-----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, CEJ8QFaZJ0DKW7T5d0z3uswlkCj/6wK4kUORkWFAwmbJaiQlJy0IKTLLg+3tvMDV 40z6ruVF9euSXAkYfOmuPw== 0000950144-99-003686.txt : 19990402 0000950144-99-003686.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003686 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J H HEAFNER CO INC CENTRAL INDEX KEY: 0001068152 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLE SUPPLIES & NEW PARTS [5013] IRS NUMBER: 560754594 STATE OF INCORPORATION: NC FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-75313 FILM NUMBER: 99580773 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: 333-75313-01 FILM NUMBER: 99580774 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: 333-75313-02 FILM NUMBER: 99580775 BUSINESS ADDRESS: STREET 1: 900 W ALAMEDA AVENUE CITY: BURBANK STATE: CA ZIP: 91506 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: 333-75313-03 FILM NUMBER: 99580776 BUSINESS ADDRESS: STREET 1: 1140 CAMPBELL AVENUE CITY: SAN JOSE STATE: CA ZIP: 95126 BUSINESS PHONE: 4082433400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA TIRE CO CENTRAL INDEX KEY: 0001082815 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943245253 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-75313-04 FILM NUMBER: 99580777 BUSINESS ADDRESS: STREET 1: 2295 DAVIS COURT CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5104875777 MAIL ADDRESS: STREET 1: 2295 DAVIS COURT CITY: HAYWARD STATE: CA ZIP: 94545 S-4 1 J.H. HEAFNER S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999 REGISTRATION NOS. 333- , 333- , 333- , 333- , 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 of (Primary Standard Industrial (I.R.S. Employer Identification Incorporation or Organization) Classification Code Number) No.)
------------------------------------ AND ITS GUARANTORS OLIVER & WINSTON, INC. CALIFORNIA 5598 95-2407343 THE SPEED MERCHANT CALIFORNIA 5014 94-2414221 PHOENIX RACING, INC. CALIFORNIA 5598 77-0474076 CALIFORNIA TIRE COMPANY CALIFORNIA 5014 94-3245253 (Exact Name of Registrant (State or Other Jurisdiction (Primary Standard (IRS Employer as Specified in Its of Incorporation or Organization) Industrial Identification Number) Charter) Classification Code Number)
2105 WATER RIDGE PARKWAY, SUITE 500 CHARLOTTE, NORTH CAROLINA 28217 (704) 423-8989 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants' 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) ------------------------------------ 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(d) 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
- -------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING AGGREGATE REGISTRATION BE REGISTERED REGISTERED PRICE PER NOTE (1) OFFERING PRICE FEE(2) - -------------------------------------------------------------------------------------------------------------------------------- 10% Senior Notes Due 2008................... $150,000,000 $1,000 $150,000,000 $41,700 Guarantees 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 Guarantees. ------------------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH 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 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. HEAFNER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 31, 1999 THE J.H. HEAFNER COMPANY, INC. EXCHANGE OFFER OF $150,000,000 SERIES D 10% SENIOR NOTES DUE 2008 FOR ANY AND ALL OUTSTANDING SERIES B AND SERIES C 10% SENIOR NOTES DUE 2008 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED THE SERIES D NOTES - The terms of the Series D notes are virtually identical to the terms of the Series B and Series C notes. Like the Series B notes, the Series D notes will be freely transferable and will not have any covenants regarding exchange and registration rights. MATERIAL TERMS OF THE EXCHANGE OFFER - The exchange offer expires at 5 p.m., New York City time, on , 1999, unless extended. - The exchange offer is subject to certain customary conditions, including the condition that the exchange offer not violate any applicable law or any applicable interpretation of the staff of the Securities and Exchange Commission. - Tenders of Series B and Series C notes may be withdrawn any time prior to the expiration of the exchange offer. - Heafner will not receive any proceeds from the exchange offer. - Heafner believes that the exchange of Series B or Series C notes for Series D notes will not be a taxable exchange for U.S. federal income tax purposes. - All Series B and Series C notes that are validly tendered and not withdrawn will be exchanged for Series D notes. - All broker-dealers must comply with the registration and prospectus delivery requirements of the Securities Act. - Heafner does not intend to apply for listing of the Series D notes on any securities exchange or to arrange for them to be quoted on any quotation system. INVESTING IN THE SERIES D NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 10. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 10 Where You Can Find More Information......................... 16 Forward-Looking Information................................. 17 The Transactions............................................ 18 Use of Proceeds............................................. 20 Capitalization.............................................. 22 The Exchange Offer.......................................... 23 Unaudited Pro Forma Condensed Combined Financial Data....... 32 Selected Historical Financial Data.......................... 35 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 41 Business.................................................... 50 Management.................................................. 60 Principal Stockholders...................................... 69 Certain Relationships and Related Transactions.............. 71 Description of Credit Facility.............................. 73 Description of the Series D Notes........................... 75 Certain U.S. Federal Income Tax Considerations.............. 108 Plan of Distribution........................................ 108 Legal Matters............................................... 109 Experts..................................................... 109 Index to Consolidated Financial Statements.................. F-1
You should rely only on the information contained in this prospectus. Heafner has not authorized anyone to provide you with information different from that contained in this prospectus or incorporated by reference in this prospectus. Heafner is not making offers or soliciting offers to exchange Series B notes or Series C notes for Series D notes in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. The prospectus incorporates business and financial information about Heafner that is not included in or delivered with the document. YOU MAY REQUEST AND OBTAIN THIS INFORMATION FREE OF CHARGE BY WRITING OR TELEPHONING HEAFNER AT THE FOLLOWING ADDRESS: THE J.H. HEAFNER COMPANY, INC., 2105 WATER RIDGE PARKWAY, SUITE 500, CHARLOTTE, NORTH CAROLINA 28217, ATTENTION: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER; TELEPHONE: (704) 423-8989. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date. 2 4 PROSPECTUS 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. For purposes of the financial and other information in this prospectus, references to a fiscal year relate to a December 31 fiscal year end for Heafner, to a September 30 fiscal year end for ITCO Logistics Corporation, and to an October 31 fiscal year end for The Speed Merchant, Inc., d/b/a Competition Parts Warehouse ("CPW"). References to years relate to calendar years. THE J.H. HEAFNER COMPANY, INC. The J.H. Heafner Company, Inc. is an independent supplier of tires to the replacement tire market in the United States. With 65 distribution centers servicing 26 states, Heafner believes that it is the largest independent distributor of new replacement tires in the Southeast and in California. Through its distribution network, Heafner's wholesale divisions supplied 12.6 million tires in 1998 and currently serve an average of 25,000 customers each month. Through its retail division, Heafner operates over 200 retail tire and automotive service outlets in California and Arizona which sold over 1.2 million tires in 1998. Heafner supplies premium, economy and private-label brands of tires manufactured by the major tire manufacturers. In addition to its tire sales, Heafner is an independent distributor and retailer of aftermarket wheels, automotive replacement parts and accessories and automotive service equipment. THE TRANSACTIONS ITCO merger. On May 20, 1998, a wholly-owned subsidiary of Heafner was merged with ITCO Logistics Corporation, with ITCO surviving as a new, wholly-owned subsidiary of Heafner. The total consideration paid to the stockholders of ITCO in connection with the ITCO merger consisted of $18.0 million in cash, 1,400,667 newly issued shares of Heafner's Class B common stock, $.01 par value, and $1.4 million payable to holders of ITCO stock appreciation rights upon their exercise of those rights. In connection with the ITCO merger, Heafner's authorized common stock was reclassified into shares of Class A common stock, $.01 par value, and shares of Class B common stock. After the closing of the ITCO merger, ITCO's then-existing subsidiaries, all of which had been acquired by Heafner through the ITCO merger, were consolidated into ITCO, which in turn was merged into Heafner. CPW acquisition. Also on May 20, 1998, Heafner acquired all of the issued and outstanding shares of CPW from CPW's stockholders. Heafner paid $35.0 million on May 20, 1998 in exchange for the stock of CPW. An additional $10.0 million is payable as follows: $7.4 million is payable in installments for five years after May 20, 1998, in exchange for non-compete covenants, and $2.6 million is payable in the form of other contingent payouts to the selling CPW stockholders. Repayment of debt. On the closing date of the ITCO merger and the CPW acquisition, Heafner repaid $16.0 million of subordinated debt it had outstanding and $10.3 million in borrowings outstanding under a term loan. Credit facility. The financing necessary to complete the ITCO merger, the CPW acquisition and the repayment of Heafner's outstanding subordinated debt was obtained from the proceeds of the offering of Heafner's Series A 10% Senior Notes Due 2008, which is described below, as well as borrowings under an amended and restated senior revolving credit facility entered into on May 20, 1998. This credit facility, which is referred to as the "credit facility," replaced Heafner's then-existing senior credit facility, referred to as the "old credit facility," under which $33.5 million was outstanding on May 20, 1998. An ITCO facility with Fleet Capital Corporation, under which $26.3 million was outstanding on May 20, 1998, 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 May 20, 1998 and borrowed on that date under the credit facility. The aggregate amount of commitments under the credit facility is currently $100.0 million, of which $21.9 million in borrowings was outstanding and an additional $64.7 million could have been borrowed on December 31, 1998. 3 5 Series A notes offering and Series B exchange offer. Simultaneously with the closing of the ITCO merger and the CPW acquisition, Heafner completed the offer of $100.0 million aggregate principal amount of its Series A 10% Senior Notes Due 2008. Heafner sold the Series A notes to the initial purchasers, Credit Suisse First Boston and BancBoston Robertson Stephens Inc. (formerly BancBoston Securities Inc.) in a private offering not subject to the registration requirements of the Securities Act of 1933, as amended. The initial purchasers then resold the Series A notes in reliance upon Rule 144A under the Securities Act. In accordance with a registration rights agreement among Heafner, certain of Heafner's subsidiaries and the initial purchasers, Heafner filed a registration statement with the SEC on August 18, 1998 with respect to a registered exchange offer of all of its outstanding Series A notes for an equal aggregate principal amount of its Series B 10% Senior Notes Due 2008. That registration statement, as amended, was declared effective by the SEC on October 16, 1998. The Series B exchange offer was commenced on October 16, 1998 and closed on November 16, 1998. All of the outstanding Series A notes were tendered in the Series B exchange offer. No additional Series A notes are outstanding or permitted to be issued. There were no proceeds to Heafner from the Series B exchange offer. The Series A notes and Series B notes were issued under an indenture (the "Series B indenture"), dated as of May 15, 1998, among Heafner, certain of Heafner's subsidiaries, and First Union National Bank, as trustee. The Series B notes are identical in all material respects to the Series A notes, except that the Series B notes are freely transferable. Series C notes offering. On December 1, 1998, Heafner sold to the same initial purchasers $50.0 million aggregate principal amount of its Series C 10% Senior Notes Due 2008 in a private offering not subject to the registration requirements of the Securities Act. The initial purchasers then resold the Series C notes in reliance upon Rule 144A under the Securities Act. All of the Series C notes remain outstanding. The terms of the Series C notes are identical in all material respects to the Series B notes, except that there are restrictions on the transfer of the Series C notes. The Series C notes were, and the Series D notes will be, issued under an indenture (the "Series D Indenture") dated as of December 1, 1998, among Heafner, certain of its subsidiaries and First Union National Bank, as trustee. The ITCO merger, the reclassification of Heafner's stock, the CPW acquisition, obtaining financing under the credit facility, the offering of the Series A notes, the application of the proceeds of the Series A notes and the credit facility and the related transactions are collectively referred to in this prospectus as the "Transactions." California Tire acquisition. In January 1999, Heafner acquired the outstanding membership interests of California Tire Company, LLC by merging it with and into a wholly-owned subsidiary of Heafner. The subsidiary was renamed California Tire Company. Heafner does not consider this acquisition to be significant. See Note 15 to Heafner's audited financial statements at the back of this prospectus. THE EXCHANGE OFFER Heafner is conducting this exchange offer not only for the Series C notes, but also for the Series B notes, to allow all of its 10% Senior Notes Due 2008, which are referred to collectively as the "senior notes," to trade as a single issue. Up to $150 million of Series D notes can be issued in exchange for Series B notes and Series C notes. Heafner believes that a single series of senior notes existing after the exchange offer, which will be in a larger aggregate principal amount outstanding than either the Series B notes or Series C notes alone, will provide greater liquidity than the Series B notes and Series C notes trading separately. Under the Registration Rights Agreement, which Heafner and the initial purchasers entered into in connection with the Series C notes offering, Heafner is required to file, on or prior to March 31, 1999, the registration statement of which this prospectus is a part, providing for an exchange offer of Series D notes identical in all material respects to the Series C notes and Series B notes, except that, in contrast to the Series C notes (but like the Series B notes), the Series D notes will be freely transferable. Heafner believes that you may resell your Series D notes without compliance with the registration and prospectus delivery provisions of the Securities Act, subject to certain conditions. You should read the discussion 4 6 under the headings "Summary of the Exchange Offer" and "The Exchange Offer" for further information regarding the exchange offer and resale of Series D notes. SUMMARY DESCRIPTION OF THE SERIES D NOTES NOTES OFFERED.............. $150.0 million aggregate principal amount of Series D 10% Senior Notes Due 2008 issued by Heafner. The form and terms of the Series D notes are the same as the form and terms of the Series C notes and the Series B notes, except that, in contrast to the Series C notes (but like the Series B notes), the Series D notes will be registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not be entitled to registration under the Securities Act. The Series D notes will evidence the same debt as the Series C notes and the Series B notes that are exchanged for Series D notes. Both the Series C notes and the Series D notes are governed by the Series D indenture. The terms of the Series D indenture are substantially the same as the terms of the Series B indenture. MATURITY................... May 15, 2008. INTEREST PAYMENT DATES..... May 15 and November 15 of each year, commencing November 15, 1999. INTEREST ON THE SERIES D NOTES...................... The Series D notes will accrue interest at 10% per year, from either the last date Heafner paid interest on the Series B notes or Series C notes that you exchanged, or, if no interest has been paid on the Series B notes or Series C notes, from the date Heafner originally issued the notes you exchanged. SINKING FUND............... None. OPTIONAL REDEMPTION........ Heafner has the right to redeem the Series D notes, in whole or in part at any time and from time to time, on or after May 15, 2003, at the redemption prices described in this prospectus under the heading "Description of the Series D Notes -- Optional Redemption," plus accrued and unpaid interest, if any, to the date of redemption. Heafner also has the right to redeem up to 35% of the aggregate original principal amount of its Series B and Series C notes originally issued, at any time prior to May 15, 2001, at the redemption prices set forth in this prospectus under the heading "Description of the Series D Notes -- Optional Redemption," plus accrued and unpaid interest, if any, to the redemption date, with the net proceeds of one or more Public Equity Offerings, except that at least $97.5 million of the total aggregate original principal amount of the senior notes must remain outstanding following each such redemption. CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, Heafner will be required to offer to purchase all or any part of each holder's senior notes at a price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the date of repurchase. The events that will result in a Change of Control are described under the heading "Description of the Series D Notes -- Change of Control." Heafner may not have the financial resources necessary, or may not be 5 7 permitted by the credit facility or its other contractual commitments, to purchase the senior notes upon a Change of Control. SUBSIDIARY GUARANTIES...... The Series D notes will be fully, unconditionally and jointly and severally guaranteed on an unsecured, senior basis by all of Heafner's subsidiaries, all of which are directly or indirectly wholly-owned by Heafner. Each subsidiary guaranty will be irrevocable and unconditional, but limited in amount to the extent required by laws relating to fraudulent transfer or similar laws. RANKING.................... The Series D notes: - will be unsecured, senior obligations of Heafner, - will be fully, unconditionally and jointly and severally guaranteed on an unsecured, senior basis by the subsidiary guarantors, - will rank equally in right of payment with all of Heafner's other existing and future unsecured senior indebtedness, including the Series B notes, - will rank senior in right of payment to any of Heafner's existing and future subordinated indebtedness, - will be effectively subordinated to all existing and future secured indebtedness of Heafner and the subsidiary guarantors to the extent of the value of the assets securing that secured indebtedness, and - will be structurally subordinated to all existing and future indebtedness of any subsidiary of Heafner that is not a subsidiary guarantor. RESTRICTIVE COVENANTS...... The Series D indenture contains covenants for your benefit which, among other things and subject to certain exceptions, restrict Heafner's ability to: - incur additional indebtedness, - restrict distributions from subsidiaries, - pay dividends or make other restricted payments, - create liens and engage in sale/leaseback transactions, - enter into certain transactions with affiliates, and - consolidate, merge, or sell substantially all of its assets. The Series B indenture contains identical covenants. ABSENCE OF A PUBLIC MARKET FOR THE NOTES.............. The Series D notes are new securities and there is currently no established market for them. SUMMARY OF THE EXCHANGE OFFER REGISTRATION RIGHTS AGREEMENT.................. Heafner issued the Series C notes on December 8, 1998 to the initial purchasers, BancBoston Robertson Stephens Inc. and Credit Suisse First Boston. The initial purchasers placed the Series C notes with institutional investors in transactions exempt from the registration requirements of the Securities Act pursuant to Rule 144A under the Securities Act and applicable state securities laws. In connection with 6 8 this private placement, Heafner, Heafner's subsidiaries and the initial purchasers entered into the Registration Rights Agreement, which requires Heafner to make the exchange offer for both the Series B notes and Series C notes. THE EXCHANGE OFFER......... Heafner is offering Series D notes in exchange for an equal principal amount of Series B notes and Series C notes. The Series B notes and Series C notes are referred to together as the "old notes." As of the date of this prospectus, there is $150.0 million aggregate principal amount of old notes outstanding. Old notes may be tendered only in integral multiples of $1,000. RESALE OF SERIES D NOTES... Heafner believes that the Series D notes issued in the exchange offer in exchange for the Series B notes and Series C notes may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: - you are acquiring the Series D notes in the ordinary course of your business; - you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the Series D notes; and - you are not an "affiliate" of Heafner or any of its subsidiaries. If any of the foregoing are not true and you transfer any Series D notes received in exchange for Series B notes or Series C notes without registering the Series D notes and delivering a prospectus meeting the requirements of the Securities Act, or without an exemption from those requirements, you may incur liability under the Securities Act. Heafner does not assume or indemnify you against that liability. Each broker-dealer that is issued Series D notes for its own account in exchange for Series C notes that were acquired by that broker-dealer as a result of market making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the Series D notes. Each broker-dealer that is issued Series D notes in exchange for Series B notes, where the broker-dealer was issued Series B notes for its own account in exchange for Series A notes that were acquired by it as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the Series D notes. A broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the Series D notes. Subject to certain limitations, Heafner will take steps to ensure that the issuance of the Series D notes will comply with state securities or "blue sky" laws. CONSEQUENCES OF FAILURE TO EXCHANGE SERIES C NOTES.................... If you do not exchange your Series C notes for Series D notes, you will no longer be able to compel Heafner to register the Series C notes under the Securities Act. In addition, you will not be able to offer or sell the Series C notes unless they are registered under the Securities Act, or unless you offer and sell them in a transaction that is not 7 9 required to be registered under the Securities Act. Heafner will have no obligation to register your Series C notes under the Securities Act after the completion of the exchange offer, except in some limited circumstances. EXPIRATION OF THE EXCHANGE OFFER.................... The expiration date of the exchange offer will be 5:00 p.m., New York City time, on , 1999, unless Heafner decides to extend the expiration date. CONDITIONS TO THE EXCHANGE OFFER.................... The exchange offer is not subject to any conditions, other than that: - the exchange offer does not violate applicable law or any applicable interpretation of the staff of the SEC; and - there is no injunction, order or decree issued by any court or any governmental agency that would prohibit, prevent or otherwise materially impair Heafner's ability to proceed with the exchange offer. PROCEDURES FOR TENDERING OLD NOTES.................. If you wish to accept the exchange offer, you must complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, and transmit it together with the old notes to be exchanged and all other documents required by the letter of transmittal to First Union National Bank, as exchange agent, at the address given on the cover page of the letter of transmittal. In the alternative, you can tender your old notes by following the procedures for book-entry transfer, as described in this prospectus under "The Exchange Offer -- Book-Entry Transfer." GUARANTEED DELIVERY PROCEDURES................. If you wish to tender your old notes and you cannot deliver your required documents to the exchange agent by the expiration date, you may tender your old notes according to the guaranteed delivery procedure described in this prospectus under the heading "The Exchange Offer -- Guaranteed Delivery Procedure." SPECIAL PROCEDURE FOR BENEFICIAL HOLDERS......... If you are a beneficial holder whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender your old notes on your behalf. If you are a beneficial holder and you wish to tender your old notes on your own behalf, you must, prior to delivering the letter of transmittal and your old notes to the exchange agent, either make appropriate arrangements to register ownership of your old notes in your own name or obtain a properly completed bond power from the registered holder. WITHDRAWAL RIGHTS.......... You may withdraw the tender of your old notes at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw, you must send a written or facsimile transmission of your notice of withdrawal to the exchange agent at its address given under the heading "The Exchange Offer -- Exchange Agent" by 5:00 p.m., New York City time, on the expiration date. 8 10 ACCEPTANCE OF OLD NOTES AND DELIVERY OF SERIES D NOTES.................... Subject to certain conditions, Heafner will accept any and all old notes that are properly tendered in the exchange offer and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date. Heafner will deliver the Series D notes promptly after the expiration date. TAX CONSIDERATIONS......... Heafner believes that the exchange of old notes for Series D notes will not be a taxable exchange for federal income tax purposes, but you should consult your tax adviser about the tax consequences of this exchange. EXCHANGE AGENT............. First Union National Bank is serving as exchange agent in connection with the exchange offer. FEES AND EXPENSES.......... Heafner will bear all expenses related to consummating the exchange offer and complying with the Registration Rights Agreement. USE OF PROCEEDS............ Heafner will not receive any cash proceeds from the issuance of the Series D notes. Heafner used the net proceeds from the issuance of the Series A notes to complete the Transactions. It used the net proceeds of the issuance of the Series C notes to repay certain amounts then outstanding under the credit facility. ------------------------------------ RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth Heafner's unaudited consolidated ratios of earnings to fixed charges on a historical basis. 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, earnings were insufficient to cover fixed charges by $254,000, and for the year ended December 31, 1998, earnings were insufficient to cover fixed charges by $2.2 million on an actual basis and $3.6 million on a pro forma basis, giving effect to the Transactions as if they had occurred on January 1, 1998.
FISCAL YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 ------------------ 1994 1995 1996 1997 ACTUAL PRO FORMA ---- ---- ---- ---- ------ --------- (DOLLARS IN THOUSANDS) Ratio of earnings to fixed charges.............. 1.9x 1.4x 1.5x -- -- --
------------------------------------ PRINCIPAL EXECUTIVE OFFICES Heafner's principal executive offices are located at 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217, and its telephone number is (704) 423-8989. 9 11 RISK FACTORS You should carefully consider the following factors together with the other matters described in this prospectus before deciding whether to exchange your Series B notes or Series C notes for Series D notes in the exchange offer. HEAFNER'S SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS, AND THE RESTRICTIONS IMPOSED BY THE TERMS OF ITS INDEBTEDNESS, COULD ADVERSELY AFFECT ITS OPERATING FLEXIBILITY AND PLACE IT AT A COMPETITIVE DISADVANTAGE Heafner is highly leveraged and has significant debt service requirements. As of December 31, 1998, Heafner had approximately $185.3 million of long-term debt outstanding, approximately $27.6 million of which was secured, and Heafner's ratio of indebtedness to total capital was 0.86 to 1. Heafner's substantial level of debt has important consequences, including the following: 1. Heafner's ability to obtain additional financing, whether for working capital, acquisitions, capital expenditures, or other purposes, may be impaired. For example, the Series D indenture, the Series B indenture and the credit facility contain covenants imposing a number of significant operating and financial restrictions on Heafner's business which, subject to certain exceptions: (a) limit Heafner's ability to: - incur additional indebtedness, - restrict distributions from subsidiaries, - pay dividends or make other restricted payments, - create liens and engage in sale/leaseback transactions, - enter into certain transactions with affiliates, and - consolidate, merge, or sell substantially all of its assets. (b) require Heafner to comply with certain financial ratios (minimum net worth) and tests (minimum loan availability). 2. A substantial portion of Heafner's pro forma EBITDA will be required for debt service, reducing funds available to Heafner for its operations. For example, approximately 50% of pro forma EBITDA for the year ended December 31, 1998 would have been required for debt service. On a pro forma basis, Heafner had a net loss of $3.7 million in fiscal 1998. 3. Certain of Heafner's indebtedness, including the credit facility and the senior notes, contains financial and other restrictive covenants, which, if breached, would result in an event of default under that indebtedness. A breach could result in the holders of the indebtedness declaring that indebtedness to be immediately due and payable. 4. Certain of Heafner's indebtedness, including borrowings under the credit facility, bears interest at variable or floating interest rates. Of the up to $100.0 million principal amount of loans that may be outstanding from time to time under the credit facility, Heafner has effectively fixed the applicable interest rates for a total of $20.0 million of such loans through interest rate swap agreements that expire at various times through October 2002. Accordingly, Heafner is vulnerable to increases in interest rates and increases in its interest costs, for the unfixed portion of the interest due. While these restrictions are intended to protect the holders of senior notes and other indebtedness, they may also negatively affect Heafner's ability to plan for or react to market conditions or meet extraordinary capital needs. These restrictions also could restrict Heafner's corporate activities, including adversely affecting its ability to finance its future operations or capital needs or to engage in other business activities that would be in the interest of Heafner. 10 12 Heafner's breach of any of these restrictions or its inability to comply with the required financial ratios and tests could result in an event of default under the credit facility, the Series D indenture or the Series B indenture. Upon the occurrence of an event of default, the lenders under the credit facility could elect to declare all amounts borrowed under the credit facility, together with accrued interest, to be due and payable. If Heafner were unable to repay those borrowings, the lenders could foreclose upon their collateral. Heafner's assets may not be sufficient to repay in full its obligations under the credit facility, its other indebtedness and the senior notes. For these reasons, Heafner's substantial degree of leverage may limit its flexibility in planning for or reacting to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions in its business. Heafner'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 Heafner's control. Based on the current level of operations, Heafner believes that its operating cash flow, together with available borrowings under the 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. However, Heafner's business may not generate cash flow at levels sufficient to meet these requirements. If it is unable to do so, Heafner may be required to refinance all or a portion of its indebtedness, including the senior notes, to sell assets or to obtain additional financing. Heafner may not be able to complete any such refinancing or asset sale or obtain additional financing on terms acceptable to it, or at the time or in the amounts necessary. THE SENIOR NOTES AND THE SUBSIDIARY GUARANTIES ARE EFFECTIVELY SUBORDINATED TO SECURED INDEBTEDNESS OF HEAFNER, WHICH COULD LIMIT COLLECTIBILITY OF THE SENIOR NOTES IN THE EVENT OF A BANKRUPTCY The Series D notes and the subsidiary guaranties of the Series D notes, like the old notes and the subsidiary guaranties of the old notes, will be effectively subordinated to all existing and future secured indebtedness of Heafner and the subsidiary guarantors, including indebtedness under the credit facility, to the extent of the value of the assets securing that indebtedness. Indebtedness under the credit facility is secured by a lien on all inventory and accounts receivable of Heafner and its material subsidiaries, all of which are subsidiary guarantors. Holders of existing or future secured indebtedness of Heafner and the subsidiary guarantors that is permitted under the Series D indenture, including holders of indebtedness under the credit facility, will have claims with respect to assets constituting collateral that are prior to the claims of the holders of the Series D notes and the old notes. The Series D notes will be, and the old notes are, structurally subordinated to all existing and future indebtedness of any subsidiary of Heafner, other than the subsidiary guarantors. As of December 31, 1998, Heafner had outstanding, either directly or through guaranties, approximately $185.3 million of indebtedness, all of which was senior indebtedness and approximately $27.6 million of which was secured. As of December 31, 1998, Heafner could have borrowed an additional $64.7 million under the credit facility, all of which would have been secured. Subject to certain limitations, the Series D indenture and the Series B indenture permit Heafner to incur additional indebtedness, including senior indebtedness, some of which may be secured. DIFFICULTY IN IMPLEMENTING ITS ACQUISITION STRATEGY MAY REDUCE POTENTIAL COST SAVINGS OR DIVERT RESOURCES FROM OTHER ASPECTS OF HEAFNER'S BUSINESS Heafner may not be able to successfully integrate the business, operations or assets of either or both of ITCO and CPW, which represent the largest acquisitions by Heafner to date and the most significant expansion of its business. The integration of ITCO and CPW may result in unforeseen difficulties that require a disproportionate amount of management's attention and Heafner's resources, diverting them from the day-to-day operations of Heafner. Heafner may not be able to achieve the cost savings, efficiencies and economies of scale it anticipates from the ITCO merger and CPW acquisition. Although Heafner 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, those amounts may not be 11 13 adequate to cover those costs, and the ITCO merger and CPW acquisition may have an adverse effect upon Heafner's operating results, while the operations of ITCO and CPW are being integrated into Heafner's operations. As part of its business strategy, Heafner may expand its network of distribution centers and retail stores through selective acquisitions. Heafner may not be able to identify or complete any such acquisitions and, if completed, Heafner may not be able to successfully integrate the businesses, operations or assets of acquired companies into its existing operations. In addition, the credit facility prohibits Heafner from committing funds to new acquisitions beyond $25.0 million in any fiscal year and $40.0 million during the term of the credit facility. Heafner may not be able to obtain a waiver of these limits in the future and therefore may not be able to complete acquisitions it believes to be in its interest. HEAFNER IS DEPENDENT ON A SMALL NUMBER OF TIRE MANUFACTURERS FOR ITS SUPPLIES There are a limited number of tire manufacturers worldwide. Accordingly, Heafner relies on a limited number of tire manufacturers for its products. In particular, Heafner relied on Michelin and Kelly-Springfield, a division of Goodyear, its top two suppliers for a majority of the tires it sold in 1998. Although in most cases Heafner has long-term relationships with these manufacturers, Heafner's contracts with all but one of its suppliers are short-term in nature, and Heafner makes no assurances that these suppliers will continue to supply products to Heafner on favorable terms, or at all. In addition, in the event that any of Heafner's vendors were to experience financial, operational, production, supply or quality assurance difficulties that could result in a reduction or interruption in supply to Heafner, or otherwise failed to meet Heafner's requirements and specifications, Heafner could be materially adversely affected. For example, in 1997, two of Heafner's principal suppliers experienced labor strikes. Although Heafner was not materially adversely affected by these labor actions, the strikes did affect Heafner's suppliers' ability to meet Heafner's supply orders. To the extent that Heafner 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 Heafner. COMPLIANCE WITH ENVIRONMENTAL LAWS IMPOSES COSTS AND POTENTIAL LIABILITIES ON HEAFNER Heafner's operations and properties are subject to federal, state and local laws, regulations and ordinances relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes under which Heafner could be held strictly, jointly and severally liable for costs associated with the investigation and clean-up of contaminated properties. The nature of Heafner's existing and historical operations exposes it to the risk of liabilities or claims with respect to environmental matters, including off-site disposal matters. For example, in its automotive service operations Heafner handles waste motor oil and hydraulic brake fluid, the storage and disposal of which is strictly regulated by federal and state authorities. Heafner contracts with outside services to handle disposal of these materials. Although Heafner believes that it complies with all relevant environmental regulations and does not incur significant costs maintaining compliance with those laws, it could incur material costs in connection with environmental liabilities or claims. In addition, future events such as changes in existing laws and regulations or their interpretation could give rise to additional compliance costs or liabilities that could have a material adverse effect on Heafner. FAILURE TO COMPLY WITH CONSUMER PROTECTION LAWS COULD RESULT IN BUSINESS DISRUPTIONS OR FINES 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 and fined a number of automobile repair and service centers, including Winston, for unfair consumer practices. That investigation resulted in fines against Winston in 1993 totaling $1.4 million and directly led to a change in Winston's consumer practices. Although Heafner believes that it materially 12 14 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 Heafner's operations, changes in practices or fines against Heafner. YEAR 2000 TECHNOLOGY PROBLEMS COULD CAUSE BUSINESS INTERRUPTIONS INCLUDING IN HEAFNER'S SUPPLY, INVENTORY CONTROL OR DISTRIBUTION NETWORK Portions of some of the accounting and operational systems and software used by Heafner and its customers and suppliers identify years with two digits instead of four. If not corrected, these information technology systems may recognize the year 2000 as the year 1900, which might cause system failures or inaccurate reporting of data that disrupts operations. If Year 2000 issues in Heafner's information technology and non-information technology systems are not remedied in a timely manner, or if Year 2000 problems on the part of Heafner's customers and suppliers exist and are not remedied in a timely manner, significant business interruptions or increased costs having a material adverse effect on the business, financial condition or results of operations of Heafner could occur in connection with the change in century. Risks of Year 2000 non-compliance on the part of Heafner or any of its significant suppliers could include interruptions in supply from tire manufacturers, disruption of Heafner's internal and external distribution network, reduced customer service capabilities, breakdown of inventory control and fulfillment systems and impairment of essential information technology systems used by management. However, Heafner believes that its systems that are not yet Year 2000 compliant can be brought into compliance by late 1999 and that the costs of compliance will not be material. Heafner has not established nor does it plan to establish a contingency plan for Year 2000 compliance issues. FAILURE TO RETAIN CERTAIN MEMBERS OF MANAGEMENT COULD RESULT IN ADVERSE BUSINESS CONSEQUENCES Heafner is dependent upon the services of its executive officers for management of Heafner. The loss or interruption of the continued full-time services of certain of these executives could have a material adverse effect on Heafner, and there can be no assurance that Heafner would be able to find replacements with equivalent skills or experience. The success of Heafner's integration of ITCO and CPW, or the identification of other acquisition opportunities, and the acquisition and integration of those opportunities may depend on the retention of certain members of the current management of Heafner, ITCO and CPW. Although Heafner intends to retain these executives, substantially all of whom have employment contracts with Heafner, there can be no assurance that they will remain with Heafner. Heafner has no key man life insurance policies with respect to any of its senior executives. FLUCTUATIONS IN DEMAND DUE TO SEASONALITY OR CHANGES IN CONSUMERS' CIRCUMSTANCES COULD AFFECT HEAFNER'S SALES Demand for tires tends to fluctuate from quarter to quarter, with the highest demand generally from March through October of each year and the lowest demand typically from November through February of each 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. HEAFNER MAY BE UNABLE TO REPURCHASE SENIOR NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, the holders of senior notes (the Series D notes and the old notes), have the right to require Heafner to offer to purchase all of their outstanding senior notes at 101% of the principal amount of their senior notes, plus accrued and unpaid interest, if any, to the date of repurchase. Heafner may not have sufficient funds available or may not be permitted by its other debt agreements to purchase their senior notes upon the occurrence of a Change of Control. In addition, the occurrence of a Change of Control may require Heafner to offer to purchase other outstanding indebtedness and may cause a default under the credit facility. The inability of Heafner to purchase all of 13 15 the senior notes tendered would constitute an Event of Default under both the Series B indenture and the Series D indenture. FRAUDULENT TRANSFER LAWS MAY LIMIT COLLECTIBILITY OF SENIOR NOTES IN THE EVENT OF BANKRUPTCY Under fraudulent transfer laws, a court could take certain actions detrimental to holders of senior notes if it found that: 1. at the time Heafner issued the senior notes, or a subsidiary guarantor issued its subsidiary guaranty, Heafner or the subsidiary guarantor did not receive fair consideration or reasonably equivalent value for incurring the indebtedness or obligation represented by the senior notes or the guaranty, and 2. at the same time, Heafner or the subsidiary guarantor: - was insolvent, - was rendered insolvent by reason of its incurring that indebtedness or obligation, - was engaged in a business or transaction for which the assets remaining in Heafner or the subsidiary guarantor, as the case may be, constituted unreasonably small capital, or - intended to incur or believed it would incur debts beyond its ability to pay such debts as they matured. If a court made these findings, it could: - invalidate, in whole or in part, the notes or the subsidiary guaranty of the subsidiary guarantor as fraudulent conveyances, or - subordinate the senior notes or the note guaranty to existing or future creditors of Heafner or the subsidiary guarantor, as the case may be, or - do both. In addition, if a court were to find that Heafner or any subsidiary guarantor, as the case may be, satisfied the measures of insolvency or capital inadequacy described under Point (2) above, that court could order that any previous distribution by Heafner or the subsidiary guarantor in respect of the senior notes be returned to Heafner or the subsidiary guarantor, or to a fund for the benefit of Heafner's or the subsidiary guarantor's creditors. The effect of the court's actions could be that the holders of the senior notes may not be repaid in full, and that other creditors would be entitled to be paid in full before any payment could be made on the senior notes. In that circumstance, there would be no assurance that any repayment on the senior notes would ever be recovered by the noteholders. CONTROL BY PRINCIPAL STOCKHOLDERS COULD EXPOSE NOTEHOLDERS TO RISKS INCLUDING CONFLICTING INTERESTS Heafner's Chairperson, Ann H. Gaither, and its President and Chief Executive Officer, William H. Gaither, own or control, on a fully diluted basis, 67.8% of the combined voting power of Heafner's outstanding capital stock, including shares of stock held by other members of the Gaither family voted under a voting trust agreement. The voting trust agreement among Ann H. Gaither and William H. Gaither and other members of their immediate family who own shares of common stock gives Ann H. Gaither and William H. Gaither the right to vote the common stock of the other members of their family. Consequently, Ann H. Gaither and William H. Gaither have the ability to control the business and affairs of Heafner because they are able to elect a majority of Heafner's board of directors and because of their voting power with respect to actions requiring stockholder approval. If Heafner encounters financial difficulties, or is 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 senior notes. In addition, the principal stockholders may have an interest in pursuing acquisitions, divestitures, sales of their stock or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of the senior notes. 14 16 FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL LIMIT OPPORTUNITIES TO SELL SERIES C NOTES AND SERIES B NOTES IN THE FUTURE If you do not exchange your Series C notes for Series D notes in the exchange offer, you will continue to be subject to the restrictions on transfer of your Series C notes, as specified in the legend on your Series C notes. The restrictions on transfer of your Series C notes arise because Heafner issued the Series C notes in a transaction not requiring registration under the Securities Act and applicable state securities laws. In general, the Series C notes may not be offered or sold, unless registered under the Securities Act and applicable state securities laws, or under an exemption from those requirements. Heafner does not intend to register the Series C notes under the Securities Act. After completion of the exchange offer, holders of Series C notes who do not tender their Series C notes in the exchange offer will no longer be entitled to any exchange or registration rights under the Registration Rights Agreement, except under limited circumstances. If Series C notes or Series B notes are tendered and accepted in the exchange offer, there will be fewer Series C notes and Series B notes outstanding and the liquidity of the trading markets for untendered Series C notes and Series B notes could be adversely affected. ABSENCE OF PUBLIC MARKET FOR THE SERIES D NOTES COULD LIMIT OPPORTUNITIES TO SELL YOUR SERIES D NOTES The Series D notes are new securities for which there currently is no trading market. Heafner does not intend to apply for listing of the Series D notes on any securities exchange or for quotation through an automated quotation system. It is not certain that any trading market for the Series D notes will develop or that any such market would be liquid. The trading market for "high yield" securities, such as the Series D notes and the old notes, is volatile and unpredictable. This volatility and unpredictability may have an adverse effect on the liquidity of, and prices for, such securities. The Series D notes could trade at prices that may be lower than their initial offering price as a result of many factors, including prevailing interest rates and Heafner's operating results. General declines in the market for similar securities may adversely affect the liquidity of, and the trading market for, the Series D notes. Such a decline may adversely affect liquidity and trading markets independently of Heafner's financial performance and prospects. ACTUAL EVENTS OR RESULTS COULD BE DIFFERENT FROM CURRENT EXPECTATIONS Certain information included in this prospectus is forward-looking, including statements contained in the "Prospectus 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 Heafner and its directors and officers. This 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, Heafner. These risks and uncertainties include, but are not limited to: 1. the ability of Heafner to maintain existing relationships with long-standing vendors or customers, successfully implement its business strategy, integrate ITCO and CPW, market and sell new products and continue to comply with environmental laws, rules and regulations; and 2. uncertainties relating to economic conditions, acquisitions and divestitures, government and regulatory policies, technological developments and changes in the competitive environment in which Heafner operates. Persons reading this prospectus are cautioned that forward-looking statements are only predictions and that actual events or results may differ materially. In evaluating any forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by the forward-looking statements, including those discussed in "Risk Factors." 15 17 WHERE YOU CAN FIND MORE INFORMATION Heafner has filed with the Securities and Exchange Commission a registration statement on Form S-4 under the Securities Act covering the Series D notes. This prospectus does not contain all of the information included in the registration statement. Any statement made in this prospectus concerning the contents of any contract, agreement or other document is not necessarily complete. If Heafner has filed any contract, agreement or other document as an exhibit to the registration statement, you should read the exhibit for a more complete understanding of the document or matter involved. The SEC allows Heafner to "incorporate by reference" exhibits it has filed with them. This means that, rather than filing a document Heafner has previously filed with the SEC as an exhibit to this registration statement, Heafner can refer you to that document by telling you, in the exhibit list at the back of this registration statement, the filing to which the document was attached as an exhibit. Each statement in this prospectus regarding a contract, agreement or other document is qualified in its entirety by reference to the actual document. Heafner is required to file periodic reports and other information with the SEC under the Securities Exchange Act. In addition, under the Series B indenture and the Series D indenture, Heafner has agreed to file with the SEC financial and other information for public availability and to deliver to the trustee, First Union National Bank, for forwarding to you, copies of all reports that Heafner files with the SEC without any cost to you. Heafner will also furnish such other reports as it may determine or as the law requires. If Heafner ceases to be subject to the reporting requirements of the Securities Exchange Act at any time that notes remain outstanding, Heafner is required under the Series B indenture and the Series D indenture to continue to file with the SEC and to furnish holders of the notes with: - all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, and, with respect to the annual information only, a report on the financial statements by Heafner's certified independent accountants, and - all periodic reports that would be required to be filed with the SEC on Form 8-K. In addition, for so long as any of the Series C notes remain outstanding, Heafner has agreed to provide without charge, upon written request, a copy of such information as is required by Rule 144A(d)(4) under the Securities Act to enable resales of the notes to be made under Rule 144A under the Securities Act. You may read and copy the registration statement, including the attached exhibits, and any reports, statements or other information that Heafner files, at the SEC's public reference room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549-1004, and at the SEC's Midwest Regional Office located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and its Northeast Regional Office located at 7 World Trade Center, Suite 1300, New York, New York 10048. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Heafner's SEC filings are also available to the public on the SEC's Internet site at http://www.sec.gov. These filings are also available to holders of senior notes, without charge, directly from Heafner. You may request a copy of these filings or other information that Heafner has agreed to provide by writing or telephoning Heafner at the following address: The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217, Attention: Senior Vice President and Chief Financial Officer; telephone: (704) 423-8989. IN ORDER TO ENSURE TIMELY DELIVERY OF ANY COPIES OF FILINGS REQUESTED FROM HEAFNER, PLEASE WRITE OR TELEPHONE HEAFNER NO LATER THAN , 1999 (FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER). 16 18 FORWARD-LOOKING INFORMATION This prospectus contains "forward looking statements," which are statements other than statements of historical facts. These forward-looking statements are principally contained under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Unaudited Pro Forma Condensed Combined Financial Data," and in statements using phrases such as "expects" or "anticipates" located throughout this prospectus. The forward-looking statements include, among other things, Heafner's expectations and estimates about its business operations, strategy, future costs savings and integration of ITCO and CPW, and its expectations and estimates about its future financial performance, including its financial position, cash flows from operations, capital expenditures and ability to refinance indebtedness. The forward-looking statements are subject to risks, uncertainties and assumptions about Heafner and about the future, and could prove not to be correct. Cautionary statements describing factors that could cause actual results to differ materially from Heafner's expectations are discussed in this prospectus, including in conjunction with the forward-looking statements included in this prospectus and under "Risk Factors." All subsequent written or oral forward-looking statements attributable to Heafner or to persons acting on behalf of Heafner are expressly qualified in their entirety by those cautionary statements. Heafner undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus may not occur. The market share information, descriptions of markets and industry statistics contained in the "Business" section and elsewhere in this prospectus are based on the good faith estimates of Heafner's management. The estimates are based on various factors, including: - industry publications including Modern Tire Dealer and Tire Business and industry statistics published by organizations such as the Rubber Manufacturers Association (RMA), - management's knowledge of the market based on its historical business and industry experience, - management's discussions with customers and competitors in the markets in which Heafner competes, and - Heafner's product sales compared to management's good faith estimates of the total product sales in the relevant market. Although Heafner believes this information to be reliable, it has not independently verified any of this information. 17 19 THE TRANSACTIONS THE ITCO MERGER AND THE RECLASSIFICATION On the day the Transactions were closed, a wholly owned subsidiary of Heafner merged with ITCO Logistics in accordance with an Agreement and Plan of Merger with ITCO Logistics and ITCO Logistics' stockholders. The total consideration paid on the Transactions closing date to the ITCO stockholders upon completion of the ITCO merger consisted of $18.0 million in cash and 1,400,667 newly issued shares of Heafner's Class B common stock. In addition, approximately $5.1 million of ITCO's total indebtedness remained outstanding, with the balance of approximately $26.3 million repaid as part of the Transactions. The ITCO Merger Agreement contains certain representations, warranties and covenants made by Heafner on the one hand and the ITCO stockholders on the other hand. With certain limited exceptions, those representations and warranties expire two years after the closing date of the Transactions. In general, the ITCO Merger Agreement provides for indemnification of Heafner by the ITCO stockholders, and for the indemnification of the ITCO stockholders by Heafner, each for losses relating to misrepresentations or breaches by the other of its 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 Heafner, up to 1,400,667 newly issued shares of Class B common stock. In connection with the ITCO merger, Heafner's authorized common stock was reclassified into shares of Class A common stock, $.01 par value, and shares of Class B common stock, $.01 par value. As a result of the reclassification, all outstanding shares of Heafner's common stock became shares of Class A common stock, and all options, warrants and other rights exercisable into or exchangeable for Heafner's common stock, became instead exercisable into or exchangeable for shares of Class A common stock. 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 on all matters submitted to a vote of Heafner's stockholders. In conjunction with the ITCO merger, Heafner entered into a number of ancillary agreements with the ITCO stockholders which, among other things: - grant certain registration rights to the ITCO stockholders with respect to their shares of Class B common stock, - grant to the ITCO stockholders the right to designate a person to Heafner's Board of Directors, - restrict the transfer of the ITCO stockholders' shares of Class B common stock, - restrict Heafner's ability to sell or issue shares of its common stock, or securities convertible into or exchangeable for shares of its common stock, at a price per share that is less than the fair market value of the common stock, - place limits on transactions between Heafner and any affiliate of Heafner, and - grant to the ITCO stockholders the right to require Heafner to redeem all of the outstanding shares of Class B common stock that were issued to the ITCO stockholders according to an agreed upon formula upon the earlier of the occurrence of certain events or January 4, 2005. THE CPW ACQUISITION On the closing date of the Transactions, Heafner acquired all of the outstanding shares of Speed Merchant under a Stock Purchase Agreement, referred to in this prospectus as the "CPW acquisition agreement," between Heafner and the stockholders of Speed Merchant, referred to as the "CPW stockholders." The total consideration payable to the CPW stockholders in connection with the CPW acquisition was $45.0 million in cash, of which $35.0 million was paid on the Transactions closing date 18 20 upon completion of the CPW acquisition in exchange for the stock of Speed Merchant. The additional $10.0 million is payable as follows: $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 the remaining $2.6 million is payable in the form of other contingent payouts to the CPW stockholders. At the request of Heafner, the agent under the credit facility issued a letter of credit under the credit facility to be held in escrow to secure Heafner's obligations to make the non-compete payments. In addition, at the Transactions 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 Heafner on the one hand and the CPW stockholders on the other hand. With certain limited exceptions, the representations and warranties expire two years after the Transactions closing date. In general, the CPW acquisition agreement provides for indemnification of Heafner by the CPW stockholders, and for the indemnification of the CPW stockholders by Heafner, each for losses relating to misrepresentations or breaches by the other of its representations, warranties and covenants. An additional adjustment amount is payable by Heafner to the CPW stockholders if the net earnings attributable to certain Arizona retail stores acquired by Phoenix Racing, Inc., a wholly owned subsidiary of Speed Merchant, exceed specified targets for the year following the Transactions closing date; alternatively, if the net earnings of the retail stores fall short of the targets, then an adjustment amount will be payable by the CPW stockholders to Heafner. On the Transactions closing date, Arthur C. Soares, the president of Heafner's CPW division and a CPW stockholder, entered into a two-year employment agreement with Heafner and Ray C. Barney, the Chief Operating Officer of Heafner's CPW division and a CPW stockholder, entered into a three-year employment agreement with Speed Merchant. Both employment agreements provide for an annual base salary, stay-put bonuses payable at the end of each year of the agreement's 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 Heafner's board of directors. Both employment agreements also contain non-compete, non-solicitation and confidentiality provisions. FINANCING TRANSACTIONS Financing necessary to complete the acquisitions of ITCO and CPW and the repayment of Heafner's outstanding subordinated debt was obtained from the proceeds of the Series A notes offering and amounts outstanding under the credit facility. The credit facility replaced the old credit facility, under which $33.5 million was outstanding on the Transactions closing date, prior to giving effect to the Transactions. The ITCO facility, under which $26.3 million was outstanding on the Transactions 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 if, on the Transactions closing date, they were repaid and then borrowed under the credit facility. The aggregate amount of commitments under the credit facility is currently $100.0 million, of which $21.9 million was outstanding at December 31, 1998. Also on the Transactions closing date, Heafner applied a portion of the proceeds of the Series A notes offering to repay $16.0 million of subordinated debt and $10.3 million under an outstanding Heafner term loan. 19 21 SOURCES AND USES OF FUNDS The following table indicates the approximate sources and uses of funds on the Transactions closing date (amounts in thousands): SOURCES OF FUNDS Credit facility............................................. $ 48,054 Series A notes.............................................. 100,000 Assumption of indebtedness(1)............................... 11,106 Deferred payments(2)........................................ 11,390 Class B common stock........................................ 14,959 -------- Total Sources............................................. $185,509 ======== USES OF FUNDS ITCO merger(3).............................................. $ 34,349 CPW acquisition(4).......................................... 45,000 Repayment/refinancing of existing indebtedness(5)........... 87,054 Assumption of indebtedness(1)............................... 11,106 Estimated transaction fees and expenses(6).................. 8,000 -------- Total Uses................................................ $185,509 ========
- --------------- (1) Represents assumption of ITCO building mortgages of $2.5 million and vendor loans and other amounts at ITCO and CPW. (2) Includes: (a) $7.4 million payable in installments over five years after the Transactions closing date in exchange for certain non-compete covenants of the CPW stockholders, (b) $2.6 million in other contingent payouts to the CPW stockholders and (c) $1.4 million for the exercise of stock appreciation rights by certain employees of ITCO. (3) 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. (4) Includes the amounts described in clauses (a) and (b) of footnote (2). (5) Represents repayment or refinancing of: (a) $59.8 million of long-term indebtedness of Heafner, including $16.0 million of subordinated debt, (b) $26.3 million of long-term indebtedness of ITCO and (c) $1.0 million of long-term indebtedness of CPW. (6) Fees and expenses include the initial purchasers' discount and other fees and expenses of the Series A notes offering and other fees and direct expenses incurred in connection with the Transactions. Fees and expenses include lenders' fees such as prepayment fees, legal fees, accounting fees and other out-of-pocket expenses. ----------------------------------------- USE OF PROCEEDS Approximately $49.0 million of the proceeds of the Series C offering were applied by Heafner to repay amounts outstanding under the credit facility. The remainder of the proceeds were used to pay fees and expenses incurred in connection with the Series C offering, which included the discount to the initial purchasers, legal and accounting fees and other out-of-pocket expenses, and for general corporate purposes. The amounts outstanding under the credit facility that were repaid with the net proceeds of the Series C offering had originally been borrowed in order to finance the Transactions and to refinance or repay existing long-term indebtedness of Heafner and ITCO as described above in "The Transactions." The aggregate amount of commitments under the credit facility remained at $100.0 million after the Series C offering was completed. As of December 31, 1998, $64.7 million was available for additional borrowings under the credit facility. 20 22 Indebtedness under the credit facility bears interest, at Heafner's option: - at the "base rate," which is a floating rate per year equal to the greater of the federal funds rate plus 0.5% or the rate announced by the credit facility agent from time to time as its base or prime lending rate plus the applicable margin, as described below under "Description of Credit Facility", or - at the "Eurodollar rate," which is a fixed rate per year based on LIBOR, for one, two, three, six or (subject to the lenders' agreement) twelve months plus the applicable margin. The credit facility will mature on May 20, 2003. See "Description of Credit Facility." 21 23 CAPITALIZATION The following table sets forth, as of December 31, 1998, Heafner's consolidated capitalization. This table should be read in conjunction with the consolidated financial statements of Heafner, ITCO and CPW and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus.
DECEMBER 31, 1998 ---------------------- (DOLLARS IN THOUSANDS) Cash........................................................ $ 6,648 ======== Long-term debt, including current maturities: Credit facility........................................... $ 21,925 Series B notes............................................ 100,000 Series C notes............................................ 50,000 Vendor loans.............................................. 8,132 Other debt................................................ 5,279 -------- Total debt............................................. 185,336 -------- Redeemable preferred stock Series A -- 4% cumulative, $.01 par value, 7,000 shares authorized, issued and outstanding............................................... 7,000 Redeemable preferred stock Series B -- variable rate cumulative, $.01 par value, 4,500 shares authorized, issued and outstanding.................................... 4,353 Warrants.................................................... 1,137 Stockholders' equity: Class A common stock, $.01 par value, 10,000,000 shares authorized; 3,697,000 shares issued at December 31, 1998(a)................................................ 37 Class B common stock, $.01 par value, 20,000,000 shares authorized; 1,400,667 shares issued and outstanding at December 31, 1998...................................... 14 Additional paid-in capital................................ 22,360 Notes receivable from stock sales......................... (177) Accumulated deficit....................................... (4,110) -------- Total stockholders' equity............................. 18,124 -------- Total capitalization................................. $215,950 ========
- --------------- (a) Excludes 1,034,000 shares issuable upon exercise of warrants and 493,650 shares issuable upon exercise of options. 22 24 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER Heafner sold $100.0 million in aggregate principal amount of its Series A notes in a private offering on May 20, 1998 to the initial purchasers, who then resold the Series A notes to qualified institutional buyers in reliance upon and subject to the restrictions imposed under Rule 144A under the Securities Act. In a subsequent exchange offer, the Series A noteholders exchanged all of their Series A notes for Series B notes. The Series B notes have similar terms to the Series A notes, but were registered under the Securities Act and, therefore, freely transferable. No Series A notes remain outstanding. On December 8, 1998, Heafner sold $50.0 million in aggregate principal amount of its Series C notes in a private offering to the same initial purchasers, who resold the Series C notes to qualified institutional buyers under Rule 144A under the Securities Act. Heafner is conducting this exchange offer not only for the Series C notes, but also for the Series B notes, to allow all of its 10% Senior Notes Due 2008 to trade as a single issue. Heafner believes that this will increase the liquidity of the notes. Under the Registration Rights Agreement, which Heafner, its subsidiaries and the initial purchasers entered into in connection with the private offering of the Series C notes, Heafner is required to: - file, on or prior to March 31, 1999, the registration statement of which this prospectus is a part, providing for an exchange offer of Series D notes identical in all material respects to Series B notes and the Series C notes, except that, unlike the Series C notes, the Series D notes will be freely transferable, and will not have any covenants regarding exchange and registration rights; - offer up to $150.0 million of Series D notes in exchange for both the Series C notes and the Series B notes; - use its best efforts to cause the registration statement to be declared effective within 180 days after the date Heafner originally issued the Series C notes; and - keep the exchange offer open for not less than 20 business days, or longer if required by applicable law, after the date that notice of the exchange offer is mailed to holders of the old notes. The Registration Rights Agreement also provides that, under certain circumstances, Heafner will file with the SEC a shelf registration statement relating to the offer and sale of Series C notes by holders of Series C notes who satisfy certain conditions regarding the provision to Heafner of information in connection with the shelf registration statement. The exchange offer being made by this prospectus is intended to satisfy Heafner's obligations under the Registration Rights Agreement. If Heafner fails to fulfill the registration and exchange obligations under the Registration Rights Agreement, each holder of Series C notes will be entitled to receive additional interest at the rate of 0.50% per year per $1,000 principal amount of their Series C notes constituting "transfer restricted securities" until Heafner has fulfilled these obligations. The additional interest will be paid in cash on the same interest payment dates as regular interest payments on the notes. Transfer restricted securities means each Series C note or Series D note until: - the date on which the Series C note has been exchanged by a person other than a broker-dealer for a Series D note in the exchange offer; - if the Series D note is received by a broker-dealer in exchange for a Series C note in the exchange offer, or in exchange for a Series B note that had been received by the broker-dealer for a Series A note in the Series B exchange offer, then the date on which that Series D note is sold to a purchaser who receives from the broker-dealer a copy of this prospectus; - the date on which the Series C note has been effectively registered under the Securities Act and disposed of in accordance with the shelf registration statement; or - the date on which the Series C note could be resold under Rule 144(k) under the Securities Act. 23 25 Once the SEC declares the registration statement effective, Heafner will offer the Series D notes in exchange for surrender of the old notes. Each of your Series D notes will accrue interest from the last interest payment date on which interest was paid on the old note you exchanged for that Series D note. If Heafner has not paid any interest on the old note, your Series D note will accrue interest from the date Heafner originally issued that old note. The old notes Heafner accepts for exchange will cease to accrue interest upon issuance of the Series D notes. The number of Series B notes and Series C notes tendered and accepted in the exchange offer will reduce the number of Series B notes and Series C notes outstanding, resulting in a decrease in the liquidity in the market for both the Series B notes and the Series C notes. In addition, Series C notes that are not tendered and accepted in the exchange offer will continue to be subject to transfer restrictions imposed by the securities laws. In either case, your Series C notes will be more difficult to trade. Although Series B notes are not subject to the transfer restrictions, you may find that Series B notes will also be more difficult to trade after the exchange offer because of the decrease in the liquidity of the market for the Series B notes. REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS Based on interpretations by the staff of the SEC as stated in no-action letters issued to third parties, Heafner believes that you may offer for resale, resell and otherwise transfer the Series D notes issued to you in the exchange offer for your Series B notes or Series C notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that you can represent that: - you are acquiring the Series D notes in the ordinary course of your business; - you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the Series D notes; - you are not an "affiliate" as defined in Rule 405 of the Securities Act of Heafner; and - you are not an initial purchaser who acquired the Series C notes you are tendering for exchange directly from us in the Series C offering. If you are not able to make these representations, you are a "Restricted Holder." As a Restricted Holder, you will not be able to exchange your Series B notes or Series C notes for Series D notes in the exchange offer. A Restricted Holder of Series C notes may only sell its Series C 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 under an exemption from the registration requirement of the Securities Act. Each broker-dealer that receives Series D notes for its own account in exchange for (a) Series C notes, where those Series C notes were acquired by the broker-dealer as a result of market-making activities or other trading activities or (b) Series B notes, where those Series B notes were acquired in the Series B exchange offer in exchange for Series A notes that the broker-dealer had acquired as a result of market-making activities or other trading activities, is a "Participating Broker-Dealer." Each Participating Broker-Dealer must acknowledge in the letter of transmittal that it will deliver a prospectus in connection with any resale of Series D 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. Based upon interpretations by the staff of the SEC, Heafner believes that Series D notes issued in 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 Series D notes received by it in the exchange offer. Heafner has agreed that, for a period of 90 days after the date the SEC declares the registration statement effective, Heafner will make this prospectus available to any broker-dealer, and for a period of 100 days to a Participating Broker-Dealer, for use in connection with any such resale. By acceptance of this exchange offer, each broker-dealer that receives Series D notes in the 24 26 exchange offer agrees to notify Heafner before it uses this prospectus in connection with the sale or transfer of Series D notes. For a more complete understanding of your exchange and registration rights, you should refer to the Registration Rights Agreement, which is included as an exhibit to the registration statement of which this prospectus is a part. A copy of the Registration Rights Agreement is available as described under the heading "Where You Can Find More Information." TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, Heafner 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 $150.0 million principal amount of the old notes is outstanding. Heafner will issue $1,000 principal amount of Series D notes in exchange for each $1,000 principal amount of outstanding old notes accepted in the exchange offer. You may tender some or all of your old notes in the exchange offer. However, old notes may be tendered only in integral multiples of $1,000. The form and terms of the Series D notes will be identical in all material respects to the form and terms of the old notes, but will be different from the Series C notes in that: - the offering of the Series D notes has been registered under the Securities Act; - the Series D notes will not be subject to transfer restrictions; - the Series D notes will be issued free of any obligations regarding exchange and registration rights; and - the Series D notes will not provide for the payment of additional interest. The Series D notes will evidence the same debt as the old notes and will be entitled to the benefits of the Series D indenture under which the Series C notes were, and the Series D notes will be, issued. This prospectus, together with the accompanying letter of transmittal, is initially being sent to all registered holders of old notes on or about , 1999. The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered. However, the exchange offer is subject to certain customary conditions, which Heafner may waive, and to the terms and provisions of the Registration Rights Agreement. You do not have any appraisal or dissenters' rights under law, or under either the Series B indenture or the Series D indenture, in connection with the exchange offer. Heafner intends to conduct the exchange offer in accordance with the applicable requirements of the Securities Exchange Act and the rules and regulations of the SEC under the Securities Exchange Act. If Heafner does not accept for exchange any tendered old notes 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 you, as promptly as practicable after the expiration date. If you tender old notes in the exchange offer you 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 in the exchange offer. Heafner 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 , 1999, unless Heafner, in its sole discretion, extends the exchange offer. If we extend the exchange offer, the term "expiration date" shall mean the latest date and time to which the exchange offer is extended. 25 27 Heafner has the right to delay accepting any old notes, to extend the exchange offer or, if any of the conditions described below under "Certain Conditions to the Exchange Offer" 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. Heafner also has the right to amend the terms of the exchange offer in any manner. If Heafner delays acceptance of any old notes, terminates or amends the exchange offer, Heafner will make a public announcement of that event as promptly as practicable. If Heafner believes that it has made a material amendment of the terms of the exchange offer, Heafner will promptly disclose that amendment in a manner reasonably calculated to inform the holders of notes about the amendment and Heafner 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 registered holders, if the exchange offer would otherwise expire during such period. Heafner will notify the exchange agent of any extension of the exchange offer in writing or orally (if orally, Heafner will promptly confirm in writing). Unless otherwise required by applicable law or regulation, Heafner will make a public announcement of any extension of the expiration date before 9:00 a.m., New York City time, on the first business day after the previously-scheduled expiration date. Without limiting the manner in which Heafner may choose to make public announcements of any delay, extension, termination or amendment of the exchange offer, Heafner shall have no obligation to publish, advise or otherwise communicate any such public announcement, other than by making a timely press release of any of those events. PROCEDURES FOR TENDERING Unless the tender is being effected by means of a book-entry transfer, each holder of old notes wishing to accept the exchange offer must, prior to 5:00 p.m., New York City time, on the expiration date: - complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, - have the signatures guaranteed if required by the letter of transmittal, and - mail or otherwise deliver the letter of transmittal or facsimile, together with the old notes and any other required documents, to the exchange agent. Any financial institution that is a participant in the book-entry transfer facility system of The Depository Trust Company (the "Depository" or "DTC") may make book-entry delivery of the old notes by causing DTC to transfer the old notes into the exchange agent's account and to deliver an agent's message on or prior to the expiration date in accordance with DTC's procedures for transfer and delivery. The term "agent's message" means a message, transmitted by DTC to and received by the exchange agent and forming a part of a confirmation of the book-entry tender of old notes into the exchange agent's account at DTC, which states that DTC has received an express acknowledgment from the tendering participant. The acknowledgment states that the participant has received and agrees to be bound by, and makes the representations and warranties contained in, the letter of transmittal and that Heafner may enforce the letter of transmittal against that participant. If delivery of old notes is effected through book-entry transfer into the exchange agent's account at DTC and an agent's message is not delivered, the letter of transmittal, or facsimile of the letter of transmittal, with any required signature guarantees and any other required documents must be transmitted to and received or confirmed by the exchange agent at its addresses set forth under the subheading "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a holder of old notes will constitute an agreement between that holder and Heafner in accordance with the terms and subject to the conditions in this prospectus and in the letter of transmittal. Delivery of all documents and old notes must be made to the exchange agent at its address. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to deliver the documents and old notes for them. 26 28 The method of delivery of old notes, the letter of transmittal and all other required documents to the exchange agent is at the election and risk of the holders. Instead of delivery by mail, Heafner recommends that holders use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO HEAFNER. Only a holder of old notes may tender old notes in the exchange offer. The term "holder" means any person in whose name old notes are registered on the register maintained by the trustee or any other person who has obtained a properly completed bond power from the registered holder, or any person whose old notes are held of record by DTC who desires to deliver their old notes by book-entry transfer at DTC. Any beneficial holder 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 the registered holder to tender on the beneficial holder's behalf. If the beneficial holder wishes to tender on the beneficial holder's own behalf, the beneficial holder must, prior to completing and executing the letter of transmittal and delivering old notes, either make appropriate arrangements to register ownership of the old notes in the beneficial holder's own name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal must be guaranteed 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 Securities Exchange Act; unless the old notes tendered with the letter of transmittal are tendered: - by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal; or - for the account of an eligible guarantor institution. If the letter of transmittal is signed by a person other than the registered holder of any old notes listed in the letter of transmittal, those old notes must be endorsed or accompanied by appropriate bond powers which authorize that person to tender the old notes on behalf of the registered holder, and, in either case, signed as the name of the registered holder or holders appears on the old notes. 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, those persons should so indicate when signing, and, unless waived by Heafner, submit with the letter of transmittal evidence satisfactory to Heafner of their authority to so act. All questions as to the validity, form, eligibility including time of receipt, acceptance and withdrawal of the tendered old notes will be determined by Heafner in its sole discretion, which determination will be final and binding. Heafner reserves the absolute right to reject any and all old notes not properly tendered or any old notes its acceptance of which would, in the opinion of its counsel, be unlawful. Heafner also reserves the absolute right to waive any irregularities or conditions of tender as to particular old notes. Heafner's interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as Heafner shall determine. Neither Heafner, the exchange agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of old notes nor shall Heafner, the exchange agent or any other person incur any liability for failure to give such notification. Tenders of old notes will not be deemed to have been made until such 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 27 29 waived, will be returned without cost by the exchange agent to the tendering holder of such old notes unless otherwise provided in the letter of transmittal as soon as practicable following the expiration date. In addition, Heafner 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 under " -- Certain Conditions to the Exchange Offer," 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 may differ from the terms of the exchange offer. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF SERIES D NOTES Upon satisfaction or waiver of all of the conditions to the exchange offer, Heafner will accept, promptly after the expiration date, all old notes properly tendered and will issue the Series D notes promptly after acceptance of the old notes. For purposes of the exchange offer, Heafner shall be deemed to have accepted properly tendered old notes for exchange when, as and if Heafner has given oral or written notice thereof to the exchange agent, with written confirmation of any oral notice to be given promptly thereafter. Issuance of Series D notes for old notes that are accepted for exchange in the exchange offer will be made only after timely receipt by the exchange agent of certificates for the old notes and a properly completed and duly executed letter of transmittal and all other required documents or a timely book-entry confirmation of such old notes into the exchange agent's account at DTC. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than the holder desired to exchange, such unaccepted or non- exchanged old notes will be returned without expense to the tendering holder (or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry procedures described below, such non-exchanged old notes will be credited to an account maintained with the book-entry transfer facility) as promptly as practicable after the expiration date. BOOK-ENTRY TRANSFER The exchange agent will ask DTC to open an account to handle exchanges of old notes promptly after the date of this prospectus, and any financial institution that is a participant in DTC's systems may make book-entry delivery of old notes by causing DTC to transfer old notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. However, although delivery of old notes may be effected through book-entry transfer at DTC, the letter of transmittal (or a facsimile thereof or an Agent's Message in lieu thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the exchange agent at one of the addresses set forth below under "-- Exchange Agent" on or prior to the expiration date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their old notes and who cannot deliver their old notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, or holders who cannot complete the procedure for book-entry transfer on a timely basis, may effect a tender if: - The tender is made through an eligible guarantor institution; - Prior to the expiration date, the exchange agent receives from such eligible guarantor 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 the old notes, the certificate number or numbers of such old notes and the principal amount of old notes tendered, 28 30 stating that the tender is being made thereby, and guaranteeing that, within three business days after the expiration date, the letter of transmittal (or facsimile thereof), together with the certificate(s) representing the old notes to be tendered in proper form for transfer and any other documents required by the letter of transmittal, will be deposited by the eligible guarantor institution with the exchange agent; and - Such properly completed and executed letter of transmittal (or facsimile thereof), together with the certificate(s) representing all tendered old notes in proper form for transfer (or confirmation of a book-entry transfer into the exchange agent's account at DTC of old notes delivered electronically) and all other documents required by the letter of transmittal are received by the exchange agent within three business 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 described 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 facsimile transmission or letter 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 - specify the name of the person having deposited the old notes to be withdrawn (the "Depositor"); - include a statement that the Depositor is withdrawing its election to have old notes exchanged and identify the old notes to be withdrawn, including the certificate number or numbers and principal amount of such old notes; - be signed by the Depositor 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 permit the trustee with respect to the old notes to register the transfer of such old notes into the name of the Depositor withdrawing the tender; and - specify the name in which any such old notes are to be registered, if different from that of the Depositor. If old notes have been tendered pursuant to the procedures for book-entry transfer set forth in "-- Procedures for Tendering" and "-- Book-Entry Transfer," the notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawal of old notes, in which case a notice of withdrawal will be effective if delivered to the exchange agent by written, telegraphic, telex or facsimile transmission. All questions as to the validity, form and eligibility, including time of receipt, for such withdrawal notices will be determined by Heafner, and its determination shall be final and binding. Any old notes that are withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer and no Series D notes will be issued in exchange for any withdrawn old notes unless the old notes so withdrawn are validly re-tendered. Properly withdrawn old notes may be re-tendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the expiration date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER The exchange offer is not subject to any conditions, other than that: - the exchange offer does not violate applicable law or any applicable interpretation of the staff of the SEC; and 29 31 - there is no injunction, order or decree issued by any court or any governmental agency that would prohibit, prevent or otherwise materially impair Heafner's ability to proceed with the exchange offer. There can be no assurance that any such condition will not occur. Holders of old notes will have certain rights against Heafner under the Registration Rights Agreement should Heafner fail to consummate the exchange offer. If Heafner determines that it may terminate the exchange offer because of one of the conditions described above, it may: - refuse to accept any old notes and return any old notes that have been tendered to the holders thereof; - extend the exchange offer and retain all old notes tendered prior to the expiration date, subject to the rights of such holders of tendered old notes to withdraw their tendered old notes; or - waive the termination event and accept all properly tendered old notes that have not been withdrawn. If waiving the termination event constitutes a material change in the exchange offer, Heafner will disclose the change by means of a supplement to this prospectus that will be distributed to each registered holder of old notes, and Heafner will extend the exchange offer for a period of five to ten business days, depending upon the significance of the change and the manner of disclosure to the registered holders of the old notes, if the exchange offer would otherwise expire during such period. EXCHANGE AGENT First Union National Bank, the trustee under the Series D indenture, has been appointed as exchange agent for the exchange offer. Questions and requests for assistance and inquiries for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent addressed as follows: By Mail: Facsimile Transmission Hand or Overnight Delivery: (REGISTERED OR CERTIFIED MAIL Number: First Union National Bank RECOMMENDED) 704-590-7628 Corporate Trust Reorganization First Union National Bank (FOR ELIGIBLE 1525 West W.T. Harris Boulevard, 3C3 Corporate Trust Reorganization INSTITUTIONS ONLY) Charlotte, North Carolina 28262 1525 West W.T. Harris Boulevard, 3C3 Attention: Mike Klotz Charlotte, North Carolina 28288 Confirm by Telephone: Attention: Mike Klotz 704-590-7408
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL. FEES AND EXPENSES Heafner will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. Heafner will pay the cash expenses to be incurred in connection with soliciting tenders in the exchange offer. Such expenses include fees and expenses of the exchange agent and the trustee, accounting and legal fees and printing costs, among others. TRANSFER TAXES Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes in connection with the tender or exchange, except that holders who instruct Heafner to register Series D 30 32 notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax. ACCOUNTING TREATMENT The Series D notes will be recorded at the same carrying value as the old notes on the date of the exchange. Accordingly, Heafner will not recognize any gain or loss for accounting purposes as a result of the exchange offer. 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 Series D notes. 31 33 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998 has been derived by the application of pro forma adjustments to the audited statement of operations of Heafner for the year ended December 31, 1998, and the unaudited condensed statements of operations for the five months ended May 20, 1998 for ITCO and May 31, 1998 for CPW. The unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998, give effect to the Transactions as if they had all occurred on January 1, 1998. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that Heafner 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 ITCO and CPW based on estimates of their respective fair values. The actual purchase price allocation may differ from that reflected in the unaudited Pro Forma Condensed Combined Statement of Operations. For purposes of the accompanying unaudited Pro Forma Condensed Combined Statement of Operations, goodwill resulting from the Transactions will be amortized over a 15 year period and will not be deductible for income tax reporting purposes. On May 20, 1998, Heafner merged with ITCO for a total price of $35.3 million (including $1.0 million of direct acquisition costs) and acquired CPW for a total purchase price of $46.6 million (including $1.0 million related to the repayments of debt and $0.6 million of direct acquisition costs). These transactions were accounted for as purchases with the excess of the purchase price over the fair value of the net assets acquired to goodwill, which is being amortized over 15 years. For the year ended December 31, 1998, Heafner's results included the results of ITCO and CPW for the period from the Transactions closing date through December 31, 1998. See Note 2 in Heafner's audited financial statements at the back of this prospectus for the ITCO and CPW preliminary purchase price allocations. Financing adjustments represent adjustments for the issuance of the Series A notes and Series C notes and borrowings under the credit facility. The pro forma adjustments have been applied to the audited statement of operations for the year ended December 31, 1998, for Heafner and the unaudited statements of operations for the five months ended May 20, 1998 and May 31, 1998, for ITCO and CPW, respectively, to reflect the Transactions as if they had all occurred on January 1, 1998. The unaudited Pro Forma Condensed Combined Statement of Operations does not aim to represent what Heafner's results would have been if the Transactions had occurred on January 1, 1998, or to project what Heafner's results of operations for any future period or date will be. The unaudited Pro Forma Condensed Combined Statement of Operations should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of Heafner, ITCO and CPW, and the respective notes, included in this prospectus. 32 34 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
HISTORICAL ---------------------------------- PRO FORMA ITCO CPW --------------------------------------- HEAFNER (5/20/98) (5/31/98) ACQUISITION FINANCING PRO FORMA 12/31/98 (5 MONTHS) (5 MONTHS) ADJUSTMENTS ADJUSTMENTS COMBINED -------- ---------- ---------- ----------- ----------- --------- STATEMENT OF OPERATIONS DATA: Net sales................... $713,672 $149,123 $60,964 $923,759 Cost of goods sold.......... 548,035 126,920 44,411 $ 2,340(a) 721,706 -------- -------- ------- ------- -------- Gross profit................ 165,637 22,203 16,553 (2,340) 202,053 General, selling and administrative expenses... 146,234 17,531 13,484 177,249 Amortization expense........ 6,919 375 -- 3,397(b) 10,691 Special charges............. 1,409 -- -- (1,409)(c) -- -------- -------- ------- ------- -------- Income from operations...... 11,075 4,297 3,069 (4,328) 14,113 OTHER EXPENSE: Interest expense, net....... 13,460 1,526 212 247(d) $ 2,377(e) 17,822 Other expense (income), net....................... (166) -- 50 (116) -------- -------- ------- ------- ------- -------- Total non-operating expense................... 13,294 1,526 262 247 2,377 17,706 -------- -------- ------- ------- ------- -------- Income (loss) before income taxes..................... (2,219) 2,771 2,807 (4,575) (2,377) (3,593) Provision (benefit) for income taxes.............. 289 1,179 1,125 (1,569)(f) (951)(f) 73 -------- -------- ------- ------- ------- -------- Net income (loss) before extraordinary item........ $ (2,508) $ 1,592 $ 1,682 $(3,006) $(1,426) $ (3,666) ======== ======== ======= ======= ======= ======== OTHER DATA: Depreciation and amortization.............. 12,316 1,065 246 3,397 17,024 EBITDA(g)................... 22,824 5,362 3,265 (931) 30,520 Capital expenditures........ 8,697 292 338 9,327 Ratio of earnings to fixed charges(h)................ -- 2.2x 5.2x --
33 35 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (a) To reflect CPW vendor rebate programs. (b) To reflect amortization of ITCO and CPW goodwill, amortization of CPW non-compete covenants and other deferred payments and elimination of amortization of ITCO historical goodwill. (c) To eliminate non-recurring restructuring charge directly attributable to the Transactions. (d) To reflect interest expense on notes payable to CPW stockholders for non-compete agreements. (e) To reflect interest expense on the Series A notes and Series C notes, amortization expense on deferred financing costs and elimination of historical interest expense and amortization expense related to long-term debt repaid. (f) The income tax benefit has been adjusted to reflect the income tax effects of pro forma adjustments based upon an assumed 40% tax rate. (g) EBITDA -- Represents net income (loss) before extraordinary item 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. EBITDA as calculated and presented here may not be comparable to EBITDA as calculated and presented by other companies. (h) 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 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 periods shown for Heafner historical and combined pro forma, earnings were insufficient to cover fixed charges by $2.2 million and $3.6 million, respectively. 34 36 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, 1994 through 1998 are derived from the historical consolidated financial statements of Heafner as of and for those years, which have been audited by Arthur Andersen LLP, independent certified public accountants. The consolidated financial statements of Heafner for each of the years in the three-year period ended December 31, 1998 are included at the back of this prospectus. 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 in this prospectus.
FISCAL YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1994 1995 1996 1997(A) 1998(B) -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales................................................ $161,786 $169,031 $190,535 $311,839 $713,672 Costs of goods sold...................................... 134,625 140,811 158,880 233,941 548,035 -------- -------- -------- -------- -------- Gross profit............................................. 27,161 28,220 31,655 77,898 165,637 Selling, general and administrative expenses............. 25,420 26,584 29,660 74,441 153,153 Special charges.......................................... -- -- -- -- 1,409 -------- -------- -------- -------- -------- Income from operations................................... 1,741 1,636 1,995 3,457 11,075 Interest and other expense, net.......................... 520 946 944 3,710 13,294 -------- -------- -------- -------- -------- Income (loss) from operations before provision (benefit) for income taxes and extraordinary charge.............. 1,221 690 1,051 (254) (2,219) Provision (benefit) for income taxes..................... -- -- -- (240) 289 -------- -------- -------- -------- -------- Net income (loss) from operations before extraordinary charge................................................. 1,221 690 1,051 (14) (2,508) Extraordinary charge..................................... -- -- -- -- (2,216) -------- -------- -------- -------- -------- Net income (loss)........................................ 1,221 690 1,051 (14) (4,724) Pro forma provision for income taxes..................... 520 325 439 -- -- -------- -------- -------- -------- -------- Pro forma net income (loss).............................. $ 701 $ 365 $ 612 $ (14) $ (4,724) ======== ======== ======== ======== ======== CASH FLOWS DATA: Net cash provided by (used in) operating activities...... $ 4,525 $ (363) $ 4,008 $ 6,703 $ (9,684) Net cash used in investing activities.................... (1,350) (2,200) (7,626) (46,459) (58,070) Net cash provided by (used in) financing activities...... (2,702) 2,630 3,711 41,252 71,900 Depreciation and amortization............................ 1,232 1,062 1,331 5,399 12,316 Capital expenditures..................................... 1,687 2,205 7,865 4,908 8,697 BALANCE SHEET DATA (AT END OF PERIOD) Working capital.......................................... $ 16,957 $ 19,148 $ 16,913 $ 20,582 $ 56,562 Total assets............................................. 44,844 55,458 59,551 146,508 430,821 Total debt............................................... 12,515 15,632 21,003 64,658 185,336 Stockholders' equity..................................... 11,640 11,719 11,574 7,659 18,124 OTHER DATA: EBITDA(c)................................................ $ 3,352 $ 3,060 $ 3,847 $ 9,987 $ 19,130 Ratio of earnings to fixed charges(d).................... 1.9x 1.4x 1.5x -- --
- --------------- (a) In May 1997, Heafner acquired Winston. The transaction was accounted for using the purchase method of accounting. (b) In May 1998, the ITCO merger and the CPW acquisition occurred. Each transaction was accounted for using the purchase method of accounting. (c) EBITDA represents net income before extraordinary item plus income taxes, depreciation and amortization and interest expense. EBITDA for the year ended December 31, 1998 includes $733,000 35 37 related to amortization of deferred financing charges that is included as amortization expense for cash flow purposes and interest expense in the consolidated statements of operations. 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. EBITDA as calculated and presented here may not be comparable to EBITDA as calculated and presented by other companies. (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 December 31, 1997 and 1998, earnings were insufficient to cover fixed charges by $254,000 and $2.2 million, respectively. 36 38 ITCO The following table sets forth selected historical consolidated financial data of ITCO for the periods indicated. The selected historical data are derived from audited historical consolidated financial statements of ITCO as of and for the years ended October 2, 1993, October 1, 1994 and September 30, 1995. The consolidated financial statements of ITCO for the year ended September 30, 1995 have been audited by Deloitte and Touche LLP, independent auditors, and are included elsewhere in this prospectus. The remaining selected historical data is derived from the historical consolidated financial statements of ITCO for the period from its inception on 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 at the back of 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 at the back of this prospectus, 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 in this prospectus.
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 ======== ======== ======== ======== ======== ======== ======== CASH FLOWS DATA: Net cash provided by (used in) operating activities................ (1,642) (6,065) 108 6,470 8,603 12,465 6,486 Net cash used in investing activities................ (3,302) (3,270) (668) (16,150) (742) (587) (240) Net cash provided by (used in) financing activities................ 4,850 9,668 867 11,434 (7,760) (11,765) (6,897) Depreciation and amortization.............. 1,298 1,394 1,313 2,179 2,493 1,683 1,616 Capital expenditures........ 3,563 3,520 869 1,133 1,188 1,033 711 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)
37 39
EIGHT MONTHS PERIOD FISCAL YEAR ENDED ENDED ----------------------------------------- MAY 31, MAY 20, 1993 1994 1995 1996(A) 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OTHER DATA: EBITDA(c)................... $ 4,547 $ 4,816 $ 5,107 $ 2,411 $ 4,312 $ 2,252 $ 5,626 Ratio of earnings to fixed charges(d)................ 1.8x 1.4x 1.2x -- -- -- 1.4x
- --------------- (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. (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. EBITDA as calculated and presented here may not be comparable to EBITDA as calculated and presented by other companies. (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. 38 40 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 October 31, 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 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 at the back of 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 at the back of this prospectus 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 in this prospectus.
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 ======= ======= ======= ======= ======= ======= ======= CASH FLOWS DATA: Net cash provided by (used in) operating activities............. $ 1,380 $ 1,808 $(2,223) $ 4,645 $ 4,578 $ 1,795 (1,473) Net cash used in investing activities....................... (110) (1,790) (846) (995) (2,782) (2,033) (1,847) Net cash provided by (used in) financing activities............. (759) 1,648 967 (3,768) (971) 288 3,358 Depreciation and amortization...... 116 216 338 404 484 203 328 Capital expenditures............... 108 1,639 788 655 3,489 2,586 745 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 OTHER DATA: EBITDA(b).......................... $ 1,241 $ 1,044 $ 1,905 $ 3,202 $ 4,450 $ 1,888 $ 4,833 Ratio of earnings to fixed charges(c)....................... 4.2x 2.6x 1.9x 3.3x 3.9x 3.3x 5.6x
- --------------- (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 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. 39 41 EBITDA as calculated and presented here may not be comparable to EBITDA as calculated presented by other companies. (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. 40 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the results of operations, financial condition and liquidity of Heafner, 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 included in this prospectus. OVERVIEW Most of Heafner's sales consist of passenger and light truck tires, which in 1998 would have represented approximately 78.4% of its pro forma net sales. The remainder of such sales would have been derived from automotive service and parts (9.1%), custom wheels (6.7%), automotive service equipment (5.6%) and other products (0.2%). Heafner sells its products to a variety of markets, both in terms of end-use and geography. Heafner's distribution channels consist of (a) Eastern wholesale, (b) Western retail tires and automotive service and (c) Western wholesale. In 1998, on a pro forma basis, net sales through such channels accounted for approximately 67.9%, 16.2% and 15.9%, respectively. Heafner believes that the diversity of its markets helps stabilize Heafner's sales and earnings. In connection with the Transactions completed on May 20, 1998, Heafner 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. Heafner 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 18 months following the consummation of the Transactions from these items are estimated to be approximately $5.0 million. Heafner has identified a number of areas in which it expects to realize annual cost savings as a result of the Transactions. For example, Heafner anticipates cost reductions based on elimination of duplicate corporate expenses, warehouse consolidations and maximizing efficiency of its truck fleet, inventory management systems and customer service functions. In addition, Heafner expects to realize improvements as a result of lower purchase prices on tires and other products as supplier programs are coordinated and Heafner'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. The amount of any such potential cost reductions or savings is not yet reasonably determinable. RESULTS OF OPERATIONS -- HEAFNER Heafner 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 include solely the results of Heafner without ITCO, CPW or Winston. 41 43 The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR ENDED DEC. 31, -------------------------- 1996 1997 1998 ------ ------ ------ Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 83.4 75.0 76.8 Gross profit................................................ 16.6 25.0 23.2 Selling, general and administrative expenses................ 15.6 23.9 21.7 Income from operations...................................... 1.0 1.1 1.6 Interest and other expense.................................. 0.4 1.2 1.9 Income (loss) from operations before benefit for income taxes..................................................... 0.6 (0.1) (0.3) Income taxes................................................ 0.0 (0.1) (0.0) Net income (loss) before extraordinary charge............... 0.6 0.0 (0.4) Extraordinary charge........................................ -- -- (0.3) Net income (loss)........................................... 0.6 0.0 (0.7) Pro forma provision for income taxes........................ 0.3 0.0 -- Pro forma net income (loss)................................. 0.3 0.0 --
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales were $713.7 million for 1998, an increase of $401.8 million, or 128.9%, from $311.8 million in 1997. The inclusion of sales for Winston (12 months versus 8), ITCO (7 months), and CPW (7 months) accounted for $364.3 million, or 90.7%, of the increase in sales in 1998. Distribution sales were strong throughout 1998, increasing by almost 13% due to continued market share gains in Heafner's primary service areas, aided somewhat by strong market conditions. Gross profit was $165.6 million in 1998, an increase of $87.7 million, or 112.6%, from $77.9 million in 1997. As a percentage of net sales, gross profit was 23.2% and 25.0%, respectively, for 1998 and 1997. The increase in gross profit dollars was also due to the inclusion of the acquired operations, which accounted for $78.4 million, or 89.3%, of the gross dollar increase. The decrease in overall gross margins in 1998 was due to a higher proportion of distribution sales, which generally result in lower margins than retail sales. The percentage of distribution sales was 79.0% and 67.6%, respectively, for 1998 and 1997. Selling, general and administrative expenses were $154.6 million in 1998, an increase of $80.1 million, or 107.6%, from $74.4 million in 1997. As a percentage of net sales, these expenses were 21.7% and 23.9%, respectively, for 1998 and 1997. The inclusion of the acquired operations accounted for $72.2 million, or 90.2%, of the increase in selling, general and administrative expenses in 1998. The decrease in selling, general and administrative costs as a percent of sales was due to a higher proportion of distribution sales, which generally have lower expense percentages than retail operations. Offsetting this business mix change somewhat was slightly higher selling and administrative costs in Heafner's distribution operations as a percent of sales. Interest and other expense increased from $3.7 million in 1997 to $13.3 million in 1998. Interest expense increased by $8.6 million as a result of increased borrowings incurred in connection with the acquisitions of Winston, ITCO and CPW. The results from operations for 1998 include a special charge of $1.4 million in June 1998, which was taken into account in determining income from operations, in connection with the costs of closing certain duplicative Heafner distribution centers. These costs relate to lease commitments, asset writedowns, severance and employee related costs, and other costs to shut down these facilities. A non-recurring extraordinary charge of $3.7 million ($2.2 million net of taxes) was also recorded for the write-off of unamortized financing expenses and discounts, and the payment of prepayment penalties. 42 44 Income taxes on pre-tax income before extraordinary charge were $0.3 million in 1998 compared to $(0.2) million in 1997. The effective income tax rate for 1998 was (13.0)% and was increased from the statutory rate due to non-deductible goodwill amortization. The net loss for 1998 was $(4.7) million, or (0.7)%, of net sales compared to a net loss of $(14,000), or 0.0%, of net sales in 1997, as a result of the factors discussed above. 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 personnel, programs and customer service 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. A net loss of $(14,000), or 0.0% of net sales, in 1997 represented a decrease of $1.1 million from net income in 1996 of $1.1 million, or 0.6% of net sales, in 1996 as a result of the factors discussed above. The effective income tax rate for 1997, on a pro forma basis, was 0.0%, compared to an effective tax rate for 1996, on a pro forma basis, of 41.8%, due to taxable income being $0.0 million for the four-month period in which Heafner was an S corporation. Pro forma net loss of $(14,000), or 0.0% of net sales, in 1997 represented a decrease of $0.6 million from net income in 1996 of $0.6 million, or 0.3% of net sales, in 1996 as a result of the factors discussed above. RESULTS OF OPERATIONS -- ITCO The ITCO merger took place on May 20, 1998. Results subsequent to that date are included with those of Heafner, above. ITCO acquired the assets of ITCO Holdings in a transaction accounted for as a 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. 43 45 The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR ENDED SEPTEMBER 30, EIGHT 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
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 increased sales of $8.9 million 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. 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 achieving higher margins on all product lines and emphasizing sales of certain higher margin tire product lines. 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. The entire reduction in selling, general and administrative expenses for the 1998 period as a percentage of sales was due to certain headcount reductions instituted during the latter half of the prior fiscal year, offset only 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. Net income was $0.8 million, or 0.4% of net sales, for the period ended May 20, 1998, an increase of $1.9 million from a net loss of $(1.1) million, or (0.5)% of net sales, for the first eight months of fiscal 1997 due to the factors discussed above. 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 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 44 46 $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 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. This improvement in gross margin as a percentage of sales in fiscal 1997 was primarily due to changes in customer automatic pricing programs at the warehouse level which generated higher individual customer margins and therefore allowed for the achievement of higher overall margins on product sales. 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. 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. A net loss of $(1.4) million, or (0.4)% of net sales, in fiscal 1997 represented an improvement of $0.5 million, or 26.4%, from a net loss of $(2.0) million, or (0.7)% of net sales, for fiscal 1996 due to the factors discussed above. 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 to the partial-year inclusion of sales from companies acquired during fiscal 1996. 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 primarily to expenses of companies acquired during fiscal 1996, and, to a lesser extent, 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. 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. A net loss of $(2.0) million, or (0.7)% of net sales, was experienced in fiscal 1996 as compared to net income of $0.6 million, or 0.2% of net sales, in fiscal 1995 due to the factors discussed above. 45 47 RESULTS OF OPERATIONS -- CPW CPW was acquired by Heafner on May 20, 1998. Results subsequent to that date are included with those of Heafner, 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
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 of $6.4 million from 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 receipts from vendor rebate programs. 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. Approximately three-quarters of the increase in selling, general and administrative expenses resulted from two retail store acquisitions in February 1998. 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. Net income was $2.6 million, or 3.8% of net sales, for the six months ended April 30, 1998, an increase of $1.6 million, or 166.7%, from net income of $1.0 million, or 1.7% of net sales, for the six months ended April 30, 1997 due to the factors discussed above. 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 primarily 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. 46 48 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. Net income was $2.3 million, or 1.9% of net sales in fiscal 1997, an increase of $0.6 million, or 35.7%, from net income of $1.7 million, or 1.4% of net sales, in fiscal 1996 due to the factors discussed above. 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. 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. Net income was $1.7 million, or 1.4% of net sales, for fiscal 1996, an increase of $1.0 million, or 131.4%, from net income of $0.7 million, or 0.7% of net sales, in fiscal 1995 due to the factors discussed above. YEAR 2000 COMPLIANCE Portions of some of the accounting and operational systems and software used by Heafner in its business identify years with two digits instead of four. If not corrected, these information technology systems may recognize the year 2000 as the year 1900, which might cause system failures or inaccurate reporting of data that disrupts operations. Heafner has completed an internal assessment of all of the business applications and related software used in its information technology systems, including those of ITCO and CPW, in order to identify where "Year 2000" problems exist. As a result of this review, Heafner believes that all of its information technology systems and software either are Year 2000 compliant or can be brought into compliance by October of 1999, although there can be no assurance that any required remediation will be completed in a timely manner. In addition, Heafner is contacting non-information technology vendors to ensure that any of their products currently used in Heafner's business adequately address Year 2000 issues. Areas being reviewed include warehouse equipment, telephone and voice mail systems, security systems and other office and site 47 49 support systems. Although there can be no assurance, Heafner believes based on its review that Year 2000 problems in its non-information technology systems will not cause a material disruption in Heafner's business. Heafner also may be vulnerable to business interruptions caused by unremedied Year 2000 problems of its significant suppliers of products or services. Heafner has initiated formal communications with significant suppliers, including the country's major tire manufacturers, to determine the extent to which Heafner's operations may be affected by such third parties' Year 2000 non-compliance. Each of the major tire manufacturers has informed Heafner that it anticipates no disruption of tire supply or provision of significant business information as a result of Year 2000 problems. Heafner's wholesale and retail customer base is highly fragmented, with no single customer accounting for a significant portion of Heafner's business. Accordingly, although it has not attempted to survey its customers, Heafner believes that no significant risk exists in connection with Year 2000 problems on the part of any of its customers. Heafner does not expect the historical and estimated costs associated with bringing its information technology and non-information technology systems into Year 2000 compliance, including software modification, equipment replacement and payments to outside solution providers, to be material. However, if Year 2000 issues in Heafner's information technology and non-information technology systems are not remedied in a timely manner, or if Year 2000 problems on the part of Heafner's customers and suppliers exist and are not remedied in a timely manner, there can be no assurance that significant business interruptions or increased costs having a material adverse effect on the business, financial condition or results of operations of Heafner will not occur in connection with the change in century. Risks of Year 2000 non-compliance on the part of Heafner or any of its significant suppliers could include interruptions in supply from tire manufacturers, disruption of Heafner's internal and external distribution network, reduced customer service capabilities, breakdown of inventory control and fulfillment systems and impairment of essential information technology systems used by management. Heafner has not established nor does it plan to establish a contingency plan for Year 2000 compliance issues. LIQUIDITY AND CAPITAL RESOURCES Heafner required approximately $148.1 million of financing in connection with the Transactions for: - the consummation of the ITCO merger, - the completion of the CPW acquisition, - 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 credit facility on the closing date of the Transactions) and subordinated debt, and - the payment of related fees and expenses. Heafner obtained the necessary funds from, among other sources, the issuance and sale of the Series A notes and outstanding borrowings under the credit facility. See "The Transactions". The Transactions and related financings had a significant impact on Heafner's capitalization. At December 31, 1998 the combined net indebtedness (net of cash) of Heafner was $178.7 million compared to $62.2 million (net of cash) for Heafner on a stand-alone basis at December 31, 1997. Financing currently committed by the lenders under the credit facility is $100.0 million under a revolving line of credit. As of December 31, 1998, $21.9 million was outstanding and $64.7 million was available for additional borrowings under the credit facility. Heafner's principal sources of cash during 1998, 1997, and 1996 came from operations, borrowings under revolving credit facilities, issuance of long-term subordinated debt and preferred stock in connection with the acquisition of Winston, and issuance of long-term debt in connection with the Transactions. Cash generated from (used in) operating activities totaled $(9.7) million, $6.7 million and $4.0 million, respectively, during each of those periods. Cash used in operating activities in 1998 was primarily due to increases in trade accounts receivable and inventories totaling $13.9 million and $12.2 million, respectively. 48 50 These increases were caused by an increase in total sales during the year. Cash generated in 1997 was primarily due to improved vendor payment programs which resulted in an increase in accounts payable and accrued expenses of $9.6 million. Cash generated in 1996 was primarily due to reductions in inventory levels of $5.0 million due to increased concentration on inventory management. Capital expenditures during the years ended 1998, 1997 and 1996 amounted to $8.7 million, $4.9 million, and $7.9 million, respectively. Capital expenditures during 1998 included $5.7 million at Winston for store equipment, upgrades to existing stores, new store locations and information technology. Other capital 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. Heafner estimates that future annual capital expenditures (excluding those of acquisitions of retail and distribution operations) will be $6.0 million to $8.0 million annually, and will principally be used for the renovation of retail facilities and general corporate purposes. Heafner anticipates making further acquisitions of retail and wholesale operations that may become available and that meet Heafner's overall strategic guidelines. Such acquisition spending may be incremental to the capital expenditures forecast above. The credit facility is scheduled to mature on May 20, 2003. Loans under the credit facility bear interest at a floating rate based upon federal funds or Eurodollar rates plus an applicable margin. Loans under the credit facility are guaranteed by all material subsidiaries of Heafner and secured by inventory and accounts receivable of Heafner and its subsidiaries. See "Risk Factors -- Heafner's Substantial Leverage and Debt Service Requirements, and the Restrictions Imposed by the Terms of its Indebtedness Could Adversely Affect Its Operating Flexibility and Place It at a Competitive Disadvantage," and "Description of Credit Facility." Heafner has entered into interest rate swap agreements from time to time to manage exposure to fluctuations in interest rates. As of December 31, 1998, interest rate swap agreements were in place covering notional amounts of approximately $20.0 million of indebtedness expiring at various dates through October 2002, at an average interest rate of 7.82%. Heafner does not anticipate entering into additional swap agreements or hedging arrangements at this time. Heafner anticipates that its principal use of cash going forward will be to meet working capital and debt service requirements and to make capital expenditures. In addition, Heafner expects to pay $5.0 million relating to consolidation of warehouse and office facilities, severance obligations and other exit costs over the next 18 months. Based upon current and anticipated levels of operations, Heafner believes that its cash flow from operations, together with amounts available under the credit facility, will be adequate to meet its anticipated requirements. There can be no assurance, however, that Heafner's business will continue to generate sufficient cash flow from operations in the future to be applied to meet these requirements or to service its debt, and Heafner may be required to refinance all or a portion of its existing debt, or to obtain additional financing. These increased borrowings may result in higher interest payments. In addition, there can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on Heafner. Certain minority stockholders of Heafner have been granted redemption rights commencing in 2004, subject to certain conditions, which if exercised would obligate Heafner to redeem the shares of capital stock held by such stockholders at agreed valuations (based upon a multiple of EBITDA formula). See "The 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 Heafner is required to do so or whether the terms of its outstanding indebtedness at such time, including the Series B and Series D indentures, will permit such redemption. 49 51 BUSINESS This prospectus contains trademarks, tradenames or registered marks of Heafner and other entities, including Regul(R) tires, Winston(R) tires, Pacer(R) custom wheels, ICW(R) custom wheels and Magnum(R) automotive lifts. HISTORY AND DEVELOPMENT OF HEAFNER Heafner believes that it has become one of the leading tire distributors and retailers in the United States in terms of sales and number of tires distributed. Heafner's development has been marked by the addition of five warehouses in the Southeast, increased emphasis on its private-label brand strategy, development of electronic data interlinks with its customers and suppliers and by the construction of a new mixing warehouse close to its North Carolina headquarters. With Heafner's acquisition of Winston in 1997, it entered the retail tire distribution market in California, becoming one of the nation's largest tire retailers in terms of number of outlets. With the acquisitions of CPW and ITCO in 1998, Heafner expanded its West Coast distribution network and solidified its position in the Southeastern wholesale tire distribution market. Heafner's wholesale and retail operations are divided among three principal corporate entities: - Heafner organized in 1935 and into which ITCO was merged in 1998, and Heafner's subsidiaries: - Winston, founded in 1962 and acquired by Heafner in 1997, and - CPW, founded in 1971 and acquired by Heafner in 1998. With the acquisitions of ITCO and CPW, Heafner believes that it is one of the largest independent suppliers of tires to the replacement tire market in the United States in terms of sales and number of tires distributed. Heafner's wholesale distribution operations accounted for approximately 83.8% of Heafner's total net sales, on a pro forma basis, in 1998. With 65 distribution centers servicing 26 states, Heafner believes that it is the largest independent distributor of new replacement tires in terms of number of tires shipped in the Southeast and in California. Through this distribution network, Heafner's wholesale divisions supplied 12.6 million tires in 1998 and currently serve an average of 25,000 customers each month. Through its retail division, Heafner also operates over 200 retail tire and automotive service outlets in California and Arizona which sold over 1.2 million tires in 1998. Heafner's Winston subsidiary, which operates 190 of Heafner's retail tire and automotive service outlets, was the fifth largest independent tire dealer in the United States in 1998 based on number of company-owned retail stores. Heafner generally stocks approximately 12,000 stock keeping units, or "SKUs," of tires in its distribution centers. Heafner supplies premium, economy and private-label brands of tires manufactured by the major tire manufacturers, including Michelin, which manufactures the B.F. Goodrich and Uniroyal brands, Kelly-Springfield, which is a division of Goodyear, and Dunlop, Bridgestone/Firestone and Pirelli. Heafner's private-label tires are sold under the Winston and Regul trademarks. In addition to its tire sales, Heafner believes that it is a significant independent distributor and retailer of aftermarket wheels, automotive replacement parts and accessories and automotive service equipment. Heafner 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 its presence in the Southeast and the West. Heafner believes that the ITCO merger will enable its Eastern wholesale division to provide more cost-effective service and will increase its distribution capacity, positioning it for expansion into new geographic areas. Heafner believes that the acquisition of CPW, including CPW's distribution facilities, will establish a broader supply network with more frequent delivery capabilities for Heafner's Winston retail stores, improving Heafner's ability to restock inventory and obtain customer-requested products on a more timely basis. In addition, Heafner expects to realize significant cost savings and operating efficiencies and improvements that will contribute to its goal of increasing future profitability. In fiscal 1998, on a consolidated basis, Heafner generated pro forma net sales of $923.8 million, EBITDA of $30.5 million and a net loss of $3.7 million. In 1998, on a pro forma basis, sales of tires 50 52 accounted for approximately 78.4% of Heafner's consolidated net sales, while sales of automotive service and parts accounted for 9.1% of Heafner's consolidated net sales, sales of custom wheels accounted for 6.7%, sales of automotive service equipment accounted for 5.6%, and sales of other products accounted for 0.2%. NARRATIVE DESCRIPTION OF BUSINESS HEAFNER-ITCO DIVISION Heafner acquired ITCO on May 20, 1998. Following that acquisition, ITCO's subsidiaries were merged into ITCO, and ITCO was merged into Heafner. Heafner's historical wholesale operations and ITCO's business became the Heafner-ITCO division. Founded in 1962, ITCO was, at the time it was acquired by Heafner, one of the largest wholesale distributors of tires, custom wheels, equipment and tire dealer supplies in the Southeast in terms of sales and number of tires distributed. On a pro forma basis, the Heafner-ITCO division had net sales for 1998 of approximately $627.3 million and shipped more than 8.4 million passenger and light truck tires and 285,000 medium truck tires. The Heafner-ITCO division's products include flag brands manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, Bridgestone/Firestone and Dunlop. House brands include Monarch, manufactured by Kelly-Springfield, as well as other house brands manufactured by Michelin, Bridgestone/Firestone, Kelly-Springfield and Dunlop. Private label products include Regul Tires, Winston tires, Pacer custom wheels and custom wheels manufactured by Ultra and private-branded under the ICW name. Tire sales represented approximately 83.7% of the Heafner-ITCO division's pro forma net sales in 1998. 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 fifth largest independent tire dealer in the country in 1998, based on the number of company-owned retail stores. Winston sold more than 1.2 million tires as well as other automotive products in 1998 through its chain of 190 retail stores in California and Arizona for net sales in 1998 in excess of $149.8 million. Each Winston store offers customers multiple choices of flag brands manufactured by 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 61.7% of Winston's 1998 net sales. 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 20 retail stores in California and Arizona. Of CPW's retail stores, 15 sell flag brand high performance as well as regular grade tires, wheels and related automotive products, while the remaining five retail stores sell only automotive parts. On a pro forma basis, CPW's net sales for 1998 were approximately $146.7 million and CPW shipped more than 1.9 million passenger and light truck tires. 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 one of the largest distributors of high performance tires in California. CPW also sells parts, wheels, and equipment built by nationally recognized manufacturers. Tire sales represented approximately 72.8% of CPW's total pro forma sales for 1998. Sales of high performance tires represented approximately 31% of CPW's total pro forma net sales for the same period. INDUSTRY OVERVIEW Purchasers in the United States spent approximately $18.6 billion on new replacement tires in 1998. Of that amount, passenger tires accounted for approximately 58% of sales, light truck tires accounted for approximately 16%, truck tires accounted for approximately 21% and farm, specialty and other types of 51 53 tires accounted for approximately 5%. 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 214.5 million tires in 1998. Heafner believes that the factors that have contributed to this growth include increases in both the number and average age of cars as well as passenger miles driven in the United States. Consumers of new replacement tires in the United States obtain them from several principal sources, including independent tire dealers, manufacturer-owned retail stores, mass merchandisers such as Sears and Wal-Mart, auto supply chain stores and wholesale clubs and discounters. Independent tire dealers, which represent the largest customer base served by Heafner, are the largest point of sale suppliers of new replacement passenger tires to the United States market. Independent tire dealers accounted for approximately 59.5% of retail sales of domestic replacement passenger tires in 1998. Independent tire dealers obtain their inventory of new replacement tires through three principal sources: tire manufacturers, independent wholesale distributors like Heafner, and dealer-owned warehouses. Other sources include discount or price clubs and 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 1998. Heafner 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 Heafner, who are able to deliver tires to a large number of independent tire dealers with greater efficiency. The replacement tire market for passenger cars and light trucks consists of three primary types of tires: "flag" brands, which are premium tires made by the major tire manufacturers; associate or "house" brands, which are primarily economy brand tires made by the major tire manufacturers; and private-label brands, which are brands made by tire manufacturers generally for independent tire wholesale distributors and retailers. In 1998, flag brands constituted approximately 52% of the United States passenger and light truck replacement tire markets, private-label brands constituted approximately 29% of those markets and house brands made up approximately 19% of those markets. OPERATIONS Wholesale Divisions. The Heafner-ITCO and CPW wholesale divisions of Heafner accounted for approximately 83.8% of Heafner's net sales, on a pro forma basis, in 1998. With 65 distribution centers servicing 26 states, Heafner believes that it is the largest independent distributor of replacement tires in the Southeast and in California. Through this distribution network, Heafner supplied 12.6 million tires in 1998. Heafner's distribution network provides daily delivery to its tire dealer customers in most areas and, in major markets, provides delivery two to four times a day. Heafner has been able to offer reliable, timely and 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 Heafner's customers to reduce investment in inventories while still enabling them to provide a full range of products to consumers. Heafner believes that software and on-line programs, such as Heafner's "HeafNet" electronic interlink service, will play an increasingly important role for its distribution customers. See "-- Information Systems and Technology." Heafner's fleet of approximately 650 trucks also facilitates frequent deliveries to its distribution customers. In order to improve efficiency in its Southeastern operations, Heafner utilizes a large mixing warehouse located in Lincolnton, North Carolina where products are sorted for shipments to customers located outside the territories typically served by the distribution network. The mixing warehouse also enables Heafner to make volume purchases from suppliers when advantageous and ship the resulting inventory to distribution centers within its network. Heafner believes that this mixing and accessibility of 52 54 inventory enables Heafner's customers to expand sales opportunities without the burden and expense of large investments in inventory. As an additional service to its customers, Heafner may pass through to its distribution customers all or a portion of credits from tire manufacturers for advertising or special promotions on tires or other products. These credits assist Heafner's customers in budgeting for their advertising and similar operating expenses. Heafner also participates in and sponsors dealer conferences among its customers in order to keep them informed of industry trends and new product offerings. In addition, as Heafner's retail expertise grows, Heafner intends to continue to make this expertise available to its independent tire retailer customers in order to enhance customer relations. Retail Division. Heafner's retail division operates over 200 retail tire and service outlets in California and Arizona, including 190 tire and automotive service outlets operated by Winston. Winston was the fifth largest independent tire dealer in the United States in 1998 based on number of company-owned retail stores. Heafner believes that the strength of the Winston retail franchise in California may make it suitable for expansion in the West. Heafner's CPW subsidiary, which began as a performance automotive shop in 1971, currently operates 20 of Heafner's retail stores in California and Arizona. Of these retail stores, 15 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 Heafner's retail locations:
REGION WINSTON CPW TOTAL - ------ ------- --- ----- Southern California......................................... 130 0 130 Sacramento/California Central Valley........................ 33 1 34 Northern California......................................... 24 8 32 Arizona..................................................... 3 11 14 --- -- --- Totals.................................................... 190 20 210
Through Winston's retail locations, the average size of which is approximately 4,400 square feet, Heafner also provides automotive repair and service, such as wheel alignment, oil changes and brake repair. These services accounted for approximately 43.9% of Winston's total net sales in 1998. Winston provides its customers with a guarantee on all products and services and believes that its emphasis on customer service distinguishes it from many of its competitors. Winston also conducts an eight-week training course for its store managers and mechanics and routinely monitors the performance of its customer service representatives. Through its strong consumer protection program, which includes sending mystery shoppers to store locations, Winston seeks to ensure that services and sales tactics comply with California consumer protection regulations covering the automotive services industry. Winston's programs have been highlighted by the California Bureau of Automotive Repair in its publications as examples of how compliance with such regulations can and should be achieved. PRODUCTS Heafner sells a broad selection of tires, custom wheels, automotive service equipment and related products manufactured by the leading manufacturers of those products. Heafner's products include flag brand tires manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, private-label products such as Regul tires, Winston tires and Pacer custom wheels, and house brand products such as Monarch tires, manufactured by Kelly-Springfield. Heafner generally stocks approximately 12,000 SKUs of tires in its distribution centers. Heafner also distributes alignment service equipment manufactured by Hunter Engineering Company and tire changers and balancers built by Hennessey Industries, Inc. (a division of the Danaher Corporation), both leading manufacturers in their respective fields. Heafner sells many other products, including tires for the medium truck, farm and industrial markets, automotive service equipment, wheel weights and tubes. In addition, through CPW's operations, Heafner supplies over 250,000 SKUs of automotive parts and accessories. Through Winston's retail tire and automotive service 53 55 outlets, Heafner offers other automotive products such as Quaker State oil products and Monroe and Raybestos ride control products. Heafner believes that products sold by ITCO and CPW will complement Heafner's existing product line and, in the case of CPW, increase Heafner's sales of high-performance tires and automotive parts and accessories. Heafner intends to continue to provide its customers with a broad choice of flag and private-label products. In 1998, on a pro forma basis sales of tires accounted for approximately 78.4% of Heafner's total net sales, sales of automotive service and parts accounted for 9.1% sales of custom wheels accounted for 6.7%, sales of automotive service equipment accounted for 5.6%, and sales of other products accounted for 0.2%. SUPPLIERS Heafner purchases its products in finished form from all major tire manufacturers and other suppliers. In 1998, Heafner purchased in excess of 12.2 million tires, representing approximately 5.7% of the total U.S. replacement tire market. Approximately 86% of Heafner's total tire purchases, in units, in 1998 were supplied by Michelin, Kelly-Springfield, Dunlop and Bridgestone/Firestone. Of the total 1998 U.S. new replacement passenger tire market, Michelin (including the B.F. Goodrich and Uniroyal brands) accounted for 14.0%, Bridgestone/Firestone accounted for 16.0% and the leader, Goodyear, accounted for 23.0%. Of the total 1998 U.S. replacement light truck tire market, Michelin, including the B.F. Goodrich and Uniroyal brands, accounted for 16.5%, Bridgestone/Firestone accounted for 15.0% and Goodyear accounted for 22.0%. Of Heafner'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 Heafner are private-label custom brands, such as Pacer and ICW, and are produced by a variety of manufacturers. Heafner purchases equipment and other products from multiple sources, including industry leaders such as Hunter Engineering Company and Hennessey Industries, Inc. (a division of the Danaher Corporation). With the exception of a long-term contract with Kelly-Springfield (the "Kelly-Springfield Supply Agreement"), Heafner's supply arrangements with its major suppliers generally are oral or written arrangements which are renegotiated annually. Although there can be no assurance that these arrangements will be renewed, or renewed on favorable terms, Heafner has conducted business with its major tire suppliers for many years and believes that it has strong relationships with all of its major suppliers. See "Risk Factors -- Heafner Is Dependent on a Small Number of Tire Manufacturers for Its Supplies." Heafner purchases certain private-label and house brand tires, including the Winston and Monarch products, from Kelly-Springfield. Purchases under the Kelly-Springfield Supply Agreement are made at prices specified from time to time in the manufacturer's pricing schedule. Under the Kelly-Springfield Supply Agreement, Heafner must purchase all of its requirements of Winston brand tires from Kelly-Springfield during the term of the agreement, except that it may purchase Winston brand 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 after then. The Kelly-Springfield Supply Agreement may be terminated by either party upon twelve months' advance notice. Kelly-Springfield is the sole holder of Heafner's Series A preferred stock and Series B preferred stock, as discussed below under "Certain Relationships and Related Transactions -- Preferred Stock." CUSTOMERS Wholesale. Through its Heafner-ITCO and CPW wholesale divisions, Heafner distributes tires and related automotive products principally to independent tire dealers. Heafner's other customers include national retail chains, service stations, general automotive repair facilities, auto parts stores, automobile dealers and specialty automotive repair facilities. Heafner generally requires payment from its customers 54 56 within 30 days, although it may tailor programs for its larger customers. In 1998, Heafner's wholesale divisions served an average of more than 25,000 customers in each month. Heafner's largest customer accounted for less than 0.6% of Heafner's pro forma net sales for 1998 and Heafner's top 25 customers accounted for less than 5% of Heafner's pro forma net sales for 1998. Retail. Heafner's retail operations attract a variety of individual consumers in the areas they serve. Through the Winston retail chain, Heafner also offers accounts to its corporate retail customers. Winston's corporate accounts represent approximately 17.0% of its tire business. COMPETITION The industry in which Heafner does business is highly competitive, and many of Heafner's competitors have resources significantly greater than Heafner's. Tire manufacturers distribute tires to the retail market by direct shipments to independent tire dealers, national retail chains such as Sears and Wal-Mart and manufacturer-owned retail stores as well as through shipments to independent wholesale distributors. A number of independent wholesale tire distributors also compete in the regions in which Heafner does business. In its retail business, Heafner also faces competition from national chains and department stores, other independent tire stores, tire manufacturer-owned stores, discount and warehouse clubs and other automotive product retailers. Heafner believes that the principal competitive factors in its business are reputation, breadth of product offering, delivery frequency, price and service. Heafner believes that it competes effectively in all aspects of its business due to its ability to offer a broad selection of flag and private-label branded products, its competitive prices and its ability to provide quality services in a timely manner. TRADEMARKS The major brand names under which Heafner markets its products are trademarks of Heafner. Those brand names are considered to be of material importance to Heafner's business because they both develop brand identification and foster customer loyalty. All of Heafner's trademarks are of perpetual duration so long as periodically renewed, and Heafner currently intends to maintain all of them in force. The major brand names under which Heafner markets its products are: - Regul tires, - Winston tires, - Pacer custom wheels, - ICW custom wheels, and - Magnum automotive lifts. SEASONALITY AND INVENTORY Heafner's wholesale distribution and retail service operations typically experience their highest levels of sales from March through October of each fiscal year, with the period from November through February generally experiencing the lowest levels of sales. Heafner's inventories generally fluctuate with anticipated seasonal sales volumes. Heafner believes it maintains levels of inventory that are adequate to meet its customers' needs on short notice. The average of beginning- and end-of-year inventories of Heafner in 1998 was $87.4 million. Backlog of orders is not currently significant and has not been for the 1997 and 1998 fiscal years. Orders are filled shortly after receipt from inventories. WORKING CAPITAL PRACTICES Heafner must maintain substantial inventories in connection with its wholesale distribution and retail service operations throughout the year, which fluctuate with anticipated seasonal sales volume. These 55 57 inventories are generally financed through borrowings under the credit facility, which provides for a revolving credit facility of up to $100 million. The amount of borrowings under the credit facility fluctuates throughout the year. On December 31, 1998, $21.9 million of borrowing was outstanding and an additional $64.7 million could have been borrowed under the credit facility. Both the maintenance of substantial inventories and the practice of seasonal borrowing are common to the wholesale tire distribution and retail tire and automotive service industry. INFORMATION SYSTEMS AND TECHNOLOGY Heafner believes that software and on-line programs will play an increasingly important role in linking Heafner to its distribution and retail customers and improving Heafner's management of inventories of tires, wheels and related products. Heafner is able to offer reliable, timely and frequent deliveries to its customers by utilizing inventory-management systems that link directly to its major customers and among its distribution facilities and electronic data interlinks directly with Michelin and Kelly-Springfield, its two largest suppliers. Heafner supplies a number of customers with its proprietary "HeafNet" system, which gives customers electronic access to Heafner's warehouses to locate, price and order inventory. Heafner believes this system allows its customers to respond more quickly and efficiently to retail customers' requests for products. Heafner intends to implement a company-wide inventory management system based on the strongest attributes of Heafner's, CPW's and ITCO's existing systems in order to improve the operation of its overall distribution network. Heafner also intends to make available to Heafner's retail stores in the West and independent tire dealer customer base in the Southeast interactive software programs focused on the retail customer that are currently offered by CPW to independent tire dealers in the West. 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. Heafner believes that interactive software programs such as these enhance its ability to market wheels by providing retail dealers devices that take up little floor space, are relatively easy to use and are customer oriented. ENVIRONMENTAL MATTERS Heafner's operations and properties are subject to federal, state and local laws, regulations and ordinances relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes under which Heafner could be held strictly, jointly and severally liable for costs associated with the investigation and clean-up of contaminated properties. The nature of Heafner's existing and historical operations exposes it to the risk of liabilities or claims with respect to environmental matters, including off-site disposal matters. For example, in its automotive service operations Heafner handles waste motor oil and hydraulic brake fluid, the storage and disposal of which is strictly regulated by federal and state authorities. Heafner contracts with outside services to handle disposal of these materials. Heafner believes that it currently complies with all relevant environmental regulations and it does not incur significant costs maintaining compliance with those laws. However, Heafner could incur material costs in connection with environmental liabilities or claims. In addition, future events such as changes in existing laws and regulations or in their interpretation, could give rise to additional compliance costs or liabilities that could have a material effect on Heafner's business or earnings. Expenditures related to environmental matters have not had, and are not expected to have, a material effect on Heafner's business or earnings. EMPLOYEES Heafner employed approximately 3,241 people as of December 31, 1998, of whom approximately 1,631 were employed in its wholesale divisions and approximately 1,610 were employed in its retail 56 58 division. None of Heafner's employees are represented by a union. Heafner believes its employee relations are satisfactory. LEGAL PROCEEDINGS Heafner's Winston subsidiary was named as a defendant in a class action lawsuit filed on June 10, 1998 in Los Angeles County Superior Court by plaintiffs Mike Riggs and Edmundo Feria on behalf of themselves and all other Winston store managers similarly situated. The lawsuit alleges that Winston violated certain California wage regulations and unfair business practices statutes by requiring Messrs. Riggs and Feria and the putative class of Winston store managers to work in excess of 40 hours per work week without receiving properly calculated overtime compensation. The plaintiffs seek overtime compensation due and owing, prejudgment interest, certain penalties and attorneys' fees and costs. Heafner 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. Heafner is vigorously defending the matter. Heafner is also involved in various other proceedings incidental to the ordinary course of its business. Heafner believes that none of these other proceedings will have a material adverse effect on its business or financial condition. PROPERTIES Heafner's principal properties are geographically situated to meet sales and operating requirements. All of Heafner's properties are considered to be both suitable and adequate to meet current operating requirements. Heafner is reviewing its properties to determine whether certain facilities could be consolidated into other locations. At present, Heafner plans to close 8 to 10 distribution warehouses in the Southeast and is considering closing a distribution warehouse in California in order to eliminate redundancies within its Heafner-ITCO and CPW wholesale divisions. Although there can be no assurance that it will be successful in doing so, Heafner believes that, particularly with respect to its distribution centers, it may obtain cost savings and efficiencies by closing or consolidating certain facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Distribution Centers. The following table sets forth certain information regarding Heafner's warehouse and distribution facilities as of December 31, 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
57 59
OWNED/ LOCATION COMPANY LEASED - -------- ------- ------ California: Fresno.................................................... CPW Owned Moorpark.................................................. CPW Leased Rancho Cucamonga.......................................... CPW 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................................................... ITCO Leased Pensacola................................................. Heafner Owned Tallahassee............................................... Heafner Owned Tampa..................................................... ITCO Leased West Palm Beach........................................... ITCO Leased Georgia: Augusta................................................... Heafner Leased Rome...................................................... ITCO Owned 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 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.................................................... ITCO Leased Winston-Salem............................................. Heafner Leased
58 60
OWNED/ LOCATION COMPANY 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................................................... 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
Retail Stores. As of December 31, 1998, Heafner operated over 200 retail tire and service outlets in California and Arizona, including 190 tire and automotive service outlets operated by Winston. All of these retail outlets are leased. Heafner intends to consolidate the management of all retail tire stores under its retail division. Corporate and Executive Offices. In addition to its principal executive offices, Heafner currently has corporate offices in four other 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. All of Heafner's corporate and executive offices are leased.
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
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The business of Heafner is principally conducted in three industry segments: Eastern wholesale, Western wholesale and Western retail. The financial statements for the years ended December 31, 1998, 1997 and 1996, which are included at the back of this prospectus, reflect the information relating to these segments for each of Heafner's last three fiscal years. 59 61 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table contains information regarding the directors and executive officers of Heafner. Directors hold their positions until the annual meeting of the stockholders at which their term expires or until their respective successors are elected and qualified. Executive officers hold their positions until the annual meeting of the Board of Directors or until their respective successors are elected and qualified.
NAME AGE POSITION - ---- --- -------- Ann H. Gaither............................ 67 Chairperson William H. Gaither........................ 43 President, Chief Executive Officer and Director Donald C. Roof............................ 47 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 Richard P. Johnson........................ 51 President, Heafner-ITCO Division P. Douglas Roberts........................ 51 President, Winston Tires Arthur C. Soares.......................... 49 President and Chief Operating Officer, CPW Joseph P. Donlan.......................... 52 Director V. Edward Easterling, Jr.................. 39 Director Victoria B. Jackson....................... 44 Director William M. Wilcox, Jr..................... 72 Director
Ann H. Gaither -- Chairperson. Ms. Gaither joined Heafner in 1972 and succeeded her father as Chief Executive Officer in 1984. She served as President of Heafner 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 with 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 Heafner. William H. Gaither -- President, Chief Executive Officer and Director. Mr. Gaither joined Heafner in 1978 as a management trainee, subsequently serving as an Assistant Manager in various locations. In 1986, Mr. Gaither was named Executive Vice President, a position he held until 1989. He has served as President of Heafner since 1989. Mr. Gaither also has served as the Chief Executive Officer of Heafner since 1996 and has been a Director of Heafner since 1986. He holds a B.A. from Davidson College. Mr. Gaither is the son of Ann H. Gaither, the Chairperson of Heafner. Donald C. Roof -- Senior Vice President, Chief Financial Officer and Treasurer. Mr. Roof has served as Heafner's Senior Vice President, Chief Financial Officer and Treasurer since April 1997. Prior to that time, from 1987 to November 1996, he served in a variety of positions with Yale International/ Spreckels Industries, a global industrial manufacturing and food processing company. From 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 Heafner in 1991. Prior to that time, he was a lawyer in private practice for several years. He holds a B.A. from Duke University and received his J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves on the board of directors of Ridgeview, Inc. Daniel K. Brown -- Senior Vice President/Sales and Marketing. Mr. Brown joined Heafner in 1975 and held various field sales assignments before becoming Marketing Manager in 1979. He advanced to 60 62 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 Heafner. Mr. Brown holds a B.A. from Western Carolina University. Richard P. Johnson -- President, Heafner-ITCO Division. Mr. Johnson joined ITCO as President and Chief Operating Officer in February 1997. He served as Senior Vice President of Albert Fisher Distribution from 1991 to 1994, and as its President and Chief Operating Officer from 1994 to 1996. Prior to that time, Mr. Johnson held a variety of management positions with Leprino Foods, Sargento Cheese and Kraft Foods. He holds an A.A. from Palm Beach College. P. Douglas Roberts -- President, Winston Tires. Mr. Roberts joined Winston as President -- Winston Tires in November 1998. He served with Frazee Industries as Vice President -- Sales, Development, Marketing & Store Operations from 1992 until the time he joined Winston. Prior to that time, Mr. Roberts headed a variety of management positions with Libbey-Owens-Ford, Tenneco Automotive, and Taco Bell. Mr. Roberts holds a B.A. from Western Carolina University. Arthur C. Soares -- President, CPW Division. Mr. Soares was the founder and principal owner of CPW, and currently serves as the President and Chief Operating Officer of Heafner's CPW division. 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. 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, One Call Medical, Inc. and System One Services, Inc. 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 served as its President and Chief Executive Officer from 1997 until February 1999. 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, Jr. -- 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. 61 63 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table contains information concerning the compensation for services in all capacities to Heafner for the years ended December 31, 1998, 1997 and 1996 of the following "Named Executive Officers," who are those persons who (a) served during the fiscal year ended December 31, 1998 as the Chief Executive Officer of Heafner, (b) were, at December 31, 1998, the other four most highly compensated executive officers of Heafner who earned more than $100,000 in salary and bonus in 1998 and (c) one person for whom disclosure would have been provided as among the most highly compensated executive officers but for the fact that he was not serving as an executive officer at December 31, 1998.
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ --------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(A) (#)(B) ($) - --------------------------- -------- ------- ------- ------------ ------------ ------------ William H. Gaither......... 12/31/98 342,684 109,912 26,000 -- 71,436(c) President, Chief Executive 12/31/97 318,000 49,000 25,000 62,500 41,741(c) Officer 12/31/96 303,387 -- -- -- 25,604(d,e) Donald C. Roof............. 12/31/98 231,840 122,688 25,500 15,000 -- Senior Vice President, 12/31/97 161,253(f) 60,000 25,000 25,000 -- Chief Financial Officer and Treasurer 12/31/96 -- -- -- -- -- J. Michael Gaither......... 12/31/98 213,924 113,174 15,500 15,000 -- Senior Vice President, 12/31/97 191,883 60,000 15,000 25,000 -- General Counsel and Secretary 12/31/96 155,652 26,000 15,000 -- 23,761(e) Daniel K. Brown............ 12/31/98 182,490 96,571 15,500 15,000 -- Senior Vice President/ 12/31/97 164,499 51,000 15,000 25,000 24,935(e) Sales and Marketing 12/31/96 112,335 39,599 15,000 -- 28,073(e) Thomas J. Bonburg(g)....... 12/31/98 400,751(g) 64,710 -- -- 33,333(h) President, Winston Tires 12/31/97 96,952(g) 75,000 -- 37,500 -- 12/31/96 -- -- -- -- -- Arthur C. Soares........... 12/31/98 129,810(i) 199,399 -- -- -- President and Chief 12/31/97 -- -- -- -- -- Operating Officer, CPW 12/31/96 -- -- -- -- --
- --------------- (a) This column includes nothing for perquisites and other personal benefits because in no case did the aggregate amount of perquisites and other personal benefits exceed the reporting threshold (the lesser of $50,000 or 10% of total annual salary and bonus), but includes amounts for the annual contribution for deferred compensation for such Named Executive Officer for the year. (b) This column includes stock options granted in 1997 and 1998 under Heafner's stock option plan, which is discussed below under "-- Stock Option Plan." Thirty percent of the options granted in 1997 have, or will, vest and become 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 1998. (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 Heafner in April 1997. Salary represents payments to Mr. Roof during the period of his employment in 1997. On an annualized basis, Mr. Roof's salary for 1997 would have been $215,000. 62 64 (g) Mr. Bonburg was the Chief Executive Officer of Winston Tires, which was acquired by Heafner on May 7, 1997. He resigned as President of Winston Tires on November 15, 1998. 1998 salary represents payments to Mr. Bonburg during the period of his employment in 1998. 1997 salary represents payments to Mr. Bonburg during the period following Heafner's acquisition of Winston Tires in 1997. (h) Consists of monthly severance payment to Mr. Bonburg in December 1998. Such monthly payments will continue through November 2000. (i) Mr. Soares joined Heafner in May 1998. Salary represents payments to Mr. Soares during the period of his employment in 1998. On an annualized basis, Mr. Soares' salary for 1998 would have been $259,600. OPTION/SAR GRANTS IN 1998 No stock appreciation rights were granted during 1998. The following table contains information concerning the grant of stock options to each of the Named Executive Officers during 1998:
INDIVIDUAL GRANTS ----------------------------------------------- PERCENT OF TOTAL POTENTIAL REALIZABLE OPTIONS VALUE AT ASSUMED NUMBER OF GRANTED ANNUAL RATES OF STOCK SECURITIES TO EXERCISE PRICE APPRECIATION FOR UNDERLYING EMPLOYEES OR BASE OPTION TERM(B) OPTIONS IN FISCAL PRICE EXPIRATION ---------------------- NAME GRANTED(A) YEAR ($/SH) DATE 5%($) 10%($) - ---- ---------- ---------- -------- ---------- --------- ---------- William H. Gaither.............. -- -- -- -- -- -- Donald C. Roof.................. 15,000 5.3% $7.48 9/21/08 $70,563 $178,813 J. Michael Gaither.............. 15,000 5.3 7.48 9/21/08 70,563 178,813 Daniel K. Brown................. 15,000 5.3 7.48 9/21/08 70,563 178,813 Thomas J. Bonburg............... -- -- -- -- -- -- Arthur C. Soares................ -- -- -- -- -- --
- --------------- (a) The securities underlying the options, which were granted under the stock option plan, are shares of Class A common stock. Under the stock option plan, none of the options granted to each of the Named Executive Officers will vest or are exercisable within 60 days. The options will vest as described in "-- Stock Option Plan," below. (b) The potential realizable value columns illustrate the value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compound rates of appreciation of the Class A common stock over the term of the options. These amounts represent certain assumed rates of appreciation only, assuming a fair market value on the date of grant of $7.48 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 $7.48 was assumed based on a stock appraisal as of May 1998. Actual gains on the exercise of the options are dependent on the future performance of the Class A common stock. The potential values reflected in this table may not be the actual values ultimately realized. All amounts have been rounded to the nearest whole dollar. ----------------------------------------- No options to purchase common stock were exercised by the Named Executive Officers during the 12 months ended December 31, 1998. STOCK OPTION PLAN In 1997, Heafner adopted The J.H. Heafner Company 1997 Stock Option Plan. The stock option plan is designed to motivate designated employees, officers, directors and independent contractors of Heafner and its subsidiaries by encouraging them to acquire a proprietary interest in Heafner. Heafner's board of 63 65 directors, acting through a "plan committee" of at least two members of the board, administers the stock option plan, selects eligible participants, determines the number of shares subject to each option granted under the stock option plan and sets other terms and conditions applicable to participants in the stock option plan. After giving effect to the reclassification of Heafner's Class A common stock, and a 1998 amendment increasing the number of shares available for option grants under the plan, an aggregate of 527,500 shares of Class A common stock are reserved for issuance under the stock option plan. The stock option plan provides for the grant to designated employees, officers, directors and independent contractors of Heafner and its subsidiaries of options to purchase shares of Class A common stock. The plan committee has sole authority to select those individuals to whom options may be granted and to determine the number of shares of Class A common stock that will be issuable upon exercise of the options granted. The purchase price for shares of Class A common stock issuable upon exercise of the options granted is fixed by the plan committee, but cannot be less than the fair market value of the Class A common stock, as determined in good faith by Heafner's board of directors, if the corresponding option is intended to qualify as an incentive stock option under the Internal Revenue Code. As of December 31, 1998, options to purchase an aggregate of 493,650 shares of Class A common stock, some of which are shares of common stock that were reclassified as Class A common stock, at prices ranging from $1.10 to $7.48 per share, were outstanding under the stock option plan. All options granted under the stock option plan are subject to the terms and conditions of a stock option agreement entered into by each option recipient. The stock option agreement generally requires each recipient to be bound by the terms of a stockholder agreement between certain management stockholders and Heafner in the event the recipient elects to exercise options. Options granted under the stock option plan generally vest on the first four anniversaries of the date of grant, in installments of either (a) 10%, 20%, 30% and 40% or (b) 20%, 20%, 20%, and 40%, of the total number of underlying shares. Options granted under the stock option plan are not transferable by the recipient other than by a will or by the laws of descent and distribution and, during the recipient's lifetime, may only be exercised by the recipient. Under the terms of the stock option 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 Heafner. If an option recipient dies or if his or her employment is terminated because of a permanent disability or for any other reason, other than for cause as defined in the stock option agreement, the recipient or his or her personal representative may exercise the option within 180 days after the termination date, but only to the extent the option has vested on the termination date or would have vested in the 12 months following the termination date. Any option that would still be unvested after that time will lapse. If an option recipient's employment is terminated for cause, the recipient may exercise the option within 30 days after the date of termination, but only to the extent the option has vested on the date of termination. Any option that is unvested on the date of termination will lapse. Under the stock option plan, each of the following events would constitute a "change of control": - any person or entity not controlled by Heafner's stockholders acquires more than 50% of the shares of Heafner's common stock, - all or substantially all of the assets of Heafner are sold, - the majority of Heafner's board of directors no longer comprises persons currently serving on the board or persons designated by the current board majority, - 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 Heafner, or - Heafner issues common stock in a public offering. 64 66 All options outstanding under the stock option plan will become fully vested and immediately exercisable immediately prior to any change of control. If any option is not then exercised, it will expire upon the happening of the change in control. RESTRICTED STOCK PLAN In 1997, Heafner adopted The J.H. Heafner Company 1997 Restricted Stock Plan, which is designed to motivate designated employees, officers, directors and independent contractors of Heafner and its subsidiaries by encouraging them to acquire a proprietary interest in Heafner. Heafner's board of directors, 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, 1998, an aggregate of 215,000 shares of Class A common stock, some of which are shares of common stock that were reclassified as Class A common stock, had been issued to participants in the restricted stock plan for a purchase price of $1.10 per share. The shares issued under 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 Heafner depending upon the attainment of certain earnings targets. The restricted stock plan enables designated employees, officers, directors and independent contractors of Heafner to purchase shares of Class A common stock. The plan committee has sole authority to select the 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 under 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 (the "restricted stock agreement") entered into by each option recipient. The restricted stock agreement prohibits the transfer of stock issued under the restricted stock plan except for transfers: - to Heafner upon the termination of employment of a participating stockholder, - to other management employees who have executed and delivered agreements substantially similar to the restricted stock agreement, - by will or by the laws of descent or distribution, or - if and to the extent repurchase rights in favor of Heafner on termination of employment have not been exercised, to third parties, subject to rights of first refusal in favor of Heafner and the other holders of restricted stock. Heafner has the right to repurchase all of a participating stockholder's shares upon the termination of that stockholder's employment due to cause (as defined in the restricted stock agreement) or the death of the participating stockholder. A participating stockholder may require Heafner to repurchase all of such stockholder's shares if that stockholder terminates his or her 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 their original purchase price and a price derived from Heafner's "Net Equity Value," as defined in the restricted stock agreement, at the time of repurchase. COMPENSATION OF DIRECTORS During the year ended December 31, 1998, 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. Heafner intends to continue this compensation policy for directors. 65 67 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1998, William H. Gaither, Donald C. Roof, and J. Michael Gaither served on an executive committee of Heafner which reviewed and recommended executive compensation for the Named Executive Officers and other executives of Heafner. All compensation recommendations of the executive committee were reviewed by and subject to the approval of the full board of directors of Heafner. BOARD REPORT ON EXECUTIVE COMPENSATION The executive committee, at the direction of the board of directors of Heafner, recommends the compensation of the Named Executive Officers and other executives of Heafner. In addition, the executive committee administers Heafner's compensation and stock option plans. The key components of the compensation packages of Heafner's executive officers are annual salary, bonuses dependent upon Heafner's performance, and long term, stock-based incentives. In addition, Heafner's executive officers receive health, accident, and life insurance, retirement, and other personal benefits typically offered to executives by other corporations equivalent in size. Historically, Heafner has entered into employment agreements with its senior executive officers which fix their minimum annual salaries and bonuses. The compensation philosophy of Heafner's board of directors is that the compensation of Heafner's executives and key managers should be designed to promote achievement of Heafner's business and financial objectives; to provide pay that is externally competitive and internally equitable, which will allow Heafner to attract, retain, and motivate the executives and key managers necessary to accomplish its business objectives; and to reward exceptional performance. The executive committee reviews the salaries provided for in the employment agreements with its senior executive officers, as well as the salaries of Heafner's other officers, once a year, and recommends changes to the board of directors. Mr. William H. Gaither's compensation for the last completed fiscal year was in recognition of the many major initiatives undertaken and accomplished by him since the beginning of 1998. The most notable of these initiatives were his restructuring efforts, including the ITCO merger and the CPW acquisition. Bonuses are payable based upon performance measures recommended by the executive committee for each participant. The executive committee recommends a threshold, target, and maximum performance objective for each performance measure. Each of the executive committee's recommendations must be approved by the board of directors. No payment with respect to a performance measure is made if performance is below the threshold performance objective established for that performance measure. If the target performance objective is reached, the participant is entitled to receive 100% of the bonus attributable to that performance measure. If the maximum performance objective is reached, the participant receives 200% of the bonus attributable to that performance measure. As a result, if the maximum performance objectives for all performance measures are reached, a participant will receive a bonus equal to 200% of his or her targeted bonus. No participant may receive more than 200% of his or her targeted bonus. Bonuses are subject to reduction or cancellation on the basis of a participant's individual performance or in the event of conduct by a participant detrimental to Heafner. Bonuses are payable in cash. THE BOARD OF DIRECTORS Ann H. Gaither William H. Gaither Joseph P. Donlan V. Edward Easterling, Jr. Victoria B. Jackson William M. Wilcox, Jr. 66 68 INDEMNIFICATION OF OFFICERS AND DIRECTORS Heafner's articles of incorporation provide for the release of any person serving as a director of Heafner from liability to Heafner or its stockholders for damages for breach of fiduciary duty and for the indemnification by Heafner of any person serving as a director, officer, employee or agent or other authorized person to the fullest extent permissible under the North Carolina Business Corporation Act. In addition, Heafner has purchased a directors' and officers' insurance policy covering officers and directors of Heafner and its subsidiaries for liabilities that they may incur as a result of any action, or failure to act, by such officers and directors in their capacity as officers and directors. EMPLOYMENT AND SEVERANCE AGREEMENTS Heafner has entered into employment agreements with each of Messrs. William H. and J. Michael Gaither, Roof, Brown and Roberts, providing for annual base salaries of approximately $354,444, $224,000, $243,000, $191,000 and $230,000, respectively, for the current year. The employment agreements with Messrs. William H. and J. Michael Gaither, Roof, Brown and Roberts provide for payment of annual bonuses and for additional bonuses pursuant to Heafner's executive bonus plan. Fixed bonus payments made to William H. Gaither are reduced by the amount received by him under Heafner's board-designated discretionary compensation plan. The employment agreements may be terminated at any time by Heafner. If the employee's employment with Heafner is terminated on account of death or disability, for cause, or without good reason (as defined in each employment agreement), the employee is entitled to receive his base salary and target bonus payable through the date of termination. If Heafner terminates the employee's employment without cause, or if the employee terminates his employment with good reason, then the employee is entitled to receive an additional payment equal to his base salary and target bonus for one year. In the event of a termination by Heafner as a result of or in anticipation of a change in control (as defined in the employment agreements) or a constructive termination due to a change in control, the employment agreements of each of Messrs. William H. Gaither and Roberts provide 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. The employment agreements of Messrs. J. Michael Gaither, Roof and Brown provide that, if the employee is terminated as a result of or in anticipation of a change of control, or if his employment is terminated by Heafner for any reason or by the employee for good reason within one year after the change of control, or if he terminates his employment for any reason within 30 days after the first anniversary of the change of control, then he is entitled to receive an amount equal to his base salary and target bonus for the period from his termination until the third anniversary of the change of control. All of the employment agreements contain non-compete, non-solicitation and confidentiality provisions. In conjunction with the CPW acquisition, Heafner entered into employment agreements with each of Arthur C. Soares, the current President of CPW, and Ray C. Barney, the current Executive Vice President and Chief Operating Officer of CPW. 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, payable in installments of $1,250,000 at the end of the first year and $750,000 at the end of the second year after the closing of the Transactions. It also provides for a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by Heafner's board of directors. Mr. Barney's employment agreement provides for a three-year term and an annual base salary of $140,000, a stay-put bonus of $600,000, payable in installments of $200,000 at the end of each of the first three years after the closing of the Transactions. Mr. Barney's employment agreement (with Speed Merchant) also provides for a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by Heafner's board of directors. Both employment agreements contain non-compete, non-solicitation and confidentiality provisions. 67 69 The employment agreements with Messrs. Soares and Barney are terminable at any time by Heafner. Upon termination of employment for any reason, including death or permanent disability, the employee or his heirs 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. If Heafner terminates the employee's employment without cause, or the employee terminates his employment with good reason (each as defined in the employment agreements), the employee is entitled to receive an additional payment equal to his base salary through the end of his employment term as well as the incentive bonus payable for the first year. Payment of the stay-put bonus is contingent upon the employee's continued employment with Heafner except in the case of the employee's death or permanent disability, termination by the employer without cause or termination by the employee for good reason. In conjunction with the consummation of the Transactions, Heafner entered into an employment agreement with Richard P. Johnson, who serves as President, Heafner-ITCO Division. 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 Heafner's board of directors. Upon termination of Mr. Johnson's employment by Heafner without cause, or by Mr. Johnson for good reason, or upon a change of control (each as defined in the employment agreement), Mr. Johnson is entitled to a severance payment, depending on the date of termination, ranging from 12 to 24 months' salary and bonus from and after the date of termination. The employment agreement contains non-compete, non-solicitation and confidentiality provisions. EXECUTIVE BONUS PLAN Heafner awards annual cash bonuses to up to 20 of its top executives. Bonuses are payable only if Heafner attains specified annual performance targets. Bonuses 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 Heafner's board of directors. 68 70 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Heafner's common stock as of December 31, 1998, giving effect to the reclassification of Heafner's stock and to the other Transactions, of: - each person known by Heafner to own beneficially more than 5% of the Class A common stock, - each person known by Heafner to own beneficially more than 5% of the Class B common stock, - each director, - the Named Executive Officers, and - all directors and executive officers of Heafner as a group.
NUMBER OF SHARES PERCENT OF PERCENT OF BENEFICIALLY CLASS A COMMON CLASS B COMMON NAME AND ADDRESS OF BENEFICIAL OWNER(A) OWNED STOCK(B) STOCK(B) - --------------------------------------- ---------------- -------------- -------------- Ann H. Gaither........................... 1,992,293(c) 53.9% William H. Gaither....................... 1,079,038(c,d) 28.7 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........................... 32,500(g) 1.8 J. Michael Gaither....................... 32,500(h) 1.8 Daniel K. Brown.......................... 32,500(i) 1.8 Joseph P. Donlan......................... 1,034,000(e) 21.9 V. Edward Easterling, Jr................. 1,301,264(k) 92.9 Victoria B. Jackson...................... 5,000(l) * Richard P. Johnson....................... 32,110(f,j) * 1.9 Arthur C. Soares......................... -- P. Douglas Roberts....................... 5,000(l) * William M. Wilcox, Jr.................... 5,000(l) * All directors and executive officers of Heafner as a group (11 persons)........ 4,258,941(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 that person or group of persons has the right to acquire within 60 days of March 31, 1999 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. As of December 31, 1998, 3,697,000 shares of Class A common stock and 1,400,667 shares of Class B common stock were issued and outstanding. (c) Excludes 475,919 shares of Class A common stock that Ann H. Gaither and William H. Gaither have the power to vote under a voting trust agreement among certain members of the Gaither family. 69 71 (d) Includes 18,750 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 discussed below. Mr. Donlan is the co-manager of The 1818 Mezzanine Fund, L.P. and in that capacity will have authority to vote and exercise investment power over the shares. See "Certain Relationships and Related Transactions -- Warrants." (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 7,500 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (h) Includes 7,500 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (i) Includes 7,500 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (j) Includes 5,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (k) Represents 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 (1) 27,110 shares of Class B common stock and (2) 4,231,831 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. 70 72 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, Heafner issued to The 1818 Mezzanine Fund, L. P. warrants (the "Warrants") to purchase shares of Heafner's common stock. Joseph P. Donlan, a member of Heafner's board of directors, is a Senior Manager of Brown Brothers Harriman & Co., the 1818 Fund's general partner. Mr. Donlan and Robert R. Gould, a Partner of Brown Brothers Harriman & Co., are co-managers of the 1818 Fund, and in that capacity they exercise voting and investment power over the 1818 Fund's shares. The Warrants are exercisable for 1,034,000 shares of Class A common stock. The Warrants may be exercised, in whole or in part, at any time prior to the earliest of: - May 7, 2007, - the date of an initial public offering of Class A common stock yielding gross proceeds of at least $25.0 million or representing at least 20% of the Class A common stock on a fully-diluted basis, or - Heafner's merger or consolidation with or into another entity or the sale of all or substantially all of Heafner's assets. The number of shares issuable upon the exercise of the Warrants is subject to adjustment from time to time to reflect stock dividends, splits, combinations and reclassifications. In addition, the Warrants provide for upward adjustment of the number of issuable shares if Heafner issues Class A common stock at a price per share that is less than its current fair market value. Fair market value is determined by reference to closing prices of the Class A common stock on a national exchange or, if the Class A common stock is not publicly traded, in good faith by Heafner's board of directors or a nationally recognized investment banking firm, if requested by the holders of 33% of the Class A common stock on a fully-diluted basis. The Warrants provide that the holders of a majority in interest of the Warrants issued on May 7, 1997 have the right, exercisable upon a change of control as defined in the Warrants or at any time after May 7, 2004, to require Heafner to redeem the Warrants. However, that redemption right may not be exercised after the consummation of an initial public offering of the Class A common stock yielding gross proceeds of at least $25.0 million or representing at least 20% of the Class A common stock on a fully-diluted basis. If the requested redemption right is exercised, Heafner must redeem all of the outstanding Warrants at an agreed redemption price calculated based on an EBITDA multiple of Heafner at the time of redemption, unless otherwise prevented by law. Heafner has no right to call for the redemption of the Warrants. Heafner and the 1818 Fund are also parties to a note and warrant purchase agreement and a registration rights agreement, each dated as of May 7, 1997, which contain provisions restricting the transferability of the Warrants, including a right of first offer in favor of Heafner, and grant registration rights with respect to shares of Class A common stock issuable upon exercise of the Warrants. PREFERRED STOCK In connection with entering into the Kelly-Springfield Supply Agreement, Kelly-Springfield purchased from Heafner 7,000 newly issued shares of Heafner's Series A Cumulative Redeemable Preferred Stock, par value $.01, and 4,500 newly issued shares of Heafner's Series B Cumulative Redeemable Preferred Stock, par value $.01, for an aggregate purchase price of $11.5 million. Kelly-Springfield is the sole holder of each series of preferred stock. Each series of the preferred stock has a stated value and liquidation preference equal to $1,000 per share, except the liquidation preference of the Series B preferred stock is reduced from time to time based upon purchases by Heafner of certain types of tires from Kelly-Springfield. Kelly-Springfield is entitled to receive monthly dividends on the liquidation preference of the Series A preferred stock at a rate of 4% per year, which may be increased if Heafner's annual tire purchases from 71 73 Kelly-Springfield fall below certain levels. Heafner is not required to pay dividends on the Series B preferred stock unless its annual tire purchases from Kelly-Springfield fall below certain levels. Subject to the limitations summarized below, beginning in December 2002 and ending in June 2007 Heafner is required to redeem 700 shares of Series A preferred stock each year on a semi-annual basis at 100% of the liquidation preference of such shares plus all accrued and unpaid dividends. Subject to the same limitations, Heafner is required to redeem all of the outstanding shares of Series B preferred stock in June 2007 at the same redemption price. Unless restricted by the limitations summarized below, Heafner is also required to redeem all the preferred stock if the Kelly-Springfield Supply Agreement is terminated or, at the request of Kelly-Springfield, if a change of control of Heafner occurs and Kelly-Springfield requests a termination of the Supply Agreement. Each series of preferred stock also is redeemable at any time at Heafner's option. So long as any amounts are outstanding under Heafner's existing credit facility or subordinated notes, or any amending or replacing agreement for that debt, or any commitments to lend exist under such debt, Heafner is prohibited from: - making any payment in respect of any mandatory or optional redemption of either series of preferred stock, or - declaring, making or paying any dividend or distribution in respect of either series of preferred stock, if any default or event of default under any such debt, or any event which upon notice or lapse of time, or both, would constitute an event of default, has occurred or is continuing or would result from that event and has not been cured or waived in accordance with such debt. SHARE REPURCHASES In February 1997, Heafner offered to repurchase shares of common stock from members of the Gaither family not actively involved in the operation of Heafner at a price equal to $.8058 per share, or $2,644 per share without giving effect to a 3,281-for-1 stock split that occurred on May 7, 1997. Pursuant to the offer, Heafner repurchased, and subsequently canceled and retired, 3,359,744 shares, 1,024 shares without giving effect to the stock split, of common stock from the Gaither family members for an aggregate purchase price of $2.7 million. In 1986, Heafner repurchased from Carolyn H. Williams, and subsequently canceled and retired, all of her shares of Heafner's common stock in exchange for a promissory note in the original principal amount of $1.4 million. Carolyn H. Williams is the sister of Ann H. Gaither, the Chairperson of Heafner. The note is payable through January 2006 in annual installments of $124,600, including interest at a rate per year of 7.5%. The outstanding principal amount of the note at December 31, 1998 was approximately $730,000. RELATED PARTY LEASES; LOANS AND LOAN GUARANTEE Heafner leases corporate office space in Lincolnton, North Carolina from Ann H. Gaither, the Chairperson of Heafner, and her sister, Carolyn H. Williams, for an annual rent equal to approximately $87,000. Heafner leases its Winston-Salem, North Carolina distribution center from Ann H. Gaither for an annual rent equal to approximately $55,200. In connection with this property in Winston-Salem, Ann H. Gaither has a note owing to Heafner with a principal balance of $158,591.93 payable in monthly installments of principal and interest of $3,500.00, accruing interest at 9% per year with the final due date of October 1, 2003. Heafner leases the data processing and human resources buildings adjacent to its corporate headquarters in Lincolnton, North Carolina from Evangeline Heafner, Ann H. Gaither's mother, for an annual rent equal to approximately $37,000. The expiration dates of these leases are September 30, 2002, August 1, 2003 and December 30, 2002, respectively. Heafner believes that these leases are on terms no less favorable to it than could have been obtained from an independent third party. Pursuant to a guaranty dated March 31, 1997, Heafner has agreed to guarantee all obligations of William H. Gaither, President and Chief Executive Officer of Heafner, under a mortgage loan in an aggregate principal amount not to exceed $890,000. 72 74 DESCRIPTION OF CREDIT FACILITY The following is a summary description of the principal terms of the credit facility. The description below does not purport to be complete and is qualified in its entirety by reference to the agreements containing the principal terms and conditions of the credit facility. Copies of those agreements (other than schedules and exhibits) are available from Heafner. In addition, the credit facility was filed as Exhibit 10.1 to Heafner's registration statement related to the Series B exchange offer filed with the SEC on August 18, 1998. The credit facility is available from Heafner and from the SEC as described in "Where You Can Find More Information." Heafner and its subsidiaries (the "borrowers") entered into the credit facility on the closing date of the Transactions. As of December 31, 1998, approximately $21.9 million was outstanding and an additional $64.7 million was available for additional borrowings under the credit facility. The credit facility has been syndicated among the several lenders parties to the credit facility, with BankBoston, N.A., as agent, and Fleet Capital Corporation and First Union National Bank as co-agents (together, the "agents"). The credit facility provides for a senior secured revolving credit facility, which may be borrowed in the aggregate principal amount of up to $100.0 million, of which up to $10.0 million may be utilized in the form of commercial and standby letters of credit. Guaranties and Security. All obligations of the borrowers under the credit facility are guaranteed by certain of Heafner's subsidiaries which are not direct obligors under the credit facility. The borrowers' obligations under the 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 Heafner may be required to become credit facility guarantors or borrowers under the credit facility. Availability and Maturity. Provided that no event of default exists, loans made under the 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 borrowing. The credit facility will be permanently reduced by an amount equal to any Net Available Cash, as defined in the Series B indenture and the Series D indenture, and Heafner will be required to prepay the credit facility to the extent necessary at the time of any such permanent reduction. The credit facility will mature and become due and payable in May 2003, except that the borrowers and the lenders may agree to extend the credit facility for up to an additional five years. Interest. Indebtedness under the credit facility bears interest, at Heafner's option: - at the "base rate," which is a floating rate per year equal to the greater of the federal funds rate plus 0.5% or the rate announced by the credit facility agent from time to time as its base or prime lending rate, plus the "applicable margin" or - at the "Eurodollar rate," which is a fixed rate per year 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 is 0.25% and the applicable margin for Eurodollar rate loans is 1.75%, subject in each case to performance based step-downs based on Heafner's ratio of Funded Debt to EBITDA, as defined in the credit facility. Overdue sums under the credit facility will bear interest at a default rate equal to the applicable interest rate plus 2% per year. Certain Fees. Heafner is required to pay the lenders a commitment fee equal to 0.375% per year on the committed undrawn amount of the credit facility, subject to performance based step-downs based upon Heafner's ratio of Funded Debt to EBITDA. Heafner is also required to pay the lenders letter of credit fees equal to the applicable margin applicable to Eurodollar rate loans on a per year basis and a fronting fee of 0.125% per year to be paid to the issuer of letters of credit. Heafner has agreed to pay certain other fees and expenses of the lenders and the credit facility agent. Covenants. The credit facility requires Heafner to meet certain financial tests, including minimum net worth and minimum loan availability. The credit facility also contains covenants which, among other things, restrict Heafner's ability to incur additional indebtedness; enter into guaranties; make loans and 73 75 investments, except that Heafner will be permitted to make investments in respect of new acquisitions up to $25 million in any fiscal year and $40 million in total during the term of the credit facility; make capital expenditures in excess of $12 million in any fiscal 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 Heafner 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 Heafner and its subsidiaries; and maintain insurance. Events of Default. The 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 Heafner directly or indirectly to own 100% of any borrower or credit facility guarantor (except to the extent the borrower is merged into Heafner or one of Heafner's wholly owned subsidiaries) or the occurrence of a change of control as defined in the credit facility. Heafner applied the net proceeds of the Series C offering to repay outstanding amounts under the credit facility. See "Use of Proceeds." The aggregate amount of commitments under the credit facility remained at $100.0 million after the Series C offering was consummated. Heafner anticipates that borrowings under the credit facility will be repaid with internally generated funds, including those of ITCO and CPW, 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. That decision will be made based on Heafner'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 it may deem appropriate. 74 76 DESCRIPTION OF THE SERIES D NOTES The Series C notes were, and the Series D notes will be, issued under the Series D indenture dated as of December 1, 1998, among Heafner, the subsidiary guarantors and First Union National Bank, as trustee. The Series B notes were issued under the Series B indenture, dated as of May 15, 1998, among Heafner, the subsidiary guarantors and First Union National Bank, as trustee. The term "notes" as used in this Description of the Notes refers to the Series B notes, the Series C notes and the Series D notes to be issued in exchange for the Series B notes and Series C notes, and the term "indenture" generally refers to the Series D indenture. The following is a summary of the material provisions of the Series D notes. As a summary, it is not complete and is subject to the provisions of the Series D indenture, including the definitions contained in the Series D indenture and the terms made part of the Series D indenture by the Trust Indenture Act. Capitalized terms used and not otherwise defined have the meanings set forth under "-- Certain Definitions." For a more complete understanding of the terms of the Series D notes, holders of the notes should refer to the Series D indenture. In describing the terms of the Series D notes, Heafner has included a summary of the terms of the Series B notes where there is any material difference between the Series B notes and the Series D notes. For a more complete understanding of the terms of the Series B notes, holders of the notes should refer to the Series B indenture, which was filed as an exhibit to Heafner's registration statement filed with the SEC on August 18, 1998, in connection with the registered exchange offer for the Series B notes. In addition, each of the Series B indenture and the Series D indenture are available as described in "Where You Can Find More Information." PRINCIPAL, INTEREST AND ISSUANCE OF THE SERIES D NOTES The Series D notes will be unsecured senior obligations of Heafner, of up to $150.0 million aggregate principal amount, and will mature on May 15, 2008. The Series D notes will bear interest at a rate of 10% per year from December 8, 1998, or from the most recent date on which interest was paid on the old notes exchange for Series D notes. Interest on the Series D notes is payable on May 15 and November 15 of each year to holders of record at the close of business on the May 1 or November 1 immediately preceding the interest payment date. The first interest payment will be made on May 15, 1999 to holders of record at the close of business on May 1, 1999. Heafner will pay interest on any overdue principal at a rate of 11% per year, and it will pay interest at a rate of 11% on overdue installments of interest to the extent it is lawful. The Series D notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. There is no service charge for any registration of transfer or exchange of any notes, but Heafner may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection with a transfer or exchange. OPTIONAL REDEMPTION Beginning on May 15, 2003, the notes will be redeemable at Heafner's option, in whole or in part, at any time or from time to time, at the following prices, which are expressed as percentages of principal amount, plus accrued interest to the redemption 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%
75 77 Heafner must provide not less than 30 days', nor more than 60 days', prior notice of the redemption by first-class mail to the registered address of each holder of notes. In addition, prior to the closing of the exchange offer, Heafner may redeem up to 35% of the original principal amount of the Series C notes with the proceeds of one or more Public Equity Offerings following which there is a Public Market. After each such redemption, at least 65% of the aggregate original principal amount of the Series C notes must remain outstanding and be held, directly or indirectly, by persons or entities other than Heafner and its Affiliates. After the closing of the exchange offer and prior to May 15, 2001, Heafner may redeem up to $52.5 million in total principal amount of Series C and Series D notes then outstanding with the proceeds of one or more Public Equity Offerings following which there is a Public Market. If Series B notes are still outstanding at the time of the redemption, however, the $52.5 million will be reduced by the maximum aggregate principal amount of Series B notes that Heafner is permitted to redeem under the Series B indenture at the time of the redemption. After each such redemption, at least $97.5 million in aggregate principal amount of Heafner's senior notes must remain outstanding and be held, directly or indirectly, by persons or entities other than Heafner and its Affiliates. The redemption price shall be 110.0% of the principal amount of the notes being redeemed plus accrued and unpaid interest to the redemption date. In the case of any partial redemption, selection of the notes that will be redeemed will be made by the trustee in proportion to the percentage of the total amount of notes outstanding held by each holder, or by lot or by such other method as the trustee in its sole discretion shall deem to be fair and appropriate. No note of $1,000 or less in original principal amount shall be redeemed in part. If any note is to be redeemed in part only, the notice of redemption relating to that note shall state the portion of the principal amount of that note that will be redeemed. A new note in principal amount equal to the unredeemed portion will be issued in the name of the holder of the original note upon cancellation of the original note. SUBSIDIARY GUARANTIES The obligations of Heafner under the notes, including the obligation to offer to repurchase the senior notes upon a change of control, will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by each of the subsidiary guarantors. All of the subsidiary guarantors are directly or indirectly wholly-owned by Heafner. Each subsidiary guaranty will be limited to an amount that does not exceed the maximum amount that can be guaranteed by the subsidiary guarantor without rendering its subsidiary guaranty voidable under applicable laws 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 guaranties and other contingent liabilities, of the subsidiary guarantor, and, depending on the amount of its indebtedness, a subsidiary guarantor's liability on its subsidiary guaranty could be reduced to zero. See "Risk Factors -- Fraudulent Transfer Laws May Limit Collectibility of Notes in the Event of Bankruptcy." Upon the sale or other disposition of a subsidiary guarantor, or the sale or disposition of all or substantially all of the assets of a subsidiary guarantor, other than to Heafner or an Affiliate of Heafner and which is permitted by the indenture, the subsidiary guarantor will be released and relieved from all of its obligations under its subsidiary guaranty. RANKING The indebtedness evidenced by the Series D notes will constitute a senior unsecured obligation of Heafner, ranking equally in right of priority of payment with all existing and future senior indebtedness of Heafner, including the Series B notes. In addition, the Series D notes will be senior in right of payment to all future subordinated indebtedness of Heafner. The subsidiary guaranties will rank equally in right of priority of payment with all existing and future senior indebtedness of the subsidiary guarantors, including the subsidiary guaranties of the Series B notes, and will be senior in right of payment to all future subordinated indebtedness of the subsidiary guarantors. The Series D notes and the subsidiary guaranties will be effectively subordinated to all existing and future secured indebtedness of Heafner and the 76 78 subsidiary guarantors, including indebtedness under the Credit Facility, to the extent of the value of the assets securing that indebtedness. As of December 31, 1998, Heafner and the subsidiary guarantors had outstanding, either directly or through guarantees, approximately $185.3 million of indebtedness, all of which was senior indebtedness, and approximately $27.6 million of which was secured. In addition, at December 31, 1998, Heafner could have borrowed an additional $64.7 million under the Credit Facility, all of which would have been secured. A portion of Heafner's operations are conducted through its subsidiaries. Claims of creditors of those subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by those subsidiaries, and claims of any preferred stockholders of those subsidiaries, generally will have priority over the claims of creditors of Heafner, including holders of the notes, with respect to the assets and earnings of those subsidiaries. The notes, therefore, are effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of subsidiaries of Heafner (other than the subsidiary guarantors). Excluding the subsidiary guaranties, at December 31, 1998, the total liabilities of Heafner's subsidiaries, all of whom are subsidiary guarantors, were approximately $67.3 million, including trade payables. Although the indenture limits the incurrence of Indebtedness and issuance of preferred stock of certain of Heafner's subsidiaries, the limitation is subject to a number of significant qualifications. Moreover, the indenture does not impose any limitation on the incurrence by the subsidiaries of liabilities that are not considered to be Indebtedness or Preferred Stock under the indenture. See "-- Certain Covenants - -- Limitation on Indebtedness." BOOK-ENTRY, DELIVERY AND FORM The Series D notes will be issued in the form of a global note. The 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 global note may be transferred, in whole and not in part, only to the Depository or another nominee of the Depository. Noteholders may hold their beneficial interests in the global note directly through the Depository if they have an account with the Depository or indirectly through organizations which have accounts with the Depository. Series D 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 global note has previously been exchanged for notes in definitive form, be exchanged for an interest in the global note in an amount equal to the principal amount of notes being transferred. The Depository has advised Heafner as follows: The Depository is a limited-purpose trust company organized under the laws of the State of New York, is a member of the Federal Reserve System, and is a "clearing corporation" within the meaning of the New York Uniform Commercial Code and "a clearing agency" registered under the provisions of Section 17A of the Securities 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, eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers, which may include the initial purchasers, as well as 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 global note, the Depository will credit, on its book-entry registration and transfer system, the principal amount of the notes represented by such global note to the accounts of participants. The accounts to be credited shall be designated by the trustee. Ownership of beneficial interests in the global note will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the 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 by participants, with respect to the owners of beneficial interests in the global 77 79 note other than participants. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of securities in definitive form. Such limits and laws may impair the ability to transfer or pledge beneficial interests in the global note. So long as the Depository, or its nominee, is the registered holder and owner of the 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 the notes and the indenture. Except as set forth below, owners of beneficial interests in the global note will not be entitled to have the notes represented by the 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 global note. Heafner understands that under existing industry practice, in the event an owner of a beneficial interest in the global note desires to take any action that the Depository, as the holder of the global note, is entitled to take, the Depository would authorize the participants to take that action, and that the participants would authorize beneficial owners owning through such participants to take that action or the participants would otherwise act upon the instructions of beneficial owners owning through them. Payment of principal of and interest on notes represented by the 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 global note. Heafner expects that the Depository or its nominee, upon receipt of any payment of principal of or interest on the 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. Heafner also expects that payments by each participant to owners of beneficial interests in the global note held through that participant will be governed by standing instructions and customary practices and will be the responsibility of the participant. Heafner 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 global note for any note or for maintaining, supervising or reviewing any records relating to those beneficial ownership interests or for any other aspect of the relationship between the Depository and its participants, or the relationship between the participants and the owners of beneficial interests in the global note owning through the participants. Unless and until it is exchanged in whole or in part for certificated notes in definitive form, the global note may not be transferred except as a whole 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. Although the Depository has agreed to the above procedures in order to facilitate transfers of interests in the global note among participants of the Depository, it is under no obligation to perform or continue to perform those procedures, and it may discontinue them at any time. Neither the trustee nor Heafner 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 global note will be exchangeable for certificated notes in definitive form of like tenor as such notes in denominations of $1,000 and integral multiples of $1,000 if: - the Depository notifies Heafner that it is unwilling or unable to continue as Depository for the global note or if at any time the Depository ceases to be a clearing agency registered under the Securities Exchange Act and a successor Depository is not appointed by Heafner within 90 days, - Heafner in its discretion at any time determines not to have all of the notes represented by the global note, or - an Event of Default has occurred and is continuing. Any note that is exchangeable because of the occurrence of any of the above events is exchangeable for certificated notes issuable in authorized denominations and registered in such names as the Depository 78 80 shall direct, subject to certain ownership certification requirements imposed by Regulation S under the Securities Act. Subject to the foregoing, the global note is not exchangeable, except for a global note of the same aggregate denomination to be registered in the name of the Depository or its nominee. SAME-DAY PAYMENT Payments in respect of notes, including principal, premium and interest, will be made by wire transfer of immediately available funds to the accounts specified by the holders of the notes or, if no account is specified by a holder, by mailing a check to that holder's registered address. EXCHANGE OFFER; REGISTRATION RIGHTS On December 1, 1998, Heafner and the Initial Purchasers entered into the Registration Rights Agreement. Holders of Series D notes are not entitled to any registration rights with respect to their Series D notes. Heafner has agreed for a period of 180 days after the date the registration statement is declared effective by the SEC 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 Series D notes. The registration statement of which this prospectus is a part constitutes the registration statement for the exchange offer which is the subject of the Registration Rights Agreement. Upon the closing of the exchange offer, subject to certain limited exceptions, holders of untendered Series B or Series C notes will not retain any rights under the Registration Rights Agreement. Following the closing of the exchange offer, the Series C notes and the Series D notes will vote and consent together on all matters as one class. None of the Series C notes or the Series D notes will have the right to vote or consent as a class separate from one another on any matter. For a discussion of the terms of the Exchange Offer under the Registration Rights Agreement, See "The Exchange Offer." CHANGE OF CONTROL Upon the occurrence of any of the following events, each of which constitutes a "change of control," each holder shall have the right to require that Heafner repurchase its notes in accordance with the procedures outlined below at a price in cash equal to 101% of the principal amount of the holder's notes. Heafner shall also pay accrued and unpaid interest, if any, to the date of purchase, except that a holder of record on the relevant record date, if different from the holder on the date of the repurchase, will have the right to receive interest due on the relevant interest payment date. It will be a change of control if any of the following events occurs: 1. Any "person," as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act, other than a Permitted Holder, is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power of the Voting Stock of Heafner. A "beneficial owner" is used here as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all shares that that person has the right to acquire, whether their right is exercisable immediately or only in the future. In addition, a person shall be deemed to beneficially own any Voting Stock of a corporation held by a parent corporation, if that person is the beneficial owner, directly or indirectly, of more than 50% of the voting power of the Voting Stock of the parent corporation. 2. During any period of two consecutive years, the following cease for any reason to constitute a majority of the board of directors then in office: (a) individuals who at the beginning of that period constituted Heafner's board of directors, together with 79 81 (b) any new directors whose election by Heafner's board of directors, or whose nomination for election by Heafner's shareholders, was approved by: - a vote of 66 2/3% of the directors of Heafner then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously approved in accordance with these procedures, or - Permitted Holders holding a majority of the aggregate voting power of the Voting Stock of Heafner held by all Permitted Holders. 3. The adoption of a plan relating to the liquidation or dissolution of Heafner. 4. The merger or consolidation of Heafner with or into another entity or the merger of another entity with or into Heafner to another person or entity who is not controlled by the Permitted Holders, and the securities of Heafner that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of Heafner are changed into or exchanged for cash, securities or property, unless such securities of Heafner are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation immediately after such transaction. 5. The sale of all or substantially all the assets of Heafner to another person or entity who is not controlled by the Permitted Holders. Within 30 days following any change of control, Heafner shall make a change of control offer by mailing a notice to each holder, with a copy to the trustee, stating: - that a change of control has occurred and that the holder has the right to require Heafner to purchase the holder's notes at a purchase price in cash equal to 101% of the principal amount of the holder's notes, 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; - 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 the change of control; - the repurchase date, which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed; and - the instructions determined by Heafner, consistent with this covenant, that a holder must follow in order to have its notes purchased. Heafner 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 applicable to a change of control offer made by Heafner and the third party purchases all notes validly tendered and not withdrawn under its change of control offer. Heafner shall comply, to the extent applicable, with the requirements of Section 14(e) of the Securities Exchange Act and any other securities laws or regulations in connection with its repurchase of notes as described in this covenant. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this covenant, Heafner shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this covenant or the indenture. The change of control repurchase feature is the result of negotiations between Heafner and the initial purchasers. Subject to the limitations discussed below, Heafner 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 or otherwise affect Heafner's capital structure or credit ratings. Restrictions on the ability of Heafner to incur 80 82 additional Indebtedness are contained in the covenants described under "-- Certain Covenants -- Limitation on Indebtedness," "-- Limitation on Liens" and "-- Limitation on Sale/Leaseback Transactions." Those 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 those covenants, however, the indenture does not contain any covenants or provisions that may afford holders of the notes protection in the event of a highly leveraged transaction. The Credit Facility contains, and future indebtedness of Heafner may contain, prohibitions on the occurrence of certain of the 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 Heafner 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 on Heafner of making the repurchase. If a change of control occurs, Heafner may not be able to obtain the consents from its lenders that would be needed to consummate the change of control offer without causing a default under the Credit Facility or other indebtedness. Finally, Heafner's ability to pay cash to the holders of notes following the occurrence of a change of control may be limited by Heafner's then existing financial resources. There may not be sufficient funds available when necessary to make any required repurchases. The potential inability of Heafner to obtain sufficient funds to consummate a repurchase of notes or other indebtedness in connection with a change of control could have the effect of deterring certain mergers, tender offers or other takeover attempts involving Heafner and could adversely affect the market price of Heafner's securities or its ability to obtain additional financing. The provisions under the indenture relative to Heafner'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 the following: LIMITATION ON INDEBTEDNESS Heafner shall not, and shall not permit any Restricted Subsidiary to, incur, directly or indirectly, any Indebtedness, except that Heafner may incur Indebtedness if, on the date of, and after giving effect to, the incurrence, 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 on or after May 15, 2000. Heafner and the Restricted Subsidiaries may also incur any or all of the following Indebtedness, regardless of whether the above test is met: 1. Indebtedness incurred under the Credit Facility, except that, after giving effect to that incurrence, the aggregate principal amount of Indebtedness then outstanding under the Credit Facility does not exceed the greater of: - $100 million less the sum of all principal payments with respect to that Indebtedness described in Point (2)(A) of the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock," and - the sum of 65% of the book value of the inventory of Heafner and its Restricted Subsidiaries and 85% of the book value of the accounts receivables of Heafner and its Restricted Subsidiaries; 2. Indebtedness owed to and held by Heafner or a Restricted Subsidiary; provided, however, that: - any subsequent issuance or transfer of any Capital Stock which results in any Restricted Subsidiary ceasing to be a Restricted Subsidiary, or any subsequent transfer of such 81 83 Indebtedness other than to Heafner or a Restricted Subsidiary, shall be deemed, in each case, to constitute the incurrence of such Indebtedness by the obligor thereon, and - if Heafner is the obligor on such Indebtedness, then such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the notes; 3. the Series B notes, the Series C notes and the Series D notes; 4. Vendor Financing, and Refinancing Indebtedness in respect of Vender Financing, in an aggregate amount which does not exceed $20 million, when taken together with all other outstanding Indebtedness incurred in accordance with the covenant described in this Point (4), including Vendor Financing outstanding on May 20, 1998; 5. Attributable Debt in respect of Sale/Leaseback Transactions, and Refinancing Indebtedness in respect of Sale/Leaseback Transactions, in an amount which does not exceed $15 million when taken together with all other outstanding Indebtedness incurred in accordance with the covenant described in this Point (5), but only if the Sale/Leaseback Transactions comply with the covenant described under "-- Limitation on Sale/Leaseback Transactions"; 6. Indebtedness outstanding, or incurred under commitments that were outstanding, on May 20, 1998, other than Indebtedness described in Points (1), (2), (3), (4) or (5) above; 7. Indebtedness of a Restricted Subsidiary incurred and outstanding on or prior to the date on which that Subsidiary was acquired by Heafner, 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 transactions by which that Subsidiary became a Subsidiary or was acquired by Heafner if, on the date of the acquisition and after giving effect to the acquisition, Heafner would have been able to incur at least $1.00 of additional Indebtedness under the Consolidated Coverage Ratio test described in the first paragraph of this "-- Limitation on Indebtedness" covenant summary; 8. Refinancing Indebtedness in respect of Indebtedness incurred in accordance with the Consolidated Coverage Ratio test described in the first paragraph of this "--Limitation on Indebtedness" covenant summary or in accordance with Points (3), (6), (7) or this Point (8), except that Refinancing Indebtedness that directly or indirectly refinances Indebtedness of a Subsidiary incurred in accordance with Point (7) shall be incurred only by the Subsidiary; 9. Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be incurred by Heafner under the indenture; 10. the subsidiary guaranties of the Series B notes, Series C notes and Series D notes; and 11. Indebtedness of Heafner in an aggregate principal amount which, together with all other Indebtedness of Heafner outstanding on the date of such incurrence other than Indebtedness permitted as described in Points (1) through (10) above or the first paragraph of this "-- Limitation on Indebtedness" covenant summary, does not exceed $15 million. However, Heafner shall not incur any Indebtedness under Points (1) through (11) if the proceeds of the Indebtedness are used, directly or indirectly, to refinance any Subordinated Obligations unless that Indebtedness shall be subordinated to the notes to at least the same degree as the Subordinated Obligations that are refinanced. For purposes of determining compliance with this covenant: - if an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in Points (1) through (11), Heafner, in its sole discretion, will classify that item of Indebtedness and only be required to include the amount and type of that Indebtedness in one of the above types, and - an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described in Points (1) through (11). 82 84 LIMITATION ON RESTRICTED PAYMENTS Heafner shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time Heafner or such Restricted Subsidiary makes that Restricted Payment: 1. a Default shall have occurred and be continuing or would result from the making of the Restricted Payment; 2. Heafner is not able to incur an additional $1.00 of Indebtedness under the test in the first paragraph of the covenant described under "-- Limitation on Indebtedness"; or 3. the aggregate amount of the Restricted Payment and all other Restricted Payments since May 20, 1998, would exceed the sum of: A. 50% of the Consolidated Net Income accrued during the period from July 1, 1998 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment, or, if the Consolidated Net Income is a deficit, subtract an amount equal to 100% of that deficit; B. the aggregate Net Cash Proceeds received by Heafner from the issuance or sale of its Capital Stock, other than Disqualified Stock, subsequent to May 20, 1998, other than an issuance or sale to a Subsidiary of Heafner and other than an issuance or sale to an employee stock ownership plan or to a trust established by Heafner or a Subsidiary of Heafner for the benefit of its employees; C. the aggregate Net Cash Proceeds received by Heafner after May 20, 1998, 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 Heafner, except that if the employee stock ownership plan incurs any Indebtedness, the aggregate amount shall be limited to an amount equal to any increase in the Consolidated Net Worth of Heafner resulting from principal repayments made by the employee stock ownership plan with respect to Indebtedness incurred by it to finance the purchase of the Capital Stock; D. the amount by which Indebtedness of Heafner is reduced on Heafner's balance sheet after May 20, 1998, upon the conversion or exchange, other than by a Subsidiary of Heafner, of any Indebtedness of Heafner convertible or exchangeable for Capital Stock of Heafner, other than Disqualified Stock, less the amount of any cash, or the fair value of any other property, distributed by Heafner upon that conversion or exchange; E. an amount equal to the sum of: - the net reduction in Investments in a person or entity resulting from dividends, repayments of loans or advances or other transfers of assets to Heafner or any Restricted Subsidiary from such person or entity, and - the portion, proportionate to Heafner'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; except that that sum shall not exceed, for any particular person or entity, the amount of Investments previously made by Heafner or any Restricted Subsidiary in such person or entity from May 20, 1998 to the date of the Restricted Payment, and which are included in the calculation of Restricted Payments; and F. $5.0 million. The following will not be prohibited, regardless of the provisions of the above paragraph: 1. any acquisition of any Capital Stock of Heafner made out of the proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of Heafner, other than Disqualified 83 85 Stock and other than Capital Stock issued or sold to a Subsidiary of Heafner or an employee stock ownership plan or to a trust established by Heafner or any of its Subsidiaries for the benefit of their employees; provided that: - the acquisition of Capital Stock shall be excluded in the calculation of the amount of Restricted Payments, and - the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under Point (3)(B) above; 2. 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 Heafner which is permitted to be incurred under the covenant described under "-- Limitation on Indebtedness"; provided that that purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; 3. dividends paid within 60 days after the date they are declared if at the date of declaration the dividend would have complied with this covenant, except that the payment may not be made if, at the time of payment of the dividend, another Default shall have occurred and be continuing or would result from the payment and provided that the dividend shall be included in the calculation of the amount of Restricted Payments; 4. the repurchase or other acquisition of shares of, or options to purchase shares of, common stock of Heafner or any of its Subsidiaries from employees, former employees, directors or former directors of Heafner or any of its Subsidiaries or from permitted transferees of such employees, former employees, directors or former directors: - upon death, retirement, severance or termination of employment or service, or - under the terms of the agreements, including employment agreements, or plans approved by the board of directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of common stock of Heafner or its Subsidiaries; except that the aggregate amount of such repurchases and other acquisitions may not exceed $1.0 million in any calendar year and such repurchases and other acquisitions must be excluded in the calculation of the amount of Restricted Payments; 5. 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, but only in the amounts required to be paid by Heafner under the terms, as stated on May 20, 1998, of that stock, provided that that payment shall be excluded in the calculation of the amount of Restricted Payments; or 6. payments not to exceed $1.5 million in the aggregate to employees of ITCO in respect of certain stock appreciation rights granted by ITCO and required to be made upon consummation of the Transactions, provided that such payments shall be excluded from the calculation of the amount of Restricted Payments. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES Heafner 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 Heafner or a Restricted Subsidiary or pay any Indebtedness owed to Heafner, 84 86 (b) make any loans or advances to Heafner, or (c) transfer any of its property or assets to Heafner. However, Heafner may, and may permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective: 1. any encumbrance or restriction under an agreement in effect at or entered into on May 20, 1998 or the Credit Facility as in effect on May 20, 1998; 2. any encumbrance or restriction with respect to a Restricted Subsidiary under an agreement relating to any Indebtedness incurred by that Restricted Subsidiary on or prior to the date on which that Restricted Subsidiary was acquired by Heafner and outstanding on the date that Restricted Subsidiary was acquired by Heafner, 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 by which that Restricted Subsidiary became a Restricted Subsidiary or was acquired by Heafner; 3. any encumbrance or restriction under an agreement effecting a Refinancing of Indebtedness incurred under an agreement referred to in Points (1) or (2) above or in this Point (3), or contained in any amendment to an agreement referred to in Point (1) or (2) above or in this Point (3), except that the encumbrances and restrictions with respect to the 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 the Restricted Subsidiary contained in the predecessor agreements; 4. any encumbrance or restriction consisting of customary provisions restricting assignments, subletting or other transfers contained in leases, licenses and similar agreements to the extent those provisions restrict the transfer of the property subject thereto, or customary provisions restricting the assignment or other transfer of any lease or other contract; 5. in the case of Point (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 6. any restriction with respect to a Restricted Subsidiary imposed under an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of that Restricted Subsidiary pending the closing of the sale or disposition. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK Heafner shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless: 1. Heafner or the Restricted Subsidiary receives consideration at the time of the 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 Heafner, of the shares and assets subject to the Asset Disposition and at least 75% of the consideration received by Heafner or the Restricted Subsidiary is in the form of cash or cash equivalents, and 2. an amount equal to 100% of the Net Available Cash from the Asset Disposition is applied by Heafner or the Restricted Subsidiary, as the case may be, as follows: A. first, to prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness of a Wholly Owned Subsidiary, other than any Disqualified Stock and other than Indebtedness owed to Heafner or an Affiliate of Heafner, within one year from the later of the date of the Asset Disposition or the receipt of the Net Available Cash, to the extent that Heafner elects, or is required by the terms of any Indebtedness; 85 87 B. second, the balance of the Net Available Cash remaining after application in accordance with Point (A), to the extent Heafner elects, to acquire Additional Assets within one year from the later of the date of the Asset Disposition or the receipt of the Net Available Cash; C. third, to the extent of the balance of the Net Available Cash remaining after application in accordance with Points (A) and (B), to make an offer to the holders of the notes and to holders of other Senior Indebtedness designated by Heafner to purchase notes and such other Senior Indebtedness in accordance with the conditions contained in the indenture; and D. fourth, to the extent of the balance of the Net Available Cash remaining after application in accordance with Points (A), (B) and (C), in any manner that does not violate the indenture. In connection with any prepayment, repayment or purchase of Indebtedness under Points (A) or (C) above, Heafner or the Restricted Subsidiary must permanently retire that Indebtedness and must cause any related loan commitment to be permanently reduced in an amount equal to the principal amount prepaid, repaid or purchased. Heafner and the Restricted Subsidiaries shall not, however, be required to apply any Net Available Cash in accordance with Point (2) above, except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with Point (2) exceeds $5 million. Pending application of any Net Available Cash under this covenant, that 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: - the assumption of Indebtedness of Heafner or any Restricted Subsidiary and the release of Heafner or the Restricted Subsidiary from all liability on that Indebtedness in connection with the Asset Disposition, and - securities received by Heafner or any Restricted Subsidiary from the transferee that are promptly converted by Heafner or the Restricted Subsidiary into cash. In the event of an Asset Disposition that requires the purchase of the notes (and other Senior Indebtedness) under Point (2)(C) above, Heafner will be required to purchase notes tendered in an offer by Heafner for the notes (and other Senior Indebtedness) at a purchase price of 100% of their principal amount 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 set forth in the indenture, including prorating in the event of oversubscription. If the aggregate purchase price of notes (and any other Senior Indebtedness) tendered in the offer is less than the Net Available Cash allotted to the purchase of notes (and other Senior Indebtedness), Heafner shall apply the remaining Net Available Cash in accordance with Point (2)(D) above. Heafner shall not be required to make an offer to purchase notes (and other Senior Indebtedness) under this covenant if the Net Available Cash available for the offer is less than $5.0 million. However, that lesser amount shall be added to the Net Available Cash from any subsequent Asset Disposition for purposes of determining whether an offer is required to be made with respect to the Net Available Cash from that subsequent Asset Disposition. Heafner shall comply, to the extent applicable, with the requirements of Section 14(e) of the Securities Exchange Act of 1934, as amended, and any other securities laws or regulations in connection with the repurchase of notes under the covenant described in this section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, Heafner shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations as described under this clause by virtue of such compliance. 86 88 LIMITATION ON AFFILIATE TRANSACTIONS Heafner shall not, and shall not permit any Restricted Subsidiary to, enter into any transaction with an Affiliate of Heafner (an "Affiliate Transaction"), including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service, unless: 1. the terms of the Affiliate Transaction are no less favorable to Heafner or the Restricted Subsidiary than those that could be obtained at the time of the Affiliate Transaction in arm's-length dealings with a person or entity who is not an Affiliate of Heafner, 2. if the Affiliate Transaction involves an amount in excess of $1 million, the terms of the Affiliate Transaction are set forth in writing and have been approved by a majority of the members of the board of directors of Heafner having no personal stake in the Affiliate Transaction, and 3. if the Affiliate Transaction involves an amount in excess of $7.5 million, the terms of the Affiliate Transaction have been determined by a nationally recognized investment banking firm to be fair, from a financial standpoint, to Heafner and its Restricted Subsidiaries. However, this covenant shall not prohibit: - any transaction permitted under the covenant described under "-- Limitation on Restricted Payments," or explicitly excluded from the definition of "Restricted Payment," - any issuance of securities or other payments, awards or grants in cash, securities or otherwise, under, or the funding of, employment arrangements, stock options and stock ownership plans approved by the board of directors of Heafner, - the grant of stock options or similar rights to employees and directors of Heafner under plans approved by the board of directors, - loans or advances to employees in the ordinary course of business in accordance with the past practices of Heafner or its Restricted Subsidiaries, but in any event not to exceed $1 million in the aggregate outstanding at any one time, - the payment of reasonable fees to directors of Heafner and its Restricted Subsidiaries who are not employees of Heafner or its Restricted Subsidiaries, - any Affiliate Transaction between Heafner and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no Affiliate of Heafner (other than another Restricted Subsidiary) owns the Capital Stock of any such Restricted Subsidiary, - the issuance or sale of any Capital Stock (other than Disqualified Stock) of Heafner, or - the amendment or extension or renewal of any transaction in effect on May 20, 1998 on terms no less favorable to Heafner and its Restricted Subsidiaries than the terms in effect on May 20, 1998. LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES Heafner 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: - to Heafner or a Wholly Owned Subsidiary, - directors' qualifying shares, - if, immediately after giving effect to the issuance, sale or other disposition of the Capital Stock, neither Heafner nor any of its Subsidiaries own any Capital Stock of that Restricted Subsidiary, or - if, immediately after giving effect to the issuance, sale or other disposition of the Capital Stock, that Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in the former Restricted Subsidiary remaining after giving effect to the issuance, sale or other 87 89 disposition of its Capital Stock would have been permitted to be made under the covenant described under "-- Limitation on Restricted Payments" on the date of the issuance, sale or other disposition. LIMITATION ON LIENS Heafner 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 May 20, 1998 or later acquired, other than Permitted Liens, without effectively providing that the notes shall be secured equally and ratably with or prior to the obligations secured for so long as those obligations are secured. LIMITATION ON SALE/LEASEBACK TRANSACTIONS Heafner shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless: 1. Heafner or such Subsidiary would be entitled to: - incur Indebtedness in an amount equal to the Attributable Debt with respect to the Sale/ Leaseback Transaction under the covenant described under "-- Limitation on Indebtedness," and - create a Lien on the property securing the Attributable Debt without equally and ratably securing the notes in accordance with the covenant described under "-- Limitation on Liens," 2. the net proceeds received by Heafner or any Restricted Subsidiary in connection with the Sale/ Leaseback Transaction are at least equal to the fair value of such property as determined by the board of directors of Heafner, and 3. Heafner applies the proceeds of the transaction in compliance with the covenant described under "-- Limitation on Sale of Assets and Subsidiary Stock." However, the sale by ITCO Holding Company, Inc., a former subsidiary of ITCO, or its successor of its facility in Orlando, Florida owned as of May 20, 1998, and the subsequent lease by ITCO Holding Company, Inc. or its successor of such facility as contemplated as of May 20, 1998, shall not be a Sale/ Leaseback Transaction for purposes of this covenant. MERGER AND CONSOLIDATION Heafner 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: 1. the resulting, surviving or transferee person or entity (the "Successor Issuer") shall be a person or entity organized and existing under the laws of the United States, any State of the United States or the District of Columbia and the Successor Issuer, if not Heafner, shall expressly assume all the obligations of Heafner under the notes and the Series D indenture, by a supplemental indenture executed and delivered to the trustee in a form satisfactory to the trustee; 2. immediately after giving effect to the transaction, and treating any Indebtedness which becomes an obligation of the Successor Issuer or any Subsidiary as a result of the transaction as having been incurred by the Successor Issuer or the Subsidiary at the time of the transaction, no Default shall have occurred and be continuing; 3. immediately after giving effect to the transaction, the Successor Issuer would be able to incur an additional $1.00 of Indebtedness under the Consolidated Coverage Ratio test in the covenant described under "-- Limitation on Indebtedness," except that the requirements described in this Point (3) shall not apply to a merger between Heafner and any Wholly Owned Subsidiary; 88 90 4. immediately after giving effect to the transaction, the Successor Issuer shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of Heafner immediately prior to the transaction, except that the requirements described in this Point (4) shall not apply to a merger between Heafner and any Wholly Owned Subsidiary; 5. Heafner shall have delivered to the trustee an officers' certificate and an opinion of counsel addressed to the trustee with respect to the foregoing matters; and 6. Heafner 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 the 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 the transaction had not occurred. Heafner 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 or entity unless: - the transaction or transactions results in a release of the subsidiary guarantor as described under "-- Subsidiary Guaranties" above, provided that Heafner certifies to the trustee that Heafner will comply with the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock"; - the resulting, surviving or transferee person or entity, if not the subsidiary guarantor, shall be organized and existing under the laws of the United States, or any State of the United States or the District of Columbia, and shall expressly assume, by a Guaranty Agreement, in a form satisfactory to the trustee, all the obligations of the subsidiary guarantor, if any, under its subsidiary guaranty; - immediately after giving effect to the transaction or transactions on a pro forma basis, and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee person or entity as a result of the transaction as having been issued by that person or entity at the time of the transaction, no Default shall have occurred and be continuing; and - Heafner delivers to the trustee an officers' certificate and an opinion of counsel addressed to the trustee with respect to the above matters. The Successor Issuer shall be the successor to Heafner and shall succeed to, and be substituted for, and may exercise every right and power of, Heafner under the Series D 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 the subsidiary guarantor and shall succeed to, and be substituted for, and may exercise every right and power of, the subsidiary guarantor under the Series D indenture, but the 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 Heafner shall cause each domestic Restricted Subsidiary, other than an Immaterial Subsidiary that is neither a borrower nor a guarantor under the Credit Facility, to execute and deliver to the trustee a Guaranty Agreement under which the Restricted Subsidiary will guarantee payment of the notes on the same terms and conditions as those set forth in the indenture. SEC REPORTS Whether or not it is subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act, Heafner shall file with the SEC, to the extent its filings are accepted by the SEC, and shall provide the trustee and noteholders with any information, documents and reports as are specified in Sections 13 and 15(d) of the Securities Exchange Act and applicable to a U.S. corporation subject to 89 91 those Sections. Heafner shall file such information, documents and reports and shall provide them to the trustee and noteholders, at the times specified for the filing of such information, documents and reports under the Securities Exchange Act. DEFAULTS An Event of Default is defined in the indenture as: 1. a default in the payment of interest on the notes when due, continued for 30 days, 2. a default in the payment of principal of any note when due at its Stated Maturity, whether upon optional redemption, upon required repurchase, upon declaration or otherwise, 3. the failure by Heafner to comply with its obligations under "-- Certain Covenants -- Merger and Consolidation" above, 4. the failure by Heafner to comply for 30 days after notice with any of its obligations described above (a) under "Change of Control," other than a failure to purchase notes, or (b) in the covenants described under "-- Certain Covenants -- 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," 5. the failure by Heafner to comply for 60 days after notice with its other agreements contained in the indenture, 6. Indebtedness of Heafner, any subsidiary guarantor or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders of the Indebtedness because of a default and the total amount of the Indebtedness unpaid or accelerated exceeds $10 million (the "cross acceleration provision"), 7. certain events of bankruptcy, insolvency or reorganization of Heafner or a Significant Subsidiary (the "bankruptcy provisions"), 8. any final, non-appealable judgment or decree for the payment of money in excess of $10 million is entered against Heafner or a Significant Subsidiary, remains outstanding for a period of 60 days following the judgment and is not discharged, waived or stayed within 10 days after notice (the "judgment default provision"), or 9. 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 Points (4), (5) and (8) will not constitute an Event of Default until the trustee or the holders of 25% in principal amount of the outstanding notes notify Heafner of the default and Heafner does not cure the default within the time specified after receipt of the 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, the principal and interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of Heafner occurs and is continuing, the principal of and interest on all the notes will 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. 90 92 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 the 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: - the holder has previously given the trustee notice that an Event of Default is continuing, - holders of at least 25% in principal amount of the outstanding notes have requested the trustee to pursue the remedy, - such holders have offered the trustee reasonable security or indemnity against any loss, liability or expense, - the trustee has not complied with the request within 60 days after the receipt of the request and the offer of security or indemnity, and - the holders of a majority in principal amount of the outstanding notes have not given the trustee a direction inconsistent with the request within that 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, Heafner is required to deliver to the trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers of the certificate know of any Default that occurred during the previous year. Heafner also is required to deliver to the trustee, within 30 days after its occurrence, written notice of any event which would constitute certain Defaults, their status and what action Heafner 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, which may include consents obtained in connection with a tender offer or exchange for the notes. 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 by the amendment, no amendment may, among other things: - reduce the amount of notes whose holders must consent to an amendment, - reduce the rate of or extend the time for payment of interest on any note, - reduce the principal of or extend the Stated Maturity of any note, - 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," - make any note payable in money other than that stated in the note, 91 93 - 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 for such payments or to institute suit for the enforcement of any payment on or with respect to such holder's notes, - make any change in the amendment provisions which require each holder's consent or in the waiver provisions, or - make any change in any subsidiary guaranty that would adversely affect the noteholders. Without the consent of any holder of the notes, Heafner, 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 Heafner or the subsidiary guarantors under the Series D indenture, to provide for uncertificated notes in addition to or in place of certificated notes so long as the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Internal Revenue Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Internal Revenue Code, to add guarantees with respect to the notes, to secure the notes, to add to the covenants of Heafner or the subsidiary guarantors for the benefit of the holders of the notes or to surrender any right or power conferred upon Heafner, 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 Series D indenture under the Trust indenture Act. The consent of the holders of the notes is not necessary under the Series D indenture to approve the particular form of any proposed amendment. It is sufficient if their consent, if their consent is necessary, approves the substance of the proposed amendment. After an amendment under the Series D indenture becomes effective, Heafner is required to mail to holders of the notes a notice briefly describing the amendment. However, the failure to give that notice to all holders of the notes, or any defect in the notice, will not impair or affect the validity of the amendment. The Series D indenture provides that the Series C notes and the Series D notes will vote and consent together on all matters as one class and that none of the Series C notes or the Series D notes will have the right to vote or consent as a class separate from one another on any matter. However, any Series B notes that remain outstanding after the exchange offer will continue to be governed by the Series B indenture and will vote and consent separately from the Series C notes and Series D notes on all matters. TRANSFER The Series D notes will be issued in registered form and will be transferable only upon the surrender of the Series D notes being transferred for registration of transfer. Heafner 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 this exchange offer. DEFEASANCE Heafner at any time may terminate all its obligations under the notes and the Series D 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. Heafner at any time may terminate its obligations under the "Change of Control" provision and under the covenants described under "-- Certain Covenants" except for 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 Points (3) and (4) under "-- Certain Covenants -- Merger and Consolidation" above ("covenant defeasance"). 92 94 Heafner may exercise its legal defeasance option regardless of any previous exercise of its covenant defeasance option. If Heafner exercises its legal defeasance option, payment of the notes may not be accelerated because of an Event of Default with respect to the notes. If Heafner exercises its covenant defeasance option, payment of the notes may not be accelerated because of an Event of Default specified in Points (4), (6), (7) (with respect only to Significant Subsidiaries) or (8) under "-- Defaults" above or because of the failure of Heafner to comply with Points (3) or (4) under "-- Certain Covenants - --Merger and Consolidation" above. If Heafner 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, Heafner 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. In the case of legal defeasance only, the opinion of counsel must be based on a ruling of the Internal Revenue Service or a change in applicable Federal income tax law. CONCERNING THE TRUSTEE First Union National Bank is the trustee under the Series D indenture and the Series B indenture and has been appointed by Heafner as registrar and paying agent with regard to the Series B notes, the Series C notes and the Series D notes. The indenture contains certain limitations on the rights of the trustee, should the trustee become a creditor of Heafner, 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, except that if it acquires any conflicting interest it must either eliminate the conflict within 90 days, apply to the SEC for permission to continue or resign as trustee. The Holders of a majority in principal amount of the Series C and Series D notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee under the Series D indenture, subject to certain exceptions. The Series D indenture provides that if an Event of Default occurs and is not cured, the 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 those provisions, the trustee will be under no obligation to exercise any of its rights or powers under the Series D indenture at the request of any holder of notes, unless that holder shall have offered to the trustee security and indemnity satisfactory to the trustee against any loss, liability or expense and then only to the extent required by the terms of the Series D indenture. GOVERNING LAW The Series D 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 by those principles. ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the Series D indenture without charge by contacting Heafner at 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217 or by telephone at (704) 423-8989. 93 95 CERTAIN DEFINITIONS "Additional Assets" means: 1. any property or assets, other than Indebtedness and Capital Stock, in a Related Business; 2. the Capital Stock of a person or entity that becomes a Restricted Subsidiary as a result of the acquisition of that Capital Stock by Heafner or another Restricted Subsidiary, or 3. Capital Stock constituting a minority interest in any person or entity that at the time is a Restricted Subsidiary, but, as to Points (2) and (3) above, only if the Restricted Subsidiary described in those Points is primarily engaged in a Related Business. "Affiliate" of any specified person or entity means any other person or entity directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified person or entity. For the purposes of this definition, "control," when used with respect to any person or entity means the power to direct the management and policies of such person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have correlative meanings. For purposes of the provisions described under "-- Certain Covenants -- Limitation on Restricted Payments," "-- Limitation on Affiliate Transactions" and "-- Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more, on a fully diluted basis, of the total voting power of the Voting Stock of Heafner or of rights or warrants to purchase such Capital Stock, whether or not currently exercisable, and any person or entity who would be an Affiliate of any such beneficial owner under the first sentence of this definition. "Asset Disposition" means any sale, lease, transfer or other disposition, or series of related sales, leases, transfers or dispositions, by Heafner 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: - 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 or entity other than Heafner or a Restricted Subsidiary, - all or substantially all the assets of any division or line of business of Heafner or any Restricted Subsidiary, or - any other assets of Heafner or any Restricted Subsidiary outside of the ordinary course of business of Heafner or such Restricted Subsidiary. However, the following shall not constitute an Asset Disposition: - a disposition by a Restricted Subsidiary to Heafner or by Heafner or a Restricted Subsidiary to a Restricted Subsidiary, - 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," - 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 - 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 notes, compounded annually, 94 96 of the total obligations of the lessee for rental payments during the remaining term of the lease included in the Sale/ Leaseback Transaction, including any period for which the 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 (a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of that Indebtedness or redemption or similar payment with respect to that Preferred Stock multiplied by the amount of such payment, by (b) the sum of all such payments. "Banks" means the Lenders as defined in the Credit Facility. "Bank Indebtedness" means all obligations under the Credit Facility. "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 that obligation shall be the capitalized amount of that obligation determined in accordance with GAAP; and the Stated Maturity of that obligation shall be the date of the last payment of rent or any other amount due under the lease prior to the first date upon which the lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any person or entity means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests, however designated, in equity of that person or entity, including any Preferred Stock but excluding any debt securities convertible into any such equity. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (a) 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 determination to (b) Consolidated Interest Expense for such four fiscal quarters. With respect to Indebtedness incurred under a revolving credit facility, however, 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 Heafner. In addition: 1. if Heafner or any Restricted Subsidiary has incurred any Indebtedness since the beginning of such period and that Indebtedness 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 case Indebtedness incurred under a revolving credit facility), then EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to that Indebtedness as if it had been incurred on the first day of such period, and to the application of the proceeds of that 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 that Indebtedness, as if the application had occurred on the first day of such period; 2. if Heafner 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, then EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if that discharge had occurred on the first day of such period and as if Heafner or the Restricted Subsidiary had not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge that Indebtedness; 3. if since the beginning of such period Heafner or any Restricted Subsidiary shall have made any Asset Disposition or disposition of a Permitted Investment (a "Disposition"), then EBITDA for 95 97 such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of the Disposition for such period, or increased by an amount equal to the EBITDA (if negative), directly attributable to the Disposition 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 Heafner or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to Heafner and its continuing Restricted Subsidiaries in connection with the 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 the Restricted Subsidiary to the extent Heafner and its continuing Restricted Subsidiaries are no longer liable for the Indebtedness after the sale; 4. if since the beginning of such period Heafner or any Restricted Subsidiary, by merger or otherwise, shall have made an Investment in any Restricted Subsidiary or any person or entity 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, then EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect to the Investment or acquisition (including the incurrence of any Indebtedness other than under a revolving credit facility) as if the Investment or acquisition occurred on the first day of such period; and 5. if since the beginning of such period any person or entity that subsequently became a Restricted Subsidiary or was merged with or into Heafner 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 under Points (3) or (4) above if made by Heafner or a Restricted Subsidiary during such period, then EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect to the Disposition, Investment or acquisition as if the 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 to the acquisition and the amount of Consolidated Interest Expense associated with any Indebtedness incurred in connection with the acquisition, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of Heafner. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on that 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 Heafner and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by Heafner or its Restricted Subsidiaries, without duplication: - 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, - amortization of debt discount and debt issuance cost, - capitalized interest, - non-cash interest expenses, - commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, 96 98 - net costs associated with Hedging Obligations, including amortization of fees, - Preferred Stock dividends in respect of all Preferred Stock held by Persons other than Heafner or a Wholly Owned Subsidiary, other than non-cash dividends in respect of Preferred Stock that is not Disqualified Stock of Heafner, - interest incurred in connection with Investments in discontinued operations, - interest accruing on any Indebtedness of any other person or entity to the extent that Indebtedness is Guaranteed by, or secured by the assets of, Heafner or any Restricted Subsidiary, and - the cash contributions to any employee stock ownership plan or similar trust to the extent those contributions are used by that plan or trust to pay interest or fees to any person or entity, other than Heafner, in connection with Indebtedness incurred by that plan or trust. "Consolidated Net Income" means, for any period, the net income of Heafner and its consolidated Subsidiaries, except that there shall not be included in Consolidated Net Income: 1. any net income of any person or entity, other than Heafner, if that person or entity is not a Restricted Subsidiary, except that: - subject to the exclusion contained in Point (4) below, Heafner's equity in the net income of that person or entity for such period shall be included in Consolidated Net Income up to the aggregate amount of cash actually distributed by that person or entity during such period to Heafner 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 Point (3) below, and - Heafner's equity in a net loss of that person or entity for such period shall be included in determining such Consolidated Net Income; 2. any net income or loss of any person or entity acquired by Heafner or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; 3. any net income of any Restricted Subsidiary to the extent the 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 Heafner, except that Heafner's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining Consolidated Net Income; 4. any gain or loss realized upon the sale or other disposition of any assets of Heafner, its consolidated Subsidiaries or any other person or entity, including under 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 or entity; 5. extraordinary gains or losses; and 6. the cumulative effect of a change in accounting principles. However, 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 Heafner or a Restricted Subsidiary to the extent those dividends, repayments or transfers increase the amount of Restricted Payments permitted under Point (3)(D) of that covenant. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of Heafner and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of Heafner ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as: 97 99 1. the par or stated value of all outstanding Capital Stock of Heafner, plus 2. paid-in capital or capital surplus relating to that Capital Stock, plus 3. any retained earnings or earned surplus, less: - any accumulated deficit, and - any amounts attributable to Disqualified Stock. "Credit Facility" means the Amended and Restated Loan and Security Agreement, dated as of May 20, 1998, by and among Heafner, 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 to the Credit Facility including the notes, guarantees and security documents under the Credit Facility, 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. "Currency Agreement" means, in respect of any person or entity, any foreign exchange contract, currency swap agreement or other similar agreement designed to protect that person or entity 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 or entity, 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, on or prior to the first anniversary of the Stated Maturity of the notes: - matures or is mandatorily redeemable under a sinking fund obligation or otherwise, - is convertible or exchangeable at the holder's option for Indebtedness or Disqualified Stock, or - is redeemable or must be purchased, upon the occurrence of certain events or otherwise, by that person or entity at the option of the holder, in whole or in part. However, any Capital Stock that would not constitute Disqualified Stock but for provisions giving holders of the Capital Stock the right to require the person or entity to purchase or redeem the 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: - the "asset sale" or "change of control" provisions applicable to that Capital Stock are not more favorable to the holders of that Capital Stock than the terms applicable to the notes and described under "-- Change of Control" and "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock," and - any requirement to repurchase or redeem only becomes operative after compliance with such terms applicable to the notes, including the purchase of any notes tendered pursuant to such requirement. However, any class of Capital Stock of that person or entity that, by its terms, authorizes that person or entity to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption or repurchase of the Capital Stock 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: 98 100 - all income tax expense of Heafner and its consolidated Restricted Subsidiaries, - depreciation expense of Heafner and its consolidated Restricted Subsidiaries, - amortization expense of Heafner and its consolidated Restricted Subsidiaries, and - all other non-cash charges of Heafner 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. However, 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 that Restricted Subsidiary was included in calculating Consolidated Net Income. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of May 20, 1998, including those set forth in: - the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, - statements and pronouncements of the Financial Accounting Standards Board, - such other statements by such other entity as approved by a significant segment of the accounting profession, and - 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 under Section 13 of the Securities 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 or entity directly or indirectly guaranteeing any Indebtedness of any other person or entity and any obligation, direct or indirect, contingent or otherwise, of that other person or entity: - to purchase, pay or advance or supply funds for the purchase or payment of the Indebtedness or other obligation of that other person or entity, 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 - entered into for the purpose of assuring in any other manner the obligee of the Indebtedness of the payment of the Indebtedness or to protect the obligee against loss in respect thereof, whether in whole or in part. The term "Guarantee," however, 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 or entity Guaranteeing any obligation. "Guaranty Agreement" means a supplemental indenture, in a form satisfactory to the trustee, under which a subsidiary guarantor guarantees Heafner's obligations with respect to the notes on the terms provided for in the Series D indenture. "Hedging Obligations" of any person or entity means the obligations of that person or entity under any Interest Rate Agreement or Currency Agreement. "Holder" or "noteholder" means the person or entity 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. Any Indebtedness or Capital Stock of a person or entity existing at the time that person or entity becomes a Subsidiary, 99 101 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 or entity on any date of determination, without duplication: 1. the principal in respect of (a) indebtedness of that person or entity for money borrowed and (b) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which that person or entity is responsible or liable, including, in each case, any premium on the indebtedness to the extent the premium has become due and payable; 2. all Capital Lease Obligations of that person or entity and all Attributable Debt in respect of Sale/ Leaseback Transactions entered into by that person or entity; 3. all obligations of that person or entity issued or assumed as the deferred purchase price of property, all conditional sale obligations of that person or entity and all obligations of that person or entity under any title retention agreement, but excluding trade accounts payable arising in the ordinary course of business; 4. all obligations of that person or entity 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 Points (1), (2) and (3) above, entered into in the ordinary course of business of that person or entity 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; 5. the amount of all obligations of that person or entity with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of that person or entity, the liquidation preference with respect to any Preferred Stock, but excluding, in each case, any accrued dividends; 6. all obligations of the type referred to in Points (1) through (5) above or other persons or entities and all dividends of other persons or entities for the payment of which, in either case, the person or entity is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; 7. all obligations of the type referred to in Points (1) through (6) above of other persons or entities secured by any Lien on any property or asset of the person or entity, whether or not such obligation is assumed by the person or entity, the amount of such obligation being deemed to be the lesser of the value of the property or assets or the amount of the obligation so secured; and 8. to the extent not otherwise included in this definition, Hedging Obligations of the person or entity. The amount of Indebtedness of any person or entity at any date shall be the outstanding balance at that 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 that date. "Interest Rate Agreement" means, in respect of a person or entity, any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect such person or entity against fluctuations in interest rates. "Investment" in any person or entity 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 100 102 - other extension 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 that person or entity. For purposes of the definition of "Unrestricted Subsidiary," the definition of "Restricted Payment" and the covenant described under "-- Certain Covenants - -- Limitation on Restricted Payments": 1. "Investment" shall include the portion, proportionate to Heafner's equity interest in the Subsidiary, of the fair market value of the net assets of any Subsidiary of Heafner at the time that the Subsidiary is designated an Unrestricted Subsidiary. However, upon a redesignation of that Subsidiary as a Restricted Subsidiary, Heafner shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount, if positive, equal to: - Heafner's "Investment" in the Subsidiary at the time of the redesignation, less - the portion, proportionate to Heafner's equity interest in the Subsidiary, of the fair market value of the net assets of the Subsidiary at the time of the redesignation; and 2. any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of the transfer, in each case as determined in good faith by the board of directors of Heafner. "Legal Holiday" means 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. "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 from the Asset Disposition, including any cash payments received by way of deferred payment of principal under 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 or entity of Indebtedness or other obligations relating to such properties or assets or received in any other non-cash form, in each case net of: - 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 the Asset Disposition, - all payments made on any Indebtedness which is secured by any assets subject to the Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to those assets, or which must by its terms, or in order to obtain a necessary consent to the Asset Disposition, or by applicable law, be repaid out of the proceeds from the Asset Disposition, - all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of the Asset Disposition, and - 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 the Asset Disposition and retained by Heafner or any Restricted Subsidiary after the Asset Disposition. 101 103 "Net Cash Proceeds," with respect to any issuance or sale of Capital Stock, means the cash proceeds of that 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 that issuance or sale and net of taxes paid or payable as a result of that issuance or sale. "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. "Permitted Investment" means an Investment by Heafner or any Restricted Subsidiary in: - Heafner, a Restricted Subsidiary or a person or entity that will, upon the making of the Investment, become a Restricted Subsidiary, provided that the primary business of the new Restricted Subsidiary is a Related Business; - another person or entity if as a result of the Investment the other person or entity is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, Heafner or a Restricted Subsidiary, provided that the person or entity's primary business is a Related Business; - Temporary Cash Investments; - receivables owing to Heafner or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, except that those trade terms may include such concessionary trade terms as Heafner or any Restricted Subsidiary deems reasonable under the circumstances; - payroll, travel and similar advances to cover matters that are expected at the time of the advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; - loans or advances to employees made in the ordinary course of business consistent with the past practices of Heafner or the Restricted Subsidiary; - stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to Heafner or any Restricted Subsidiary or in satisfaction of judgments; - promissory notes issued by members of management of Heafner and its Subsidiaries as payments for restricted shares of Capital Stock of Heafner not to exceed $500,000 per year; and - any person or entity to the extent the Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted under the covenant described under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock." "Permitted Liens" means, with respect to any person or entity, (a) the following, in each case incurred in the ordinary course of business: - pledges or deposits by that person or entity under worker's compensation laws, unemployment insurance laws or similar legislation, - good faith deposits in connection with bids, tenders, contracts (other than contracts for the payment of Indebtedness), - leases to which that person or entity is a party, - deposits to secure public or statutory obligations of that person or entity, - deposits of cash or United States government bonds to secure surety or appeal bonds to which that person or entity is a party, or - deposits as security for contested taxes or import duties or for the payment of rent; 102 104 (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or that are being contested in good faith by appropriate proceedings, or other Liens arising out of judgments or awards against that person or entity with respect to which that person or entity 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 at the request of and for the account of that person or entity in the ordinary course of its business, but only if those 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 that person or entity 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 its properties or materially impair the use of those properties in the operation of the business of that person or entity; (f) Liens securing Indebtedness, including Indebtedness incurred as described in Point (4) under "-- Certain Covenants -- Limitation on Indebtedness," that are incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of that person or entity, but only if those Liens do not extend to cover any additional property (other than improvements on the property originally securing the Indebtedness) owned by that person or entity or any of its Subsidiaries at the time the Lien is incurred, and the Indebtedness, other than any interest on the Indebtedness, 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 the provisions described in Points (1) and (5) under "-- Certain Covenants -- Limitation on Indebtedness"; (h) Liens existing, or incurred in connection with Indebtedness committed on, on May 20, 1998; (i) Liens on property or shares of Capital Stock of another person or entity at the time the other person or entity becomes a Subsidiary of that person or entity, but only if those Liens are not created, incurred or assumed in connection with, or in contemplation of, the other person or entity becoming a Subsidiary and only if those Liens do not extend to any other property (other than improvements on the property originally subject to the Lien) owned by that person or entity or any of its Subsidiaries; (j) Liens on property at the time that person or entity or any of its Subsidiaries acquires the property, including any acquisition by means of a merger or consolidation with or into that person or entity or a Subsidiary of that person or entity, but only if those Liens are not created, incurred or assumed in connection with, or in contemplation of, such acquisition and only if the Liens do not extend to any other property (other than improvements on the property originally subject to the Lien) owned by that person or entity or any of its Subsidiaries; (k) Liens securing Indebtedness or other obligations of a Subsidiary of that person or entity owing to that person or entity or a Restricted Subsidiary of that person or entity; (l) Liens securing Hedging Obligations so long as the Hedging Obligations relate to Indebtedness that is, and is permitted to be under the Series D indenture, secured by a Lien on the same property that secures the Hedging Obligations; (m) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease; 103 105 (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 Heafner 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 Points (f), (h), (i) and (j), but only if: 1. the new Lien is limited to all or part of the same property that secured the original Lien plus any improvements to or on the property that secured the original Lien, and 2. the Indebtedness secured by the Lien at that time is not increased to an amount greater than the sum of: - the outstanding principal amount or, if greater, the committed amount of the Indebtedness described under Points (f), (h), (i) or (j) at the time the original Lien became a Permitted Lien, and - an amount necessary to pay any fees and expenses, including premiums, related to that refinancing, refunding, extension, renewal or replacement. However, "Permitted Liens" will not include any Lien described in clauses (f), (i) or (j) above to the extent that the Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash in accordance with the covenant described under "-- Certain Covenants -- Limitation on Sale of Assets and Subsidiary Stock." For purposes of this definition, the term "Indebtedness" includes interest on such Indebtedness. "Preferred Stock," as applied to the Capital Stock of any person or entity, 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 or entity, over shares of Capital Stock of any other class of that person or entity. "Public Equity Offering" means an underwritten primary public offering of common stock of Heafner pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after a Public Equity Offering has been completed and at least 15% of the total issued and outstanding common stock of Heafner has been distributed by means of an effective registration statement under the Securities Act or sales under Rule 144 under the Securities Act. "Refinancing Indebtedness" means Indebtedness existing on May 20, 1998 or incurred in compliance with the Series D indenture that refinances any Indebtedness of Heafner or any Restricted Subsidiary, including Indebtedness that refinances Refinancing Indebtedness, but only if: 1. the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced, 2. the Refinancing Indebtedness has an Average Life at the time it is incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced, and 3. the Refinancing Indebtedness has an aggregate principal amount, or an aggregate issue price if it was incurred with original issue discount, that is equal to or less than the aggregate principal amount, or the aggregate accreted value if it was incurred with original issue discount, then outstanding or committed plus any fees and expenses, including premium and defeasance costs, under the Indebtedness being refinanced. However, Refinancing Indebtedness shall not include either Indebtedness of a Subsidiary that refinances Indebtedness of Heafner or Indebtedness of Heafner or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of Heafner and the Restricted Subsidiaries on May 20, 1998. 104 106 "Restricted Payment" with respect to any person or entity means: - 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 that person or entity, or any 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 Heafner or a Restricted Subsidiary, except that pro ratadividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders, or to the owners of an equivalent interest in the Subsidiary in the case of a Subsidiary that is an entity other than a corporation, shall not be a Restricted Payment; - the purchase, redemption or other acquisition or retirement for value on or after May 20, 1998 of any Capital Stock of Heafner held by any person or entity, or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of Heafner other than Heafner or a Restricted Subsidiary, including the exercise of any option to exchange any Capital Stock other than into Capital Stock of Heafner that is not Disqualified Stock; - 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, but excluding 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 - the making of any Investment other than a Permitted Investment in any person or entity. "Restricted Subsidiary" means any Subsidiary of Heafner that is a Subsidiary on May 20, 1998 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 Heafner or a Restricted Subsidiary transfers the property to another person or entity and Heafner or a Restricted Subsidiary leases it from that person or entity. "Senior Indebtedness" of a person or entity means, unless the instrument creating or evidencing the Indebtedness or under which the Indebtedness is outstanding provides that the obligations under that instrument or Indebtedness are subordinate in right of payment to the notes: 1. Indebtedness of that person or entity, whether outstanding on May 20, 1998 or later incurred, and 2. 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: - indebtedness of that person or entity for money borrowed, and - indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which that person or entity is responsible or liable. However, Senior Indebtedness shall not include: - any obligation of Heafner to any Subsidiary, or of any subsidiary guarantor to Heafner or any other Subsidiary, - any liability for Federal, state, local or other taxes owed or owing by that person or entity, - any accounts payable or other liability to trade creditors arising in the ordinary course of business, including guarantees of, or instruments evidencing, those liabilities, - any Indebtedness of that person or entity, and any accrued and unpaid interest in respect of that Indebtedness, which is subordinate or junior in any respect to any other Indebtedness or other obligation of that person or entity, or 105 107 - that portion of any Indebtedness which, at the time of its incurrence, is incurred in violation of the Series D indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of Heafner 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 the security as the fixed date on which the final payment of principal of the security is due and payable, including under any mandatory redemption provision, but excluding any provision providing for the repurchase of the security at the option of the holder of the security upon the happening of any contingency unless that contingency has occurred. "Subordinated Obligation" means any Indebtedness of Heafner, whether outstanding on May 20, 1998 or later incurred, which is subordinate or junior in right of payment to the notes under a written agreement to that effect. "Subsidiary" means, in respect of any person or entity, 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 its directors, managers or trustees is at the time owned or controlled, directly or indirectly, by (a) such person or entity, (b) such person or entity and one or more Subsidiaries of such person or entity, or (c) one or more Subsidiaries of such person or entity. "Temporary Cash Investments" means any of the following: 1. any investment in direct obligations of the U.S. or any agency of the U.S. or in obligations guaranteed by the U.S. or any agency of the U.S., 2. investments in a money-market fund sponsored by a registered broker-dealer or mutual fund distributor, or in time deposit accounts, certificates of deposit and money market deposits maturing within 360 days of the date of their acquisition and which are issued by a bank or trust company which is organized under the laws of the U.S., any state of the U.S. or any foreign country recognized by the U.S., so long as the bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 or the foreign currency equivalent of that amount and has outstanding debt which is rated "A" (or the equivalent of "A") or higher by at least one nationally recognized statistical rating organization as defined in Rule 436 under the Securities Act, 3. repurchase obligations with a term of not more than 30 days for underlying securities of the types described in Point (1) above entered into with a bank meeting the qualifications described in Point (2) above, 4. investments maturing not more than 360 days after the date of their acquisition in commercial paper issued by a corporation, other than an Affiliate of Heafner, that is organized and in existence under the laws of the U.S. or any foreign country recognized by the U.S. and that has a rating 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 at the time any investment in its commercial paper is made, 5. investments in split dollar life insurance policies on various officers, directors and shareholders of Heafner and its Subsidiaries in the ordinary course of business consistent with past practices, and 6. investments in securities with maturities of 12 months or less from the date of their acquisition issued or fully guaranteed by any state, commonwealth or territory of the U.S., or by any political subdivision or taxing authority of the U.S., and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. 106 108 "Unrestricted Subsidiary" means: - any Subsidiary of Heafner that at the time of determination shall be designated an Unrestricted Subsidiary by Heafner's board of directors in the manner described below, and - any Subsidiary of an Unrestricted Subsidiary. The board of directors may designate any Subsidiary of Heafner, other than a subsidiary guarantor but including any newly-acquired or newly-formed Subsidiary, to be an Unrestricted Subsidiary unless that Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, Heafner or any Subsidiary of Heafner that is not a Subsidiary of the Subsidiary to be so designated. However, the board of directors may not designate a Subsidiary to be an Unrestricted Subsidiary unless: - the Subsidiary to be so designated has total assets of $1,000 or less, or - if the Subsidiary has assets greater than $1,000, then the 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 if, immediately after giving effect to that designation, Heafner could incur $1.00 of additional Indebtedness under the Consolidated Coverage Ratio test in the covenant described under "-- Certain Covenants -- Limitation on Indebtedness" and no Default shall have occurred and be continuing. Any designation by the board of directors as described above shall be evidenced to the trustee by Heafner's promptly filing with the trustee a copy of the resolution of the board of directors giving effect to the designation and an officers' certificate certifying that the designation complied with the above provisions. "U.S. Government Obligations" means direct obligations, or certificates representing an ownership interest in those obligations, of the U.S. or any agency or instrumentality of the U.S. for the payment of which the full faith and credit of the U.S. is pledged and which are not callable at Heafner's option. "Vendor Financing" means Indebtedness incurred to finance the cost to acquire inventory to the extent that Indebtedness is issued to and held by the supplier of the inventory. "Voting Stock" of a person or entity means all classes of Capital Stock or other interests, including partnership interests, of that person or entity then outstanding and normally entitled, without regard to the occurrence of any contingency, to vote in the election of its directors, managers or trustees. 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 Heafner or one or more Wholly Owned Subsidiaries. 107 109 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of the principal United States federal income tax consequences to holders of Series B notes and Series C notes who exchange their notes for Series D notes in the exchange offer. This discussion is based on currently existing provisions of the Internal Revenue Code, existing, temporary and proposed Treasury regulations promulgated under the Internal Revenue Code, and administrative and judicial interpretations of the Internal Revenue Code, all as in effect or proposed on the date of this prospectus and all of which are subject to change, possibly with retroactive effect, or to different interpretations. This discussion is limited to holders of Series B notes and Series C notes who hold their notes as capital assets within the meaning of section 1221 of the Internal Revenue Code. Moreover, this discussion is for general information only and does not address all of the tax consequences that may be relevant to holders of Series B notes, Series C notes or Series D notes in light of their personal circumstances, or to certain types of holders of Series B notes, Series C notes or Series D notes, such as certain financial institutions, insurance companies, tax-exempt entities, dealers in securities or persons who have hedged the risk of owning a Note. In addition, this discussion does not address any tax consequences arising under the laws of any state, locality or foreign jurisdiction, or any estate or gift tax considerations. EXCHANGE OFFER The exchange of Series B notes or Series C notes for Series D notes in the Exchange Offer should not be treated as an exchange or other taxable event for U.S. Federal income tax purposes. Accordingly, there should be no U.S. Federal income tax consequences to holders who exchange Series B notes or Series C notes for Series D notes in the exchange offer and any holder of Series B notes or Series C notes should have the same adjusted tax basis and holding period in the Series D notes as it had in the Series B notes or Series C notes immediately before the exchange. PLAN OF DISTRIBUTION Each holder of Series B notes or Series C notes desiring to participate in the exchange offer will be required to represent, among other things, that: - it is not an "affiliate" as defined in Rule 405 of the Securities Act of Heafner or any subsidiary guarantor, - it is not engaged in, does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series D notes, and - it is acquiring the Series D notes in the ordinary course of its business. A Restricted Holder, which is any holder who cannot make these representations, will not be able to participate in the exchange offer. A Restricted Holder of Series C notes may only sell its Series C 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 under 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 Series D notes that it receives in the exchange offer. Based upon interpretations by the staff of the SEC, Heafner believes that Series D notes issued in 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 all broker-dealers subject to the prospectus delivery requirements of the Securities Act, including Participating Broker-Dealers, in connection with resales of Series D notes received in exchange for Series C notes where the Series C notes were acquired as a result of market-making activities or other trading activities. 108 110 Heafner has agreed that, for a period of 90 days after the registration statement has been declared effective by the SEC, it will make this prospectus, as amended or supplemented, available to any broker-dealer, and for a period of 100 days to any Participating Broker-Dealer, for use in connection with any resale of Series D notes. If Heafner is not notified by any Participating Broker-Dealers that they may be subject to the prospectus delivery requirements, or if Heafner is later notified by all Participating Broker-Dealers that they are no longer subject to those requirements, Heafner will not be required to maintain the effectiveness of the registration statement or to amend or supplement this prospectus following the consummation of the exchange offer or following the date of notification, as the case may be. Heafner 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 SEC, Heafner believes that Series D notes issued in the exchange offer may be offered for resale, resold, and otherwise transferred by a Holder of Series D notes who is not a Restricted Holder or a Participating Broker-Dealer, without compliance with the registration and prospectus delivery requirements of the Securities Act. Heafner will not receive any proceeds from any sale of Series D notes by broker-dealers, including Participating Broker-Dealers. Series D notes received by Participating Broker-Dealers for their own accounts in 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 Series D notes or by a combination of those methods of resale, whether at market prices prevailing at the time of resale, at prices related to the prevailing market prices or at 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 selling Participating Broker-Dealer and/or the purchasers of any of their Series D notes. Any Participating Broker-Dealer that resells Series D notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any resale by it of Series D 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. Heafner has agreed to pay all expenses incidental to the exchange offer other than commissions and concessions of any brokers or dealers. Heafner will indemnify holders of the notes, including any broker-dealers, against certain liabilities, including liabilities under the Securities Act, as specified in the Registration Rights Agreement. By acceptance of the exchange offer, each Participating Broker-Dealer that receives Series D notes in the exchange offer agrees to notify Heafner prior to using the prospectus in connection with the sale or transfer by it of Series D notes. By its acceptance, each Participating Broker-Dealer also acknowledges and agrees that, upon receipt of notice from Heafner 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, it will suspend use of the prospectus until Heafner has amended or supplemented the prospectus to correct the misstatement or omission and has furnished copies of the amended or supplemented prospectus to the Participating Broker-Dealer. LEGAL MATTERS The validity of the Series D notes will be passed upon on behalf of Heafner by Howard, Smith & Levin LLP, New York, New York. EXPERTS The consolidated financial statements of Heafner as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this prospectus and elsewhere in the 109 111 registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included in this prospectus in reliance upon the authority of said firm 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. and subsidiaries for the year ended September 30, 1995 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so 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 LLP, independent certified public accountants, as stated in their report appearing herein. 110 112 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- THE J.H. HEAFNER COMPANY, INC. -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-24 Consolidated Balance Sheets as of September 30, 1997 and 1996...................................................... F-25 Consolidated Statements of Operations for the year ended September 30, 1997 and for the ten month period ended September 30, 1996........................................ F-26 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-27 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-28 Notes to Consolidated Financial Statements.................. F-29 ITCO HOLDING COMPANY AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-38 Consolidated Statement of Earnings for the year ended September 30, 1995........................................ F-39 Consolidated Statement of Stockholders' Equity for the year ended September 30, 1995.................................. F-40 Consolidated Statement of Cash Flows for the year ended September 30, 1995........................................ F-41 Notes to Consolidated Financial Statements.................. F-42 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheet as of May 20, 1998..... F-45 Unaudited Consolidated Statement of Operations for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-46 Unaudited Consolidated Statements of Shareholders' Deficit for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-47 Unaudited Consolidated Statement of Cash Flows for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-48 Notes to Unaudited Interim Consolidated Financial Statements................................................ F-49 THE SPEED MERCHANT, INC. (FORMERLY THE SPEED MERCHANT, INC. AND SUBSIDIARY) -- FINANCIAL STATEMENTS Independent Auditors' Report................................ F-50 Balance Sheets as of October 31, 1996 and 1997 and April 30, 1998 (Unaudited).......................................... F-51 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-52 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-53 Notes to Financial Statements............................... F-54
F-1 113 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of The J. H. Heafner Company, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of The J. H. Heafner Company, Inc. (a North Carolina Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The J. H. Heafner Company, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, March 22, 1999. F-2 114 THE J. H. HEAFNER COMPANY, INC. CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 6,648,000 $ 2,502,000 Accounts receivable, net of allowances of $2,220,000 and $400,000 in 1998 and 1997, respectively................ 109,471,000 31,809,000 Inventories, net.......................................... 133,221,000 41,530,000 Other current assets...................................... 13,319,000 3,187,000 ------------ ------------ Total current assets................................. 262,659,000 79,028,000 ------------ ------------ Property and equipment: Land...................................................... 3,945,000 1,639,000 Buildings and leasehold improvements...................... 22,583,000 14,501,000 Machinery and equipment................................... 18,581,000 10,925,000 Furniture and fixtures.................................... 7,368,000 6,336,000 Vehicles and other........................................ 2,013,000 1,720,000 Construction in progress.................................. 1,162,000 0 ------------ ------------ 55,652,000 35,121,000 Less -- Accumulated depreciation.......................... (12,850,000) (9,130,000) ------------ ------------ 42,802,000 25,991,000 ------------ ------------ Goodwill, net............................................... 104,405,000 34,979,000 Other intangible assets, net................................ 8,376,000 0 Other assets................................................ 12,579,000 6,510,000 ------------ ------------ $430,821,000 $146,508,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $169,847,000 $ 43,457,000 Accrued expenses.......................................... 33,239,000 12,410,000 Current maturities of long-term debt...................... 3,011,000 2,579,000 ------------ ------------ Total current liabilities............................ 206,097,000 58,446,000 ------------ ------------ Revolving credit facility................................... 21,925,000 31,949,000 Long-term debt.............................................. 160,400,000 15,161,000 Other liabilities........................................... 11,785,000 5,687,000 Subordinated debt........................................... 0 14,969,000 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................. 4,353,000 4,500,000 Warrants.................................................... 1,137,000 1,137,000 Commitments and contingencies Stockholders' equity: Class A Common stock, par value $.01 per share; authorized 10,000,000 shares in 1998 and 1997; 3,697,000 and 3,691,000 shares issued and outstanding in 1998 and 1997, respectively..................................... 37,000 37,000 Class B Common stock, par value $.01 per share; authorized 20,000,0000 and 0 shares in 1998 and 1997, respectively; 1,400,667 and 0 shares issued and outstanding in 1998 and 1997, respectively............. 14,000 0 Additional paid-in capital................................ 22,360,000 7,255,000 Notes receivable from stock sales......................... (177,000) (247,000) Retained earnings (deficit)............................... (4,110,000) 614,000 ------------ ------------ 18,124,000 7,659,000 ------------ ------------ $430,821,000 $146,508,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 115 THE J. H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ NET SALES......................................... $713,672,000 $311,839,000 $190,535,000 COST OF GOODS SOLD................................ 548,035,000 233,941,000 158,880,000 ------------ ------------ ------------ Gross profit.................................... 165,637,000 77,898,000 31,655,000 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES...... 153,153,000 74,441,000 29,660,000 SPECIAL CHARGES................................... 1,409,000 0 0 ------------ ------------ ------------ Income from operations.......................... 11,075,000 3,457,000 1,995,000 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense................................ (13,460,000) (4,842,000) (1,465,000) Interest income................................. 635,000 606,000 491,000 Other........................................... (469,000) 525,000 30,000 ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES...................... (2,219,000) (254,000) 1,051,000 Provision (benefit) for income taxes............ 289,000 (240,000) 0 ------------ ------------ ------------ NET INCOME (LOSS) FROM OPERATIONS BEFORE EXTRAORDINARY CHARGE............................ (2,508,000) (14,000) 1,051,000 EXTRAORDINARY CHARGE FROM EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFITS OF $1,478,000...................................... (2,216,000) 0 0 ------------ ------------ ------------ NET INCOME (LOSS)................................. (4,724,000) (14,000) 1,051,000 PRO FORMA PROVISION FOR INCOME TAXES.............. 0 0 439,000 ------------ ------------ ------------ PRO FORMA NET INCOME (LOSS)....................... $ (4,724,000) $ (14,000) $ 612,000 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 116 THE J. H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON STOCK ------------------------------------------ NOTES CLASS A CLASS B ADDITIONAL RECEIVABLE -------------------- ------------------- PAID IN FROM STOCK RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL SALES EARNINGS TOTAL --------- -------- --------- ------- ----------- ---------- ----------- ----------- Balance, December 31, 1995................ 2,080 $208,000 0 $ 0 $ 0 $ 0 $11,511,000 $11,719,000 Net income.......... 0 0 0 0 0 0 1,051,000 1,051,000 Dividends........... 0 0 0 0 0 0 (1,196,000) (1,196,000) --------- -------- --------- ------- ----------- --------- ----------- ----------- Balance, December 31, 1996................ 2,080 208,000 0 0 0 0 11,366,000 11,574,000 Net loss............ 0 0 0 0 0 0 (14,000) (14,000) Dividends........... 0 0 0 0 0 0 (1,193,000) (1,193,000) Repurchase of common shares............ (1,024) (102,000) 0 0 0 0 (2,606,000) (2,708,000) Stock split......... 3,464,944 (71,000) 0 0 71,000 0 0 0 Shares issued for notes receivable........ 225,000 2,000 0 0 245,000 (247,000) 0 0 Reclassification of S Corporation retained earnings to additional paid-in capital... 0 0 0 0 6,939,000 0 (6,939,000) 0 --------- -------- --------- ------- ----------- --------- ----------- ----------- Balance, December 31, 1997................ 3,691,000 37,000 0 0 7,255,000 (247,000) 614,000 7,659,000 Net loss............ 0 0 0 0 0 0 (4,724,000) (4,724,000) Issuance of Class B Common stock...... 0 0 1,400,667 14,000 14,945,000 0 0 14,959,000 Issuance of Class A Common stock...... 16,000 0 0 0 171,000 0 0 171,000 Forgiveness of note receivable........ 0 0 0 0 0 62,000 0 62,000 Repurchase of Class A Common stock.... (10,000) 0 0 0 (11,000) 8,000 0 (3,000) --------- -------- --------- ------- ----------- --------- ----------- ----------- Balance, December 31, 1998................ 3,697,000 $ 37,000 1,400,667 $14,000 $22,360,000 $(177,000) $(4,110,000) $18,124,000 ========= ======== ========= ======= =========== ========= =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 117 THE J. H. HEAFNER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ (4,724,000) $ (14,000) $ 1,051,000 Adjustments to reconcile net income (loss) to net cash used in operating activities, net of the ITCO merger, CPW acquisition and the Winston acquisition -- Depreciation and amortization......................... 12,316,000 5,399,000 1,331,000 Extraordinary charge.................................. 3,694,000 0 0 Special charges....................................... 1,409,000 0 0 Deferred taxes........................................ (4,162,000) (528,000) 0 Loss (gain) on sale of property and equipment......... 264,000 (114,000) (390,000) Reduction in stated value of Series A preferred stock............................................... (147,000) 0 0 Change in assets and liabilities: Accounts receivable, net................................ (13,923,000) (5,758,000) (1,672,000) Inventories, net........................................ (12,242,000) (2,377,000) 4,956,000 Prepaid expenses and other current assets............... 1,967,000 200,000 (136,000) Accounts payable and accrued expenses................... 7,090,000 9,581,000 (1,145,000) Other................................................... (1,226,000) 314,000 13,000 ------------ ------------ ------------ Net cash used in operating activities............... (9,684,000) (6,703,000) (4,008,000) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of CPW, net of cash acquired.................. (36,074,000) 0 0 Merger of ITCO, net of cash acquired...................... (17,125,000) 0 0 Acquisition of Winston, net of cash acquired.............. 0 (42,195,000) 0 Purchase of property and equipment........................ (8,697,000) (4,908,000) (7,865,000) Proceeds from sale of property and equipment.............. 3,826,000 363,000 1,090,000 Purchases of real estate held for sale.................... 0 0 (542,000) Other..................................................... 0 281,000 (309,000) ------------ ------------ ------------ Net cash used in investing activities................. (58,070,000) (46,459,000) (7,626,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................. 150,000,000 28,000,000 6,447,000 Net proceeds from revolving credit facility and other notes................................................... (38,071,000) 18,405,000 1,429,000 Proceeds from issuance of preferred stock................. 0 11,500,000 0 Principal payments on long-term debt...................... (32,714,000) (10,558,000) (2,506,000) Cash paid for stock repurchase............................ (11,000) (2,708,000) 0 Cash paid for financing costs............................. (8,030,000) (2,378,000) 0 Cash dividends paid....................................... 0 (1,193,000) (1,196,000) Collection (issuance) of notes receivable, net............ 726,000 184,000 (463,000) ------------ ------------ ------------ Net cash provided by financing activities............. 71,900,000 41,252,000 3,711,000 ------------ ------------ ------------ NET INCREASE IN CASH........................................ 4,146,000 1,496,000 93,000 CASH, BEGINNING OF YEAR..................................... 2,502,000 1,006,000 913,000 ------------ ------------ ------------ CASH, END OF YEAR........................................... $ 6,648,000 $ 2,502,000 $ 1,006,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash payments for interest................................ $ 10,495,000 $ 3,585,000 $ 1,428,000 ============ ============ ============ Cash payments for taxes................................... $ 1,963,000 $ 0 $ 0 ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: In 1998, in connection with the ITCO Merger (Note 2), the Company issued 1,400,667 shares of Class B Common Stock at a fair value of approximately $15.0 million. During 1997, the Company received $2.6 million in accounts payable credits from a vendor in exchange for a note payable. The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 118 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 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 and retail distribution of tires and tire accessories. In May 1997, the Company acquired all outstanding shares of common stock of Oliver and Winston, Inc. (Winston), a California-based operation of 190 retail tire and automotive service centers in California and Arizona (Note 2). In May 1998, the Company merged with ITCO Logistics Corporation and Subsidiaries (ITCO), a wholesaler of tires and related accessories in the eastern part of the United States. Following the merger, ITCO's subsidiaries were merged into ITCO and ITCO was merged into the Company. 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. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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. This change has been applied by retroactively restating the accompanying financial statements for prior years, including retained earnings for the years ended December 31, 1996 and 1995. Net income for 1996 was reduced by $868,000 to reflect the effect of this change. 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. 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 expenses are reflected in the financial statements at fair value because of the short-term maturity of those instruments. The fair values of the Company's debt and interest rate swaps are disclosed in Note 5. F-7 119 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 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: Buildings and leasehold improvements........................ 10-39 years Machinery and equipment..................................... 5-10 years Furniture and fixtures...................................... 5-7 years Vehicles and other.......................................... 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 4, 5 and 6), are capitalized and amortized using the effective interest method and charged to interest expense over the life of the associated debt in the accompanying consolidated statements of operations. The unamortized balance of these deferred costs included in the accompanying consolidated balance sheets were $7.4 million and $2.4 million at December 31, 1998 and 1997, respectively. 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 nondiscounted 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. GOODWILL Goodwill, which represents the excess of the purchase price over the fair value of the net assets of Winston, CPW and ITCO is being amortized on a straight-line basis over a period of 15 years. Amortization of goodwill applicable to continuing operations was $5.3 million and $1.5 million in 1998 and 1997, respectively. The carrying amount of goodwill will be reviewed periodically based on the nondiscounted cash flows and pretax income of the acquired entity over the remaining amortization period. Should this review indicate that the goodwill balance will not be fully recoverable, the Company's carrying value of the goodwill will be reduced. At December 31, 1998, the Company believes goodwill of $104.4 million is fully recoverable. F-8 120 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 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 $6.9 million 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 year ended December 31, 1996, reflects 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement is effective for fiscal years beginning after June 15, 1999. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, design and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting Statement 133 on the financial statements and has not determined the timing or the method of our adoption of Statement 133. However, the Statement could increase the volatility in earnings and other comprehensive income. INFORMATION CONCERNING BUSINESS SEGMENTS On January 1, 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 established revised standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 121 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 RECLASSIFICATIONS Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS: WINSTON ACQUISITION On May 7, 1997, the Company acquired all outstanding shares of common stock of Winston, a California-based operation of retail tire and automotive service centers, for approximately $43.1 million, consisting of $42.4 million in cash and $686,000 in direct acquisition costs. The acquisition was funded primarily through proceeds from a revolving credit facility with a bank ($3.6 million), proceeds from a term loan with a bank ($12.0 million), issuance of 12% Senior Subordinated Notes ($16.0 million) and issuance of Series A and Series B preferred stock ($11.5 million). The 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 related purchase price allocation follows (000's): Purchase price -- Cash...................................................... $42,447 Direct acquisition costs.................................. 686 ------- Total purchase price................................... $43,133 ======= Purchase price allocation -- Current assets............................................ $26,426 Current liabilities....................................... (26,533) ------- (107) Property, plant and equipment............................. 11,896 Goodwill.................................................. 36,736 Other assets.............................................. 2,033 Other noncurrent liabilities.............................. (7,425) ------- Cash paid for common stock................................ $43,133 =======
In connection with the acquisition, the Company recorded a $2.9 million liability for estimated costs related to employee severance and other exit costs in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." As of December 31, 1998, the Company had charged approximately $1.7 million to this reserve. F-10 122 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 ITCO MERGER On May 20, 1998, the Company acquired all of the common stock of ITCO for $18.0 million in cash and 1,400,667 newly issued shares of the Company's Class B Common Stock with an appraised value of approximately $15.0 million. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill ($44.6 million) and is being amortized over 15 years. A summary of the purchase price and related preliminary purchase allocation follows (000's): Purchase price -- Cash paid to holders of ITCO common and preferred stock... $ 18,000 Appraised fair value of Class B Common Stock issued in connection with the ITCO Merger (1,400,667 shares at $10.68 per share)...................................... 14,959 Amount payable upon settlement of ITCO stock appreciation rights................................................. 1,390 Direct acquisition costs.................................. 951 --------- Total purchase price................................... $ 35,300 ========= Preliminary purchase price allocation -- Current assets............................................ $ 106,342 Current liabilities....................................... (100,120) --------- 6,222 Property, plant and equipment............................. 10,622 Goodwill.................................................. 44,590 Other assets.............................................. 1,592 Long term liabilities..................................... (27,726) --------- Cash paid for common stock.................................. $ 35,300 =========
In connection with the ITCO merger, the Company recorded a $3.5 million liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." As of December 31, 1998, the Company had charged approximately $358,000 to this reserve. F-11 123 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 CPW ACQUISITION On May 20, 1998, the Company acquired all of the outstanding common stock of CPW for $45.0 million in cash, of which $35.0 million was paid on May 20, 1998, with $7.4 million payable in installments over five years in consideration for noncompete agreements and $2.6 million payable in the form of contingent payments to CPW stockholders. The excess purchase price over the net tangible assets acquired was allocated to goodwill ($29.9 million) which is being amortized over a 15 year period, and $10.0 million 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 follows (000's): Purchase price -- Cash paid to CPW Stockholders............................. $35,000 Amount payable for non-compete agreement and other deferred payments...................................... 10,000 Cash paid for repayment of debt........................... 976 Direct acquisition costs.................................. 623 ------- Total purchase price................................... $46,599 ======= Preliminary purchase price allocation Current assets............................................ $46,769 Current liabilities....................................... (43,127) ------- 3,642 Property, plant and equipment............................. 6,472 Goodwill.................................................. 29,924 Noncompete agreement and other deferred payments.......... 10,000 Other assets.............................................. 613 Long term liabilities..................................... (4,052) ------- Cash paid for common stock............................. $46,599 =======
In connection with the CPW acquisition, the Company recorded a $1.7 million liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination." As of December 31, 1998, the Company had charged approximately $166,000 against this reserve. Prior to the acquisition, Winston and ITCO had a fiscal year-end of September 30 and CPW had a fiscal year end of October 31. Winston, ITCO and CPW results have been restated to conform with the Company's year-end. The following unaudited pro forma summary information, which is not covered by the report of independent accountants, presents information for the years ended December 31, 1998 and 1997, as if the Winston acquisition, the ITCO merger and the CPW acquisition occurred as of January 1, 1997 (in 000's):
YEAR ENDED DECEMBER 31 -------------------- 1998 1997 -------- -------- Net sales................................................... $924,000 $831,000 Loss from continuing operations before extraordinary charge.................................................... (5,075) (5,111) Net loss.................................................... (7,291) (5,111) ======== ========
F-12 124 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 The unaudited pro forma information is provided for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition taken place on January 1, 1997, nor is it indicative of future results of the combined companies. 3. INCOME TAXES: Through May 7, 1997, the Company was an S Corporation for federal and state income tax purposes. Accordingly, all income and losses of the Company through May 7, 1997, were recognized by the Company's stockholders in their individual income tax returns. The Company terminated its S Corporation status upon completion of the Winston acquisition. In accordance with 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, 1998 and 1997, and a pro forma income tax provision for the year ended December 31, 1996, as if the Company had been subject to federal and state income taxes for that year. The following historical and pro forma income tax information summarizes the components of the Company's income tax provision (benefit) on income (loss) from operations for the years ended December 31, 1998 and 1997, and the Company's pro forma income tax provision (benefit) for the year ended December 31, 1996, as if the Company had been subject to federal and state income taxes for that year (000's):
YEAR ENDED DECEMBER 31, ----------------------------- PRO FORMA 1998 1997 1996 ------- ----- --------- Federal -- Current provision......................................... $ 1,765 $ 252 $304 Deferred provision (benefit).............................. (1,519) (473) 69 ------- ----- ---- 246 (221) 373 State -- Current provision......................................... 311 65 54 Deferred provision (benefit).............................. (268) (84) 12 ------- ----- ---- 43 (19) 66 ------- ----- ---- Total provision (benefit)................................. $ 289 $(240) $439 ======= ===== ====
As discussed in Note 8, the Company incurred an extraordinary charge in May 1998 related to the early extinguishment of debt resulting in an income tax benefit of $1.5 million. F-13 125 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 Actual and pro forma income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 34% as a result of the following (000's):
YEAR ENDED DECEMBER 31, ----------------------------- PRO FORMA 1998 1997 1996 ------- ----- --------- Income tax provision (benefit) computed at the federal statutory rate............................................ $ (754) $ (85) $357 Amortization of nondeductible goodwill...................... 1,091 109 0 Adoption of SFAS No. 109 upon termination of S Corporation status.................................................... 0 (383) 0 State income taxes, net of federal income tax benefit....... 277 65 54 Other....................................................... (325) 54 28 ------- ----- ---- Income tax provision (benefit).............................. $ 289 $(240) $439 ======= ===== ====
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, 1998 and 1997, are as follows (000's):
1998 1997 ------- ------- Deferred tax assets -- Accrued expenses and liabilities.......................... $ 7,639 $ 2,400 Employee benefits, including post retirement benefits..... 2,848 1,215 Uniform capitalization.................................... 1,223 0 Other..................................................... 760 451 ------- ------- Gross deferred tax assets.............................. 12,470 4,066 ------- ------- Deferred tax liabilities -- Section 481 adjustments................................... (378) (288) Other..................................................... (361) (21) ------- ------- Gross deferred tax liabilities......................... (739) (309) ------- ------- Net deferred tax asset................................. $11,731 $ 3,757 ======= =======
The above amounts have been classified in the consolidated balance sheet as follows (000's):
1998 1997 ------- ------- Deferred tax assets -- Current, included in other current assets................. $10,470 $ 2,102 Noncurrent, included in other assets...................... 1,261 1,655 ------- ------- $11,731 $ 3,757 ======= =======
4. REVOLVING CREDIT FACILITY: On May 20, 1998, the Company replaced its existing loan and security agreement with a new credit facility that provides for a senior secured revolving credit facility (the Revolver). The Revolver provides for borrowings in the aggregate principal amount of up to the lesser of $100.0 million or the Borrowing F-14 126 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 Base, as defined in the agreement, based on 85% of eligible accounts receivable and 65% of eligible tire inventory and 50% of all other eligible inventory (of which up to $10.0 million may be utilized in the form of letters of credit). At December 31, 1998, the maximum loan amount available was $86.7 million of which $21.9 million was outstanding. In addition, the Company had trade letters of credit outstanding at December 31, 1998, of $8.9 million, which reduces the availability under the Revolver at December 31, 1998. 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 Revolver requires the Company to meet certain financial requirements, including minimum net worth and minimum loan availability and contains certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guarantees; make loans and investments; make capital expenditures; declare dividends; engage in mergers, consolidations and asset sales; enter into transactions with affiliates; create liens and encumbrances; enter into sale/leaseback transactions; modify material agreements; and change the business it conducts. The Company's obligations under the Revolver are secured by all inventory and accounts receivable. 5. LONG-TERM DEBT: Long-term debt consists of the following (000's):
1998 1997 -------- ------- Series B Senior Notes, interest due semiannually at 10%, commencing on November 15, 1998, due May 2008............. $100,000 $ 0 Series C Senior Notes, interest due semiannually at 10%, commencing on May 15, 1999, due May 2008.................. 50,000 0 Term loan with a bank, payable in monthly principal installments beginning on June 1, 1997, with the final installment for the remaining balance due on May 7, 2002...................................................... 0 11,000 Other....................................................... 13,411 6,740 -------- ------- 163,411 17,740 Less -- Current maturities.................................. (3,011) (2,579) -------- ------- $160,400 $15,161 ======== =======
Aggregate maturities required on long-term debt at December 31, 1998, are as follows (000's): 1999........................................................ $ 3,011 2000........................................................ 3,795 2001........................................................ 3,036 2002........................................................ 379 2003........................................................ 269 Thereafter.................................................. 152,921 -------- $163,411 ========
F-15 127 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 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, 1998, approximates fair value. SERIES A SENIOR NOTES On May 20, 1998, the Company sold $100.0 million of Series A Senior Notes due May 15, 2008, resulting in net proceeds of approximately $97.0 million. The Series A 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 Series A Senior Notes at 110% of par with one or more public equity offerings. Interest on the Series A Senior Notes is payable semiannually on May 15 and November 15 of each year commencing November 15, 1998. EXCHANGE OF SERIES A SENIOR NOTES On November 16, 1998, the $100.0 million Series A Senior Notes were exchanged for Series B Senior Notes. The form and terms of the Series B Senior Notes are identical in all material respects to the form and terms of the Series A Senior Notes, except for certain transfer restrictions and registration and other rights relating to the exchange of the Series A Senior Notes for Series B Senior Notes. The Series B Senior Notes evidence the same debt as the Series A Senior Notes and were issued under the indenture governing the Series A Senior Notes. See Note 10 for subsidiary guarantor information. SERIES C SENIOR NOTES On December 8, 1998, the Company sold $50.0 million of Series C Senior Notes due May 15, 2008, resulting in net proceeds of approximately $49.0 million. The Series C 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, commencing May 15, 1999. See Note 10 for subsidiary guarantor information. TERM LOAN At December 31, 1997, there was $11.0 million outstanding under the $12.0 million Term Loan which was paid in full with proceeds from the Series A Senior Notes in 1998. SENIOR NOTES DEBT COVENANTS The Series B and Series C Senior Notes contain certain covenants that, among other things, limits the ability of the Company to incur indebtedness, make restricted payments, make certain distributions, sell assets and subsidiary stock, enter into certain affiliate transactions, sell or issue of capital stock of restricted subsidiaries, incur liens, enter into sale/leaseback transactions, and engage in mergers and consolidations. INTEREST RATE SWAP AGREEMENTS The Company periodically enters into interest rate swap agreements (Swaps) to manage exposure to fluctuations in interest rates. The Swaps represent contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without exchange of the underlying notional F-16 128 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 amounts. The notional amounts of Swaps are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the Swaps is recognized as an adjustment to interest expense. At December 31, 1998, Swaps were in place covering notional amounts of approximately $20.0 million of indebtedness expiring from October 2000 through October 2002, at an average interest rate of 7.82%. 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, 1998 is approximately $507,000 which does not necessarily reflect the potential expense that would be realized on an actual settlement of the liability. 6. SUBORDINATED DEBT: In May 1997, the Company issued $16.0 million of 12% Senior Subordinated Debt (Subordinated Debt) due on May 7, 2004, with interest payable quarterly. In connection with the issuance of Subordinated Debt, the Company issued detachable warrants which permit the holder to acquire up to 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, which resulted in a discount on the Subordinated Debt in the same amount, which was being amortized over the term of the Subordinated Debt. The Subordinated Debt was paid in full with the proceeds from the Series A Senior Notes Offering. The unamortized discount at the time of repayment was written off and is included as an extraordinary charge in the accompanying statement of operations (see Note 8). 7. SPECIAL CHARGES: In the second quarter of 1998, the Company recorded special charges of $1.4 million related to the restructuring of its eastern wholesale business, which includes the closing of 8-10 distribution centers commencing in the third quarter. The charges include lease commitments for certain distribution centers, asset writedowns, severance and employee related costs and costs to shut down certain facilities. As of December 31, 1998, the Company had charged approximately $222,000 against these reserves. 8. 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 discount of subordinated debt of $1.7 million, net of applicable income tax benefits of $1.1 million. 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. 9. SEGMENT INFORMATION: The Company classifies its business interests into three fundamental areas: eastern wholesale distribution of tires and products, western wholesale distribution of tires and products and western retail sales of tires, products and services. The Company evaluates performance based on several factors, of which the primary financial measure is profit (loss) before interest expense, income taxes, noncash amortization of intangible assets and depreciation (EBITDA). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). F-17 129 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 The operating results of the Company reflect the acquisitions of Winston effective as of May 7, 1997, and CPW and ITCO effective as of May 20, 1998 (000's):
EASTERN WESTERN WESTERN WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS --------- -------- --------- ------------ -------- 1998 -- Revenues from external customers................... $478,120 $152,848 $ 82,704 $ -- $713,672 EBITDA(1)...................... 8,587 4,877 5,666 -- 19,130 Segment assets................. 502,081 80,088 120,351 (271,699) 430,821 Expenditures for segment assets...................... (1,810) (5,654) (1,233) -- (8,697) 1997 -- Revenues from external customers................... $210,781 $101,058 $ -- $ -- $311,839 EBITDA(1)...................... 5,016 4,971 -- -- 9,987 Segment assets................. 125,098 71,151 -- (49,741) 146,508 Expenditures for segment assets...................... 2,941 1,967 -- -- 4,908 1996 -- Revenues from external customers................... $190,535 $ -- $ -- $ -- $190,535 EBITDA(1)...................... 3,847 -- -- -- 3,847 Segment assets................. 59,551 -- -- -- 59,551 Expenditures for segment assets...................... 7,865 -- -- -- 7,865
- --------------- (1) EBITDA represents income (loss) before interest expense, income taxes, noncash amortization of intangible assets and depreciation. Depreciation and amortization, as noted in the consolidated statement of cash flows, includes $733,000 of amortization expense related to deferred transaction fees that is included in interest expense in the consolidated statement of operations. 10. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION: The Series B and Series C Senior Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company's direct subsidiaries, each of which is wholly owned. The combined summarized information of these subsidiaries is as follows (000's):
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 -------------- Current assets.............................................. $82,660 Noncurrent assets........................................... 94,127 Current liabilities......................................... 59,262 Noncurrent liabilities...................................... 7,999 Net sales................................................... 235,552 Gross margin................................................ 87,474 Net loss.................................................... (2,784)
F-18 130 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 The above information excludes $24.6 million of net intercompany payable and $30.3 million of intercompany sales of the Company's subsidiary guarantors. In preparation of the Company's consolidated financial statements, all intercompany accounts were eliminated. 11. EMPLOYEE BENEFITS: PROFIT SHARING PLAN The Company has a separate qualified profit-sharing and 401(k) plan for each reportable segment 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 Heafner and ITCO plan matches 50% of the participant's contributions, up to 6% of their compensation. The Winston plan matches 100% of the first 1% of participant contributions and 5% of the next 5% of participant contributions. The CPW plan does not match the participant contributions. The Heafner and Winston plans also provide 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, 1998, 1997 and 1996, was $538,000, $413,000 and $346,000, respectively. 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 authorized the issuance of up to 265,000 shares of voting common stock to be issued to officers and key employees under terms and conditions to be set by the Company's Board of Directors. During 1997, 256,000 options were granted to various members of management at a fair value price of $1.10 per share, as determined by an independent appraisal. 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 were vested and accordingly no options were exercised at December 31, 1997. In the third quarter of 1998, the Plan was amended to authorize the issuance of an additional 262,500 shares, for a total of 527,500 shares, of voting common stock to be issued to officers and key employees under terms and conditions to be set by the Company's Board of Directors. In 1998, an additional 283,400 options were granted to various members of management at a fair value of $7.48 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 September 1999. At December 31, 1998, 24,000 options were vested; however, no options were exercised. F-19 131 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 The following presents the status of the Plan as of December 31, 1998:
WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Outstanding at December 31, 1996............................ 0 $0 Granted................................................... 256,000 1.10 Exercised................................................. 0 0 Forfeited................................................. 0 0 ------- ----- Outstanding at December 31, 1997............................ 256,000 1.10 Granted................................................... 283,400 7.48 Exercised................................................. 0 0 Forfeited................................................. (45,750) 1.10 ------- ----- Outstanding at December 31, 1998 (24,000 exercisable)....... 493,650 $4.76 ======= =====
The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and its related interpretations. Pursuant to APB No. 25, compensation expense is recognized for financial reporting purposes using the intrinsic value method when it becomes probable that the options will be exercisable. The amount of compensation expense to be recognized is determined by the excess of the fair value of common stock over the exercise price of the related option at the measurement date. 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. The following information is presented as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123 (000's):
1998 1997 ------- ---- Net loss............................................. $(4,724) $(14) Pro forma............................................ (4,873) (42)
The weighted average fair value of options granted during 1998 and 1997 estimated on the date of grant using the Black-Scholes option pricing model was $4.68 and $.58, respectively. The fair value of options granted in 1998 and 1997 were determined using the following assumptions: a risk-free interest rate of 4.69% and 6.42%, respectively, no dividend yield, expected life of 10 years which equals the lives of the grants, and no expected volatility. F-20 132 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 The following is summary information about the Company's stock options outstanding at December 31, 1998:
WEIGHTED WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE PRICE 1998 TERM (YEARS) PRICE 1998 PRICE ---------- -------------- ------------ -------- -------------- -------- $ 1.10 210,250 8.42 $1.10 24,000 $1.10 7.48 283,400 9.75 7.48 0 0 ---------- ------- ---- ----- ------ ----- $1.10-7.48 493,650 9.18 $4.76 24,000 $1.10 ========== ======= ==== ===== ====== =====
12. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings, equipment and vehicles under various operating leases which expire between 1999 and 2012, including two properties which are leased from individual stockholders. The Company also has obligations totaling $651,000 related to properties which have been subleased. Future minimum lease commitments at December 31, 1998 (excluding subleased properties) are as follows (000's): 1999........................................................ $20,913 2000........................................................ 18,338 2001........................................................ 15,031 2002........................................................ 12,323 2003........................................................ 10,002 Thereafter.................................................. 18,579 ------- $95,186 =======
Rent expense under these operating leases was $19.6 million in 1998, $9.0 million in 1997 and $2.4 million in 1996. Related-party rent expense was $179,000 for 1998, $222,000 for 1997 and $369,000 in 1996. Obligations under capital leases are not significant. PURCHASE COMMITMENTS In May 1997, the Company entered into a purchase agreement with a supplier (the Tire Supply Agreement -- see Note 13) which expires May 2007. Under the terms of the agreement, the Company has agreed to purchase all requirements of its "Winston" brand tires at a negotiated price specified in the agreement. LEGAL PROCEEDINGS Winston was named as a defendant in a class action lawsuit filed on June 10, 1998 in Los Angeles County Superior Court on behalf of Winston store managers. The lawsuit alleges that Winston violated certain California wage regulations and unfair business practices. The Company believes that Winston's operations, including its wage practices, fully comply with applicable California and federal legal requirements and that the plaintiffs' clams are without merit. The Company is vigorously defending the matter. Additionally, 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 F-21 133 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 not expect that any of these matters will have a material adverse effect on the financial position or results of operations of the Company. 13. REDEEMABLE PREFERRED STOCK: On May 2, 1997, the Company issued 11,500 shares of preferred stock with par value of $.01 per share to a supplier (the Supplier). Of the 11,500 shares, 7,000 shares are designated Series A Cumulative Redeemable Preferred Stock (the Series A Preferred Stock) and 4,500 shares are designated Series B Cumulative Redeemable Preferred Stock (the Series B Preferred Stock). The Series A and B Preferred Stock each contain a provision whereby upon the termination of the Tire Supply Agreement (see Note 12), the Company shall redeem all shares of Preferred Stock outstanding at a price equal to the sum of the stated value and the applicable premium, as defined, plus all accrued and unpaid dividends. If at any time a change of control occurs, as defined, the Supplier may request redemption of all outstanding shares. The Company may not make payment in respect of any of the above redemption requirements, so long as amounts are outstanding under the Loan and Security Agreement, the Senior Notes and other agreements entered into in connection therewith, including any replacement agreement which results in a greater principal amount outstanding. SERIES A PREFERRED STOCK The stated value of Series A Preferred Stock is $1,000 per share. Holders of Series A Preferred Stock are entitled to receive, when and if declared by the Board of Directors, cumulative cash dividends at an annual rate of 4%, subject to adjustment based on the volume of purchases from the Supplier. Additional dividends will accrue, when and if declared by the Board of Directors, and are payable on the last business day of January, beginning in 1999. 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 12 ). Dividends on Series B Preferred Stock are payable, when and if declared by the Board of Directors, at the prime rate if the Company does not meet certain tire purchase requirements. The remaining value of Series B Preferred Stock shall be redeemed by the Company on the last business day of June 2007 at a price equal to the adjusted stated value plus all accrued and unpaid dividends. As of December 31, 1998, based on the Company's purchases, the stated value of the Series B Preferred Stock was reduced by $147,000. 14. COMMON STOCK: CLASS A AND CLASS B COMMON STOCK On May 12, 1998, the Company's Board of Directors amended their Articles of Incorporation to create two classes of common stock. At December 31, 1998, the Company has authorized for issuance 10,000,000 shares that have been designated Class A Common Stock (Class A) and 20,000,000 shares that have been designated Class B Common Stock (Class B). Class A and Class B have equal rights related to dividends and distributions and liquidation, dissolution or winding up. However, Class A is entitled to 20 votes per share and Class B is entitled to one vote per share. F-22 134 THE J. H. HEAFNER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 Class B shall automatically convert into one share of Class A without the requirement of any further action on the part of the Corporation or it stockholders upon the earliest of (i) an initial public offering of the Class A in connection with the registration of the Class A under the Securities Act of 1933, as amended (ii) the occurrence of any condition or event which results in the acceleration of the maturity of the indebtedness evidenced by the debt documents, or (iii) an order for relief under Title 11 of the United States Code is entered against the Company. STOCK REPURCHASE AND STOCK SPLIT At December 31, 1996, the Company had 5,000 shares of $100 par value common stock authorized with 2,080 shares issued and outstanding. On May 2, 1997, the Company amended its Articles of Incorporation to authorize 10,000,000 shares of common stock, and reduce the par value of common stock from $100 to $.01 per share. On May 7, 1997, the Board of Directors approved the repurchase and subsequent cancellation and retirement of 1,024 outstanding shares of common stock at a price equal to $2,644 per share on a pre-stock split basis. On the same date, the Board of Directors authorized a 3,281-for-1 stock split on all outstanding shares of common stock at the close of business on that date. 15. SUBSEQUENT EVENT: ACQUISITION On January 12, 1999, the Company entered into a Stock Purchase Agreement with the stockholders of California Tire, a wholesaler and retailer of tires, parts and accessories located in California. The total consideration to be paid to the stockholders is $3.9 million in cash. The acquisition is not expected to be significant to the Company's financial position or results of operations. F-23 135 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-24 136 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-25 137 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-26 138 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 A........................................ -- -- (695,504) (695,504) ---- -------- ----------- ----------- 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 A........................................ -- -- (913,087) (913,087) ---- -------- ----------- ----------- Balance at September 30, 1997................. $900 $899,100 $(5,003,256) $(4,103,256) ==== ======== =========== ===========
See accompanying notes. F-27 139 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED PERIOD FROM INCEPTION SEPTEMBER 30 (NOVEMBER 13, 1995) 1997 TO SEPTEMBER 30 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 equipment... 1,621,564 1,511,167 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-28 140 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 F-29 141 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 condition, but generally does not require collateral to support such receivables. The Company also establishes an allowance 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-30 142 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 wholesale distribution of car and truck tires located in Florida (Acme), Alabama, Tennessee (McGriff), F-31 143 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 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 pro forma 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-32 144 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 ========== ==========
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%. F-33 145 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 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-34 146 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-35 147 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-36 148 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-37 149 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-38 150 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-39 151 ITCO HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED SEPTEMBER 30, 1995
TOTAL COMMON RETAINED STOCKHOLDERS' STOCK EARNINGS 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-40 152 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-41 153 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-42 154 ITCO HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED SEPTEMBER 30, 1995 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-43 155 ITCO HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED SEPTEMBER 30, 1995 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-44 156 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-45 157 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-46 158 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-47 159 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-48 160 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-49 161 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 LLP Mountain View, California December 23, 1997, except as to Note 10, which is as of January 21, 1998 F-50 162 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-51 163 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-52 164 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-53 165 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-54 166 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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.) 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-55 167 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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.) (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. F-56 168 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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.) (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 =========== =========== ===========
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. F-57 169 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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.) 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. (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 ======== ========= =========
F-58 170 THE SPEED MERCHANT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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.) 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. (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-59 171 - ------------------------------------------------------ - ------------------------------------------------------ HEAFNER HAS NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER INDIVIDUAL 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 HEAFNER 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 HEAFNER OR THE SUBSIDIARY GUARANTORS SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Risk Factors........................... 10 Where You Can Find More Information.... 16 Forward-Looking Information............ 17 The Transactions....................... 18 Use of Proceeds........................ 21 Capitalization......................... 22 The Exchange Offer..................... 23 Unaudited Pro Forma Condensed Combined Financial Data....................... 32 Selected Historical Financial Data..... 35 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 41 Business............................... 50 Management............................. 60 Principal Stockholders................. 69 Certain Relationships and Related Transactions......................... 71 Description of Credit Facility......... 73 Description of the Series D Notes...... 75 Certain U.S. Federal Income Tax Considerations....................... 108 Plan of Distribution................... 108 Legal Matters.......................... 109 Experts................................ 109 Index to Consolidated Financial Statements........................... F-1
------------------------ UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE SERIES D 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 ACTING AS UNDERWRITERS, INCLUDING SELLING SERIES D NOTES RECEIVED IN EXCHANGE FOR SERIES B NOTES AND C NOTES HELD FOR THEIR OWN ACCOUNT (SEE "PLAN OF DISTRIBUTION") AND WITH RESPECT TO ANY UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ $150,000,000 THE J.H. HEAFNER COMPANY, INC. ------------------------------ PROSPECTUS ------------------------------ OFFER TO EXCHANGE ITS 10% SENIOR NOTES DUE 2008 ------------------------------------------------------ ------------------------------------------------------ 172 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The J.H. Heafner Company, Inc. Heafner is a North Carolina corporation. 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. Heafner, in its Articles of Incorporation, 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., Phoenix Racing, Inc. and California Tire Company Winston, Speed Merchant, Phoenix Racing, Inc. ("Phoenix") and California Tire Company ("California Tire") 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. Both Winston and California Tire's Articles of Incorporation allow them to provide indemnification to their 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-1 173 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. 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. 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 Articles of Incorporation of The Speed Merchant, Inc.* 3.6 By-laws of The Speed Merchant, Inc.* 3.7 Articles of Incorporation of Phoenix Racing, Inc.* 3.8 By-laws of Phoenix Racing, Inc.* 3.9 Articles of Incorporation of California Tire Company++ 3.10 By-laws of California Tire Company++ 4.1 Indenture, dated as of December 1, 1998, among the Company, First Union National Bank, as Trustee (the "Trustee"), and Oliver & Winston, Inc., ITCO Logistics Corporation, ITCO Holding Company, Inc., ITCO Tire Company, ITCO Tire Company of Georgia, The Speed Merchant, Inc., and Phoenix Racing, Inc. (the "Series D Indenture")+ 4.2 Form of Series C and Series D Note (attached as Exhibit A to the Series D Indenture)+ 4.3 Supplemental Indenture to the Series D Indenture, dated as of February 22, 1999, among the Company, the Trustee, Oliver & Winston, Inc., The Speed Merchant, Inc., Phoenix Racing, Inc. and California Tire Company++ 4.4 Indenture, dated as of May 15, 1998, among the Company, the Trustee, and Oliver & Winston, Inc., ITCO Logistics Corporation, ITCO Holding Company, Inc., ITCO Tire Company, ITCO Tire Company of Georgia, The Speed Merchant, Inc., and Phoenix Racing, Inc. (the "Series B Indenture")* 4.5 Form of Series B Global Note (attached as Exhibit A to the Series B Indenture)* 4.6 Supplemental Indenture to the Series B Indenture, dated as of February 22, 1999, among the Company, the Trustee, Oliver & Winston, Inc., The Speed Merchant, Inc., Phoenix Racing, Inc. and California Tire Company++ 4.7 Registration Rights Agreement, dated as of December 1, 1998, among the Company, its subsidiaries and BancBoston Robertson Stephens Inc. and Credit Suisse First Boston Corporation++ 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes++
II-2 174 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.* 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 Agreement")* 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 Letter Agreements, dated as of November 24 and 25, 1998, respectively, by and between Michelin North America and the Company++ 10.20 The J.H. Heafner Company 1997 Stock Option Plan (the "1997 Stock Option Plan")* 10.21 The J.H. Heafner Company 1998 Stock Option Plan Amendment (amending 1997 Stock Option Plan)++ 10.22 Form of Stock Option Agreement (incentive stock options)* 10.23 Form of Stockholder Agreement (pursuant to the 1997 Stock Option Plan)*
II-3 175 10.24 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.* 10.25 The J.H. Heafner Company 1997 Restricted Stock Plan* 10.26 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders* 10.27 Employment and Severance Agreements between the Company and William H. Gaither and Thomas J. Bonburg** 10.28 Employment Agreement, dated as of May 20, 1998, between the Company and Richard P. Johnson* 10.29 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C. Soares* 10.30 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc. and Ray C. Barney* 10.31 Lease Agreement, dated October 1, 1992, by and between Carolyn Heafner, Ann H. Gaither, Albert C. Gaither and the Company, as amended* 10.32 Amended and Restated Employment Agreements, dated as of January 1, 1999, between the Company and Daniel K. Brown, J. Michael Gaither and Donald C. Roof++ 10.33 Lease, dated August 1, 1988, by and between Ann Heafner Gaither and the Company, as amended** 10.34 Lease Agreement, dated January 1, 1993, by and between Evangeline H. Heafner 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 Ernst & Young LLP++ 23.3 Consent of KPMG LLP++ 23.4 Consent of Arthur Andersen LLP++ 23.5 Consent of Howard, Smith & Levin LLP (filed as part of Exhibit 5.1) 24.1 Power of Attorney of Directors and Officers (set forth on the signature pages hereto) 25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes++ 27.1 Financial Data Schedules++ 99.1 Form of Letter of Transmittal++ 99.2 Form of Notice of Guaranteed Delivery++ Form of Exchange Agent Agreement#
- --------------- * Incorporated by reference to Heafner's Registration Statement on Form S-4 filed with the SEC on August 18, 1998. ** Incorporated by reference to Amendment No. 1 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 2, 1998. *** Incorporated by reference to Amendment No. 2 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 14, 1998. herewith. All other exhibits were filed with the Registration Statement dated August 18, 1998 or Amendment No. 1 to the Registration Statement dated October 2, 1998. + Incorporated by reference to Heafner's Form 8-K filed on December 15, 1998. ++ Filed herewith. # To be filed by amendment. II-4 176 (b) Financial Data Schedules (filed as exhibit 27.1) 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-5 177 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 March 31, 1999. 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 March 31, 1999 - --------------------------------------------- Executive Officer William H. Gaither /s/ DONALD C. ROOF Senior Vice President, Chief Financial March 31, 1999 - --------------------------------------------- Officer and Treasurer Donald C. Roof /s/ J. LEWIS MCKNIGHT, JR. Chief Accounting Officer March 31, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. /s/ ANN H. GAITHER Chairperson of the Board March 31, 1999 - --------------------------------------------- Ann H. Gaither /s/ VICTORIA B. JACKSON Director March 31, 1999 - --------------------------------------------- Victoria B. Jackson
II-6 178
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOSEPH P. DONLAN Director March 31, 1999 - --------------------------------------------- Joseph P. Donlan /s/ WILLIAM M. WILCOX, JR. Director March 31, 1999 - --------------------------------------------- William M. Wilcox, Jr. /s/ V. EDWARD EASTERLING, JR. Director March 31, 1999 - --------------------------------------------- V. Edward Easterling, Jr.
II-7 179 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 March 31, 1999. 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 Officer March 31, 1999 - --------------------------------------------- William H. Gaither /s/ P. DOUGLAS ROBERTS Director, President and Chief March 31, 1999 - --------------------------------------------- Operating Officer P. Douglas Roberts /s/ DONALD C. ROOF Director, Vice President and Treasurer March 31, 1999 - --------------------------------------------- Donald C. Roof /s/ J. MICHAEL GAITHER Director, Vice President, General March 31, 1999 - --------------------------------------------- Counsel and Secretary J. Michael Gaither
II-8 180
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. LEWIS MCKNIGHT, JR Chief Accounting Officer March 31, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. /s/ ANN H. GAITHER Chairperson of the Board March 31, 1999 - --------------------------------------------- Ann H. Gaither
II-9 181 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 March 31, 1999. 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 Officer March 31, 1999 - --------------------------------------------- William H. Gaither /s/ ARTHUR C. SOARES Director, President and Chief March 31, 1999 - --------------------------------------------- Operating Officer Arthur C. Soares /s/ DONALD C. ROOF Director, Vice President, Chief March 31, 1999 - --------------------------------------------- Financial Officer and Treasurer Donald C. Roof /s/ J. MICHAEL GAITHER Director, Vice President, General March 31, 1999 - --------------------------------------------- Counsel and Secretary J. Michael Gaither /s/ J. LEWIS MCKNIGHT, JR. Chief Accounting Officer March 31, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. /s/ ANN H. GAITHER Chairperson of the Board March 31, 1999 - --------------------------------------------- Ann H. Gaither
II-10 182 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 March 31, 1999. 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 Officer March 31, 1999 - --------------------------------------------- William H. Gaither /s/ P. DOUGLAS ROBERTS Director, President and Chief March 31, 1999 - --------------------------------------------- Operating Officer P. Douglas Roberts /s/ DONALD C. ROOF Director, Vice President, Chief March 31, 1999 - --------------------------------------------- Financial Officer and Treasurer Donald C. Roof /s/ J. MICHAEL GAITHER Director, Vice President, General March 31, 1999 - --------------------------------------------- Counsel and Secretary J. Michael Gaither /s/ J. LEWIS MCKNIGHT, JR. Chief Accounting Officer March 31, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. /s/ ANN H. GAITHER Chairperson of the Board March 31, 1999 - --------------------------------------------- Ann H. Gaither
II-11 183 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 March 31, 1999. CALIFORNIA 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 Officer March 31, 1999 - --------------------------------------------- William H. Gaither /s/ MICHAEL LARGENT President March 31, 1999 - --------------------------------------------- Michael Largent /s/ DONALD C. ROOF Director, Vice President, Chief March 31, 1999 - --------------------------------------------- Financial Officer and Treasurer Donald C. Roof /s/ J. MICHAEL GAITHER Director, Vice President, General March 31, 1999 - --------------------------------------------- Counsel and Secretary J. Michael Gaither /s/ ANN H. GAITHER Chairperson of the Board March 31, 1999 - --------------------------------------------- Ann H. Gaither
II-12 EX-3.1 2 SECOND AMENDED/RESTATED ARTICLES OF INCORPORATION 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- 18 STATE OF NORTH CAROLINA ARTICLES OF MERGER OF ITCO LOGISTICS CORPORATION A DELAWARE CORPORATION INTO THE J. H. HEAFNER COMPANY, INC. A NORTH CAROLINA CORPORATION Pursuant to sections 55-11-07(a)(4), 55-11-04, and 55-11-05 of the North Carolina Business Corporation Act (the "NCBCA"), The J. H. Heafner Company, Inc., a corporation organized under the laws of North Carolina (the "Surviving Corporation"), hereby submits these Articles of Merger for the purpose of merging ITCO Logistics Corporation, a corporation organized under the laws of Delaware (the "Merging Corporation"), with and into the Surviving Corporation (such transaction being the "Merger"). 1. With respect to each corporation which is a party to the Merger, the Plan of Merger attached hereto as Exhibit A and made a part hereof was duly authorized and approved by unanimous consent and in the manner prescribed by law by the Board of Directors as required by the NCBCA and the General Corporation Law of Delaware (the "DGCL"). 2. The Surviving Corporation owns all of the outstanding shares of each class of stock of the Merging Corporation. Pursuant to Section 55-11-04 of the NCBCA and Section 253 of the DGCL, the Merger does not require the vote of the shareholders of either the Surviving Corporation or the Merging Corporation. 3. The Merger is permitted by the law of the state of incorporation of each foreign entity which is a party to the Merger. 4. Each foreign entity which is a party to the merger has complied or shall comply with the applicable laws of its state of incorporation regarding such Merger. 5. These Articles of Merger shall be effective as of 9:00 p.m., North Carolina time, on December 31, 1998. 19 This 31 day of December, 1998. The J. H. Heafner Company, Inc., a North Carolina corporation /s/ William H. Gaither By: ________________________________ William H. Gaither President and Chief Executive Officer 20 PLAN OF MERGER THIS PLAN OF MERGER ("Plan") made as of November 23, 1998, by and between The J. H. Heafner Company, Inc., a corporation organized under the laws of North Carolina ("Heafner") and ITCO Logistics Corporation, a corporation organized under the laws of Delaware (the "Merging Corporation") (collectively, Heafner and the Merging Corporation are herein referred to as "Constituent Corporations"). W I T N E S S E T H: WHEREAS, Merging Corporation is a wholly-owned, direct subsidiary of Heafner; WHEREAS, the Board of Directors of each of Heafner and the Merging Corporation have determined that it is advisable and in the best interests of such corporations for the Merging Corporation to be merged with and into Heafner (the "Merger") upon the terms and conditions set forth herein and in accordance with the Delaware General Corporation Law and the North Carolina Business Corporation Act; and NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Subject to the terms and conditions contained herein, at the Effective Time (as defined below), the Merging Corporation shall be merged with and into Heafner, with Heafner being the surviving corporation (the "Surviving Corporation"). Upon the effectiveness of the Merger, the Surviving Corporation shall possess all of the rights, privileges, powers and franchises of the Constituent Corporations, and all property (real, personal and mixed) and other assets (tangible and intangible) belonging to the Constituent Corporations shall be vested in the Surviving Corporation, and all such property, assets, rights, privileges, powers and franchises shall thereafter belong to the Surviving Corporation, and the title to any real estate vested by deed or otherwise in the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger, but all rights of creditors and all liens upon any property of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations shall, following the Merger, attach to the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by the Surviving Corporation. 1.2 Consummation of the Merger. Promptly following and subject to the satisfaction of the conditions set forth in Article V herein, the parties hereto shall cause Articles of Merger to be filed with the Secretary of State of North Carolina in such form as required by, and executed in accordance with, the relevant provisions of the North Carolina Business Corporation Act. Furthermore, promptly following and subject to the satisfaction of the conditions set forth in Article V herein, the Surviving Corporation shall cause a Certificate of Ownership and Merger to 21 be filed with the Secretary of State of Delaware in such form as required by, and executed in accordance with, the relevant provisions of the Delaware General Corporation Law. The Merger shall be effective upon the completed filing of the Articles of Merger and Certificate of Ownership and Merger (the "Effective Time"). 1.3 Further Assurances. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any further deeds, assignments, assurances or any other acts are necessary, desirable or proper to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, the title to any property or right of the Constituent Corporations acquired or to be acquired by reason, or as a result, of the Merger, the Merging Corporation agrees that the Surviving Corporation and its officers shall execute and deliver all such deeds, assignments and assurances and do all acts necessary, desirable or proper to vest, perfect or confirm title to such property or right in the Surviving Corporation, and the officers of the Surviving Corporation are fully authorized in the name of the Merging Corporation or otherwise to take any and all such action. ARTICLE II THE SURVIVING CORPORATION 2.1 Articles of Incorporation. Following the Effective Time, the Articles of Incorporation of Heafner on the date hereof shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended or repealed in accordance with the terms thereof and applicable law. 2.2 By-Laws. Following the Effective Time, the By-Laws of Heafner shall continue to be the By-Laws of the Surviving Corporation until amended or repealed in accordance with the provisions thereof, the Articles of Incorporation of the Surviving Corporation and applicable law. 2.3 Directors. Following the Effective Time, the directors of Heafner shall continue to be the directors of the Surviving Corporation until their respective successors are duly elected and qualified in the manner provided in the By-Laws and the Articles of Incorporation of the Surviving Corporation and applicable law, or until their earlier resignation or removal. 2.4 Officers. Following the Effective Time, the officers of Heafner shall continue to be the officers of the Surviving Corporation until their successors are duly elected and qualified in the manner provided in the By-Laws and the Articles of Incorporation of the Surviving Corporation and applicable law, or until their earlier resignation or removal. 2 22 ARTICLE III CONVERSION AND CANCELLATION OF SHARES 3.1 Conversion and Cancellation of Shares. As of the Effective Time, by virtue of the Merger and without any further action on the part either of the constituent corporations or any holder of any of the capital stock thereof: (a) Each issued and outstanding share of the Merging Corporation Stock shall cease to exist and shall be cancelled, retired, and eliminated, and no shares of Heafner shall be issued in respect thereof. (b) Each issued and outstanding share of Heafner Common Stock shall remain outstanding after the Merger and shall not be affected thereby. ARTICLE IV CONDITIONS TO CLOSING The obligations of the Constituent Corporations to consummate the transactions contemplated by this Plan are subject only to the approval of the Merger at or before the Effective Time, by the affirmative vote or by the written consent, of the board of directors of Heafner pursuant to Section 55-11-04 of the North Carolina Business Corporation Act and Section 253 of the Delaware General Corporation Law. [SIGNATURES ON FOLLOWING PAGE] 3 23 IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the date first written above. THE J. H. HEAFNER COMPANY, INC., a North Carolina corporation /s/ William H. Gaither By: _________________________________________ William H. Gaither President and Chief Executive Officer ITCO LOGISTICS CORPORATION, a Delaware corporation /s/ William H. Gaither By: _________________________________________ William H. Gaither President and Chief Executive Officer 4 24 CERTIFICATE OF OWNERSHIP AND MERGER MERGING ITCO LOGISTICS CORPORATION INTO THE J.H. HEAFNER COMPANY, INC. THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation, does hereby certify pursuant to Section 253 and Section 103 of the Delaware General Corporation Law as follows: 1. THE J.H. HEAFNER COMPANY, INC. owns all of the outstanding shares of each class of stock of ITCO LOGISTICS CORPORATION, a Delaware corporation. 2. THE J.H. HEAFNER COMPANY, INC. hereby merges ITCO LOGISTICS CORPORATION into THE J.H. HEAFNER COMPANY, INC. and assumes all obligations of ITCO LOGISTICS CORPORATION pursuant to the resolutions of the Board of Directors of THE J.H. HEAFNER COMPANY, INC., a copy of which is attached as Exhibit A hereto, which were duly adopted by the Directors of THE J.H. HEAFNER COMPANY, INC at the November 23, 1998 Regular Meeting of the Directors. 3. This Certificate of Ownership and Merger shall be effective as of 9:00 p.m., Delaware Time, on December 31, 1998. IN WITNESS WHEREOF, THE J.H. HEAFNER COMPANY, INC. has caused this Certificate of Ownership and Merger to be signed by William H. Gaither, its President and Chief Executive Officer, this 31 day of December, 1998. THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation /s/ William H. Gaither By:_________________________________ William H. Gaither President and Chief Executive Officer EX-3.9 3 ARTICLES OF INCORPORATION/CALIFORNIA TIRE CO 1 ARTICLES OF INCORPORATION OF CALTIRE ACQUISITION CO. The undersigned, being a natural person of full age and acting as the incorporator for the purpose of forming the business corporation hereinafter named pursuant to the provisions of the Corporations Code of the State of California, does hereby adopt the following articles of incorporation. FIRST: The name of the corporation (hereinafter referred to as the "corporation") is CalTire Acquisition Co. SECOND: The existence of the corporation is perpetual. 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 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. FOURTH: The name of the corporation's initial agent for service of process within the State of California in accordance with the provisions of subdivision (b) of Section 1502 of the Corporations Code of the State of California is Corporation Service Company which will do business in California as CSC-Lawyers Incorporating Service. FIFTH: The total number of shares which the corporation is authorized to issue is One Thousand (1,000), all of which are of one class and of a par value of $.01 each, and all of which are Common shares. The Board of Directors of the corporation may issue any or all of the aforesaid authorized shares of the corporation from time to time for such consideration as it shall determine and may determine from time to time the amount of such consideration, if any, to be credited to paid-in surplus. SIXTH: In the interim between meetings of shareholders held for the election of directors or for the removal of one or more directors and the election of the replacement or replacements thereat, any vacancy which results by reason of the removal of a director or directors by the shareholders entitled to vote in an election of directors, and which has not been filled by said shareholders, may be filled by a majority of the directors then in office, whether or not less than a quorum, or by the sole remaining director, as the case may be. 2 SEVENTH: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. EIGHTH: 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 shareholders 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. Signed on January 6, 1999. /s/ John W. Nurkin, Esq. ------------------------------------ John W. Nurkin, Esq., Incorporator [seal] 3 AGREEMENT OF MERGER THIS AGREEMENT OF MERGER ("Agreement") is made as of February 5, 1999, by and among CalTire Acquisition Co., a California corporation ("CalTire"), CalTire Acquisition Co. #2, a California corporation ("CalTire2"), and California Tire Company, LLC, a California limited liability company ("CLLC"). W I T N E S S E T H: WHEREAS, the Board of Directors of CalTire, the Board of Directors of CalTire2 and all of the members of CLLC have determined that it is advisable and in the best interests of such entities for CalTire2 and CLLC to be merged with and into CalTire (the "Merger") upon the terms and conditions set forth herein and in accordance with the California General Corporation Law and the California Limited Liability Company Act (CalTire, CalTire2 and CLLC are sometimes referred to herein, collectively, as the "Constituent Entities"); and WHEREAS, CalTire2 is a wholly-owned direct subsidiary of CalTire; and WHEREAS, the interest of CLLC is 99% owned by CalTire and 1% owned by CalTire2. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Subject to the terms and conditions contained herein, at the Effective Time (as defined below), CalTire2 and CLLC (each a "Disappearing Entity" and, collectively, the "Disappearing Entities") will be merged with and into CalTire, with CalTire being the surviving corporation in the Merger (the "Surviving Corporation"). Upon the effectiveness of the Merger, the Surviving Corporation shall possess all of the rights, privileges, powers and franchises of each Disappearing Entity, and all property (real, personal and mixed) and other assets (tangible and intangible) belonging to each Disappearing Entity shall be vested in the Surviving Corporation, and all such property, assets, rights, privileges, powers and franchises shall thereafter belong to the Surviving Corporation, and the title to any real estate vested by deed or otherwise in any Disappearing Entity shall not revert or be in any way impaired by reason of the Merger, but all rights of creditors and all liens upon any property of any Disappearing Entity shall be preserved unimpaired, and all debts, liabilities and duties of each Disappearing Entity shall, following the Merger, attach to the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by the Surviving Corporation. 1.2 Consummation of the Merger. Promptly following and subject to the satisfaction of the conditions set forth in Article IV herein, the parties hereto shall cause a copy of this Agreement of Merger along with all necessary attachments to be filed with the Secretary of State of California in such form as required by, and executed in accordance with, the relevant provisions of the California General Corporation Law and the California Limited Liability Act. The Merger shall be effective upon the completion of such filing (the "Effective Time"). 4 1.3 Further Assurances. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any further deeds, assignments, assurances or any other acts are necessary, desirable or proper to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, the title to any property or right of either Disappearing Entity acquired or to be acquired by reason, or as a result, of the Merger, each Disappearing Entity agrees that the Surviving Corporation and its officers shall execute and deliver all such deeds, assignments and assurances and do all acts necessary, desirable or proper to vest, perfect or confirm title to such property or right in the Surviving Corporation, and the officers of the Surviving Corporation are fully authorized in the name of such Disappearing Entity or otherwise to take any and all such action. ARTICLE II THE SURVIVING CORPORATION 2.1 Articles of Incorporation. At and following the Effective Time, the Articles of Incorporation of CalTire shall continue to be the Articles of Incorporation of the Surviving Corporation until amended or repealed in accordance with the terms thereof and applicable law, subject to and amended by the following: Article FIRST is amended to read, in its entirety, as follows: "The name of the corporation (hereinafter referred to as the "corporation") is California Tire Company." 2.2 By-Laws. At and following the Effective Time, the By-Laws of CalTire shall continue to be the By-Laws of the Surviving Corporation until amended or repealed in accordance with the provisions thereof, the Articles of Incorporation of the Surviving Corporation and applicable law. 2.3 Directors. At and following the Effective Time, the directors of CalTire shall continue to be the directors of the Surviving Corporation until their respective successors are duly elected and qualified in the manner provided in the By-Laws and the Articles of Incorporation of the Surviving Corporation and applicable law, or until their earlier resignation or removal. 2.4 Officers. At and following the Effective Time, the officers of CalTire shall continue to be the officers of the Surviving Corporation until their successors are duly elected and qualified in the manner provided in the By-Laws and the Articles of Incorporation of the Surviving Corporation and applicable law, or until their earlier resignation or removal. 5 ARTICLE III CONVERSION AND CANCELLATION OF SHARES 3.1 Conversion and Cancellation of Shares. At the Effective Time, by virtue of the Merger and without any further action on the part either of the Constituent Entities or any holder of any of the capital stock or any interest thereof: (a) Each issued and outstanding share of CalTire2 Common Stock shall be canceled and all rights and privileges related thereto shall terminate, and no shares of the Surviving Corporation shall be issued in respect thereof. (b) Each interest of CLLC shall be canceled and all rights and privileges related thereto shall terminate, and no shares of the Surviving Corporation shall be issued in respect thereof. (c) Each issued and outstanding share of CalTire Common Stock shall remain outstanding after the Merger and shall not be affected thereby. ARTICLE IV CONDITIONS TO CLOSING The obligations of each of CalTire2, CLLC, and CalTire to consummate the transactions contemplated by this Agreement are subject to the approval of the Merger at or before the Effective Time, by the affirmative vote or by the written consent, as required by law, of the holders of a majority of the outstanding shares of CalTire Common Stock, of the holders of a majority of the outstanding shares of CalTire2 Common Stock and of the holders of a majority in interest of the members of CLLC. [SIGNATURES ON FOLLOWING PAGE] 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. CalTire Acquisition Co., a California corporation By: /s/ Donald C. Roof ------------------------------ Donald C. Roof Vice President By: /s/ J. Michael Gaither -------------------------------- J. Michael Gaither Secretary CalTire Acquisition Co. #2, a California corporation By: /s/ Donald C. Roof -------------------------------- Donald C. Roof Vice President By: /s/ J. Michael Gaither -------------------------------- J. Michael Gaither Secretary California Tire Company, LLC, a California limited liability company By: /s/ J. Michael Gaither -------------------------------- J. Michael Gaither Manager 7 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER Donald C. Roof and J. Michael Gaither state and certify that: 1. They are the Vice President and Secretary, respectively, of CalTire Acquisition Co., a California corporation. 2. The agreement of merger in the form attached was duly approved by the Board of Directors and shareholders of the corporation. 3. There is only one class of shares and the total number of outstanding shares is 1,000. 4. The shareholder percentage vote required for the aforesaid approval was any vote greater than 50 percent. 5. The principal terms of the merger agreement in the form attached were approved by the corporation by a vote of the number of shares which equaled or exceeded the vote required. On the date set forth below, in the City of Charlotte in the State of North Carolina, each of the undersigned does hereby declare under the penalty of perjury under the laws of the State of California that he signed the foregoing certificate in the official capacity set forth beneath his signature, and that the statements set forth in said certificate are true of his own knowledge. Signed on February 5, 1999. /s/ Donald C. Roof ------------------------------ Donald C. Roof, Vice President /s/ J. Michael Gaither ------------------------------ J. Michael Gaither, Secretary 8 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER Donald C. Roof and J. Michael Gaither state and certify that: 1. They are the Vice President and Secretary, respectively, of CalTire Acquisition Co. #2, a California corporation. 2. The agreement of merger in the form attached was duly approved by the Board of Directors and shareholders of the corporation. 3. There is only one class of shares and the total number of outstanding shares is 1,000. 4. The shareholder percentage vote required for the aforesaid approval was any vote greater than 50 percent. 6. The principal terms of the merger agreement in the form attached were approved by the corporation by a vote of the number of shares which equaled or exceeded the vote required. On the date set forth below, in the City of Charlotte in the State of North Carolina, each of the undersigned does hereby declare under the penalty of perjury under the laws of the State of California that he signed the foregoing certificate in the official capacity set forth beneath his signature, and that the statements set forth in said certificate are true of his own knowledge. Signed on February 5, 1999. /s/ Donald C. Roof ------------------------------ Donald C. Roof, Vice President /s/ J. Michael Gaither ------------------------------ J. Michael Gaither, Secretary 9 | [LOGO] STATE OF CALIFORNIA | SECRETARY OF STATE | BILL JONES | | | LIMITED LIABILITY COMPANY -- CERTIFICATE OF MERGER | WHEN COMPLETING FORM, PLEASE TYPE OR PRINT IN BLACK INK. | | | | - --------------------------------------------------------------------------------------------------------------- IMPORTANT -- READ THE INSTRUCTIONS ON THE BACK OF THIS FORM BEFORE COMPLETING | THIS SPACE FOR FILING ONLY - --------------------------------------------------------------------------------------------------------------- | | | 1. Name of surviving entity: | 2. Type of entity | 3. File number: | 4. Jurisdiction of organization: CalTire Acquisition Co. | Corporation | 2129772 | California | | | - --------------------------------------------------------------------------------------------------------------- | | | 5. Name of disappearing entity: | 6. Type of entity | 7. File number: | 8. Jurisdiction of organization: California Tire Company, LLC | LLC | | California | | | - --------------------------------------------------------------------------------------------------------------- 9. If a vote was required pursuant to Section 17551 or Section 1200 et seq., enter each class entitled to vote and the percentage of vote required: | Surviving Entity | Disappearing Entity ---------------- | ------------------- Each class entitled Percentage of vote | Each class entitled Percentage of vote to vote required | to vote required ------------------- ------------------ | ------------------- -------------------- Common greater than 50% | Membership interest majority in interest | - --------------------------------------------------------------------------------------------------------------- 10. The principal terms of the agreement of merger were approved by a vote of the number of interests or shares of each clas that equaled or exceeded the vote required: / X / Yes / / No - --------------------------------------------------------------------------------------------------------------- 11. Requisite changes to the information set forth in the articles of organization of the surviving limited liability company resulting from the merger. Attach additional pages if necessary: Not applicable - --------------------------------------------------------------------------------------------------------------- 12. Principal business address of the surviving foreign limited liability company or other business entity: Address: Not applicable City: State: Zip Code: - --------------------------------------------------------------------------------------------------------------- 13. Other information required to be stated in the certificate of merger pursuant to the laws under which each constituent other business entity was organized. Attach additional pages if necessary. Not applicable - --------------------------------------------------------------------------------------------------------------- 14. Future effective date, if any: | 15. Number of pages attached, if any: | Not applicable | 1 | - --------------------------------------------------------------------------------------------------------------- 15. I certify that the statements contained in this document are true and correct of my own knowledge. I declare that I am the person who is executing this instrument, which execution is my act and deed. Attach additional signature pages, if necessary. Donald C. Roof [signature] Donald C. Roof, Vice President -------------------------------------- -------------------------------------- Signature of authorized person for the Type or print name and title of person surviving entity signing J. Michael Gaither [signature] J. Michael Gaither, Secretary -------------------------------------- -------------------------------------- Signature of authorized person for the Type or print name and title of person surviving entity signing J. Michael Gaither [signature] J. Michael Gaither, Manager -------------------------------------- -------------------------------------- Signature of authorized person for the Type or print name and title of person surviving entity signing -------------------------------------- -------------------------------------- Signature of authorized person for the Type or print name and title of person surviving entity signing
10 ATTACHMENT TO CERTIFICATE OF MERGER 5a. Name of disappearing entity: CalTire Acquisition Co. #2 6a. Type of entity: Corporation 7a. File number: 8a. Jurisdiction of organization: California 9a. Disappearing Entity Each class entitled to vote: Percentage of vote required ---------------------------- --------------------------- common greater than 50% 16a. I certify that the statements contained in this document are true and correct of my own knowledge. I declare that I am the person who is executing this instrument, which execution is my act and deed. /s/ Donald C. Roof /s/ Donald C. Roof, Vice President - ------------------------------ ----------------------------------- Signature of authorized person Type or print name and title for the disappearing entity of person signing /s/ J. Michael Gaither /s/ J. Michael Gaither, Secretary - ------------------------------ ----------------------------------- Signature of authorized person Type or print name and title for the disappearing entity of person signing EX-3.10 4 BY-LAWS/CALIFORNIA TIRE CO 1 EXHIBIT 3.10 - --------------------------------------------------------------------- BY-LAWS OF CalTire Acquisition Co. - --------------------------------------------------------------------- Effective as of January 7, 1999 2 INDEX OF BYLAWS OF CALTIRE ACQUISITION CO. (STATE OF CALIFORNIA) ARTICLE I OFFICES Section 1. Principal Office Section 2. Registered Office Section 3. Other Offices ARTICLE II ANNUAL MEETING OF SHAREHOLDERS Section 1. Location Section 2. Annual Meeting Section 3. Notice ARTICLE III SPECIAL MEETINGS OF SHAREHOLDERS Section 1. Special Meetings Section 2. Notice of Special Meetings Section 3. Business at Special Meetings ARTICLE IV QUORUM AND VOTING STOCK Section 1. Quorum and Adjournments Section 2. Vote Section 3. Action Without Meeting 3 ARTICLE V DIRECTORS Section 1. Number Section 2. Vacancies Section 3. Powers Section 4. Books Section 5. Compensation ARTICLE VI MEETINGS OF THE BOARD OF DIRECTORS Section 1. Location Section 2. First Meeting Section 3. Regular Meetings Section 4. Special Meetings Section 5. Waiver of Notice Section 6. Quorum Section 7. Action Without Meeting ARTICLE VII EXECUTIVE COMMITTEE Section 1. Executive Committee Section 2. Minutes Section 3. Authority ARTICLE VIII NOTICES Section 1. Writing Section 2. Waiver 4 ARTICLE IX OFFICERS Section 1. Officers Section 2. Election Section 3. Other Officers Section 4. Compensation Section 5. Term THE PRESIDENT Section 6. Duties and Powers THE VICE PRESIDENTS Section 7. Duties and Powers THE SECRETARY AND ASSISTANT SECRETARIES Section 8. Duties and Powers Section 9. Assistant Secretaries THE CHIEF FINANCIAL OFFICER Section 10. Duties and Powers Section 11. Disbursement Section 12. Bond Section 13. Assistant Treasurers ARTICLE X CERTIFICATES FOR SHARES Section 1. Certificates Section 2. Facsimile Signatures Section 3. Lost Certificates Section 4. Transfers of Shares Section 5. Closing of Transfer Books Section 6. Registered Shareholders 5 ARTICLE XI GENERAL PROVISIONS Section 1. Dividends Section 2. Checks Section 3. Fiscal Year Section 4. Seal ARTICLE XII AMENDMENTS Section 1. Amendments ARTICLE XIII DIRECTORS' ANNUAL REPORT Section 1. Directors Annual Report 6 CALTIRE ACQUISITION CO. ****** BYLAWS ****** ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal executive office shall be located in Hayward, California. SECTION 2. REGISTERED OFFICE. The registered office of the corporation required by law to be maintained in the State of California 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 also have offices at such other places both within and without the State of California as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II ANNUAL MEETING OF SHAREHOLDERS SECTION 1. LOCATION. All meetings of shareholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of California as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meeting of shareholders for any other purpose may be held at such time and place, within or without the State of California, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. If no other place is stated or fixed, shareholders' meetings shall be held at the principal executive office of the corporation. SECTION 2. ANNUAL MEETING. Annual meetings of shareholders, commencing with year 1999, shall be held on the last day in the month of June in each year, if not a legal holiday, and if a legal holiday, then on the next secular day following at nine o'clock a.m., or at such other date and time as shall be designated from time to time by the Board of Directors and stated Page 1 of 12 7 in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. NOTICE. Written or printed notice of the annual meeting stating the place, day and hour of the meeting shall be given to each shareholder entitled to vote thereat not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date of the meeting. Notice may be sent by third-class mail only if the outstanding shares of the corporation are held of record by 500 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting. ARTICLE III SPECIAL MEETINGS OF SHAREHOLDERS SECTION 1. SPECIAL MEETINGS. Special meetings of shareholders for any purpose other than the election of directors may be held at such time and place within or without the State of California as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the articles of incorporation, may be called by the president, the Board of Directors, or the holders of not less than 10 percent of all the shares entitled to vote at the meeting and if the corporation has a chairman of the Board of Directors, special meetings of the shareholders may be called by the chairman. SECTION 2. NOTICE OF SPECIAL MEETINGS. Written or printed notice of a special meeting of shareholders, stating the time, place and purpose or purposes thereof, shall be given to each shareholder entitled to vote thereat not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date fixed for the meeting. Notice may be sent by third-class mail only if the outstanding shares of the corporation are held of record by 500 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting. SECTION 3. BUSINESS AT SPECIAL MEETINGS. The business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. ARTICLE IV QUORUM AND VOTING STOCK SECTION 1. QUORUM AND ADJOURNMENTS The holders of a majority of the shares of stock issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute or by the articles of incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders present in person or represented by proxy shall have power to adjourn the meeting from time to time, Page 2 of 12 8 without notice other than announcement at the meeting, until a quorum shall be present or represented. 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 original meeting. If a quorum is present, the affirmative vote of a majority of the shares of stock represented and voting at the meeting (which shares voting affirmatively also constitute at least a majority of the required quorum), shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. SECTION 2. VOTE. Each outstanding share of stock, having voting power, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. A shareholder may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. In all elections for directors, every shareholder entitled to vote shall have the right to vote, in person or by proxy, the number of shares of stock owned by him for as many persons as there are directors to be elected, or, upon satisfaction of the requirements set forth in Section 708(b) of the California General Corporation Law, to cumulate the vote of said shares, 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 the shareholder's shares are normally entitled, or to distribute the votes on the same principle among as many candidates as he may see fit. Section 708(b) of the California General Corporation Law provides that no shareholder shall be entitled to cumulate votes for any candidate for the office of director unless such candidates' names have been placed in nomination prior to the voting and at least one shareholder has given notice at the meeting prior to the voting of his intention to cumulate his votes. SECTION 3. ACTION WITHOUT MEETING. Unless otherwise provided in the articles, any action, except election of directors, 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, shall be signed by the holders 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 shares entitled to vote thereon were present and voted. Except to fill a vacancy in the Board of Directors not filled by the directors, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Any election of a director to fill a vacancy (other than a vacancy created by removal) not filled by the directors requires the written consent of a majority of the shares entitled to vote. ARTICLE V DIRECTORS SECTION 1. NUMBER. The number of directors shall be not less than one (1) nor more than seven (7) as shall be determined from time to time by the directors. The number constituting the initial Board of Directors shall be four (4). Directors need not be residents of the State of California nor shareholders of the corporation. The directors, other than the first Board of Directors, shall be elected at the annual meeting of the shareholders, and each director elected shall serve until the next succeeding annual meeting and until his successor shall have been Page 3 of 12 9 elected and qualified. The first Board of Directors shall hold office until the first annual meeting of shareholders. SECTION 2. VACANCIES. Unless otherwise provided in the articles of incorporation, vacancies, except for a vacancy created by the removal of a director, and newly created directorships resulting from any increase in the number of directors may be filled by a majority of the directors then in office, though less than quorum, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify. Unless otherwise provided in the articles of incorporation any vacancy created by the removal of a director shall be filled by the shareholders by the vote of a majority of the shares entitled to vote at a meeting at which a quorum is present. Any vacancies, which may be filled by directors and are not filled by the directors, may be filled by the shareholders by a majority of the shares entitled to vote at a meeting at which a quorum is present. SECTION 3. POWERS. The business affairs of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the articles of incorporation or by these bylaws directed or required to be exercised or done by the shareholders. SECTION 4. BOOKS. The directors may keep the books of the corporation, except such as are required by law to be kept within the state, outside the State of California, at such place or places as they may from time to time determine. SECTION 5. COMPENSATION. The Board of Directors, by the affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise. ARTICLE VI MEETINGS OF THE BOARD OF DIRECTORS SECTION 1. LOCATION. Meetings of the Board of Directors, regular or special, may be held either within or without the State of California. SECTION 2. FIRST MEETING. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present, or it may convene at such place and time as shall be fixed by the consent in writing of all the directors. SECTION 3. REGULAR MEETINGS. Regular meetings of the Board of Directors may be called by the chairman of the board, the president, any vice president, the secretary or any two directors, and may be held upon such notice, or without notice, and at such time and at such place as shall from time to time be determined by the board. Page 4 of 12 10 SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the president on four (4) days' notice if by mail, or 48 hours if delivered personally or by telephone or facsimile telecommunications to each director; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director; in which case, special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. SECTION 5. WAIVER OF NOTICE. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. 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 6. QUORUM. Unless the Articles of Incorporation or these bylaws provide otherwise, a majority of the number of directors fixed by or pursuant to these bylaws constitute a quorum for the transaction of business unless a greater number is required by law or by the articles of incorporation. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by statute or by the articles of incorporation. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 7. ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. ARTICLE VII EXECUTIVE COMMITTEE SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by the bylaws or otherwise, may designate two or more directors to constitute an executive committee, which committee, to the extent provided in such resolution, shall have and exercise all of the authority of the Board of Directors in the management of the corporation, except as otherwise required by law. Vacancies in the membership of the committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of the executive committee. SECTION 2. MINUTES. The executive committee shall keep regular minutes of its proceedings and report the same to the board when required. Page 5 of 12 11 SECTION 3. AUTHORITY. The executive committee shall not have authority: (1) To approve any action which will also require the shareholders' approval; (2) To fill vacancies on the board or in any committee; (3) To fix the compensation of directors for serving on the board or on any committee; (4) To amend or repeal the bylaws or adopt new bylaws; (5) To amend or repeal any resolution of the board which by its express terms is not so amendable or repealable; (6) To make a distribution to the shareholders except at a rate or in periodic amount or within a price range determined by the board; or (7) To appoint other committees of the board or the members thereof. ARTICLE VIII NOTICES SECTION 1. WRITING. Whenever, under the provisions of the statutes or of the articles of incorporation or of these bylaws, notice is required to be given to any director or shareholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or shareholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile telecommunication. Notice to any shareholder shall be given at the address furnished by such shareholder for the purpose of receiving notice. If such address is not given and if no address appears on the records of the corporation for such shareholder, notice may be given to such shareholder at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which said principal executive office is located. If a notice of a shareholders' meeting is sent by mail it shall be sent by first-class mail, or, in the case the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting, notice may be by third-class mail. SECTION 2. WAIVER. Whenever any notice whatever is required to be given under the provisions of the statutes or under the provisions of the articles of incorporation or these bylaws, 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 deemed equivalent to the giving of such notice. ARTICLE IX OFFICERS SECTION 1. OFFICERS. The officers of the corporation, except those elected in accordance with Section 210 of the California General Corporation Law, shall be chosen by the Board of Directors and shall be a president, a vice-president, a secretary and a chief financial officer. The Board of Directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Page 6 of 12 12 SECTION 2. ELECTION. The Board of Directors, at its first meeting after each annual meeting of shareholders, shall choose a president, one or more vice-presidents, a secretary and a chief financial officer, none of whom need be a member of the board. SECTION 3. OTHER OFFICERS. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 4. COMPENSATION. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. SECTION 5. TERM. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. THE PRESIDENT SECTION 6. DUTIES AND POWERS. The president shall be the chief executive officer of the corporation, shall preside at all meetings of the shareholders and the Board of Directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute bonds, mortgage and other contracts requiring a seal, under the seal 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 expressly delegated by the Board of Directors to some officers or agent of the corporation. THE VICE PRESIDENTS SECTION 7. DUTIES AND POWERS. The vice president, or if there shall be more than one, the vice presidents in the order determined by the Board of Directors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARIES SECTION 8. DUTIES AND POWERS. The secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, Page 7 of 12 13 under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. SECTION 9. ASSISTANT SECRETARIES. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE CHIEF FINANCIAL OFFICER SECTION 10. DUTIES AND POWERS. The chief financial officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The chief financial officer is, for the purpose of executing any documents requiring the signature of the "Treasurer," deemed to be the treasurer of the corporation. SECTION 11. DISBURSEMENT. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as chief financial officer and of the financial condition of the corporation. SECTION 12. BOND. If required by the Board of Directors, he shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. SECTION 14. ASSISTANT TREASURERS. The assistant treasurers, or, if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors, shall, in the absence or disability of the chief financial officer, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Page 8 of 12 14 ARTICLE X CERTIFICATES FOR SHARES SECTION 1. CERTIFICATES. Every holder of shares 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, or the president or a vice-president and the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares and the class or series of shares owned by him in the corporation. If the shares of the corporation are classified or if any class of shares has two or more series, there shall appear on the certificate either (1) a statement of the rights, preferences, privileges and restrictions granted to or imposed upon each class or series of shares to be issued and upon the holders thereof; or (2) a summary of such rights, preferences, privileges and restrictions with reference to the provisions of the articles and any certificates of determination establishing the same; or (3) a statement setting forth the office or agency of the corporation from which shareholders may obtain, upon request and without charge, a copy of the statement referred to in item (1) heretofore. Every certificate shall have noted thereon any information required to be set forth by the California General Corporation Law and such information shall be set forth in the manner provided by such law. SECTION 2. FACSIMILE SIGNATURES. 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 upon a certificate shall have ceased to be such officer, transfer agent or register before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it deems adequate, to protect the corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. SECTION 4. TRANSFERS OF SHARES. Upon surrender to the corporation or the transfer agent of the corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto, and the old certificate canceled and the transaction recorded upon the books of the corporation. SECTION 5. CLOSING OF TRANSFER BOOKS. In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or 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, the board may fix, in advance, a record date, which shall not Page 9 of 12 15 be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned meeting, but the board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. SECTION 6. REGISTERED SHAREHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessment a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or note it shall have express or other notice thereof, except as otherwise provided by the laws of California. ARTICLE XI GENERAL PROVISIONS SECTION 1. DIVIDENDS. Subject to the provision of the articles of incorporation relating thereto, if any, dividends may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to any provisions of the articles of incorporation and the California General Corporation Law. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conductive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 2. CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SECTION 4. SEAL. The corporate seal shall have inscribed thereon the name of the corporation, the date of its incorporation and the words "Corporate Seal, California." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Page 10 of 12 16 ARTICLE XI AMENDMENTS SECTION 1. AMENDMENTS. The bylaws may be altered, amended or repealed or new bylaws may be adopted (a) at any regular or special meeting of shareholders at which a quorum is present or represented, by the affirmative vote of a majority of the stock entitled to vote, provided notice of the proposed alteration, amendment or repeal be contained in the notice of such meeting, or (b) by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the board. The Board of Directors shall not make or alter any bylaw specifying a fixed number of directors or the maximum or minimum number of directors and the directors shall not change a fixed board to a variable board or vice versa in the bylaws. The Board of Directors shall not change a bylaw, if any, which requires a larger proportion of the vote of directors for approval than is required by the California General Corporation Law. ARTICLE XII DIRECTORS' ANNUAL REPORT SECTION 1. DIRECTORS' ANNUAL REPORT. The directors shall cause to be sent to the shareholders not later than 120 days after the close of the fiscal year, an annual report which shall include a balance sheet as of the closing date of the last fiscal year, and an income statement of changes in financial position for said fiscal year. Said annual report shall be accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. This annual report is hereby waived whenever the corporation shall have less than 100 shareholders as defined in Section 605 of the California General Corporation Law. Except when said waiver applies, the annual report shall be sent to the shareholder at least 15 (or if sent by third-class mail, 35) days prior to the date of the annual meeting. The annual report may be sent by third-class mail only if the corporation has outstanding shares held by 500 or more persons (as determined by the provisions of Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting. In addition to the financial statements included in the annual report, the annual report of the corporation, if it has more than 100 shareholders as defined in Section 605 of the California General Corporation Law and if it is not subject to the reporting requirements of Section 13 of the Securities and Exchange Act of 1934, or exempt from such registration by Section 12(g)(2) of said act, shall also describe briefly: (1) Any transaction (excluding compensation of officers and directors) during the previous fiscal year involving an amount in excess of forty-thousand ($40,000) (other than contracts let at competitive bids or services rendered at prices regulated by law) to which the corporation or its parent or subsidiary was a party and in which any director or officer of the corporation or of a subsidiary of (if known to the corporation or its parent or subsidiary) any holder of more than 10 percent of the outstanding voting shares of the corporation had a direct or indirect material interest, naming such person and stating such person's relationship to the corporation, the nature of such person's interest in the transaction and, where practicable, the amount of such interest; provided, that in the case of a transaction Page 11 of 12 17 with a partnership of which such person is a partner, only the interest of the partnership need be stated; and provided further than no such report need be made in the case of transactions approved by the shareholders under subdivision (a) of Section 310 or the California General Corporation Law. (2) The amount and circumstances of any indemnification or advances aggregating more than ten thousand dollars ($10,000) paid during the fiscal year to any officer or director of the corporation pursuant to Section 317 of the California General Corporation Law, provided, that no such report need be made in the case of indemnification approved by the shareholders under paragraph (2) of subdivision (e) of Section 317 of the California General Corporation Law. Page 12 of 12 EX-4.3 5 SUPPLEMENTAL INDENTURE TO SERIES D INDENTURE 1 EXHIBIT 4.3 SUPPLEMENTAL INDENTURE, dated as of February 22, 1999 (the "Supplemental Indenture"), among CALIFORNIA TIRE COMPANY, a California corporation (the "New Guarantor"), THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), each other existing Subsidiary Guarantor under the Indenture referred to below, and FIRST UNION NATIONAL BANK, as Trustee (the "Trustee") under the Indenture referred to below. ----------------------------------------------------------------- W I T N E S S E T H: WHEREAS, the Company, the then existing Subsidiary Guarantors and the Trustee have heretofore executed and delivered an Indenture, dated as of May 15, 1998 (as amended, supplemented, waived or otherwise modified, the "Indenture"), providing for the issuance of an aggregate principal amount of $100 million of 10% Senior Notes due 2008 of the Company (the "Securities"); WHEREAS, Section 4.12 of the Indenture provides that the Company is required to cause each domestic Restricted Subsidiary (other than an Immaterial Subsidiary that is neither a borrower nor a guarantor under the 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 of the Indenture; WHEREAS, the Company is causing the New Guarantor to execute this Supplemental Indenture in order to comply with the terms of Section 4.12 of the Indenture and the New Guarantor intends thereby to become bound as a Subsidiary Guarantor; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee and the Company are authorized to execute and deliver this Supplemental Indenture amending the Indenture, without the consent of any Holder (as defined in the Indenture); NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor, the Company, the existing Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Securities as follows: ARTICLE I Definitions SECTION 1.1 Defined Terms. As used in this Supplemental Indenture, terms defined in the Indenture or in the preamble or recital hereto are used herein as 2 therein defined, except that the term "Holders" in this Supplemental Indenture shall refer to the term "Holders" as defined in the Indenture and the Trustee acting on behalf or for the benefit of such Holders. The words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular section hereof. ARTICLE II Agreement to be Bound; Guarantee SECTION 2.1 Agreement to be Bound. The New Guarantor hereby becomes a party to the Indenture as a Subsidiary Guarantor and as such will have all of the rights and be subject to all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. The New Guarantor agrees to be bound by all of the provisions of the Indenture applicable to a Subsidiary Guarantor and to perform all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. SECTION 2.2 Guarantee. The New Guarantor hereby fully, unconditionally and irrevocably guarantees, jointly and severally with each other Subsidiary Guarantor, to each Holder of the Securities and the Trustee and its successors and assigns, the full and punctual payment when due, whether at maturity, by acceleration, by redemption or otherwise and within applicable grace periods, of the Obligations pursuant to Article 10 of the Indenture and subject to the terms and conditions of the Indenture. ARTICLE III Miscellaneous SECTION 3.1 Notices. All notices and other communications to the New Guarantor shall be given as provided in Section 11.02 of the Indenture. SECTION 3.2 Parties. Nothing expressed or mentioned herein is intended or shall be construed to give any Person, firm or corporation, other than the Holders and the Trustee, any legal or equitable right, remedy or claim under or in respect of this Supplemental Indenture or the Indenture or any provision herein or therein contained. Section 3.3 Governing Law. This Supplemental Indenture shall be governed by 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 3.4 Severability Clause. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or 2 3 impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. Section 3.5 Ratification of Indenture; Supplemental Indenture Part of Indenture. Except as expressly supplemented hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. The Trustee makes no representation or warranty as to the validity or sufficiency of this Supplemental Indenture. Section 3.6 Counterparts. The parties hereto may sign one or more copies of this Supplemental Indenture in counterparts, all of which together shall constitute one and the same agreement. Section 3.7 Headings. The headings of the Articles and the sections in this Supplemental Indenture are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ William H. Gaither --------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer CALIFORNIA TIRE COMPANY, as a Guarantor By: /s/ William H. Gaither --------------------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary OLIVER & WINSTON, INC. By: /s/ William H. Gaither --------------------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary 3 4 THE SPEED MERCHANT, INC. By: /s/ William H. Gaither --------------------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary PHOENIX RACING, INC. By: /s/ William H. Gaither --------------------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary FIRST UNION NATIONAL BANK, as Trustee By: /s/ Shannon Schwartz --------------------------------------- Name: Shannon Schwartz Title: Assistant Vice President 4 EX-4.6 6 SUPPLEMENTAL INDENTURE TO SERIES B INDENTURE 1 EXHIBIT 4.6 SUPPLEMENTAL INDENTURE, dated as of February 22, 1999 (the "Supplemental Indenture"), among CALIFORNIA TIRE COMPANY, a California corporation (the "New Guarantor"), THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), each other existing Subsidiary Guarantor under the Indenture referred to below, and FIRST UNION NATIONAL BANK, as Trustee (the "Trustee") under the Indenture referred to below. ---------------------------------------------------------------------- W I T N E S S E T H: WHEREAS, the Company, the then existing Subsidiary Guarantors and the Trustee have heretofore executed and delivered an Indenture, dated as of May 15, 1998 (as amended, supplemented, waived or otherwise modified, the "Indenture"), providing for the issuance of an aggregate principal amount of $100 million of 10% Senior Notes due 2008 of the Company (the "Securities"); WHEREAS, Section 4.12 of the Indenture provides that the Company is required to cause each domestic Restricted Subsidiary (other than an Immaterial Subsidiary that is neither a borrower nor a guarantor under the 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 of the Indenture; WHEREAS, the Company is causing the New Guarantor to execute this Supplemental Indenture in order to comply with the terms of Section 4.12 of the Indenture and the New Guarantor intends thereby to become bound as a Subsidiary Guarantor; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee and the Company are authorized to execute and deliver this Supplemental Indenture amending the Indenture, without the consent of any Holder (as defined in the Indenture); NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor, the Company, the existing Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Securities as follows: ARTICLE I Definitions SECTION 1.1 Defined Terms. As used in this Supplemental Indenture, terms defined in the Indenture or in the preamble or recital hereto are used herein as 2 therein defined, except that the term "Holders" in this Supplemental Indenture shall refer to the term "Holders" as defined in the Indenture and the Trustee acting on behalf or for the benefit of such Holders. The words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular section hereof. ARTICLE II Agreement to be Bound; Guarantee SECTION 2.1 Agreement to be Bound. The New Guarantor hereby becomes a party to the Indenture as a Subsidiary Guarantor and as such will have all of the rights and be subject to all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. The New Guarantor agrees to be bound by all of the provisions of the Indenture applicable to a Subsidiary Guarantor and to perform all of the obligations and agreements of a Subsidiary Guarantor under the Indenture. SECTION 2.2 Guarantee. The New Guarantor hereby fully, unconditionally and irrevocably guarantees, jointly and severally with each other Subsidiary Guarantor, to each Holder of the Securities and the Trustee and its successors and assigns, the full and punctual payment when due, whether at maturity, by acceleration, by redemption or otherwise and within applicable grace periods, of the Obligations pursuant to Article 10 of the Indenture and subject to the terms and conditions of the Indenture. ARTICLE III Miscellaneous SECTION 3.1 Notices. All notices and other communications to the New Guarantor shall be given as provided in Section 11.02 of the Indenture. SECTION 3.2 Parties. Nothing expressed or mentioned herein is intended or shall be construed to give any Person, firm or corporation, other than the Holders and the Trustee, any legal or equitable right, remedy or claim under or in respect of this Supplemental Indenture or the Indenture or any provision herein or therein contained. Section 3.3 Governing Law. This Supplemental Indenture shall be governed by 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 3.4 Severability Clause. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or 2 3 impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. Section 3.5 Ratification of Indenture; Supplemental Indenture Part of Indenture. Except as expressly supplemented hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. The Trustee makes no representation or warranty as to the validity or sufficiency of this Supplemental Indenture. Section 3.6 Counterparts. The parties hereto may sign one or more copies of this Supplemental Indenture in counterparts, all of which together shall constitute one and the same agreement. Section 3.7 Headings. The headings of the Articles and the sections in this Supplemental Indenture are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ William H. Gaither --------------------------- Name: William H. Gaither Title: President and Chief Executive Officer CALIFORNIA TIRE COMPANY, as a Guarantor By: /s/ William H. Gaither --------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary OLIVER & WINSTON, INC. By: /s/ William H. Gaither --------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary 3 4 THE SPEED MERCHANT, INC. By: /s/ William H. Gaither --------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary PHOENIX RACING, INC. By: /s/ William H. Gaither --------------------------- Name: William H. Gaither Title: Chief Executive Officer By: /s/ J. Michael Gaither --------------------------- Name: J. Michael Gaither Title: Vice President, General Counsel & Secretary FIRST UNION NATIONAL BANK, as Trustee By: /s/ Shannon Schwartz --------------------------- Name: Shannon Schwartz Title: Assistant Vice President 4 EX-4.7 7 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.7 THE J.H. HEAFNER COMPANY, INC. $100,000,000 10% SENIOR NOTES DUE 2008 $50,000,000 10% SENIOR NOTES DUE 2008 REGISTRATION RIGHTS AGREEMENT December 1, 1998 BancBoston Robertson Stephens Inc. Credit Suisse First Boston Corporation c/o BancBoston Robertson Stephens Inc. 100 Federal Street M/S 01-12-07 Boston, MA 02110 Dear Sirs: The J. H. Heafner Company, Inc., a North Carolina corporation (the "Issuer"), proposes to issue and sell to BancBoston Robertson Stephens Inc. ("BancBoston") and Credit Suisse First Boston Corporation ("CSFBC" and, together with BancBoston, the "Initial Purchasers"), upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), $50,000,000 aggregate principal amount of its 10% Senior Notes Due 2008 (the "Initial Securities") to be unconditionally guaranteed (each, a "Subsidiary Guaranty") on an unsecured senior basis by certain of the Issuer's subsidiaries (the "Subsidiary Guarantors", and together with the Issuer, the "Company"). The obligations of the Company in this Agreement are joint and several obligations of the Issuer and the Subsidiary Guarantors. The Initial Securities will be issued pursuant to an Indenture, dated as of December 1, 1998, (the "Indenture") among the Issuer, the Subsidiary Guarantors and First Union National Bank, as trustee (the "Trustee"). Pursuant to an Indenture dated May 15, 1998 among the Issuer, certain of the Issuer's current subsidiaries and First Union National Bank, as trustee, the Issuer issued $100,000,000 aggregate principal amount of its 10% Senior Notes Due 2008 (the "Existing Securities"). As an inducement to the Initial Purchasers, the Company agrees with the Initial Purchasers, for the benefit of the holders of the Initial Securities (including, without limitation, the Initial Purchasers), the Exchange Securities (as defined below) and the Private Exchange Securities (as defined below) (collectively the "Holders"), as follows: 2 1. Registered Exchange Offer. The Company shall, at its own cost, prepare and, not later than March 31, 1999, file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Exchange Offer Registration Statement") on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a proposed offer (the "Registered Exchange Offer") to the Holders of Transfer Restricted Securities (as defined in Section 6 hereof) who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer, and to the holders of the Existing Securities, to issue and deliver to such Holders or holders of Existing Securities, as the case may be, in exchange for: (a) the Initial Securities, a like aggregate principal amount (up to $50,000,000 aggregate principal amount) of debt securities (the "Initial Exchange Securities") of the Issuer and (b) the Existing Securities, a like principal amount (up to $100,000,000 aggregate principal amount) of debt securities (together with the Initial Exchange Securities, the "Exchange Securities") of the Issuer, each of the Exchange Securities issued under the Indenture and identical in all material respects to the Initial Securities (except for the transfer restrictions relating to the Initial Securities and the provisions relating to the matters described in Section 6 hereof) that would be registered under the Securities Act. The Company shall use its best efforts to cause such Exchange Offer Registration Statement to become effective under the Securities Act within 180 days (or if the 180th day is not a business day, the first business day thereafter) after the date of original issue of the Initial Securities (the "Issue Date") and shall keep the Exchange Offer Registration Statement effective for not less than 20 Business Days (as defined in the Indenture) (or longer, if required by applicable law) after the date notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "Exchange Offer Registration Period"). If the Company effects the Registered Exchange Offer, the Company will be entitled to close the Registered Exchange Offer 20 Business Days after the commencement thereof provided that the Company has accepted all the Initial Securities and the Existing Securities theretofore validly tendered in accordance with the terms of the Registered Exchange Offer. Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder of Transfer Restricted Securities or holder of Existing Securities, as the case may be, electing to exchange the Initial Securities or the Existing Securities, as applicable, for Exchange Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Securities Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. 3 The Company acknowledges that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder of Transfer Restricted Securities which is a broker-dealer electing to exchange Securities, acquired for its own account as a result of market making activities or other trading activities, for Exchange Securities (an "Exchanging Dealer"), is required to deliver a prospectus containing the information set forth in (a) Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and (c) Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) an Initial Purchaser that elects to sell Exchange Securities acquired in exchange for Securities (as defined below) constituting any portion of an unsold allotment is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale. The Company shall use its best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein, in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided, however, that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall be the lesser of 180 days and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Securities held by them received in exchange for Initial Securities (unless such period is extended pursuant to Section 3(j) below) and (ii) the Company shall make such prospectus and any amendment or supplement thereto, available to any broker-dealer for use in connection with any resale of any Exchange Securities received in exchange for Initial Securities for a period of not less than 90 days after the consummation of the Registered Exchange Offer. If, upon consummation of the Registered Exchange Offer, any Initial Purchaser holds Initial Securities acquired by it as part of its initial distribution, the Company, simultaneously with the delivery of the Exchange Securities pursuant to the Registered Exchange Offer, shall issue and deliver to such Initial Purchaser upon the written request of such Initial Purchaser, in exchange (the "Private Exchange") for the Initial Securities held by such Initial Purchaser, a like principal amount of debt securities of the Company issued under the Indenture and identical in all material respects (including the existence of restrictions on transfer under the Securities Act and the securities laws of the several states of the United States, but excluding provisions relating to the matters described in Section 6 hereof) to the Initial Securities (the "Private Exchange Securities"). The Initial Securities, the Exchange Securities and the Private Exchange Securities are herein collectively called the "Securities." 4 In connection with the Registered Exchange Offer, the Company shall: (a) mail to each Holder and each holder of Existing Securities a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 20 Business Days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders; (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; (d) permit Holders and holders of Existing Securities to withdraw tendered Securities and tendered Existing Securities at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer shall remain open; and (e) otherwise comply with all applicable laws. As soon as practicable after the close of the Registered Exchange Offer or the Private Exchange, as the case may be, the Company shall: (x) accept for exchange all the Initial Securities or Existing Securities, as the case may be, validly tendered and not withdrawn pursuant to the Registered Exchange Offer or the Private Exchange, as the case may be; (y) deliver to the Trustee for cancelation all the Initial Securities or Existing Securities, as the case may be, so accepted for exchange; and (z) cause the Trustee to authenticate and deliver promptly to each Holder of the Initial Securities and to each holder of Existing Securities, Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Initial Securities or Existing Securities, as the case may be, of such Holder or holder of Existing Securities so accepted for exchange. The Indenture will provide that the Exchange Securities will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Initial Securities or the Existing 5 Securities, as the case may be, surrendered in exchange therefor or, if no interest has been paid on the Initial Securities, from the date of original issue of the Initial Securities. Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company or if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such Holder is a broker-dealer, that it will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain 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 and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2. Shelf Registration. If, (i) because of any change in law or in applicable interpretations thereof by the staff of the Commission, the Company is not permitted to effect a Registered Exchange Offer, as contemplated by Section 1 hereof, (ii) the Registered Exchange Offer is not consummated within 225 days of the Issue Date (or, if such 225th day is not a business day, the first business day thereafter), (iii) any Initial Purchaser so requests with respect to the Initial Securities (or the Private Exchange Securities) not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following consummation of the Registered Exchange Offer or (iv) any Holder (other than an Exchanging Dealer) is not eligible to participate in the Registered Exchange Offer or, in the case of any Holder (other than an Exchanging Dealer) that participates in the Registered Exchange Offer, such Holder does not receive 6 freely tradeable Exchange Securities on the date of the exchange, the Company shall take the following actions: (a) The Company shall, at its cost, as promptly as practicable (but in no event more than 45 days after so required or requested pursuant to this Section 2) file with the Commission and thereafter shall use its best efforts to cause to be declared effective a registration statement (the "Shelf Registration Statement" and, together with the Exchange Offer Registration Statement, a "Registration Statement") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, the "Shelf Registration"); provided, however, that no Holder (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company shall use its reasonable efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities for a period of two years (or for such longer period if extended pursuant to Section 3(j) below) from the date of its effectiveness or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) are no longer restricted securities (as defined in Rule 144 under the Securities Act, or any successor rule thereof). The Company shall be deemed not to have used its reasonable efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action is required by applicable law. (c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, any Registered Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply: (a) The Company shall (i) furnish to each Initial Purchaser, prior to the 7 filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Registered Exchange Offer or the Shelf Registration Statement, the Company shall use its reasonable efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; (iii) if requested by an Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange Securities received by such broker-dealer in the Registered Exchange Offer (a "Participating Broker-Dealer"), whether such positions or policies have been publicly disseminated by the staff of the Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders, who propose to sell Securities pursuant to the Shelf Registration Statement, as selling securityholders. (b) The Company shall give written notice to the Initial Purchasers, the Holders of the Securities and any Participating Broker-Dealer from whom the Company has received prior written notice that it will be a Participating Broker-Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when the Registration Statement or any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or 8 supplements to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus do not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading. (c) The Company shall make every reasonable effort to obtain the withdrawal at the earliest possible time, of any order suspending the effectiveness of the Registration Statement. (d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company shall deliver to each Exchanging Dealer and each Initial Purchaser, and to any other Holder or holder of Existing Securities who so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Initial Purchaser or any such Holder requests, all exhibits thereto (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by the prospectus, or any amendment or supplement thereto, included in the Shelf 9 Registration Statement. (g) The Company shall deliver to each Initial Purchaser, any Exchanging Dealer, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by any Initial Purchaser, if necessary, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Securities covered by the prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement. (h) Prior to any public offering of the Securities, pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (i) The Company shall cooperate with the Holders of the Securities or to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement. (j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) above during the period for which the Company is required to maintain an effective Registration Statement, the Company shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Securities or holders of the Existing Securities, as the case may be, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be 10 stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Initial Purchasers, the Holders of the Securities, the holders of the Existing Securities and any known Participating Broker-Dealer in accordance with paragraphs (ii) through (v) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities, the holders of the Existing Securities and any such Participating Broker-Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the Securities, the holders of the Existing Securities and any known Participating Broker-Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j). (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or the Shelf Registration and will make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period. (m) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Company may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the 11 Securities of any Holder that unreasonably fails to furnish such information within a reasonable time after receiving such request. (o) The Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as any Holder of the Securities shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration. (p) In the case of any Shelf Registration, the Company shall (i) make reasonably available for inspection by the Holders of the Securities any underwriter participating in any disposition pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders of the Securities or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors and employees to supply, and use all reasonable efforts to obtain from its accountants and auditors, all relevant information reasonably requested by the Holders of the Securities or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case, as shall be reasonably necessary to enable such persons, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing inspection and information gathering shall be coordinated on behalf of the Initial Purchasers by you and on behalf of the other parties, by one counsel designated by and on behalf of such other parties as described in Section 4 hereof. Each Holder shall be under an obligation to, and each Holder will, keep all non-public or proprietary information so supplied confidential unless and until such information is generally available to the public. (q) In the case of any Shelf Registration, the Company, if requested by any Holder of Securities covered thereby, shall direct (i) its counsel to deliver an opinion and updates thereof relating to the Securities in customary form addressed to such Holders and the managing underwriters, if any, thereof and dated, in the case of the initial opinion, the effective date of such Shelf Registration Statement (it being agreed that the matters to be covered by such opinion shall include, without limitation, the due incorporation and good standing of the Company and its subsidiaries; the qualification of the Company and its subsidiaries to transact business as foreign corporations; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section 3(o) hereof; the due authorization, execution, authentication and issuance, and the validity and enforceability, of the applicable Securities; the absence of material legal or governmental proceedings involving the Company and its subsidiaries; the absence of governmental approvals required to be obtained in connection with the Shelf Registration Statement, the offering and sale of the applicable Securities, or any agreement of the type referred to in Section 3(o) hereof; the compliance as to form of such Shelf Registration Statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the 12 Trust Indenture Act, respectively; and, as of the date of the opinion and as of the effective date of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from such Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, and from any documents incorporated by reference therein of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Exchange Act); (ii) its officers to execute and deliver all customary documents and certificates and updates thereof requested by any underwriters of the applicable Securities and (iii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Shelf Registration Statement to provide to the selling Holders of the applicable Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) In the case of the Registered Exchange Offer, if requested by any Initial Purchaser or any known Participating Broker-Dealer, the Company shall direct (i) its counsel to deliver to such Initial Purchaser or such Participating Broker-Dealer a signed opinion or opinions in substantially the form or forms set forth in the opinion delivered pursuant to Section 6(c) of the Purchase Agreement with such changes as are customary in connection with the preparation of a Registration Statement and (ii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Registration Statement to deliver to such Initial Purchaser or such Participating Broker-Dealer a comfort letter, in customary form, meeting the requirements as to the substance thereof as set forth in Sections 6(a) of the Purchase Agreement, with appropriate date changes. (s) If a Registered Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Initial Securities or the Existing Securities, as the case may be, by Holders or holders of Existing Securities to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Company shall mark, or caused to be marked, on the Initial Securities or the Existing Securities, as the case may be, so exchanged that such Initial Securities or the Existing Securities, as the case may be, are being canceled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall the Initial Securities or the Existing Securities, as the case may be, be 13 marked as paid or otherwise satisfied. (t) The Company will use its reasonable efforts to (a) if the Initial Securities or the Existing Securities, as the case may be, have been rated prior to the initial sale of the Initial Securities confirm such ratings will apply to the Securities covered by a Registration Statement, or (b) if the Initial Securities or the Existing Securities, as the case may be, were not previously rated, cause the Securities covered by a Registration Statement to be rated with the appropriate rating agencies, if so requested by Holders of a majority in aggregate principal amount of Securities covered by such Registration Statement, or by the managing underwriters, if any. (u) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules (the "Rules") of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company will assist such broker-dealer in complying with the requirements of such Rules, including, without limitation, by (i) if such Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to such Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules. (v) The Company shall use its best efforts to take all other steps necessary to effect the registration of the Securities or the Existing Securities, as the case may be, covered by a Registration Statement contemplated hereby. 4. Registration Expenses. The Company shall bear all fees and expenses incurred in connection with the performance of its obligations under Sections 1 through 3 hereof (excluding fees and expenses, if any, of counsel for the Initial Purchasers), whether or not the Registered Exchange Offer or a Shelf Registration is filed or becomes effective, and, in the event of a Shelf Registration, shall bear or reimburse the Holders of the Securities covered thereby for the reasonable fees and disbursements of one firm of counsel designated by the Holders of a majority in principal amount of the Initial Securities covered thereby to act as counsel for the Holders of the Initial Securities in connection therewith. 14 5. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of the Securities any Participating Broker-Dealer and each person, if any, who controls such Holder or such Participating Broker-Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Participating Broker-Dealer and such controlling persons are referred to collectively as the "Indemnified Parties") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer (or controlling person thereof) from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer (or controlling person thereof) under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Company had previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided further, however, that this indemnity agreement will be in addition to any liability which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (b) Each Holder of the Securities, severally and not jointly, will indemnify and hold harmless the Company and each person, if any, who controls the Company within the 15 meaning of the Securities Act or the Exchange Act from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Company or any such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by the Company or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Company or any of its controlling persons. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party, and which counsel, together with one local counsel in each jurisdiction, shall act on behalf of all the indemnified parties with respect to such action), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. 16 (d) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the exchange of the Securities pursuant to the Registered Exchange Offer, or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Holder or such other indemnified party, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 5(d), the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 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. For purposes of this paragraph (d), each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company. (e) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancelation of this Agreement or any investigation made by or on behalf of any indemnified party. 6. Additional Interest Under Certain Circumstances. (a) Additional interest (the "Additional Interest") with respect to the Initial Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iii) below a 17 "Registration Default"): (i) If by March 31, 1999, neither the Exchange Offer Registration Statement nor a Shelf Registration Statement has been filed with the Commission; (ii) If by July 21, 1999, neither the Registered Exchange Offer is consummated nor, if required in lieu thereof, the Shelf Registration Statement is declared effective by the Commission; or (iii) If after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective (A) such Registration Statement thereafter ceases to be effective; or (B) such Registration Statement or the related prospectus ceases to be usable (except as permitted in paragraph (b)) in connection with resales of Transfer Restricted Securities during the periods specified herein because either (1) any event occurs as a result of which the related prospectus forming part of such Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend such Registration Statement or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Initial Securities over and above the interest set forth in the title of the Securities from and including the date on which any such Registration Default shall occur to but excluding the earlier of the date on which (i) all such Registration Defaults have been cured and (ii) the Initial Securities no longer constitute Transfer Restricted Securities, at a rate of 0.50% per annum. (b) A Registration Default referred to in Section 6(a)(iii)(B) hereof shall be deemed not to have occurred and be continuing in relation to a Shelf Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to such Shelf Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events, with respect to the Company that would need to be described in such Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company is proceeding promptly and in good faith to amend or supplement such Shelf Registration Statement and related prospectus to describe such events; provided, however, that in any case if such Registration Default occurs for a continuous period in excess of 30 days, Additional Interest shall be payable in accordance with the above paragraph from the day such Registration Default occurs until such Registration Default is cured. (c) Any amounts of Additional Interest due pursuant to clause (i), (ii) or (iii) of Section 6(a) above will be payable in cash on the regular interest payment dates with 18 respect to the Initial Securities. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Initial Securities, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (d) "Transfer Restricted Securities" means each Security until (i) the date on which such Transfer Restricted Security has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of a Initial Security for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Initial Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Initial Securities is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 7. Rules 144 and 144A. The Company shall use its reasonable efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Initial Securities, make publicly available other information so long as necessary to permit sales of Transfer Restricted Securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Transfer Restricted Securities identified to the Company by the Transfer Restricted Securities upon request. Upon the request of any Holder of Transfer Restricted Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 8. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("Managing Underwriters") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities to be included in such offering; provided that the Managing Underwriters must be reasonably satisfactory to the Company. No person may participate in any underwritten registration hereunder unless such 19 person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Miscellaneous. (a) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Company. (2) if to the Initial Purchasers; BancBoston Robertson Stephens Inc. 100 Federal Street M/S 01-12-07 Boston, MA 02110 Attention: High Yields Capital Markets with a copy to: Cravath, Swaine & Moore 825 Eighth Avenue New York, NY 10019-7475 Fax No.: (212) 474-3700 Attention: William J. Whelan, III (3) if to the Company, at its address as follows: The J. H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Attention: Chief Financial Officer 20 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, NY 10019 Attention: Scott F. Smith All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (c) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (d) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns. (e) 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. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. (h) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (i) Securities Held by the Company. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 21 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Initial Purchasers, the Issuer and each Subsidiary Guarantor in accordance with its terms. Very truly yours, THE J. H. HEAFNER COMPANY, INC. by /s/ Donald C. Roof ---------------------------------- Name: Donald C. Roof Title: SVP & CFO OLIVER & WINSTON, INC. by /s/ Donald C. Roof ---------------------------------- Name: Donald C. Roof Title: SVP & CFO by /s/ J. Michael Gaither ---------------------------------- Name: J. Michael Gaither Title: SVP & General Counsel THE SPEED MERCHANT, INC., by /s/ Donald C. Roof ---------------------------------- Name: Donald C. Roof Title: SVP & CFO by /s/ J. Michael Gaither ---------------------------------- Name: J. Michael Gaither Title: SVP & General Counsel PHOENIX RACING, INC., by /s/ Donald C. Roof ---------------------------------- Name: Donald C. Roof Title: SVP & CFO 22 by /s/ J. Michael Gaither ---------------------------------- Name: J. Michael Gaither Title: SVP & General Counsel ITCO LOGISTICS CORPORATION, by /s/ J. Michael Gaither ---------------------------------- Name: J. Michael Gaither Title: SVP & General Counsel 23 The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. BANCBOSTON ROBERTSON STEPHENS INC. CREDIT SUISSE FIRST BOSTON CORPORATION by: BANCBOSTON ROBERTSON STEPHENS INC. by /s/ Ian B. Blumenstein ------------------------------- Name: Ian B. Blumenstein Title: Managing Director 24 ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. 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 Exchange Securities received in exchange for Initial Securities where such Initial Securities 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 (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." 25 ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities, where such Initial Securities were acquired by such 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 Exchange Securities. See "Plan of Distribution." 26 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. 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 Exchange Securities received in exchange for Initial Securities where such Initial Securities 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 broker-dealer for use in connection with any such resale. In addition, until , 199 , all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus.1 The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account 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 Exchange Securities 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 broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission 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. - -------- 1 In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer prospectus. 27 For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. 28 ANNEX D [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: Address: If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, 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. EX-5.1 8 OPINION OF HOWARD, SMITH & LEVIN 1 EXHIBIT 5.1 LETTERHEAD OF HOWARD, SMITH & LEVIN LLP March 31, 1999 The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933, as amended (the "Act"), pursuant to the Registration Statement on Form S-4 (the "Registration Statement") to be filed with the Securities and Exchange Commission, of the offer and sale of (a) $150,000,000 aggregate principal amount of 10% Senior Notes Due 2008, Series D (the "Series D Notes") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and (b) Subsidiary Guaranties of the Series D Notes (the "Subsidiary Guaranties" and, together with the Series D Notes, the "Securities") by Oliver & Winston, Inc., a California corporation, The Speed Merchant, Inc., a California corporation, Phoenix Racing, Inc., a California corporation, and California Tire Company, a California corporation (collectively, the "Subsidiary Guarantors"), in each case to be issued pursuant to the Indenture dated as of December 1, 1998, as amended by the First Supplemental Indenture dated as of February 22, 1999 (the "Indenture") among the Company, its subsidiaries and First Union National Bank, as trustee (the "Trustee"), we have reviewed such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. We have assumed that each of the Company, the Subsidiary Guarantors and the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, that it has or had all requisite power and authority to execute, deliver and perform the Indenture and, as applicable, to issue and authenticate the Securities, and that it has duly authorized, executed and delivered the Indenture, and has duly authorized the transactions contemplated thereby. Upon the basis of such review and subject to the foregoing assumptions, we advise you that, in our opinion, when the Registration Statement has become effective under the Act, and the Series D Notes have been duly executed and authenticated in accordance with the Indenture and issued in exchange for $150,000,000 aggregate principal amount of 10% Senior Notes Due 2008, consisting of $100,000,000 aggregate principal amount of 10% Senior Notes Due 2008, Series B, 2 The J.H. Heafner Company, Inc. -2- and $50,000,000 aggregate principal amount of 10% Senior Notes Due 2008, Series C, which were previously issued by the Company, all in accordance with the exchange offer contemplated by the Registration Statement, and assuming compliance with the Act, the Series D Notes will constitute the valid and binding obligations of the Company, and each Subsidiary Guaranty of a Subsidiary Guarantor will constitute the valid and binding obligation of such Subsidiary Guarantor, in each case enforceable against such party in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights, to general equity principles, and to the qualification that we express no opinion with respect to the waivers contained in Section 6.12 of the Indenture. We are members of the bar of the State of New York. We do not purport to be experts in, and we do not express any opinion on, any laws other than the law of the State of New York, the Delaware General Corporation Law and the Federal law of the United States of America. We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ HOWARD, SMITH & LEVIN LLP EX-10.19 9 LETTER AGREEMENTS 1 EXHIBIT 10.19 [LOGO] MICHELIN NORTH AMERICA MICHELIN NORTH AMERICA, Inc. One Parkway South Post Office Box 19001 Greenville, SC 29602-9001 November 24, 1998 THE J H HEAFNER CO INC-MAIN 814 EAST MAIN STREET LINCOLNTON, NC 28092 Dear Sir: We are pleased to propose to you that your 1998 Michelin North America, Inc. ("MNA") Authorized Dealer Agreement, including any security provisions related thereto, be extended through December 31, 1999. All terms and conditions will remain the same as in the 1998 MNA Dealer Agreement, and will carry forward through 1999, with the following exceptions: As stated in Section II of the 1998 MNA Dealer Agreement, the Authorized Dealer is not permitted to sell directly or indirectly, Michelin brand products to dealers owned by MNA's Competition. Failure to follow this restriction may result in cancellation of this dealership agreement. In addition, without limiting MNA's rights to terminate the Dealer Agreement, tires that are found to have been sold to the competition will be credited back at the purchase price, and rebilled at the Earthmover Price List Base pricing, without any discounts or other incentives. Please acknowledge your understanding and agreement to the above extension as modified herein by signing below and returning this letter to me by December 31, 1998. Thank you for your continued support of MNA brand products. We look forward to working together toward our pursuit of a successful 1999. Authorized Categories: Industrial X Small Earthmover X --- --- Very truly yours, Jake Jordal Director of Sales MICHELIN EARTHMOVER TIRES NORTH AMERICA * Must also be authorized on a ship to basis in accordance with the annual sales program. AGREED: By:(signature): /s/ Daniel K. Brown -------------------------- Name (print): Daniel K. Brown -------------------------- Title: Sr. V.P. MKT & Sales -------------------------- Date: Dec 3, 1998 -------------------------- 2 Home office/Bill-To #: 1000234 3 November 25, 1998 Heafner/ITCO Tires and Products 814 East Main Street P. O. Box 837 Lincolnton, NC 28092 Dear Dealer: We are pleased to propose to you that your 1998 Michelin North America, Inc. ("MNA') Authorized Dealer Agreement, including any security provisions related thereto, be extended through December 31, 1999. All terms and conditions will remain the same as in the 1998 MNA Dealer Agreement, and will carry forward through 1999. Please acknowledge your understanding and agreement to the above extension by signing below and returning this letter to me by December 30, 1998. Thank you for your continued support of MNA brand products. We look forward to working together toward our pursuit of a successful 1999. Very truly yours, AGREED: /s/Daniel K. Brown - --------------------------- Name (please print name) Sr. V.P. Sales & Marketing - --------------------------- Title Nov. 27, 1998 - --------------------------- Date Bill-To #: 1002722 --------------- EX-10.21 10 J.H. HEAFNER 1998 STOCK OPTIN PLAN AMENDMENT 1 EXHIBIT 10.21 THE J.H. HEAFNER COMPANY 1998 STOCK OPTION PLAN AMENDMENT WHEREAS, the Board of Directors at their September 16, 1998 meeting voted to authorize up to 527,500 shares to be reserved for grant of options under The J.H. Heafner Company, Inc. 1997 Option Plan. NOW, THEREFORE, The J.H. Heafner Company, Inc. Stock Option Plan is hereby amended such that the total number of shares reserved for grant of option in paragraph 5 of the said Plan is hereby amended to read 527,500 shares of Stock. There are no other changes to the said Plan. EX-10.32 11 AMENDED & RESTATED EMPLOYMENT AGREEMENTS 1 EXHIBIT 10.32(a) AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and Daniel K. Brown (the "Employee"). The Employer and the Employee are parties to an Employment Agreement, dated as of May 20, 1998, and desire to amend and restate such Employment Agreement in its entirety. The Employer desires to continue to retain the Employee to supply services to the Employer, and the Employee desires to continue provide such services to the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as Senior Vice President-Sales and Marketing of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $191,000 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 February 1. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee (i) an amount equal to the greater of (x) annual fixed bonus payments (the "Fixed Bonus") equal to 15% of the Employee's Base 2 Salary for such year, payable on or around February 1 of the following year, or (y) annual target bonus payments (as defined in the Employer's Executive Bonus Plan) (the "Target Bonus"), payable on or around February 1 of the following year, and (ii) other incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder) at any time although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. (c) Restricted Stock and Stock Options. The Employee purchased shares of Class A Common Stock of the Employer pursuant to a Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee, and was granted options (pursuant to the Employer's 1997 Stock Option Plan) to acquire shares of Class A Common Stock of the Employer, pursuant to Stock Option Agreements between the Employer and the Employee dated as of May 28, 1997 and _________, 1998. Such Securities Purchase and Stockholders Agreement and Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms no less favorable than those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Executive Committee. In the event of a Change in Control, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or similar plans maintained by the Employer, any contrary provisions of such plans notwithstanding. Any such plans shall be deemed amended to the extent necessary to carry out the intent expressed in the preceding sentence. (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. If the Employment Period is terminated by the Employer or the Employee in connection with a Change in Control (as defined), the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense during three year period following the effective date of such Change in Control (the "Change in Control Period"). (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. -2- 3 (f) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 4 and 5, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the -3- 4 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. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary and Target Bonus earned to the date of death or termination for disability or Cause, as the case may be. Any Target Bonus payments payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date declared or payable. (ii) Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee or his estate an amount (in addition to amounts payable under Section 3(e)(i)) equal to one year's Base Salary and Target Bonus, in each case, at the rate in effect on the date of termination. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). (iii) Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, (y) by the Employee with Good Reason or by the Employer for any reason within one year after a Change in Control, or (z) by the Employee for any reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, then the Employer shall pay to the Employee within five business days of such termination an amount (in addition to amounts payable under Section 3(e)(i)) equal to the sum of (A) the higher of (1) the annual Base Salary at the date of such termination or (2) the annual Base Salary at the time of the Change in Control, in each case multiplied by the number of years remaining in the Change in Control Period, and (B) the Target Bonus at the annual rate in effect at the date of such termination multiplied by the number of years remaining in the Change in Control Period. (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the -4- 5 Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity not directly or indirectly controlled by the Employer's stockholders of more than 35% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (D) individuals serving as directors of the Employer on the date hereof and who were nominated to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by (x) a vote of such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones 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, limited liability company or other entity all of the capital stock or other ownership interests of which are owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any payment due under Section 3(e)(iii) shall be limited to the extent the Board of Directors of the Employer, in its good faith determination, deems necessary to preserve the deductibility by the Employer of such payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended, or any successor provision of any successor statute. The Employer may elect to make any payments due under Section 3(e)(ii) in a lump sum or as they would have been paid had the Employment Period not been terminated. Unless otherwise specifically stated to be payable over a period of time, all amounts due under this Section 3 shall be payable on demand by the Employee and shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 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. -5- 6 SECTION 4. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 4(a), the Employee shall not disclose any Confidential Information of the Employer or any 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 Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 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 Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, -6- 7 the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 5. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent or principal of another business firm, (x) 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, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 5. SECTION 6. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 5 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision -7- 8 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 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Assignment; Benefit. This Agreement is personal in its nature and neither party shall assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other; provided, that the Employer may assign this Agreement and its rights and obligations hereunder to any transferee of all or substantially all of the Business (whether by merger, consolidation, sale of stock or assets or otherwise) without the Employee's consent. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and not for the benefit of, or enforceable by, any third party. (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 Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) Dispute Resolution; Attorney's Fees. In making any determination as to the existence of Cause for termination or the occurrence of a Change in Control, the Board of Directors shall, subject to its members' fiduciary duties, abide by the recommendation of a committee comprising only members who were nominated by one or more Principal Shareholders. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such -8- 9 event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (g) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (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: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 -9- 10 If to the Employee: Daniel K. Brown 17715 Jetton Road Cornelius, North Carolina 28031 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. (j) Descriptive Headings; Certain Interpretations. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement: (i) any reference in this Agreement to any agreement, document or instrument includes all permitted supplements and amendments; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (iii) the words "include," "included" and "including" are not limiting; and (iv) a reference to a person or entity includes its permitted successors and assigns. (k) Counterparts; Entire Agreement. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Other Agreements contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Other Agreements and supersede all other or prior written or oral agreements or understandings among the parties with respect to the Employee's employment by the Employer. The Employment Agreement, dated as of May 20, 1998, between the Employer and the Employer is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY 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 -10- 11 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. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 6(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. -11- 12 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: William H. Gaither Title: /s/ Daniel K. Brown ------------------------------- Daniel K. Brown -12- 13 EXHIBIT 10.32(b) AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and J. Michael Gaither (the "Employee"). The Employer and the Employee are parties to an Employment Agreement, dated as of May 20, 1998, and desire to amend and restate such Employment Agreement in its entirety. The Employer desires to continue to retain the Employee to supply services to the Employer, and the Employee desires to continue provide such services to the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as Senior Vice President, General Counsel and Secretary of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $224,000 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 February 1. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee (i) an amount equal to the greater of (x) annual fixed bonus payments (the "Fixed Bonus") equal to 15% of the Employee's Base 14 Salary for such year, payable on or around February 1 of the following year, or (y) annual target bonus payments (as defined in the Employer's Executive Bonus Plan) (the "Target Bonus"), payable on or around February 1 of the following year, and (ii) other incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder) at any time although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. (c) Restricted Stock and Stock Options. The Employee purchased shares of Class A Common Stock of the Employer pursuant to a Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee, and was granted options (pursuant to the Employer's 1997 Stock Option Plan) to acquire shares of Class A Common Stock of the Employer, pursuant to Stock Option Agreements between the Employer and the Employee dated as of May 28, 1997 and _________, 1998. Such Securities Purchase and Stockholders Agreement and Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms no less favorable than those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Executive Committee. In the event of a Change in Control, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or similar plans maintained by the Employer, any contrary provisions of such plans notwithstanding. Any such plans shall be deemed amended to the extent necessary to carry out the intent expressed in the preceding sentence. (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. If the Employment Period is terminated by the Employer or the Employee in connection with a Change in Control (as defined), the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense during three year period following the effective date of such Change in Control (the "Change in Control Period"). (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. -2- 15 (f) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 4 and 5, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the -3- 16 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. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary and Target Bonus earned to the date of death or termination for disability or Cause, as the case may be. Any Target Bonus payments payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date declared or payable. (ii) Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee or his estate an amount (in addition to amounts payable under Section 3(e)(i)) equal to one year's Base Salary and Target Bonus, in each case, at the rate in effect on the date of termination. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). (iii) Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, (y) by the Employee with Good Reason or by the Employer for any reason within one year after a Change in Control, or (z) by the Employee for any reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, then the Employer shall pay to the Employee within five business days of such termination an amount (in addition to amounts payable under Section 3(e)(i)) equal to the sum of (A) the higher of (1) the annual Base Salary at the date of such termination or (2) the annual Base Salary at the time of the Change in Control, in each case multiplied by the number of years remaining in the Change in Control Period, and (B) the Target Bonus at the annual rate in effect at the date of such termination multiplied by the number of years remaining in the Change in Control Period. (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (C) at any time after the consummation of an initial public offering of Class A Common Stock of the -4- 17 Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity not directly or indirectly controlled by the Employer's stockholders of more than 35% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (D) individuals serving as directors of the Employer on the date hereof and who were nominated to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by (x) a vote of such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones 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, limited liability company or other entity all of the capital stock or other ownership interests of which are owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any payment due under Section 3(e)(iii) shall be limited to the extent the Board of Directors of the Employer, in its good faith determination, deems necessary to preserve the deductibility by the Employer of such payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended, or any successor provision of any successor statute. The Employer may elect to make any payments due under Section 3(e)(ii) in a lump sum or as they would have been paid had the Employment Period not been terminated. Unless otherwise specifically stated to be payable over a period of time, all amounts due under this Section 3 shall be payable on demand by the Employee and shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 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. -5- 18 SECTION 4. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 4(a), the Employee shall not disclose any Confidential Information of the Employer or any 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 Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 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 Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, -6- 19 the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 5. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent or principal of another business firm, (x) 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, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 5. SECTION 6. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 5 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision -7- 20 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 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Assignment; Benefit. This Agreement is personal in its nature and neither party shall assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other; provided, that the Employer may assign this Agreement and its rights and obligations hereunder to any transferee of all or substantially all of the Business (whether by merger, consolidation, sale of stock or assets or otherwise) without the Employee's consent. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and not for the benefit of, or enforceable by, any third party. (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 Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) Dispute Resolution; Attorney's Fees. In making any determination as to the existence of Cause for termination or the occurrence of a Change in Control, the Board of Directors shall, subject to its members' fiduciary duties, abide by the recommendation of a committee comprising only members who were nominated by one or more Principal Shareholders. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such -8- 21 event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (g) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (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: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 -9- 22 If to the Employee: J. Michael Gaither 315 West 7th Street Newton, North Carolina 28658 Facsimile: (828) 466-2885 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (j) Descriptive Headings; Certain Interpretations. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement: (i) any reference in this Agreement to any agreement, document or instrument includes all permitted supplements and amendments; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (iii) the words "include," "included" and "including" are not limiting; and (iv) a reference to a person or entity includes its permitted successors and assigns. (k) Counterparts; Entire Agreement. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Other Agreements contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Other Agreements and supersede all other or prior written or oral agreements or understandings among the parties with respect to the Employee's employment by the Employer. The Employment Agreement, dated as of May 20, 1998, between the Employer and the Employer is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY 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 -10- 23 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. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 6(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. -11- 24 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: William H. Gaither Title: /s/ J. Michael Gaither ---------------------------- J. Michael Gaither -12- 25 EXHIBIT 10.32(C) AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and Donald C. Roof (the "Employee"). The Employer and the Employee are parties to an Employment Agreement, dated as of July 1, 1998, and desire to amend and restate such Employment Agreement in its entirety. The Employer desires to continue to retain the Employee to supply services to the Employer, and the Employee desires to continue provide such services to the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as Senior Vice President and Chief Financial Officer of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $243,000 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 February 1. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee (i) an amount equal to the greater of (x) annual fixed bonus payments (the "Fixed Bonus") equal to 28% of the Employee's Base 26 Salary for such year, payable on or around February 1 of the following year, or (y) annual target bonus payments (as defined in the Employer's Executive Bonus Plan) (the "Target Bonus"), payable on or around February 1 of the following year, and (ii) other incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder) at any time although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. (c) Restricted Stock and Stock Options. The Employee purchased shares of Class A Common Stock of the Employer pursuant to a Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee, and was granted options (pursuant to the Employer's 1997 Stock Option Plan) to acquire shares of Class A Common Stock of the Employer, pursuant to Stock Option Agreements between the Employer and the Employee dated as of May 28, 1997 and __________, 1998. Such Securities Purchase and Stockholders Agreement and Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms no less favorable than those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. In the event of a Change in Control, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or similar plans maintained by the Employer, any contrary provisions of such plans notwithstanding. Any such plans shall be deemed amended to the extent necessary to carry out the intent expressed in the preceding sentence. (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. If the Employment Period is terminated by the Employer or the Employee in connection with a Change in Control (as defined), the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense during three year period following the effective date of such Change in Control (the "Change in Control Period"). (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. -2- 27 (f) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 4 and 5, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the -3- 28 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. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary and Target Bonus earned to the date of death or termination for disability or Cause, as the case may be. Any Target Bonus payments payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date declared or payable. (ii) Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee or his estate an amount (in addition to amounts payable under Section 3(e)(i)) equal to one year's Base Salary and Target Bonus, in each case, at the rate in effect on the date of termination. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). (iii) Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, (y) by the Employee with Good Reason or by the Employer for any reason within one year after a Change in Control, or (z) by the Employee for any reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, then the Employer shall pay to the Employee within five business days of such termination an amount (in addition to amounts payable under Section 3(e)(i)) equal to the sum of (A) the higher of (1) the annual Base Salary at the date of such termination or (2) the annual Base Salary at the time of the Change in Control, in each case multiplied by the number of years remaining in the Change in Control Period, and (B) the Target Bonus at the annual rate in effect at the date of such termination multiplied by the number of years remaining in the Change in Control Period. (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (C) at any time after the consummation of an initial public offering of Class A Common Stock of the -4- 29 Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity not directly or indirectly controlled by the Employer's stockholders of more than 35% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer, (D) individuals serving as directors of the Employer on the date hereof and who were nominated to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by (x) a vote of such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones 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, limited liability company or other entity all of the capital stock or other ownership interests of which are owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any payment due under Section 3(e)(iii) shall be limited to the extent the Board of Directors of the Employer, in its good faith determination, deems necessary to preserve the deductibility by the Employer of such payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended, or any successor provision of any successor statute. The Employer may elect to make any payments due under Section 3(e)(ii) in a lump sum or as they would have been paid had the Employment Period not been terminated. Unless otherwise specifically stated to be payable over a period of time, all amounts due under this Section 3 shall be payable on demand by the Employee and shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 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. -5- 30 SECTION 4. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 4(a), the Employee shall not disclose any Confidential Information of the Employer or any 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 Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 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 Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, -6- 31 the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 5. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent or principal of another business firm, (x) 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, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 5. SECTION 6. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 5 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision -7- 32 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 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Assignment; Benefit. This Agreement is personal in its nature and neither party shall assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other; provided, that the Employer may assign this Agreement and its rights and obligations hereunder to any transferee of all or substantially all of the Business (whether by merger, consolidation, sale of stock or assets or otherwise) without the Employee's consent. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and not for the benefit of, or enforceable by, any third party. (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 Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) Dispute Resolution; Attorney's Fees. In making any determination as to the existence of Cause for termination or the occurrence of a Change in Control, the Board of Directors shall, subject to its members' fiduciary duties, abide by the recommendation of a committee comprising only members who were nominated by one or more Principal Shareholders. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such -8- 33 event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (g) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (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: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 -9- 34 If to the Employee: Donald C. Roof 6705 Seton House Lane Charlotte, North Carolina 28277 Facsimile: (704) 846-2665 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (j) Descriptive Headings; Certain Interpretations. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement: (i) any reference in this Agreement to any agreement, document or instrument includes all permitted supplements and amendments; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (iii) the words "include," "included" and "including" are not limiting; and (iv) a reference to a person or entity includes its permitted successors and assigns. (k) Counterparts; Entire Agreement. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Other Agreements contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Other Agreements and supersede all other or prior written or oral agreements or understandings among the parties with respect to the Employee's employment by the Employer. The Employment Agreement, dated as of July 1, 1998, between the Employer and the Employer is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY 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 -10- 35 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. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 6(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. -11- 36 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/ Donald C. Roof -------------------------------------- Donald C. Roof -12- EX-11.1 12 STATEMENT RE: COMPUTATION PER SHARE OF EARNINGS 1 EXHIBIT 11.1 The J.H. Heafner Company, Inc. Computation of Earnings Per Share (Unaudited)
Year ended December 31, ---------------------------------------------------------- 1998 1997 1996 ----- ---- ---- Average shares outstanding during the period 6,062,322 4,736,501 6,826,976 Incremental shares under stock options and warrants computed under the treasury stock method using the average market price of issuer's stock during the period 1,187,929 663,144 - ----------------- ----------------- --------------- Total shares for diluted EPS 7,250,251 5,399,645 6,826,976 ================= ================= =============== Income applicable to common shareholders: Loss from operations before extraordinary charge $ (2,508,000) - - ================= Net income (loss) - $ (4,724,000) $ (14,000) $ 612,000 ================= ================= =============== (Loss) income per basic common share: Loss from operations before extraordinary charge (0.41) - - Net income (loss) $ (0.78) $ (0.00) $ 0.09 ================= ================= =============== Income (loss) per diluted share: Loss from operations before extraordinary charge (0.35) - - Net income (loss) $ (0.65) $ (0.00) $ 0.09 ================= ================= ===============
EX-12.1 13 STATEMENT RE: COMPUTATION OF RATIOS 1 Page 1 EXHIBIT 12.1 THE J.H. HEAFNER COMPANY, INC. Statement Regarding: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Amounts in thousands, except ratio amounts)
Twelve months Twelve months Twelve months Twelve months Ended Ended Ended Ended December 31, December 31, December 31, December 31, 1998 1997 1996 1995 (unaudited) (unaudited) (unaudited) (unaudited) ------------- ------------- ------------- -------------- Consolidated pretax income (loss) from continuing operations (2,219) (253) 1,051 690 Interest 13,460 4,842 1,465 1,308 Interest portion of rent expense 6,474 2,985 795 661 Amortization of Deferred Debt Issuance Costs and Deferred Financing Costs 733 291 -- -- Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------- ------ ----- ----- EARNINGS 18,448 7,865 3,311 2,659 ======= ====== ===== ===== Interest 13,460 4,842 1,465 1,308 Interest portion of rent expense 6,474 2,985 795 661 Amortization of Deferred Debt Issuance Costs and Deferred Financing Costs 733 291 -- -- Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------- ------ ----- ----- FIXED CHARGES 20,667 8,118 2,260 1,969 ======= ====== ===== ===== RATIO OF EARNINGS TO FIXED CHARGES -- -- 1.47 1.35 ======= ====== ===== =====
EX-21.1 14 CHART OF SUBSIDIARIES 1 EXHIBIT 21.1 THE J.H. HEAFNER COMPANY, INC. Corporate Structure Chart
J. H. Heafner Company, Inc.* -------------------------------------------------------------------- Oliver & Winston+ The Speed Merchant, Inc.+ California Tire Company, Inc.+ d/b/a Winston Tires d/b/a/ Competition Parts Warehouse ---------------------------------- Phoenix Racing, Inc.+
* Incorporated in the state of North Carolina + Incorporated in the state of California EX-23.1 15 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement, relating to the Exchange Offer of $150,000,000 Series D 10% Senior Notes Due 2008 for any and all outstanding Series B and Series C 10% Senior Notes Due 2008 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 March 30, 1999 EX-23.2 16 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.2 Consent of Ersnt & 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 on Form S-4 and related Prospectus of J.H. Heafner Company, Inc. for the registration of the $150,000,000 10% Series D Senior Notes Due 2008. /s/ Ernst & Young LLP Raleigh, North Carolina March 29, 1999 EX-23.3 17 CONSENT OF KPMG 1 EXHIBIT 23.3 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 references to our firm under the headings "Selected Historical Financial Data" and "Experts" in the prospectus. /s/ KPMG LLP Mountain View, California March 30, 1999 EX-23.4 18 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.4 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, March 30, 1999. EX-25.1 19 STATEMENT OF ELIGIBILITY OF TRUSTEE 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) State of North Carolina (State or other jurisdiction of incorporation or organization) 56-0754594 (I.R.S. employer identification no.) William H. Gaither President and Chief Executive Officer 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) ------------------------------------------------ 1. General information. Furnish the following information as to the trustee: 2 (a) Name and address of each examining or supervising authority to which it is subject ----------------------------------------------------------------- Name Address ------------------------------------------------------------------ Federal Reserve Bank of Richmond, 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. A copy of the certificate of authority of the trustee to commence business, if not contained in the Articles of Association. 3 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 __th day of March, 1999. FIRST UNION NATIONAL BANK (trustee) By: ---------------------------- Its: -------------------------- 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, Inc. 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: ------------------------------ Name: -------------------------- Title: ----------------------- Dated: March ___, 1999 4 5 Legal Title of Bank: First Union National Bank Call Date: 6/30/98 ST-BK: 37-0351 FFIEC 031 Address: Two First Union Center Page RC-1 City, State, Zip: Charlotte, NC 28288-0201 FDIC Certificate #: 33869 -----
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 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 12,220,276 1.a. b. Interest-bearing balances (2) 0071 2,533,262 1.b. 2. Securities: /////////////// a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 1,891,097 2.a. b. Available-for-sale securities (from Schedule RC-B, column D) 1773 36,783,824 2.b. 3. Federal funds sold and securities purchased under agreements to resell 1350 8,034,320 3. 4. Loans and lease financing receivables /////////////// a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 133,283,216 /////////////// 4.a. b. LESS: Allowance for loan and lease losses RCFD 3123 1,810,465 /////////////// 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) 2125 131,472,751 4.d. 5. Trading assets (from Schedule RC-D 3545 7,042,399 5. 6. Premises and fixed assets (including capitalized leases) 2145 3,165,970 6. 7. Other real estate owned (from Schedule RC-M) 2150 128,223 7. 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 323,890 8. 9. Customers' liability to this bank on acceptances outstanding 2155 1,268,425 9. 10. Intangible assets (from Schedule RC-M) 2143 5,200,418 10. 11. Other assets (from Schedule RC-F) 2160 12,418,468 11. 12. Total assets (sum of items 1 through 11) 2170 222,483,323 12.
- ---------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. 6 Legal Title of Bank: First Union National Bank Call Date: 6/30/98 ST-BK: 37-0351 FFIEC 031 Address: Two First Union Center Page RC-1 City, State, Zip: Charlotte, NC 28288-0201 FDIC Certificate #: 33869 -----
Schedule RC--Continued
Dollar Amountin ThousandsBil 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 137,007,272 13.a. (1) Noninterest-bearing (1) RCON 6631 25,154,252 ////////////////// 13.a.(1) (2) Interest-bearing RCON 6636 110,853,020 ////////////////// 13.a.(2) b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E, ////////////////// part II) RCFN 2200 10,021,556 13.b. (1) Noninterest-bearing RCFN 6631 477,500 ////////////////// 13.b.(1) (2) Interest-bearing RCFN 6636 9,544,056 ////////////////// 13.b.(2) 14. Federal funds purchased and securities sold under agreements to repurchase. RCFD 2800 19,607,885 14. 15. a .Demand notes issued to the U.S. Treasury RCON 2840 389,283 15.a. b .Trading liabilities (from Schedule RC-D) RCFD 3548 5,075,053 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 14,089,286 16.a. b. With a remaining maturity of more than one year through three years RCFD A547 2,371,510 16.b. c. With a remaining maturity of more than three years RCFD A548 767,010 16.c. 17. Not applicable ////////////////// 18. Bank's liability on acceptances executed and outstanding RCFD 2920 1,290,934 18. 19. Subordinated notes and debentures (2) RCFD 3200 4,045,123 19. 20. Other liabilities (from Schedule RC-G) RCFD 2930 9,151,594 20. 21. Total liabilities (sum of items 13 through 20) RCFD 2948 203,806,506 21. 22. Not applicable ////////////////// EQUITY CAPITAL ////////////////// 23. Perpetual preferred stock and related surplus RCFD 3838 160,540 23. 24. Common stock RCFD 3230 454,543 24. 25. Surplus (exclude all surplus related to preferred stock) RCFD 3839 13,206,325 25. 26. a. Undivided profits and capital reserves RCFD 3632 4,441,457 26.a. b. Net unrealized holding gains (losses) on available-for-sale securities RCFD 8434 417,625 26.b. 27. Cumulative foreign currency translation adjustments RCFD 3284 (3,673) 27. 28. Total equity capital (sum of items 23 through 27) RCFD 3210 18,676,017 28. 29. Total liabilities and equity capital (sum of items 21 and 28) RCFD 3300 222,483,323 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 1997 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 NARRATIVE DESCRIPTION OF BUSINESS Heafner-ITCO division. Heafner acquired ITCO on May 20, 1998. Following the merger, ITCO's subsidiaries were merged into ITCO, and ITCO was merged into Heafner and became the Heafner-ITCO division. Founded in 1962, ITCO is one of the largest wholesale distributors of tires, custom wheels, equipment and tire dealer supplies in the Southeast in terms of sales and number of tires distributed. On a pro forma basis, the Heafner-ITCO division had net sales for fiscal 1998 of approximately $627.2 million and shipped more than 8.4 million passenger and light truck tires and 285,000 medium truck tires. Heafner-ITCO's products include flag brands manufactured by Michelin, including B.F. Goodrich and Uniroyal brands, Bridgestone/Firestone and Dunlop. House brands include Monarch manufactured for Heafner by Kelly-Springfield, a division of Goodyear as well as other house brands manufactured by Michelin, Bridgestone/Firestone, Kelly-Springfield and Dunlop. Private label products include Regal Tires, Winston tires, Pacer custom wheels and custom wheels manufactured by Ultra and private-branded under the ICW name. Tire sales represented approximately 83.7% of the Heafner-ITCO division's pro forma net sales in fiscal 1998. 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 fifth largest independent tire dealer in the country in 1998, based on the number of company-owned retail stores. Winston sold more than 1.2 million tires as well as other automotive products in 1998 through its chain if 189 retail stores in California and Arizona for net sales in 1998 in excess of 149.8 million. Each Winston store offers customers multiple choices of flag brands manufactured by 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 61.7% of Winston's fiscal 1998 net sales. 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 20 retail stores in California and Arizona. Of CPW's retail stores, 15 sell flag brand high performance as well as regular grade tires, wheels and related automotive products, while the remaining five retail stores sell only automotive parts. On a pro forma basis, CPW's net sales for fiscal 1998 were approximately $146.7 million. CPW shipped more than 1.9 million passenger and light truck tires in fiscal 1998. 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 one of the largest distributors of high performance tires in California. CPW also sells parts, wheels, and equipment built by nationally recognized manufacturers. Tire sales represented approximately 72.8% of CPW's total pro forma sales for fiscal 1998. Sales of high performance tires represented approximately 31% of CPW's total net sales for the same period. 8 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 By-Laws, 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 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 9 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 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 2 10 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 Non-Cumulative 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 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 3 11 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 Non-Cumulative 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 Non-Cumulative 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, 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 4 12 redemption shall not affect the validity of the proceedings for the redemption of any other shares of Non-Cumulative 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 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 5 13 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 Non-Cumulative Preferred Stock, the remaining assets of the Association shall be distributed among the holders of junior stock, according to their 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 6 14 outstanding shares of Non-cumulative 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 Non-Cumulative 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. 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. 7 15 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 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) 8 16 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 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. 9 17 (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. 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. 10 18 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 19 BY-LAWS OF FIRST UNION NATIONAL BANK CHARTER NO. 22693 AS RESTATED EFFECTIVE FEBRUARY 26, 1998 20 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 shareholders, such 2 21 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 22 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 number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. 4 23 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 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. 5 24 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. 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 6 25 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 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. 7 26 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 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 8 27 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. 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 9 28 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. 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 10 29 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 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 11 30 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 31 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 resolutions shall be 13 32 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 14 33 be relocated 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-27.1 20 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE J.H. HEAFNER COMPANY, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001068152 J.H. HEAFNER COMPANY, INC. 1,000 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 6,648 2,502 0 0 0 0 111,691 32,209 0 2,220 400 0 133,221 41,530 0 262,659 79,028 0 55,652 35,121 0 12,850 9,130 0 430,821 146,508 0 206,097 58,446 0 160,400 30,130 0 11,353 11,500 0 0 0 0 51 37 0 18,073 7,622 0 430,821 146,508 0 713,672 311,839 190,535 713,672 311,839 190,535 533,243 221,060 158,880 702,597 308,382 188,540 (166) (1,131) (521) 0 0 0 13,460 4,842 1,465 (2,219) (254) 1,051 289 (240) 439 (2,508) (14) 612 0 0 0 (2,216) 0 0 0 0 0 (4,724) (14) 612 (0.78) 0.00 0.09 (0.65) 0.00 0.09
EX-99.1 21 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL THE J.H. HEAFNER COMPANY, INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 10% SENIOR NOTES DUE 2008, SERIES B AND SERIES C FOR UP TO $150,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS 10% SENIOR NOTES DUE 2008, SERIES D PURSUANT TO THE PROSPECTUS DATED __________, 1999 - -------------------------------------------------------------------------------- THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________, 1999 UNLESS EXTENDED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- The Exchange Agent for the Exchange Offer is: FIRST UNION NATIONAL BANK By Mail: Facsimile Transmission Hand or Overnight Delivery: (REGISTERED OR CERTIFIED MAIL RECOMMENDED) Number: First Union National Bank First Union National Bank 704-590-7628 Corporate Trust Reorganization Corporate Trust Reorganization (FOR ELIGIBLE 1525 West W.T. Harris Boulevard, 3C3 1525 West W.T. Harris Boulevard, 3C3 INSTITUTIONS ONLY) Charlotte, North Carolina 28262 Charlotte, North Carolina 28288 Attention: Mike Klotz Attention: Mike Klotz Confirm by Telephone: 704-590-7408
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.'S 10% SENIOR NOTES DUE 2008, SERIES B OR SERIES C (THE "OLD 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 ("Holders") of Old Notes if: (i) certificates representing Old Notes are to be physically delivered to the Exchange Agent by such Holders; (ii) tender of Old Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC") pursuant to the procedures set forth in the Prospectus, dated ______, 1999 (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 Old Notes or (iii) delivery of Old 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 DTC. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY 2 Ladies and Gentlemen: By execution hereof, the undersigned acknowledges receipt of the Prospectus, dated ______, 1999 (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 the Company's offer to exchange (the "Exchange Offer") $1,000 principal amount of its 10% Senior Notes due 2008, Series D (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, Series B and Series C (the "Old Notes"). Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Old Notes indicated below. Subject to, and effective upon, the acceptance for exchange of the Old 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 Old 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 Old 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 Old Notes and all evidences of transfer and authenticity to, or transfer ownership of, such Old Notes on the account books maintained by DTC to, or upon the order of, the Company, (ii) present such Old 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 Old 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 Old Notes tendered hereby and to acquire Exchange Notes issuable upon the exchange of such tendered Old Notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Old 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 Old Notes tendered hereby or transfer ownership of such Old Notes on the account books maintained by DTC. 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 Old Notes tendered hereby and, in such event, the Old 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 OLD 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 UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED OLD 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 owner, represents (or, if the undersigned is a broker, dealer, commercial bank, trust company or other nominee, represents that it has received representations from each beneficial owner of the Old Notes tendered hereby stating) that, (i) the Exchange Notes to be acquired by it in connection with the Exchange Offer are being acquired in the ordinary course of its business, (ii) it is not engaged in, does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes, (iii) if it is participating in the Exchange Offer for the purpose of distributing the Exchange Notes it cannot rely on the interpretations of the staff of the Commission discussed in the Prospectus under the caption "The Exchange Offer--Registration and -2- 3 Prospectus Delivery Requirements" and may only sell the Exchange Notes acquired by it pursuant to a registration statement containing the selling security holder information required by Item 507 of Regulation S-K under the Securities Act, (iv) it is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or of Parent and (v) it is not a broker-dealer who purchased Series C Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act. If it is a broker-dealer, it further represents that (a) if it is tendering Series C Notes in the Exchange Offer: (i) it acquired such Series C Notes as a result of market-making activities or other trading activities and (ii) will deliver a prospectus in connection with any resale of Exchange Notes acquired in the Exchange Offer for such Series C Notes, and (b) if it is tendering Series B Notes which it received in exchange for the Company's 10% Senior Notes Due 2008, Series A: (i) it acquired such Series A Notes as a result of market-making activities or other trading activities and (ii) will deliver a prospectus in connection with any resale of Exchange Notes acquired in the Exchange Offer for such Series B Notes. In either case, by so acknowledging and by delivering a prospectus, it will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Each broker-dealer making the representations contained in the above paragraph (a "Participating Broker-Dealer"), by tendering the Series B or Series C 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 well as any notices from the Company to suspend and resume use of the Prospectus. By tendering its Old 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 Old 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 Old 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. See "The Exchange Offer--Withdrawal of Tenders" in the Prospectus. The undersigned understands that by tendering Old 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 Old 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 Old 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. -3- 4 The undersigned understands that the delivery and surrender of the Old Notes is not effective, and the risk of loss of the Old 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 Old 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 Old 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 Old Notes delivered by book-entry transfer, by credit to the account at DTC). Similarly, unless otherwise indicated herein in the box entitled "Special Delivery Instructions," the undersigned hereby requests that any Old Notes representing principal amounts not tendered or not accepted for exchange and Exchange Notes be delivered to the 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 Old 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 Old Notes so tendered. In order to properly complete this Letter of Transmittal, a Holder must (i) complete the box entitled "Description of Old Notes," (ii) complete the box entitled "Method of Delivery" by checking one of the three boxes therein and supplying the appropriate information, (iii) if such Holder is a Participating Broker-Dealer and wishes to receive additional copies of the Prospectus for delivery in connection with resales of Exchange Notes, complete the box entitled "For Participating Broker-Dealers Only," (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 Old Notes that are tendering by book-entry transfer to the Exchange Agent's account at DTC can execute the tender through DTC's Automated Tender Program ("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 Old Notes pursuant to the Exchange Offer and (i) certificates representing such Old Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Holder's Old 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 Old 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 Old Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if they desire to accept the Exchange Offer with respect to the Old Notes so registered. THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF OLD 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. -4- 5 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. List below the Old 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 OLD NOTES - --------------------------------------------------------------------------------------------------------------------- Name(s) and Address(es) of Holder(s) Certificate Aggregate Principal Aggregate Principal (please fill in, if blank) Number(s) Amount Represented Amount Tendered - -------------------------------------- -------------------- --------------------------- ---------------------------- -------------------- --------------------------- ---------------------------- -------------------- --------------------------- ---------------------------- -------------------- --------------------------- ---------------------------- -------------------- --------------------------- ---------------------------- -------------------- --------------------------- ---------------------------- - --------------------------------------- -------------------- --------------------------- ---------------------------- TOTAL - --------------------------------------- -------------------- --------------------------- ----------------------------
- -------------------------------------------------------------------------------- METHOD OF DELIVERY - -------------------------------------------------------------------------------- [ ] CHECK HERE IF CERTIFICATES FOR TENDERED OLD NOTES ARE BEING DELIVERED HEREWITH. [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ___________________________________________ Account Number: ____________ Transaction Code Number: _______________ [ ] CHECK HERE IF TENDERED OLD 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: _______________ - -------------------------------------------------------------------------------- -5- 6 - -------------------------------------------------------------------------------- FOR PARTICIPATING BROKER-DEALERS ONLY - -------------------------------------------------------------------------------- [ ] CHECK HERE AND PROVIDE THE INFORMATION REQUESTED BELOW IF YOU ARE A PARTICIPATING BROKER-DEALER AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND 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 OLD 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.) Name: _______________________________________________________________________ Address: ____________________________________________________________________ Telephone No.: ______________________________________________________________ Facsimile No.: ______________________________________________________________ - -------------------------------------------------------------------------------- -6- 7 - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL HOLDERS OF OLD NOTES REGARDLESS OF WHETHER OLD NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH) This Letter of Transmittal must be signed by the Holder(s) of Old Notes exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if delivered by a participant in DTC, exactly as such participant's name appears on a security position listing as the owner of Old 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 Old 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: ___________________________________________________________________ ___________________________________________________________________ (Include Zip Code) Area Code and Telephone No.: ________________________________________________ PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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: ______________________________________________________________________ - -------------------------------------------------------------------------------- -7- 8 - --------------------------------------------------------- ------------------------------------------------------ SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3, 4, 5 and 7) (SEE INSTRUCTIONS 4 AND 9) To be completed ONLY if Old Notes in a principal To be completed ONLY if Old Notes in a amount not tendered or not accepted for exchange principal amount not tendered or not accepted are to be issued in the name of, or Exchange for exchange or Exchange Notes are to be sent Notes are to be issued in the name of, someone to someone other than the persons whose other than the person or persons whose signature(s) signature(s) appear(s) within this letter of appear(s) within this Letter of Transmittal. transmittal or to an address different from that shown in the box entitled "Description Issue [ ] Old Notes of Old Notes" within this Letter of Transmittal. [ ] Exchange Notes (check as applicable) Issue [ ] Old Notes [ ] Exchange Notes Name ___________________________________________ (check as applicable) (Please Print) Name ___________________________________________ Address_________________________________________ (Please Print) ________________________________________________ Address_________________________________________ (Include Zip Code) ________________________________________________ ________________________________________________ (Include Zip Code) (Tax Identification or Social Security Number) (SEE SUBSTITUTE FORM W-9 HEREIN) Credit Old Notes not tendered or not exchanged by book-entry transfer to the DTC account set below: ________________________________________________ (DTC Account Number) Credit Exchange Notes to the DTC account set below: ________________________________________________ (DTC Account Number) - --------------------------------------------------------- ------------------------------------------------------
-8- 9 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 OLD NOTES OR BOOK-ENTRY CONFIRMATION; WITHDRAWAL OF TENDERS. To tender Old Notes in the Exchange Offer, physical delivery of certificates for Old Notes or confirmation of a book-entry transfer into the Exchange Agent's account with DTC of Old 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 City time on the Expiration Date. Tenders of Old 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 OLD 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 OLD 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 OLD 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 OLD NOTES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, NOT TO THE COMPANY, THE TRUSTEE OR DTC. Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m. New York City time on the Expiration Date. In order to be valid, notice of withdrawal of tendered Old 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 Old Notes pursuant to the Exchange Offer and (i) certificates representing such Old Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Holder's Old 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 Old 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 forth the name(s) and address(es) of the registered Holder(s) and the principal amount of Old 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 Old Notes (or confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC), 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 -9- 10 (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 Old Notes in proper form for transfer (or a Book-Entry Confirmation with respect to all tendered Old 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 Old 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 Old Notes" herein. The entire principal amount represented by the certificates for all Old Notes delivered to the Exchange Agent will be deemed to have been tendered, unless otherwise indicated. The entire principal amount of all Old 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 DTC 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 Old 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 DTC whose name is shown as the owner of the Old Notes tendered hereby, the signature must correspond with the name shown on the security position listing as the owner of the Old Notes. If any of the Old 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 Old 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 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 so to act must be submitted with this Letter of Transmittal. 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 Old Notes tendered herewith (or by a participant in DTC whose name appears on a security position listing as the owner of Old Notes) and certificates for Exchange Notes or for any Old 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 DTC, any Old Notes for principal amounts not tendered or not accepted for exchange are to be credited to such participant's account at DTC and neither the "Special Issuance Instructions" box nor the "Special Delivery Instructions" box of this Letter of Transmittal has been completed or (ii) such Old Notes are tendered for the account of an Eligible Institution. IN ALL OTHER CASES ALL SIGNATURES ON LETTERS OF TRANSMITTAL ACCOMPANYING OLD 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 Old 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 Old Notes, and, with respect to a participant in DTC whose name appears on a security position listing as the owner of Old Notes, exactly as the name(s) of the participant(s) appear(s) on such security position listing), with the signature on the endorsement -10- 11 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 Old 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 Old 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 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 Old Notes pursuant to the Exchange Offer, except if (i) deliveries of certificates for Old 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 Old 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 Old 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 Old Notes will be determined by the Company in its sole discretion, which determination shall be final and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL NOT BE CONSIDERED VALID. The Company reserves the absolute right to reject any and all tenders of Old 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 Old 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 Old Notes must be cured within such time as the Company determines, unless waived by the Company. Tenders of Old 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 Old 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 Old Notes, or incur any liability to Holders for failure to give any such notice. -11- 12 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 OLD NOTES. Any Holder whose certificates for Old 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 Old Notes and requests for assistance or additional copies of the Prospectus, this Letter of Transmittal, the Notice of Guaranteed Delivery or other 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 Old 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 Old 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 Old 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 Old 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. -12- 13
- -------------------------------------------------------------------------------------------------------------------- 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 [ ] Corporation [ ] Partnership [ ] Other FORM W-9 DEPARTMENT OF THE TREASURY ___________________________________________________________________________________ INTERNAL REVENUE SERVICE Address ___________________________________________________________________________________ City, State and Zip Code ----------------------------------------------------------------------------------- PART I TAXPAYER IDENTIFICATION NUMBER ("TIN"): Enter Social security number: 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 of the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for further clarification. If Employer you do not have a TIN, see instructions on how to identification number: obtain a TIN in Item C 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. APPLIED FOR TIN [ ] ------------------------------------------------------------ ------------------------ PART II PAYEES EXEMPT FROM BACKUP WITHHOLDING: Check box. (See Item B 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 item 2 below if you have been IDENTIFICATION NUMBER AND notified by the Internal Revenue Service (the "IRS") that you are currently CERTIFICATION subject to backup withholding because of underreporting interest or dividends on your tax return. 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:___________________________ - ----------------------------------------------------------------------------------------------------------------------
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. - -------------------------------------------------------------------------------- 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: _____________________________ - -------------------------------------------------------------------------------- -13- 14 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 FOR THIS TYPE OF ACCOUNT: IDENTIFICATION 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 The minor(2) to Minors Act) 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 Agriculture The public entity - --------------------------------------------------------------------------------------------------------------------
(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); (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. -14- 15 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. -15- EX-99.2 22 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY OF 10% SENIOR NOTES DUE 2008, SERIES D 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, Series B or Series C (the "Old Notes") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), who wishes to tender Old Notes for the Company's 10% Senior Notes Due 2008, Series D pursuant to the exchange offer (the "Exchange Offer"), as described in the Prospectus dated __________, 1999 (the "Prospectus") and the related Letter of Transmittal, and (i) whose Old Notes are not immediately available or (ii) who cannot deliver such Old Notes or any other documents required by the Letter of Transmittal on or before the Expiration Date 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 First Union National Bank (the "Exchange Agent"). See "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. Delivery to: FIRST UNION NATIONAL BANK, AS EXCHANGE AGENT By Mail: Facsimile Transmission Hand or Overnight Delivery: (REGISTERED OR CERTIFIED MAIL RECOMMENDED) Number: First Union National Bank First Union National Bank 704-590-7628 Corporate Trust Reorganization Corporate Trust Reorganization (FOR ELIGIBLE 1525 West W.T. Harris Boulevard, 3C3 1525 West W.T. Harris Boulevard, 3C3 INSTITUTIONS ONLY) Charlotte, North Carolina 28262 Charlotte, North Carolina 28288 Attention: Mike Klotz Attention: Mike Klotz Confirm by Telephone: 704-590-7408
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. 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 Old 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 Old Notes set forth in the Letter of Transmittal. The undersigned hereby tenders the Old 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 Old Notes will be tendered by book-entry transfer, please provide the following information:
Name of Tendering Institution: Depository Trust Company Account Number: _________________________________________________________ ____________________________________________________
2 PLEASE SIGN HERE X ________________________________________________ Date:____________________ Signature(s) of Owner(s) or Authorized Signatory Area Code and Telephone Number: ________________________________________________ Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on certificates for Old Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. 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. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): ________________________________________________________________ ________________________________________________________________ Capacity: ________________________________________________________________ Address(es): ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program, guarantees that the certificates representing the principal amount of Old Notes tendered hereby in proper form for transfer, or timely confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company pursuant to the procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus, together with one or more properly completed and duly executed Letters of Transmittal (or facsimile thereof or Agent's Message in lieu thereof), and any required signature guarantee and any other documents required by the Letter of Transmittal, will be received by the Exchange Agent at the address set forth above, no later than three New York Stock Exchange trading days after the Expiration Date. ______________________________________ _________________________________ Name of Firm Authorized Signature ______________________________________ _________________________________ Street Address Name (please print) ______________________________________ _________________________________ City, State and Zip Code Title ______________________________________ _________________________________ Area Code and Telephone Number Date DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OR CERTIFICATES FOR OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE EXECUTED LETTER OF TRANSMITTAL. -2- -----END PRIVACY-ENHANCED MESSAGE-----