate in the applicable box or boxes the name and address to which Initial Notes for principal amounts not tendered or not accepted for exchange or certificates for Exchange Notes, if applicable, are to be issued or sent, if different from the name and address of the Holder signing this Letter of Transmittal. In the case of payment to a different name, the taxpayer identification or social security number of the person named must also be indicated. 6. TAXPAYER IDENTIFICATION NUMBER. Each tendering Holder is required to provide the Exchange Agent with the Holder's social security or Federal employer identification number, on Substitute Form W-9 which is provided under "Important Tax Information" below, or alternatively to establish another basis for exemption from backup withholding. A Holder must cross out Item (2) in the Certification box in Part III of Substitute Form W-9 if such Holder is subject to backup withholding. Failure to provide the information on the form may subject such Holder to 31% Federal backup withholding tax on any payment made to the Holder with respect to the Exchange Offer. The appropriate box in Part I of Substitute Form W-9 should be checked if the tendering or consenting Holder has not been issued a Taxpayer Identification Number ("TIN") and has either applied for a TIN or intends to apply for a TIN in the near future. If the box in Part I of Substitute Form W-9 is checked, the Holder should also sign the attached Certification of Awaiting Taxpayer Identification -13- 14 Number. If the Exchange Agent is not provided with a TIN within 60 days thereafter, the Exchange Agent will withhold 31% on all such payments of the Exchange Notes until a TIN is provided to the Exchange Agent. 7. TRANSFER TAXES. The Company will pay all transfer taxes applicable to the exchange and transfer of Initial Notes pursuant to the Exchange Offer, except if (i) deliveries of certificates for Initial Notes for principal amounts not tendered or not accepted for exchange are registered or issued in the name of any person other than the Holder of Initial Notes tendered thereby, (ii) tendered certificates are registered in the name of any person other than the person signing this Letter of Transmittal or (iii) a transfer tax is imposed for any reason other than the exchange of Initial Notes pursuant to the Exchange Offer, in which case the amount of any transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith the amount of taxes will be billed directly to such tendering Holder. 8. IRREGULARITIES. All questions as to the form of all documents and the validity (including time of receipt) and acceptance of all tenders and withdrawals of Initial Notes will be determined by the Company, in its sole discretion which determination shall be final and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF INITIAL NOTES WILL NOT BE CONSIDERED VALID. The Company reserves the absolute right to reject any and all tenders of Initial Notes that are not in proper form or the acceptance of which, in the Company's opinion, would be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Initial Notes. The Company's interpretations of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding. Any defect or irregularity in connection with tenders of Initial Notes must be cured within such time as the Company determines, unless waived by the Company. Tenders of Initial Notes shall not be deemed to have been made until all defects or irregularities have been waived by the Company or cured. A defective tender (which defect is not waived by the Company or cured by the Holder) will not constitute a valid tender of Initial Notes and will not entitle the Holder to Exchange Notes. None of the Company, the Trustee, the Exchange Agent or any other person will be under any duty to give notice of any defect or irregularity in any tender or withdrawal of any Initial Notes, or incur any liability to Holders for failure to give any such notice. 9. WAIVER OF CONDITIONS. The Company reserves the right, in its reasonable discretion, to amend or waive any of the conditions to the Exchange Offer. 10. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES FOR INITIAL NOTES. Any Holder whose certificates for Initial Notes have been mutilated, lost, stolen or destroyed should write to or telephone the Trustee at the address or telephone number set forth on the cover of this Letter of Transmittal for the Exchange Agent. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering Initial Notes and requests for assistance or additional copies of the Prospectus, this Letter of Transmittal, the Notice of Guaranteed Delivery or other -14- 15 documents may be directed to the Exchange Agent, whose address and telephone number appear on the cover of this Letter of Transmittal. IMPORTANT TAX INFORMATION Under Federal income tax laws, a Holder who tenders Initial Notes prior to receipt of the Exchange Notes is required to provide the Exchange Agent with such Holder's correct TIN on the Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such Holder is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service ("IRS") and payments, including any Exchange Notes, made to such Holder with respect to Initial Notes exchanged pursuant to the Exchange Offer may be subject to backup withholding. Certain Holders (including among others, all corporations and certain foreign persons) are not subject to these backup withholding and reporting requirements. Exempt Holders should indicate their exempt status on the Substitute Form W-9. A foreign person may qualify as an exempt recipient by submitting to the Exchange Agent a properly completed IRS Form W-8 signed under penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional instructions. Holders are urged to consult their own tax advisors to determine whether they are exempt. If backup withholding applies, the Exchange Agent is required to withhold 31% of any payments made to the Holder or other payee. Backup withholding is not an additional Federal income tax. Rather, the Federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments, including any Exchange Notes, made with respect to Initial Notes exchanged pursuant to the Exchange Offer, the Holder is required to provide the Exchange Agent with (i) the Holder's correct TIN by completing the form below, certifying that the TIN provided on the Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (A) such Holder is exempt from backup withholding, (B) the Holder has not been notified by the IRS that the Holder is subject to backup withholding as a result of failure to report all interest or dividends or (C) the IRS has notified the Holder that the Holder is no longer subject to backup withholding, and (ii) if applicable, an adequate basis for exemption. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Holder is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the registered Holder. If the Initial Notes are held in more than one name or are held not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. -15- 16 PAYOR'S NAME: THE J.H. HEAFNER COMPANY, INC. PAYEE INFORMATION (Please print or type): Individual or business name (if joint account list first and circle the name of person or entity whose number you furnish in Part 1 below): _____________________________________________ Check appropriate box: SUBSTITUTE / / Individual/Sole Proprietor FORM W-9 / / Corporation / / Partnership / / Other DEPARTMENT OF THE TREASURY _____________________________________________ INTERNAL REVENUE SERVICE Address _____________________________________________ City, State and Zip Code PART I TAXPAYER IDENTIFICATION NUMBER ("TIN"): Enter your TIN in the box at right. For individuals this is your social security number; for other entities it is your employer identification number. Refer to the chart in Item A on page 1 of the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for further clarification. If you do not have a TIN, see instructions on how to obtain a TIN in Item C on page 2 of the Guidelines, check the appropriate box below indicating that you have applied for a TIN and, in addition to the Part III Certification, sign the attached Certification of Awaiting Taxpayer Identification Number. Social security number: _____________________________________________ Employer identification number: _____________________________________________ APPLIED FOR TIN / / PART II PAYEES EXEMPT FROM BACKUP WITHHOLDING: Check box. (See Item B on pages 1-2 of the Guidelines for further clarification. Even if you are exempt from backup withholding, you should still complete and sign the certification below): Exempt / / REQUEST FOR TAXPAYER PART III CERTIFICATION: You must cross out IDENTIFICATION NUMBER AND item 2 below if you have been notified by the CERTIFICATION Internal Revenue Service (the "IRS") that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return (See page 2 of the Guidelines for further clarification). Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me) and 2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by the IRS that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. Signature:___________________________________ Date:________________________________________ NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. -16- 17 YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE BOX "APPLIED FOR TIN" IN PART I OF SUBSTITUTE FORM W-9 CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify, under penalties of perjury, that a TIN has not been issued to me, and either (a) I have mailed or delivered an application to receive a TIN to the appropriate IRS Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that I must provide a TIN to the payor within 60 days of submitting this Substitute Form W-9 and that if I do not provide a TIN to the payor within 60 days, the payor is required to withhold 31% of all reportable payments thereafter to me until I furnish the payor with a TIN. Signature:_________________________________________ Date:_____________________ -17- 18 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 A. TIN -- The Taxpayer Identification Number for most individuals is their social security number. Refer to the following chart to determine the appropriate number:
- ------------------------------------------------------------------------------------------------------------------- GIVE THE SOCIAL SECURITY OR EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF: - ------------------------------------------------------------------------------------------------------------------- 1. Individual The individual 2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor (Uniform Gift to Minors Act) The minor(2) 4. a. Revocable savings trust (grantor is The grantor-trustee(1) also trustee) b. So-called trust account that is not a The actual owner(1) legal or valid trust under State law 5. Sole proprietorship The owner(3) 6. A valid trust, estate or pension trust Legal entity(4) 7. Corporate The corporation 8. Association, club, religious, charitable, The organization educational or other tax exempt organization 9. Partnership The partnership 10. A broker or registered nominee The broker or nominee 11. Account with the Department of The public entity Agriculture - -------------------------------------------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's name and social security number. (3) Show the individual's name. You may also enter your business name or "doing business as" name. You may use either your Social Security number or your employer identification number. (4) List first and circle the name of the legal trust, estate or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. B. EXEMPT PAYEES -- The following lists exempt payees. If you are exempt, you must nonetheless complete the form and provide your TIN in order to establish that you are exempt. Check the box in Part II of the form, sign and date the form. For this purpose, Exempt Payees include: (1) a corporation; (2) an organization exempt from tax under section 501(a), or an individual retirement plan (IRA) or a custodial account under section 403(b)(7); -18- 19 (3) the United States or any of its agencies or instrumentalities; (4) a state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities; (5) a foreign government or any of its political subdivisions, agencies or instrumentalities; (6) an international organization or any of its agencies or instrumentalities; (7) a foreign central bank of issue; (8) a dealer in securities or commodities required to register in the U.S. or a possession of the U.S.; (9) a real estate investment trust; (10) an entity or person registered at all times during the tax year under the Investment Company Act of 1940; (11) a common trust fund operated by a bank under section 584(a); and (12) a financial institution. C. OBTAINING A NUMBER -- If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, application for a Social Security Number, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. D. PRIVACY ACT NOTICE -- Section 6109 requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not payees are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend and certain other payments to a payee who does not furnish a taxpayer identification number. Certain penalties may also apply. E. PENALTIES -- (1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Failure to Report Certain Dividend and Interest Payments. If you fail to include any portion of an includable payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under-payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) Civil Penalty for False Information with Respect to Withholding. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) Criminal Penalty for Falsifying Information. Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -19- EX-99.2 55 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EX. 99.2 NOTICE OF GUARANTEED DELIVERY OF 10% SENIOR NOTES DUE 2008 OF THE J.H. HEAFNER COMPANY, INC. This form, or one substantially equivalent hereto, must be used by any Holder of 10% Senior Notes due 2008, (the "Initial Notes") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), who wishes to tender Initial Notes pursuant to the Company's Exchange Offer, as defined in the Prospectus dated [ ], 1998 (the "Prospectus"), and (i) whose Initial Notes are not immediately available or (ii) who cannot deliver such Initial Notes or any other documents required by the Letter of Transmittal on or before the Expiration Date (as defined in the Prospectus) or (iii) who cannot comply with the book-entry transfer procedure on a timely basis. This form may be delivered by facsimile transmission, mail or hand delivery to the Exchange Agent. See "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. THE J.H. HEAFNER COMPANY, INC. NOTICE OF GUARANTEED DELIVERY THE CHASE MANHATTAN BANK, AS EXCHANGE AGENT By Mail, Hand or Overnight Courier: Facsimile Transmission Number 55 Water Street (Eligible Institutions only): Room 234, North Building (212) 638-7375 or New York, New York 10041 (212) 344-9367 Attention: Carlos Esteves To Confirm Facsimile (IF BY MAIL, REGISTERED OR or for Information Call CERTIFIED MAIL RECOMMENDED) (212) 638-0828 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 2 Ladies and Gentlemen: The undersigned hereby tenders to the Company upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Initial Notes specified below pursuant to the guaranteed delivery procedures set forth under the caption "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. By so tendering, the undersigned does hereby make, at and as of the date hereof, the representations and warranties of a tendering Holder of Initial Notes set forth in the Letter of Transmittal. The undersigned hereby tenders the Initial Notes listed below:
Certificate Number(s) (If Available) Principal Amount Tendered - ------------------------------------------------------- ---------------------------------------------------- - ------------------------------------------------------- ---------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. If Initial Notes will be tendered by book-entry transfer, please provide the following information:
Name of Tendering Institution: - ------------------------------------------------------- ---------------------------------------------------- The Depository Trust Company ---------------------------------------------------- Account Number: Signature(s) - ------------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- Name(s) (please print) ---------------------------------------------------- Street Address ---------------------------------------------------- City, State and Zip Code - ------------------------------------------------------- ---------------------------------------------------- Date Area Code and Telephone Number
-2- 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a participant in a Recognized Signature Guarantee Medallion Program, guarantees deposit with the Exchange Agent of the Letter of Transmittal (or a facsimile thereof), together with the Initial Notes tendered hereby in proper form for transfer, or confirmation of the book-entry transfer of such Initial Notes into the Exchange Agent's account at the Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in the Prospectus, and any other required documents, all by 5:00 p.m., New York City time, on the third New York Stock Exchange trading day following the Expiration Date (as defined in the Prospectus).
- ------------------------------------------------------- ---------------------------------------------------- Name of Firm Authorized Signature - ------------------------------------------------------- ---------------------------------------------------- Street Address Name (please print) - ------------------------------------------------------- City, State and Zip Code - ------------------------------------------------------- ---------------------------------------------------- Area Code and Telephone Number Date
DO NOT SEND CERTIFICATES FOR INITIAL NOTES WITH THIS FORM. ACTUAL SURRENDER OR CERTIFICATES FOR INITIAL NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL. -3- 4 INSTRUCTIONS 1. Delivery of this Notice of Guaranteed Delivery. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at one of its addresses set forth on the cover hereof on or prior to the Expiration Date. The method of delivery to the Exchange Agent of this Notice of Guaranteed Delivery and all other required documents is at the election and risk of the Holder but, except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. Instead of delivery by mail, it is recommended that Holders use an overnight or hand delivery service, properly insured. If such delivery is by mail, it is recommended that the Holder use properly insured, registered mail with return receipt requested. For a further description of the guaranteed delivery procedures, see the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery Procedures." In all cases, sufficient time should be allowed to assure timely delivery. No Notice of Guaranteed Delivery should be sent to the Company. 2. Signature on this Notice of Guaranteed Delivery; Guarantee of Signatures. If this Notice of Guaranteed Delivery is signed by the registered Holder(s) of the Initial Notes referred to herein, then the signature must correspond with the name(s) as written on the face of the Initial Notes without alteration, addition or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, evidence satisfactory to the Company of their authority so to act must be submitted with this Notice of Guaranteed Delivery. 3. Requests for Assistance or Additional Copies. Questions relating to the Exchange Offer or the procedure for consenting and tendering as well as requests for assistance or for additional copies of the Prospectus, the Letter of Transmittal and this Notice of Guaranteed Delivery, may be directed to the Exchange Agent at the address set forth on the cover hereof or to your broker, dealer, commercial bank or trust company. -4- EX-99.3 56 FORM OF EXCHANGE AGENT AGREEMENT 1 EXHIBIT 99.3 __________ ___, 1998 EXCHANGE AGENT AGREEMENT The Chase Manhattan Bank 450 West 33rd Street, 15th Floor New York, New York 10001 Attention: [Corporate Trust Department] Ladies and Gentlemen: The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), proposes to make an offer (the "Exchange Offer") to exchange with the holders thereof (i) its 10% Senior Notes due 2008 (the "Exchange Notes") for a like principal amount of its outstanding 10% Senior Notes due 2008 (the "Initial Notes", which are part of the same series as the Exchange Notes), of which $100,000,000 aggregate principal amount is outstanding, which Exchange Notes have been registered under the Securities Act of 1933, as amended. The terms and conditions of the Exchange Offer as currently contemplated are set forth in a Prospectus (the "Prospectus") dated __________ __, 1998, distributed to record holders of the Initial Notes on or about such date. The Initial Notes and the Exchange Notes are collectively referred to herein as the "Notes." Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Prospectus. The Company hereby appoints The Chase Manhattan Bank to act as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. References hereinafter to "you" shall refer to The Chase Manhattan Bank. The Exchange Offer is expected to be commenced by the Company on or about September __, 1998. The Letter of Transmittal accompanying the Prospectus is to be used by the holders of the Initial Notes to accept the Exchange Offer and contains certain instructions with respect to (i) the delivery of certificates for Initial Notes tendered in connection therewith, (ii) the book entry transfer of Notes to the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility"), and (iii) other matters relating to the Exchange Offer. The Exchange Offer shall expire at 5:00 p.m., New York City time, on __________ __, 1998 or on such later date or time to which the Company may extend the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions set forth in the Prospectus, the Company expressly reserves the right to extend the Exchange Offer from time to time by giving oral (to be confirmed in writing) or written notice to you no later than 1:00 p.m., New York City time, on the business day following the previously scheduled Expiration Date. 2 The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Initial Notes not theretofore accepted for exchange, upon the occurrence of any failure of the conditions of the Exchange Offer specified in the Prospectus under the caption "The Exchange Offer -- Certain Conditions to the Exchange Offer." The Company will give oral (to be confirmed in writing) or written notice of any amendment, termination or nonacceptance of Initial Notes to you as promptly as practicable. In carrying out your duties as Exchange Agent, you are to act in accordance with the following instructions: 1. You will perform such duties and only such duties as are specifically set forth herein and in the Letter of Transmittal. 2. You will establish an account with respect to the Initial Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Agreement, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of the Initial Notes by causing the Book-Entry Transfer Facility to transfer such Initial Notes into your account in accordance with the Book-Entry Transfer Facility's procedure for such transfer. You are not required to collect Letters of Transmittal from persons tendering Notes through the Book-Entry Transfer Facility. 3. You are to examine each of the Letters of Transmittal, certificates for Initial Notes (or confirmations of book-entry transfers into your account at the Book-Entry Transfer Facility) and any Agent's Message or other documents delivered or mailed to you by or for holders of the Initial Notes to ascertain whether (i) the Letters of Transmittal and any such other documents are executed and properly completed in accordance with instructions set forth therein and (ii) the Initial Notes have otherwise been properly tendered. In each case where the Letter of Transmittal or any other document has been improperly completed or executed or any of the certificates for Initial Notes are not in proper form for transfer or some other irregularity in connection with the acceptance of the Exchange Offer exists, you will endeavor to inform the presenters of the need for fulfillment of all requirements and to take any other action as may be necessary or advisable to cause such irregularity to be corrected. 4. With the approval of J. Michael Gaither or any other person designated in writing by the Company (a "Designated Officer") (such approval, if given orally, to be confirmed in writing) or any other party designated by any such Designated Officer in writing, you are authorized to waive any irregularities in connection with any tender of Initial Notes pursuant to the Exchange Offer. 5. Tenders of Initial Notes may be made only as set forth in the Letter of Transmittal and in the section of the Prospectus captioned "The Exchange Offer - Procedures for Tendering Initial Notes," and Initial Notes shall be considered properly tendered to you only when tendered in accordance with the procedures set forth therein. 2 3 Notwithstanding the provisions of this paragraph 5, Initial Notes that the Designated Officer of the Company shall approve as having been properly tendered shall be considered to be properly tendered (such approval, if given orally, shall be confirmed in writing). 6. You shall advise the Company with respect to any Initial Notes delivered subsequent to the Expiration Date and accept the Company's instructions (if given orally, to be confirmed in writing) with respect to the disposition of such Initial Notes. 7. You shall accept tenders: (a) in cases where the Initial Notes are registered in two or more names only if signed by all named holders; (b) in cases where the signing person (as indicated on the Letter of Transmittal) is acting in a fiduciary or a representative capacity only when proper evidence of such person's authority to so act is submitted; and (c) from persons other than the registered holder of Initial Notes provided that customary transfer requirements, including payment of any applicable transfer taxes, are fulfilled. You shall accept partial tenders of Initial Notes where so indicated and as permitted in the Letter of Transmittal and deliver certificates for Initial Notes to the Transfer Agent for split-up and return any untendered Initial Notes to the holder (or to such other person as may be designated in the Letter of Transmittal) as promptly as practicable after expiration or termination of the Exchange Offer. 8. Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will notify you (such notice, if given orally, to be confirmed in writing) of the Company's acceptance, promptly after the Expiration Date, of all Initial Notes properly tendered and you, on behalf of the Company, will exchange such Initial Notes for Exchange Notes and will deliver such Initial Notes as directed by the Company. Delivery of Exchange Notes will be made on behalf of the Company by you at the rate of $1,000 principal amount of Exchange Notes for each $1,000 principal amount of Initial Notes tendered promptly after notice (such notices, if given orally, to be confirmed in writing) of acceptance of said Initial Notes by the Company; provided, however, that in all cases Initial Notes tendered pursuant to the Exchange Offer will be exchanged only after timely receipt by you of certificates for such Initial Notes (or confirmation of book-entry transfer into your account at the Book-Entry Transfer Facility), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or an Agent's Message in lieu thereof) and any other required documents. You shall issue Exchange Notes only in denominations of $1,000 or in any integral multiple in excess thereof. Initial Notes may be tendered in whole or in part in integral multiples of $1,000 in aggregate principal amount. 3 4 9. Tenders pursuant to the Exchange Offer are irrevocable, except that, subject to the terms and upon the conditions set forth in the Prospectus and the Letter of Transmittal, Initial Notes tendered pursuant to the Exchange Offer may be withdrawn at any time on or prior to the Expiration Date. 10. The Company shall not be required to exchange any Initial Notes tendered if any of the conditions set forth in the Exchange Offer are not met. Notice of any decision by the Company not to exchange any Initial Notes tendered shall be given (such notice, if given orally, shall be confirmed in writing) by the Company to you. 11. If, pursuant to the Exchange Offer, the Company does not accept for exchange all or part of the Initial Notes tendered because of an invalid tender, the occurrence of certain other events set forth in the Prospectus under the caption "The Exchange Offer - Certain Conditions to the Exchange Offer" or otherwise, you shall as soon as practicable after the expiration or termination of the Exchange Offer return those certificates for unaccepted Initial Notes (or effect the appropriate book-entry transfer of the unaccepted Initial Notes), together with any related required documents and the Letter of Transmittal relating thereto that are in your possession, to the persons who deposited them. 12. All certificates for reissued Initial Notes, unaccepted Initial Notes or Exchange Notes shall be forwarded at the Company's expense by (a) first-class mail, return receipt requested, under a blanket surety bond protecting you and the Company from loss or liability arising out of the nonreceipt or nondelivery of such certificates or (b) registered mail insured separately for the replacement value of each of such certificates. 13. You are not authorized to pay or offer to pay any concessions, commissions or solicitation fees to any broker, dealer, bank or other persons or to engage or utilize any person to solicit tenders. 14. As Exchange Agent hereunder, you (a) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any of the certificates or the Initial Notes represented thereby deposited with you pursuant to the Exchange Offer, and will not be required to and will make no representation as to the validity, sufficiency, value or genuineness of the Exchange Offer including without limitation the Prospectus, the Letter of Transmittal or the instructions related thereto; (b) shall not be obligated to take any action hereunder that might in your reasonable judgment involve any expense or liability, unless you shall have been furnished with reasonable indemnity satisfactory to you; (c) may conclusively rely on and shall be fully protected in acting in good faith in reliance upon any certificate, instrument, opinion, notice, letter, facsimile or other 4 5 document or security delivered to you and reasonably believed by you to be genuine and to have been signed by the proper party or parties; (d) may conclusively act upon any tender, statement, request, agreement or other instrument whatsoever not only as to its due execution and validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein that you shall in good faith reasonably believe to be genuine or to have been signed or represented by a proper person or persons; (e) may conclusively rely on and shall be fully protected in acting upon written or oral instructions from any Designated Officer of the Company with respect to the Exchange Offer; (f) shall not advise any person tendering Initial Notes pursuant to the Exchange Offer as to the wisdom of making such tender or as to the market value or decline or appreciation in market value of any Initial Notes; and (g) may consult with your counsel with respect to any questions relating to your duties and responsibilities, and the advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by you hereunder in good faith and in accordance with such advice or written opinion of such counsel. 15. You shall take such action as may from time to time be requested by any Designated Officer of the Company (and such other action as you may reasonably deem appropriate) to furnish copies of the Prospectus, the Letter of Transmittal and the Notice of Guaranteed Delivery, or such other forms as may be approved from time to time by the Company, to all persons requesting such documents and to accept and comply with telephone requests for information relating to the Exchange Offer, provided that such information shall relate only to the procedures for accepting (or withdrawing from) the Exchange Offer. The Company shall furnish you with copies of such documents at your request. 16. You shall advise by facsimile transmission or telephone, and promptly thereafter confirm in writing to J. Michael Gaither, Senior Vice President/Strategic Planning, General Counsel and Secretary, and such other person or persons as the Company may request, daily (and more frequently during the week immediately preceding the Expiration Date, if reasonably requested) up to and including the Expiration Date, as to the principal amount of the Initial Notes that have been tendered pursuant to the Exchange Offer and the items received by you pursuant to this Agreement, separately reporting and giving cumulative totals as to items properly received and items improperly received and items covered by Notices of Guaranteed Delivery. In addition, you will also inform, and cooperate in making available to, the Company or any such other person or persons as the Company reasonably requests from time to time prior to the Expiration Date of such other information as they or such person or persons reasonably request. Such cooperation shall include, without limitation, the granting by you to the Company and such person or persons as the Company may reasonably request of access to those persons on 5 6 your staff who are responsible for receiving tenders, in order to ensure that immediately prior to the Expiration Date the Company shall have received information in sufficient detail to enable it to decide whether to extend the Exchange Offer. 17. Letters of Transmittal and Notices of Guaranteed Delivery shall be stamped by you as to the date and the time of receipt thereof and shall be preserved by you for a period of time at least equal to the period of time you preserve other records pertaining to the transfer of securities. You shall dispose of unused Letters of Transmittal and other surplus materials by returning them to the Company at the address set forth below for notices. 18. For services rendered as Exchange Agent hereunder, you shall be entitled to compensation of Six Thousand Dollars ($6,000) and reimbursement of reasonable out-of-pocket expenses incurred in connection with the Exchange Offer. 19. You hereby acknowledge receipt of the Prospectus and the Letter of Transmittal and further acknowledge that you have examined each of them to the extent necessary to perform your duties hereunder. Any inconsistency between this Agreement, on the one hand, and the Prospectus and the Letter of Transmittal (as they may be amended from time to time), on the other hand, shall be resolved in favor of the latter two documents, except with respect to the rights, duties, liabilities and indemnification of you as Exchange Agent, which shall be controlled by this Agreement. 20. (a) The Company agrees to indemnify and hold you harmless in your capacity as Exchange Agent hereunder against any liability, cost, tax (other than any income tax), claim or expense, including reasonable attorneys' fees and disbursements, arising out of or in connection with any action taken or omitted to be taken by the Exchange Agent in connection with its acceptance or performance of it duties under the Agreement and the documents related thereto, including without limitation, any act, omission, delay or refusal made by you in reasonable reliance upon any signature, endorsement, assignment, certificate, order, request, notice, instruction or other instrument or document reasonably believed by you to be valid, genuine and sufficient and in accepting any tender or effecting any transfer of Initial Notes reasonably believed by you in good faith to be authorized, and in delaying or refusing in good faith to accept any tenders or effect any transfer of Initial Notes; provided, however, that the Company shall not be liable for indemnification or otherwise for any loss, liability, cost or expense to the extent arising out of your negligence, willful breach of this Agreement, willful misconduct or bad faith. You shall notify the Company in writing of the assertion of any claim against you; provided however, that your failure so to notify shall not excuse the Company from its obligations hereunder except to the extent such failure to notify shall prejudice or cause damage to the Company. The Company shall be entitled to participate at its own expense in the defense of any such claim or other action, and, if the Company so elects, shall assume the defense of any suit brought to enforce any such claim. In the event that the Company shall assume the defense of any such suit, it shall not be liable for the fees and expenses of any additional counsel thereafter retained by you so long as the Company shall retain counsel reasonably satisfactory to you to defend such suit. You shall not compromise or settle any such action or claim without the consent of the Company, provided that the Company shall not be entitled to assume the defense 6 7 of any action if representation of the parties by the same legal counsel would, in the reasonable opinion of counsel for the Exchange Agent, be inappropriate due to actual or potential conflicting interests between the parties. This indemnification shall survive the release, discharge, termination and/or satisfaction of this Agreement. (b) You agree that, without the prior written consent of the Company (which consent shall not be unreasonably withheld), you will not settle, compromise or consent to the entry of judgment in any pending or threatened claim, action, or proceeding in respect of which indemnification could be sought in accordance with the indemnification provisions of this Agreement (whether or not you or the Company or any of its controlling persons is an actual or potential party to such claim, action or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company and controlling persons from all liability arising out of such claim, action or proceeding. 21. This Agreement and your appointment as Exchange Agent hereunder shall be construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, and without regard to conflicts of law principles, and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successors and assigns of each of the parties hereto. 22. All communications, including notices, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered personally with receipt acknowledged, (ii) sent by registered or certified mail, return receipt requested, (iii) transmitted by facsimile (which shall be confirmed by telephone and by a writing sent by registered or certified mail on the business day that such facsimile is sent), or (iv) sent by recognized overnight courier for next business day delivery, addressed to the parties at the addresses or facsimile numbers as any party shall hereafter specify by communication to the other parties in the manner provided herein: If to the Company: The J.H. Heafner Company, Inc. Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Fax No.: (704) 423-8987 Attn: J. Michael Gaither Senior Vice President/Strategic Planning, General Counsel and Secretary with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, NY 10019 Fax No.: (212) 841-1010 Attention: Kelly Vance, Esq. 7 8 If to the Exchange Agent: The Chase Manhattan Bank 450 W. 33rd Street, 15th Floor New York, NY 10001-2697 Fax No.: (212) 638-7375 or (212) 344-9367 Attention: Carlos Esteves 23. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 24. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 25. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days following the Expiration Date. Notwithstanding the foregoing, paragraph 18 and 20 and any outstanding obligation of the Exchange Agent shall survive the termination of this Agreement. Please acknowledge receipt of this Agreement and confirm the arrangements herein provided by signing and returning the enclosed copy. THE J.H. HEAFNER COMPANY, INC. By: ________________________________ J. Michael Gaither Senior Vice President/Strategic Planning, General Counsel and Secretary Accepted as of the date first above written: THE CHASE MANHATTAN BANK, as Exchange Agent By: ___________________________ Name: Title: -----END PRIVACY-ENHANCED MESSAGE-----