-----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, NP9uE8RdLDaJ2fM+GcVtbr7lu9Qelt/NXrvxtkQ64PUUuN/62jncG7niJ5PJap8w hD++yA2Bw/rYKk+AUPV+nQ== 0000950144-99-007189.txt : 20020715 0000950144-99-007189.hdr.sgml : 19990610 ACCESSION NUMBER: 0000950144-99-007189 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990609 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75313 FILM NUMBER: 99642525 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75313-01 FILM NUMBER: 99642526 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75313-02 FILM NUMBER: 99642527 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75313-03 FILM NUMBER: 99642528 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75313-04 FILM NUMBER: 99642529 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/A 1 THE JH HEAFNER COMPANY INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999 REGISTRATION NOS. 333-75313, 333-75313-01, 333-75313-02, 333-75313-03, 333-75313-04 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 1 TO 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 5531 95-2407343 THE SPEED MERCHANT CALIFORNIA 5014 94-2414221 PHOENIX RACING, INC. CALIFORNIA 5531 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 PRESIDENT AND CHIEF EXECUTIVE 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: [ ] ------------------------------------ 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 PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 9, 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 JULY 9, 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 July 9, 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 11. 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 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. 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 11 Where You Can Find More Information......................... 17 Forward-Looking Information................................. 18 The Transactions............................................ 19 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.................................................... 52 Management.................................................. 62 Principal Stockholders...................................... 71 Certain Relationships and Related Transactions.............. 73 Description of Credit Facility.............................. 75 Description of the Series D Notes........................... 77 Certain U.S. Federal Income Tax Considerations.............. 111 Plan of Distribution........................................ 111 Legal Matters............................................... 112 Experts..................................................... 112 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 $44.2 million in borrowings was outstanding and an additional $30.8 million could have been borrowed on March 31, 1999. 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. CHANGE OF OWNERSHIP AND CONSENT SOLICITATION Charlesbank purchase. On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership ("Charlesbank"), purchased all of the shares of Class A common stock of Heafner held by members of the Gaither family and substantially all of the shares of Class B common stock of Heafner held by the former stockholders of ITCO for an aggregate purchase price of approximately $44.0 million. Charlesbank is a private equity fund managed by Charlesbank Capital Partners, LLC, a private investment firm that is the successor to Harvard Private Capital Group. Following the Charlesbank purchase, Charlesbank became the beneficial owner of a majority of the combined voting power of Heafner on a fully-diluted basis. Heafner agreed to pay certain fees and expenses of the selling stockholders and Charlesbank in connection with the Charlesbank purchase which are not expected to exceed $1.35 million. In addition, Heafner incurred or expects to incur additional fees and expenses in connection with the Charlesbank purchase and related transactions, including payments in connection with the consent solicitation described below, which, together with the stockholder and Charlesbank expenses, are currently estimated to be $3.0 million. 4 6 Consent solicitation. In connection with the Charlesbank purchase, Heafner solicited consents from the holders of all outstanding series of its senior notes to amendments to the indentures under which the notes were issued and under which the Series D notes will be issued. These amendments were necessary to avoid the applicability of a provision in the indentures that would have required Heafner to offer to repurchase all of its senior notes after the change of control that resulted from the Charlesbank purchase. The holders of 100% in aggregate principal amount of the outstanding senior notes consented to the amendments described in the consent solicitation, and the amendments became operative on May 24, 1999. Heafner made a consent payment of $750,000 ($5.00 per $1,000 in principal amount) to consenting holders of its outstanding senior notes after the closing of the Charlesbank purchase. 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 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 5 7 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 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. 6 8 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 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 7 9 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 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 July 9, 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 8 10 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. 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. 9 11 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. For the quarters ended March 31, 1998 and 1999, earnings were insufficient to cover fixed charges by $757,000 and $2.1 million, respectively.
FISCAL YEARS ENDED DECEMBER 31, THREE MONTHS ---------------------------------------------- ENDED 1998 MARCH 31, ------------------ ------------- 1994 1995 1996 1997 ACTUAL PRO FORMA 1998 1999 ---- ---- ---- ---- ------ --------- ----- ----- (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. 10 12 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 March 31, 1999, Heafner had approximately $206.5 million of long-term debt outstanding, approximately $51.7 million of which was secured, and Heafner's ratio of indebtedness to total capital was 0.88 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. 11 13 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 March 31, 1999, Heafner had outstanding, either directly or through guaranties, approximately $206.5 million of indebtedness, all of which was senior indebtedness and approximately $51.7 million of which was secured. As of March 31, 1999, Heafner could have borrowed an additional $30.8 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 12 14 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 13 15 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 14 16 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 Charlesbank and an affiliated entity own or control, on a fully diluted basis, approximately 62% of the combined voting power of Heafner's outstanding capital stock. Consequently, Charlesbank has the ability to control the business and affairs of Heafner because it is able to elect a majority of Heafner's board of directors and because of its 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. 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 15 17 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." 16 18 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 JULY 1, 1999 (FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER). 17 19 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. 18 20 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, 1,355,484 of which were sold by the ITCO stockholders to Charlesbank on May 24, 1999. 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. 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. 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 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 19 21 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 $44.2 million was outstanding at March 31, 1999. 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. 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). 20 22 (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 March 31, 1999, $30.8 million was available for additional borrowings under the credit facility. 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 March 31, 1999, 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.
MARCH 31, 1999 ---------------------- (DOLLARS IN THOUSANDS) Cash........................................................ $ 6,249 ======== Long-term debt, including current maturities: Credit facility........................................... $ 44,225 Series B notes............................................ 100,000 Series C notes............................................ 50,000 Vendor loans.............................................. 7,070 Other debt................................................ 5,155 -------- Total debt............................................. 206,450 -------- 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; 3,687,000 shares issued at March 31, 1999(a)................................................ 37 Class B common stock, $.01 par value, 20,000,000 shares authorized; 1,400,667 shares issued and outstanding at March 31, 1999......................................... 14 Additional paid-in capital................................ 22,349 Notes receivable from stock sales......................... (169) Accumulated deficit....................................... (5,329) -------- Total stockholders' equity............................. 16,902 -------- Total capitalization................................. $235,842 ========
- --------------- (a) Excludes 1,034,000 shares issuable upon exercise of warrants and 520,950 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 24 26 offer, each broker-dealer that receives Series D notes in the 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 June 10, 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 July 9, 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 selected historical financial data for the three months ended March 31, 1998 and 1999 have been derived from the consolidated financial statements of Heafner 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 necessary for fair presentation of the financial position and results of operations for such periods. 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.
THREE MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- ------------------- 1994 1995 1996 1997(A) 1998(B) 1998(B) 1999 -------- -------- -------- -------- -------- ------- -------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales..................................... $161,786 $169,031 $190,535 $311,839 $713,672 $89,126 $239,804 Costs of goods sold........................... 134,625 140,811 158,880 233,941 548,035 63,694 186,693 -------- -------- -------- -------- -------- ------- -------- Gross profit.................................. 27,161 28,220 31,655 77,898 165,637 25,432 53,111 Selling, general and administrative expenses..................................... 25,420 26,584 29,660 74,441 153,153 24,556 50,450 Special charges............................... -- -- -- -- 1,409 -- -- -------- -------- -------- -------- -------- ------- -------- Income from operations........................ 1,741 1,636 1,995 3,457 11,075 876 2,661 Interest and other expense, net............... 520 946 944 3,710 13,294 1,633 4,714 -------- -------- -------- -------- -------- ------- -------- Income (loss) from operations before provision (benefit) for income taxes and extraordinary charge....................................... 1,221 690 1,051 (254) (2,219) (757) (2,053) Provision (benefit) for income taxes.......... -- -- -- (240) 289 (294) (860) -------- -------- -------- -------- -------- ------- -------- Net income (loss) from operations before extraordinary charge......................... 1,221 690 1,051 (14) (2,508) (463) (1,193) Extraordinary charge.......................... -- -- -- -- (2,216) -- -- -------- -------- -------- -------- -------- ------- -------- Net income (loss)............................. 1,221 690 1,051 (14) (4,724) (463) (1,193) Pro forma provision for income taxes.......... 520 325 439 -- -- -- -- -------- -------- -------- -------- -------- ------- -------- Pro forma net income (loss)................... $ 701 $ 365 $ 612 $ (14) $ (4,724) $ (463) $ (1,193) ======== ======== ======== ======== ======== ======= ======== CASH FLOWS DATA: Net cash provided by (used in) operating activities................................... $ 4,525 $ (363) $ 4,008 $ 6,703 $ (9,684) $(2,145) $(10,978) Net cash used in investing activities......... (1,350) (2,200) (7,626) (46,459) (58,070) (1,421) (7,832) Net cash provided by (used in) financing activities................................... (2,702) 2,630 3,711 41,252 71,900 2,592 18,411 Depreciation and amortization................. 1,232 1,062 1,331 5,399 12,316 1,727 4,456 Capital expenditures.......................... 1,687 2,205 7,865 4,908 8,697 1,029 3,210 BALANCE SHEET DATA (AT END OF PERIOD) Working capital............................... $ 16,957 $ 19,148 $ 16,913 $ 20,582 $ 56,562 $25,634 $ 71,457 Total assets.................................. 44,844 55,458 59,551 146,508 430,821 148,656 450,792 Total debt.................................... 12,515 15,632 21,003 64,658 185,336 67,291 206,450
35 37
THREE MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- ------------------- 1994 1995 1996 1997(A) 1998(B) 1998(B) 1999 -------- -------- -------- -------- -------- ------- -------- (DOLLARS IN THOUSANDS) Stockholders' equity.......................... 11,640 11,719 11,574 7,659 18,124 7,196 16,902 OTHER DATA: EBITDA(c)..................................... $ 3,352 $ 3,060 $ 3,847 $ 9,987 $ 19,130 $ 2,505 $ 7,298 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 and the three months ended March 31, 1998 and 1999 includes $733,000, $163,000 and $217,000, respectively, related to amortization of deferred financing charges and amortization expense related to debt discount 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 and the three months ended March 31, 1998 and 1999, earnings were insufficient to cover fixed charges by $254,000, $2.2 million, $757,000 and $2.1 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:
QUARTER FISCAL YEAR ENDED DEC. 31, ENDED MARCH 31, -------------------------- ---------------- 1996 1997 1998 1999 1998 ------ ------ ------ ------ ------ Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............................... 83.4 75.0 76.8 77.9 71.5 Gross profit..................................... 16.6 25.0 23.2 22.1 28.5 Selling, general and administrative expenses..... 15.6 23.9 21.7 21.0 27.6 Income from operations........................... 1.0 1.1 1.6 1.1 1.0 Interest and other expense, net.................. 0.4 1.2 1.9 2.0 1.8 Income (loss) from operations before income taxes.......................................... 0.6 (0.1) (0.3) (0.9) (0.8) Income taxes..................................... 0.0 0.1 (0.0) 0.4 0.3 Net income (loss) before extraordinary charge.... 0.6 0.0 (0.4) (0.5) (0.5) 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 -- -- --
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998 Net sales for the quarter ended March 31, 1999 totaled $239.8 million, an increase of $150.7 million, or 169.1%, from sales of $89.1 million in the first quarter of 1998. The inclusion of sales for ITCO, CPW and California Tire accounted for over 90% of the increase in the first quarter of 1999. However, with the integration of operations between Heafner and ITCO in the Southeast, the exact effect cannot be determined. Each of the Company's divisions reported sales increases ranging from 6.8% upward, with an overall increase in net sales totaling 12.4% on a pro forma basis. Gross profit was $53.1 million in the first quarter of 1999, an increase of $27.7 million, or 108.8%, from $25.4 million in the corresponding quarter in 1998. As a percentage of net sales, gross profit was 22.1% and 28.5%, respectively. The increase in gross profit dollars was primarily due to the inclusion of the acquired operations. The decrease in overall gross margins in 1999 was due to a significantly higher proportion of distribution sales in the current quarter, which carry lower gross margins than retail sales. The percentage of distribution sales to total sales was in excess of 80% in the first quarter of 1999, versus just over 60% in the first quarter last year. Selling, general and administrative expenses were $50.5 million in the quarter ended March 31, 1999, an increase of $25.9 million, or 105.4%, from $24.6 million in first quarter of 1998. As a percentage of net sales, these expenses were 21.0% and 27.6%, respectively. The increase in selling, general and administrative expenses in 1999 was primarily due to the inclusion of the acquired operations. The decrease in selling, general and administrative costs as a percentage of sales was due to a significantly higher proportion of distribution sales, which have lower expense percentages than retail operations. Offsetting this business mix change somewhat were slightly higher selling and administrative costs in the company's distribution operations as a percent of sales, including increased depreciation and amortization expense in the first quarter of 1999 totaling $2.7 million. Interest and other expense increased from $1.6 million in the first quarter of 1998 to $4.7 million in the first quarter this year. Interest expense increased by $3.4 million in the first quarter of 1999 as a result of increased borrowings incurred in connection with the acquisitions of ITCO, CPW, and California Tire, and increased utilization of anticipation discounts on inventory purchases. There were no closures of overlapping warehouses in the first quarter of 1999 resulting from the Company's integration activities. Four overlapping warehouses and one headquarters location were closed by the end of 1998 with an additional seven overlapping warehouses to be closed during the remaining three quarters of 1999. 42 44 Income tax benefits on pre-tax losses were $0.9 million in the quarter ended March 31, 1999 compared to $0.3 million in the corresponding quarter last year. The company's effective income tax rates were 41.9% and 38.8% in the first quarters of 1999 and 1998, respectively. The net loss for the first quarter of 1999 was $(1.2) million, or (0.5)% of net sales compared to a net loss of $(0.5) million, or (0.5)% of net sales in the corresponding quarter in 1998, as a result of the factors discussed above. 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. 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. 43 45 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. 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
44 46 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 $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. 45 47 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. 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. 46 48 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. 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 47 49 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 support systems. Although there can be no assurance, Heafner believes based on its review that Year 2000 48 50 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 March 31, 1999 the combined net indebtedness (net of cash) of Heafner was $200.2 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 March 31, 1999, $44.2 million was outstanding and $30.8 million was available for additional borrowings under the credit facility. Heafner's principal sources of cash during the quarter ended March 31, 1999 and the years ended December 31, 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 $(11.0) million, $(9.7) million, $6.7 million and $4.0 million, respectively, during each of those periods. Cash used during the quarter ended March 31, 1999 was primarily due to increases in inventories due to seasonal stocking totaling $8.1 million and a decrease in accounts payable of 49 51 $8.8 million due to the heavy utilization of anticipation discounts offered by a major supplier to the Company. 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. 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 quarter ended March 31, 1999 and the years ended December 31, 1998, 1997 and 1996 amounted to $3.2 million, $8.7 million, $4.9 million, and $7.9 million, respectively. Capital spending during the first quarter of 1999 was primarily for new equipment in retail operations, acquisition of new retail locations, and expansion of distribution warehouses. In addition, the Company acquired California Tire in January 1999 for approximately $6.1 million in cash and acquired debt. 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 March 31, 1999, 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 12 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. The holders of Heafner's preferred stock have been granted redemption rights, subject to certain conditions, which if exercised would obligate Heafner to redeem the shares of preferred stock held by such stockholders at agreed valuations. See "Certain Relationships and Related Party Transactions -- Preferred 50 52 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. On May 24, 1999, the controlling stockholders of Heafner sold their shares to Charlesbank. Heafner expects to incur fees and expenses in connection with the Charlesbank purchase and related transactions, including payments to cover stockholder expenses and payments to holders of Heafner's senior notes in connection with the consent solicitation, which are currently estimated to be $3.0 million. 51 53 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 52 54 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%. On May 24, 1999, the majority owners of Heafner's Class A and Class B common stock sold their shares in Heafner to Charlesbank. This transaction marked the end of over sixty years of continuous ownership of Heafner by members of the Heafner and Gaither families. Also in 1999, Heafner added three warehouses to its West Coast distribution network by acquiring California Tire Company, a wholesaler of tires, parts and accessories, in a transaction that closed on January 12. 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. 53 55 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 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. 54 56 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 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 55 57 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 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." 56 58 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 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. 57 59 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 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 March 31, 1999, $44.2 million of borrowing was outstanding and an additional $30.8 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 58 60 environmental matters have not had, and are not expected to have, a material effect on Heafner's business or earnings. EMPLOYEES Heafner employed approximately 3,338 people as of March 31, 1999, of whom approximately 1,646 were employed in its wholesale divisions and approximately 1,692 were employed in its retail 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
59 61
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
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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 Hayward, California......................... Cal-Tire 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 and the three months ended March 31, 1999 and 1998, which are included at the back of this prospectus, reflect the information relating to these segments for each of these periods. 61 63 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 - ---- --- -------- William H. Gaither........................ 43 Chairman Donald C. Roof............................ 47 President and Chief Executive Officer J. Michael Gaither........................ 46 Executive Vice President, 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 Michael C. Largent........................ 50 President and Chief Operating Officer, California Tire Division Joseph P. Donlan.......................... 52 Director Kim G. Davis.............................. 45 Director Tim R. Palmer............................. 41 Director Mark A. Rosen............................. 48 Director Jon M. Biotti............................. 30 Director
William H. Gaither -- Chairman. Mr. Gaither joined Heafner in 1978 as a management trainee, subsequently serving as an Assistant Manager in various locations. In 1986, Mr. Gaither was named Executive Vice President, a position he held until 1989. He served as President of Heafner from 1989 to 1999. Mr. Gaither also served as the Chief Executive Officer of Heafner from 1996 to 1999 and has been a Director of Heafner since 1986. Mr. Gaither became Chairman of Heafner in 1999. He holds a B.A. from Davidson College. Donald C. Roof -- President and Chief Executive Officer. Mr. Roof became President and Chief Executive Officer of Heafner in May 1999, and prior to that time had served as Heafner's Senior Vice President, Chief Financial Officer and Treasurer since April 1997. Prior to that time, from 1987 to November 1996, he served in a variety of positions with Yale International/Spreckels Industries, a global industrial manufacturing and food processing company. From 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 -- Executive Vice President, General Counsel and Secretary. Mr. Gaither became Executive Vice President in May 1999, and prior to that time served as Heafner's Senior Vice President, General Counsel and Secretary since joining Heafner in 1991. Prior to that time, he was a lawyer in private practice for several years. He holds a B.A. from Duke University and received his J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves on the board of directors of Ridgeview, Inc. Daniel K. Brown -- Senior Vice President/Sales and Marketing. Mr. Brown joined Heafner in 1975 and held various field sales assignments before becoming Marketing Manager in 1979. He advanced to Director of Marketing and to Vice President of Marketing during the 1980's and was named Vice President of Sales and Marketing in 1991. 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 62 64 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. Michael C. Largent -- President, California Tire Division. Mr. Largent currently serves as President and Chief Operating Officer of Heafner's California Tire division. From October 1994 until January 1999, when Heafner acquired California Tire, he served as its President and Chief Executive Officer. Mr. Largent is also a member of California Tire's board of directors. 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. Kim G. Davis -- Director. Mr. Davis has been a Director since May 1999. He is co-founder and Managing Director of Charlesbank Capital Partners, LLC and serves as a director of Bell Sports, Inc. and Westinghouse Air Brake Company. Prior to July 1998, Mr. Davis was a Managing Director of Charlesbank's predecessor firm, Harvard Private Capital Group, Inc., the private equity and real estate investment unit of Harvard Management Company. From 1995 through 1997, Mr. Davis was engaged in personal investing activities. From 1988 through 1994 he was a General Partner at Kohlberg & Co. Mr. Davis graduated from Harvard University with a B.A. in 1976 and an M.B.A. in 1978. Tim R. Palmer -- Director. Mr. Palmer has been a Director since May 1999. He is a Managing Director and co-founder of Charlesbank Capital Partners, LLC. From 1990 through June 1998, Mr. Palmer was a Managing Director of Harvard Private Capital Group, Inc. Mr. Palmer serves on the boards of directors of Bell Sports, Inc. and The WMF Group Ltd. Previously, he was Manager, Business Development at The Field Corporation, a privately held investment company. Mr. Palmer holds a B.A. from Purdue University, a J.D. from the University of Virginia and an M.B.A. from the University of Chicago. Mark A. Rosen -- Director. Mr. Rosen has been a Director since May 1999. He is a Managing Director and co-founder of Charlesbank Capital Partners, LLC. From 1994 through June 1998, Mr. Rosen was a Managing Director of Harvard Private Capital Group, Inc. Mr. Rosen serves on the board of directors of CCC Information Services Group, Inc. Previously, Mr. Rosen was a Principal of The Conifer Group, a strategy consulting firm, President of Morningside/North America Limited, a private investment company, and a Senior Partner in the law firm of Hale and Dorr. Mr. Rosen earned a B.A., magna cum laude, from Amherst College, and holds a J.D. from Yale University. Jon M. Biotti -- Director. Mr. Biotti has been a Director since May 1999. He is a Senior Associate at Charlesbank Capital Partners, LLC. Prior to joining Charlesbank in July 1998, Mr. Biotti pursued postgraduate research studies in principal investing and entrepreneurship as an Entrepreneurial Studies Research Fellow at the Harvard Graduate School of Business Administration. Previously, he was affiliated with Brown Brothers Harriman & Co., the Walt Disney Company and Wasserstein Perella & Co. 63 65 Mr. Biotti holds a B.A. from Harvard University, an M.P.A. from the Kennedy School & Government, and an M.B.A. with distinction from Harvard University. 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. 64 66 (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. (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. 65 67 STOCK OPTION PLAN Heafner has adopted two stock option plans, the Amended and Restated 1997 Stock Option Plan and the 1999 Stock Option Plan, both of which are designed to motivate designated employees, officers, directors and independent contractors of Heafner and its subsidiaries by encouraging them to acquire a proprietary interest in Heafner. Heafner's board of directors, acting through a "plan committee" of at least two members of the board, administers the stock option plans, selects eligible participants, determines the number of shares subject to each option granted under the stock option plans and sets other terms and conditions applicable to participants in the stock option plans. The maximum aggregate number of shares which may be issued under the stock option plans is 1,563,250 shares of Class A common stock. The stock option plans provide for the grant to designated employees, officers, directors and independent contractors of Heafner 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 June 4, 1999, options to purchase an aggregate of 996,700 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 $9.00 per share, had been issued under the stock option plans. All options granted under the stock option plans are subject to the terms and conditions of a stock option agreement entered into by each option recipient. The stock option agreement generally requires each recipient to be bound by the terms of a stockholder agreement with Heafner in the event the recipient elects to exercise options. Options granted under the 1997 stock option plan generally vest on the first four anniversaries of the date of grant, in installments of either (a) 10%, 20%, 30% and 40% or (b) 20%, 20%, 20% and 40%, of the total number of underlying shares. Options granted under the 1999 stock option plan generally vest based on time, performance or the occurrence of specified events, such as an initial public offering or company sale. Time based options vest on the first four anniversaries of the date of grant in installments of 25% per year. Performance based options vest at the end of each year based on the achievement of EBITDA targets for the year. Options that vest on the basis of events such as an initial public offering or company sale do so only to the extent that Charlesbank has earned a specified return on its initial investment in shares of Heafner. All time based and performance based options vest in any event on the seventh anniversary of the date of grant. Options granted under the stock option plans are generally not transferable by the recipient other than by a will or by the laws of descent and distribution and, during the recipient's lifetime, may only be exercised by the recipient. Under the terms of the stock option plans, options expire no later than the tenth anniversary of the date of grant. Options are also subject to adjustment to avoid dilution in the event of stock splits, stock dividends, reclassifications or other similar changes in the capital structure of Heafner. Upon the termination of an option holder's employment with Heafner, the stock option agreement typically provides that all or a portion of the option lapses unless exercised by the option holder or his or her personal representative within a specified period of time after termination. In connection with the Charlesbank purchase, which constituted a "change of control" under the 1997 stock option plan, all outstanding options under the 1997 stock option plan became fully vested and are currently exercisable by the option holders. Under the 1999 stock option plan, each of the following events would constitute a "change of control": - at any time after an initial public offering, a person or entity not controlled by Heafner's existing stockholders acquires more than 30% of the combined voting power of the then outstanding shares of Heafner's common stock, 66 68 - all or substantially all of the assets of Heafner are sold, - the majority of Heafner's board of directors no longer comprises persons currently serving on the board or persons designated by the current board majority, - at any time prior to an initial public offering, Charlesbank and its affiliates collectively own less than 50% of the combined voting power of the then outstanding shares of common stock of Heafner, - the adoption of a plan relating to the liquidation or dissolution of Heafner in connection with an equity investment or sale or a business combination transaction, or - any other event or transaction that the Board of Heafner deems to be a Change in Control. Options outstanding under the stock option plans will become fully vested and immediately exercisable upon any change of control to the extent provided in the relevant stock option agreements. RESTRICTED STOCK Heafner has given designated employees, officers, directors and independent contractors of Heafner and its subsidiaries the opportunity to acquire restricted shares of Class A common stock. Heafner's board of directors administers the restricted stock arrangements, selects eligible participants, determines the number of shares to be offered to each eligible participant and sets other applicable terms and conditions. As of June 1, 1999, directors and executives of Heafner and its subsidiaries owned a total of 255,000 restricted shares of Class A common stock. Shares of restricted stock are issued by Heafner at the fair market value at the date of issuance. Some or all of the purchase price may be paid in the form of a promissory note given by the purchaser of the shares. In some cases, the principal of these notes is forgiven over time by Heafner depending upon the attainment of certain earnings targets. All shares of restricted stock are subject to the terms and conditions of a securities purchase and stockholders' agreement (the "restricted stock agreement") entered into by each stock recipient. The restricted stock agreement prohibits the transfer of restricted shares except for transfers: - to Heafner upon the termination of employment of a participating stockholder, - to other management employees who have executed and delivered agreements substantially similar to the restricted stock agreement, - by will or by the laws of descent or distribution, or - if and to the extent repurchase rights in favor of Heafner on termination of employment have not been exercised, to third parties, subject to rights of first refusal in favor of Heafner and the other holders of restricted stock. Heafner has the right to repurchase all of a participating stockholder's shares upon the termination of that stockholder's employment by Heafner due to cause or by the stockholder other than for good reason (each as defined in the restricted stock agreement) or the death of the participating stockholder. A participating stockholder may require Heafner to repurchase all of such stockholder's shares if that stockholder is terminated by Heafner without cause or terminates his or her employment for good reason (as defined in the restricted stock agreement). The repurchase price for shares of stock subject to the restricted stock agreement is generally their original purchase price or a price derived from Heafner's "Net Equity Value" (as defined in the restricted stock agreement) at the time of repurchase, whichever is lower, in the case where a stockholder is terminated for certain specified cause events or violates his or her confidentiality or non-compete obligations, or whichever is higher, in all other cases, except that the repurchase price is the original purchase price where a stockholder leaves without good reason within 24 months after the date the shares were acquired or is terminated for other cause events. Under the restricted stock agreements entered into in May 1999, the repurchase rights described in this paragraph are 67 69 exercisable by Charlesbank and other principal stockholders to the extent not exercised by Heafner. The restricted stock agreements terminate on the earlier to occur of a public offering that meets specified conditions and the tenth anniversary of the date of the agreement. COMPENSATION OF DIRECTORS During the year ended December 31, 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, and expects not to pay director fees to directors nominated by Charlesbank. 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. 1998 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. 68 70 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. 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 executive severance agreements with each of Messrs. Roof, J. Michael Gaither, Brown, Johnson and Roberts providing for annual base salaries of approximately $400,000, $246,000, $210,000, $275,000 and $230,000, respectively, for the current year. Heafner also pays William H. Gaither an annual fee of $125,000 for serving as Chairman of the Board under a consulting agreement that terminates in May 2002. The agreements with Messrs. J. Michael Gaither, Brown, Johnson and Roberts provide for additional compensation in the form of a fixed annual bonus through 2001, participation in Heafner's executive bonus plan and participation in Heafner's deferred compensation program. The agreement with Mr. Roof provides for his participation in Heafner's executive bonus plan and deferred compensation program but no fixed annual bonus. The employment agreements may be terminated at any time by Heafner or the employee. Upon termination of employment for any reason, the employee is entitled to receive a basic termination payment equal to (a) his base salary earned through the date of termination, (b) the previous year's bonus if the termination is after December 31 and before the bonus has been awarded and (c) the fixed bonus, if any, payable under the agreement prorated through the date of termination. If the employee is terminated by Heafner without cause or the employee leaves for good reason (each as defined in his severance agreement), he is entitled to an additional severance payment based on a multiple of his base salary and plan bonus. The multiple used for determining the additional severance payment is increased if termination occurs in connection with a change of control of Heafner (as defined in his severance agreement). The employment agreements each contain confidentiality and non-compete provisions. In conjunction with the CPW acquisition, Heafner entered into employment agreements with each of Arthur C. Soares, the 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 69 71 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. 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. EXECUTIVE BONUS PLAN Heafner awards annual cash bonuses to its top executives and divisional employees. Bonuses are payable only if Heafner attains specified annual performance targets. Bonuses can range from up to 20% of salary for executives in the lowest bonus bracket to up to 80% of salary for those in the highest. Within each bonus bracket, the percentage bonus also varies depending on the particular performance targets met by Heafner or the corporate division in which the executive works. The executive bonus plan may be altered in the discretion of Heafner's board of directors. 70 72 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Heafner's common stock as of June 4, 1999, giving effect to the reclassification of Heafner's stock, the other Transactions and the Charlesbank purchase, 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) - --------------------------------------- ---------------- -------------- -------------- Charlesbank Equity Fund IV, Limited Partnership............................ 4,961,734(c) 93.4% 96.8% The 1818 Mezzanine Fund, L.P............. 1,034,000(d) 21.1 Jon M. Biotti............................ --(e) Kim G. Davis............................. 4,961,734(c) 93.4 96.8 Joseph P. Donlan......................... 1,034,000(d) 21.1 William H. Gaither....................... 62,500(f) 1.6 Tim R. Palmer............................ 4,961,734(c) 93.4 96.8 Mark A. Rosen............................ 4,961,734(c) 93.4 96.8 Daniel K. Brown.......................... 90,000(g) 2.3 J. Michael Gaither....................... 90,000(h) 2.3 Richard P. Johnson....................... 77,110(i) 1.3 1.9 Michael C. Largent....................... 25,000(j) * P. Douglas Roberts....................... 50,000(k) 1.3 Donald C. Roof........................... 115,000(l) 2.9 Arthur C. Soares......................... -- All directors and executive officers of Heafner as a group (13 persons)........ 6,505,344 99.4 98.7
- --------------- * 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 June 4, 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 June 4, 1999, 3,861,250 shares of Class A common stock and 1,400,667 shares of Class B common stock were issued and outstanding. 71 73 (c) Represents (i) 3,521,528 shares of Class A common stock and 1,324,651 shares of Class B common stock owned by Charlesbank Equity Fund IV, Limited Partnership, (ii) 3,200 shares of Class A common stock and 1,244 shares of Class B common stock owned by its affiliate, Charlesbank Coinvestment Partners, LLC, and (iii) 80,278 shares of Class A common stock and 30,833 shares of Class B common stock owned by an affiliate of Bain Capital and voted by Charlesbank pursuant to an irrevocably proxy. Messrs. Davis, Palmer and Rosen are Managing Directors of Charlesbank Capital Partners, LLC, which has the indirect authority to vote and exercise investment power over shares of Class A and Class B common stock beneficially owned by Charlesbank. Since none of Messrs. Davis, Palmer and Rosen individually has the power to vote and exercise investment power over the shares, each of them disclaims beneficial ownership of the shares. (d) Represents shares issuable upon exercise of Warrants, as discussed below. Mr. Donlan is the co-manager of The 1818 Mezzanine Fund, L. P. and in that capacity will have authority to vote and exercise investment power over the shares. See "Certain Relationships and Related Transactions -- Warrants." (e) Mr. Biotti is a Senior Associate of Charlesbank Capital Partners, LLC and has no authority to vote or exercise investment power over shares of Class A and Class B common stock beneficially owned by Charlesbank. (f) Consists of 62,500 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (g) Includes 40,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (h) Includes 40,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (i) Includes 27,110 shares of Class B common stock acquired in connection with the ITCO merger and 25,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (j) Consists of 25,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (k) Includes 25,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (l) Includes 40,000 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. 72 74 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. Heafner, Charlesbank and the 1818 Fund are also parties to a warrantholder agreement and an amended and restated 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, give preemptive rights to holders of Warrants with respect to certain issuances of Heafner securities, 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 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. Kelly-Springfield waived this redemption right in connection with the Charlesbank purchase. Each series of preferred stock also is redeemable at any time at Heafner's option. 73 75 So long as any amounts are outstanding under Heafner's existing credit facility or subordinated notes, or any amending or replacing agreement for that debt, or any commitments to lend exist under such debt, Heafner is prohibited from: - making any payment in respect of any mandatory or optional redemption of either series of preferred stock, or - declaring, making or paying any dividend or distribution in respect of either series of preferred stock, if any default or event of default under any such debt, or any event which upon notice or lapse of time, or both, would constitute an event of default, has occurred or is continuing or would result from that event and has not been cured or waived in accordance with such debt. SHARE REPURCHASES In February 1997, Heafner offered to repurchase shares of common stock from members of the Gaither family not actively involved in the operation of Heafner at a price equal to $.8058 per share, or $2,644 per share without giving effect to a 3,281-for-1 stock split that occurred on May 7, 1997. Pursuant to the offer, Heafner repurchased, and subsequently canceled and retired, 3,359,744 shares, 1,024 shares without giving effect to the stock split, of common stock from the Gaither family members for an aggregate purchase price of $2.7 million. In 1986, Heafner repurchased from Carolyn H. Williams, and subsequently canceled and retired, all of her shares of Heafner's common stock in exchange for a promissory note in the original principal amount of $1.4 million. Carolyn H. Williams is the sister of Ann H. Gaither, the former Chairperson of Heafner. The note is payable through January 2006 in annual installments of $124,600, including interest at a rate per year of 7.5%. The outstanding principal amount of the note at December 31, 1998 was approximately $730,000. CHARLESBANK PURCHASE On May 24, 1999, Charlesbank purchased all of the shares of Class A common stock of Heafner held by members of the Gaither family and substantially all of the shares of Class B common stock of Heafner held by the former stockholders of ITCO for an aggregate purchase price of approximately $44.0 million. Following the Charlesbank purchase, Charlesbank became the beneficial owner of a majority of the combined voting power of Heafner on a fully-diluted basis. Heafner agreed to pay certain fees and expenses of the selling stockholders and Charlesbank in connection with the Charlesbank purchase which are not expected to exceed $1.35 million. In addition, Heafner incurred or expects to incur additional fees and expenses in connection with the Charlesbank purchase and related transactions, including payments in connection with the consent solicitation, which, together with the stockholder and Charlesbank expenses, are currently estimated to be $3.0 million. Effective upon the closing of the Charlesbank purchase, the following designees of Charlesbank were appointed to Heafner's board of directors: Kim G. Davis, Tim R. Palmer, Mark A. Rosen and Jon M. Biotti. In addition, Ann H. Gaither, V. Edward Easterling, Jr., Victoria B. Jackson and William M. Wilcox, Jr. resigned from Heafner's board of directors. Simultaneously, William H. Gaither resigned as President and Chief Executive Officer of Heafner and became its Chairman, and Donald C. Roof, formerly Senior Vice President, Chief Financial Officer and Treasurer, became President and Chief Executive Officer and was appointed to Heafner's board of directors. In connection with the Charlesbank purchase, Heafner also revised its existing employee stock option and bonus plans, and issued and sold 150,000 newly-issued restricted shares of Class A common stock to certain of its executives. MONITORING FEE Heafner expects to pay an advisory and monitoring fee not to exceed $200,000 annually to Charlesbank Capital Partners, LLC. 74 76 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 March 31, 1999, approximately $44.2 million was outstanding and an additional $30.8 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 75 77 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. Consent. On May 5, 1999, the lenders under the credit facility consented to the Charlesbank purchase and, among other things, waived any effects of non-compliance that would have resulted from the Charlesbank purchase and related transactions. 76 78 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. All references here and elsewhere in this prospectus to the senior note indentures refer to the indentures as amended and supplemented through the date of this prospectus. 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 amendments to and 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, the first supplemental indenture to the Series D indenture, dated February 22, 1999, and the second supplemental indenture to the Series D indenture, dated May 14, 1999, each of which has been filed as an exhibit to the registration statement of which this prospectus is a part. 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, as well as the first and second supplemental indentures to each of the Series B and Series D indentures, 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. 77 79 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%
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." 78 80 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 subsidiary guarantors, including indebtedness under the Credit Facility, to the extent of the value of the assets securing that indebtedness. As of March 31, 1999, Heafner and the subsidiary guarantors had outstanding, either directly or through guarantees, approximately $206.5 million of indebtedness, all of which was senior indebtedness, and approximately $51.7 million of which was secured. In addition, at March 31, 1999, Heafner could have borrowed an additional $30.8 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 March 31, 1999, the total liabilities of Heafner's subsidiaries, all of whom are subsidiary guarantors, were approximately $69.5 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 79 81 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 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. 80 82 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 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 81 83 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, provided that a person shall not be deemed to beneficially own more than 50% of the voting power of the Voting Stock of Heafner solely by reason of having entered into a stockholders or similar agreement with a Permitted Holder. 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 (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. 82 84 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 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. 83 85 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 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 84 86 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). 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: 85 87 - 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 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, 86 88 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, (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. 87 89 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; 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 88 90 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. 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, - 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, or 89 91 - the payment of, or reimbursement for, up to $1.35 million in the aggregate of Stockholder Expenses. 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 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. 90 92 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; 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 91 93 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 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 92 94 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. 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. 93 95 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, - 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 94 96 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"). 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 95 97 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. 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. 96 98 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, 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 97 99 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 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 98 100 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, - 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; 99 101 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: 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. 100 102 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: - 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 101 103 - 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, 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; 102 104 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 - 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 103 105 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. "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 Charlesbank Equity Fund IV, Limited Partnership, Charlesbank Equity Fund IV GP, Limited Partnership, Charlesbank Capital Partners, LLC, any other funds managed by Charlesbank Capital Partners, LLC, any person that, as of the date of closing of the transactions contemplated by the Stock Purchase Agreement, is a limited partner of Charlesbank Equity Fund IV, Limited Partnership, members of senior management of the Company that were employees of the Company on the date of closing of the transactions contemplated by the Stock Purchase Agreement, and any corporation, partnership or other entity a majority of the Voting Stock of which 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; 104 106 - 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 $2.5 million in aggregate principal amount outstanding at any time; 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; (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; 105 107 (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; (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. 106 108 "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. "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. 107 109 "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 - 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. "Stock Purchase Agreement" means the Stock Purchase Agreement, dated as of April 21, 1999, as amended from time to time, among Charlesbank Equity Fund IV, Limited Partnership, the Company and the stockholders of the Company party thereto. "Stockholder Expenses" means the expenses incurred by or on behalf of Charlesbank Equity Fund IV, Limited Partnership and certain stockholders of the Company in the pursuit of the transactions contemplated by the Stock Purchase Agreement that the Company has agreed to be responsible for pursuant to the Stock Purchase Agreement. "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 108 110 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. "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 109 111 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. 110 112 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. 111 113 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 112 114 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. 113 115 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- THE J.H. HEAFNER COMPANY, INC. -- CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets -- March 31, 1999 (Unaudited) and December 31, 1998......................... F-3 Unaudited Condensed Consolidated Statements of Operations -- Three Months Ended March 31, 1999 and 1998...................................................... F-4 Unaudited Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1999 and 1998....... F-5 Notes to Unaudited Condensed Consolidated Financial Statements -- Three Months Ended March 31, 1999 and 1998...................................................... F-6 THE J.H. HEAFNER COMPANY, INC. AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... F-9 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-10 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-11 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. F-12 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-13 Notes to Consolidated Financial Statements.................. F-14 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-31 Consolidated Balance Sheets as of September 30, 1997 and 1996...................................................... F-32 Consolidated Statements of Operations for the year ended September 30, 1997 and for the ten month period ended September 30, 1996........................................ F-33 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-34 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-35 Notes to Consolidated Financial Statements.................. F-36 ITCO HOLDING COMPANY AND SUBSIDIARIES -- CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-45 Consolidated Statement of Earnings for the year ended September 30, 1995........................................ F-46 Consolidated Statement of Stockholders' Equity for the year ended September 30, 1995.................................. F-47 Consolidated Statement of Cash Flows for the year ended September 30, 1995........................................ F-48 Notes to Consolidated Financial Statements.................. F-49 ITCO LOGISTICS CORPORATION AND SUBSIDIARIES -- UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Balance Sheet as of May 20, 1998..... F-52 Unaudited Consolidated Statement of Operations for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-53 Unaudited Consolidated Statements of Shareholders' Deficit for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-54 Unaudited Consolidated Statement of Cash Flows for the eight-month periods ended May 20, 1998 and May 31, 1997...................................................... F-55 Notes to Unaudited Interim Consolidated Financial Statements................................................ F-56
F-1 116
PAGE ---- THE SPEED MERCHANT, INC. (FORMERLY THE SPEED MERCHANT, INC. AND SUBSIDIARY) -- FINANCIAL STATEMENTS Independent Auditors' Report................................ F-57 Balance Sheets as of October 31, 1996 and 1997 and April 30, 1998 (Unaudited).......................................... F-58 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-59 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-60 Notes to Financial Statements............................... F-61
F-2 117 THE J. H. HEAFNER COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 6,249 $ 6,648 Accounts receivable, net of allowances of $3,115 and $2,220................................................. 111,598 109,471 Inventories, net.......................................... 146,258 133,221 Other current assets...................................... 13,386 13,319 -------- -------- Total current assets........................................ 277,491 262,659 -------- -------- Property and equipment, net................................. 44,963 42,802 Goodwill, net............................................... 106,909 104,405 Other assets................................................ 13,749 12,579 Other intangible assets, net................................ 7,680 8,376 -------- -------- $450,792 $430,821 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $166,978 $169,847 Accrued expenses.......................................... 36,030 33,239 Current maturities of long-term debt...................... 3,026 3,011 -------- -------- Total current liabilities................................... 206,034 206,097 Long-term debt.............................................. 159,199 160,400 Revolving credit facility................................... 44,225 21,925 Other liabilities........................................... 11,942 11,785 Preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding........................ 7,000 7,000 Preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding................. 4,353 4,353 Warrants.................................................... 1,137 1,137 Commitments and contingencies Stockholders' equity: Class A Common Stock, par value of $.01 per share; authorized 10,000,000 shares; 3,687,000 and 3,697,000 shares issued and outstanding.......................... 37 37 Class B Common Stock, par value of $.01 per share; 20,000,000 authorized, 1,400,667 shares issued and outstanding............................................ 14 14 Additional paid-in capital................................ 22,349 22,360 Notes receivable from stock sales......................... (169) (177) Retained deficit.......................................... (5,329) (4,110) -------- -------- 16,902 18,124 -------- -------- $450,792 $430,821 ======== ========
See notes to unaudited condensed consolidated financial statements. F-3 118 THE J. H. HEAFNER COMPANY, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales................................................... $239,804 $89,126 Cost of goods sold.......................................... 186,693 63,694 -------- ------- Gross profit................................................ 53,111 25,432 General, selling and administrative expenses................ 50,450 24,556 -------- ------- Income from operations...................................... 2,661 876 Other income (expense): Interest expense.......................................... (5,112) (1,698) Other income, net......................................... 398 65 -------- ------- Net income (loss) from operations before income taxes....... (2,053) (757) Benefit for income taxes.................................. 860 294 -------- ------- Net income (loss)........................................... $ (1,193) $ (463) ======== =======
See notes to unaudited condensed consolidated financial statements. F-4 119 THE J. H. HEAFNER COMPANY, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $(1,193) $ (463) Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of the California Tire acquisition -- Depreciation and amortization............................. 4,456 1,727 Loss on sale of property and equipment.................... 86 89 Change in assets and liabilities: Accounts receivable, net............................... 2,255 101 Other current assets................................... 289 (30) Inventories, net....................................... (8,092) (3,459) Accounts payable and accrued expenses.................. (8,779) (110) ------- ------- Net cash provided by (used in) operating activities......... (10,978) (2,145) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of California Tire, net of cash acquired........ (3,950) 0 Purchase of property and equipment.......................... (3,210) (1,029) Proceeds from sale of property and equipment................ 0 292 Other....................................................... (672) (684) ------- ------- Net cash provided by (used in) investing activities......... (7,832) (1,421) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt........................ $(1,436) $ (946) Net proceeds from revolving credit facility................. 20,219 3,538 Other....................................................... (372) 0 ------- ------- Net cash provided by financing activities................... 18,411 2,592 ------- ------- Net increase (decrease) in cash............................. (399) (974) Cash, beginning of period................................... 6,648 2,502 ------- ------- Cash, end of period......................................... $ 6,249 $ 1,528 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest.................................. $ 858 $ 1,828 Cash payments for income taxes.............................. 76 441 ======= =======
See notes to unaudited condensed consolidated financial statements. F-5 120 THE J. H. HEAFNER COMPANY, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS) 1. ORGANIZATION: The J. H. Heafner Company, Inc. (the Company), a North Carolina corporation, is engaged in the wholesale distribution of tires and tire accessories and the operation of retail tire and auto service stores. In May 1997, the Company acquired all outstanding shares of common stock of Oliver and Winston, Inc. (Winston), a California-based operation of retail tire and automotive service centers in California and Arizona. 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. In January, 1999, the Company acquired all outstanding shares of California Tire LLC (California Tire), a wholesaler and retailer of tires, parts and accessories located in California. 2. BASIS OF PRESENTATION: The unaudited condensed consolidated balance sheet as of March 31, 1999, and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 1999 and 1998, have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's consolidated financial statements for the fiscal year ended December 31, 1998. The results of the operations for the three months ended are not necessarily indicative of the operating results for the full fiscal year. 3. ACQUISITION: On January 12, 1999, 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 paid to the stockholders was $3,950 in cash. The transaction has been accounted for under the purchase method. Accordingly, results of operations for the acquired business have been included in the unaudited condensed consolidated statement of operations from the January 12, 1999 acquisition date. A preliminary allocation of the purchase price has been recorded in the accompanying unaudited condensed consolidated financial statements as of March 31, 1999, based on management's best estimate of assets acquired and liabilities assumed. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. 4. EXIT COSTS: In connection with the ITCO merger, the CPW acquisition and the Winston acquisition, the Company recorded a $3,516, $1,726 and $2,927 liability, respectively, 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." Charges of approximately $372, $82 and $158, respectively were made against these reserves in the first quarter 1999. In the second quarter of 1998, the Company recorded special charges of $1,409 related to the restructuring of its southeast wholesale business, which includes the closing of 13 distribution centers F-6 121 THE J. H. HEAFNER COMPANY, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commencing in the third quarter of 1998. The charges include lease commitments for certain distribution centers, asset writedowns, severance and employee related costs and costs to shut down certain facilities. In the first quarter of 1999, the Company charged approximately $391 against these reserves. 5. 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 operating results of the Company reflect the acquisitions of Winston effective as of May 7, 1997, CPW and ITCO effective as of May 20, 1998 and California Tire effective as of January 12, 1999:
EASTERN WESTERN WESTERN WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS --------- ------- --------- ------------ -------- Three months ended March 31, 1999 -- Revenues from external customers.......... $158,253 $37,064 $44,487 $ -- $239,804 EBITDA(1)................................. 4,468 (320) 3,150 -- 7,298 Segment assets............................ 514,984 79,853 151,321 (295,366) 450,792 Expenditures for segment assets........... 689 1,894 627 -- 3,210 Three months ended March 31, 1998 -- Revenues from external customers.......... $ 54,417 $34,709 $ -- $ -- $ 89,126 EBITDA(1)................................. 1,279 1,226 -- -- 2,505 Segment assets............................ 130,061 71,297 -- (52,702) 148,656 Expenditures for segment assets........... 274 755 -- -- 1,029
- --------------- (1) EBITDA represents income (loss) before interest expense, income taxes, noncash amortization of intangible assets and depreciation. Depreciation and amortization for the first quarter 1999, as noted in the unaudited condensed consolidated statement of cash flows, includes $217 of amortization expense related to deferred financing fees that is included in interest expense in the unaudited condensed consolidated statement of operations. Depreciation and amortization for the first quarter 1998, as noted in the unaudited condensed consolidated statement of cash flows, includes $42 of amortization expense related to debt discount and $121 of amortization expense related to deferred financing fees that is included in interest expense in the unaudited condensed consolidated statement of operations. F-7 122 THE J. H. HEAFNER COMPANY, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. 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:
AS OF AND FOR THE QUARTER ENDED MARCH 31, 1999 ----------------- Current assets.............................................. $95,077 Noncurrent assets........................................... 98,769 Current liabilities......................................... 60,594 Noncurrent liabilities...................................... 8,865 Net sales................................................... 81,551 Gross profit................................................ 27,430 Net loss.................................................... (1,295) =======
The above information excludes $36,580 of net intercompany payable and $15,365 of intercompany sales of the Company's subsidiary guarantors. In preparation of the Company's unaudited condensed consolidated financial statements, all intercompany accounts were eliminated. F-8 123 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-9 124 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-10 125 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-11 126 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-12 127 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 provided by (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-13 128 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-14 129 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-15 130 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-16 131 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-17 132 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-18 133 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-19 134 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-20 135 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-21 136 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-22 137 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-23 138 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-24 139 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-25 140 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-26 141 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-27 142 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-28 143 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-29 144 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. 16. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED) On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership (the "Purchaser"), purchased approximately 95.2% of the Company's issued and outstanding shares of Class A common stock and approximately 96.8% of its issued and outstanding shares of Class B common stock for a purchase price of approximately $44.0 million. The Purchaser is a private equity fund managed by Charlesbank Capital Partners, LLC ("Charlesbank"). Charlesbank, the successor to Harvard Private Capital Group, is a private investment firm with over $2 billion of direct private investment assets. F-30 145 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-31 146 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-32 147 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-33 148 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-34 149 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-35 150 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-36 151 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-37 152 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-38 153 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-39 154 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-40 155 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-41 156 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-42 157 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-43 158 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-44 159 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-45 160 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-46 161 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-47 162 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-48 163 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-49 164 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-50 165 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-51 166 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-52 167 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-53 168 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-54 169 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-55 170 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-56 171 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-57 172 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-58 173 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-59 174 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-60 175 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-61 176 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-62 177 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-63 178 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-64 179 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-65 180 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-66 181 - ------------------------------------------------------ - ------------------------------------------------------ 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........................... 11 Where You Can Find More Information.... 17 Forward-Looking Information............ 18 The Transactions....................... 19 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............................... 52 Management............................. 62 Principal Stockholders................. 71 Certain Relationships and Related Transactions......................... 73 Description of Credit Facility......... 75 Description of the Series D Notes...... 77 Certain U.S. Federal Income Tax Considerations....................... 111 Plan of Distribution................... 111 Legal Matters.......................... 112 Experts................................ 112 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 ------------------------------------------------------ ------------------------------------------------------ 182 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-1 183 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++
II-2 184 4.8 Second Supplemental Indenture to the Series B Indenture, dated as of May 14, 1999, among the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee# 4.9 Second Supplemental Indenture to the Series C Indenture, dated as of May 14, 1999, among the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee# 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes++ 10.1 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 Letter Agreement, dated as of May 5, 1999, by and between the Company, the Agent and Co-Agents# 10.6 Warrantholder Agreement, dated as of May 21, 1999, between the Company, The 1818 Mezzanine Fund, L.P. and Charlesbank Equity Fund IV, Limited Partnership# 10.7 Amended and Restated Warrant No. 2 exercisable for 1,034,000 shares of Class A Common Stock in the name of The 1818 Mezzanine Fund, L.P.# 10.8 Amended and Restated Registration Rights Agreement, dated as of May 21, 1999, between and among the Company, The 1818 Mezzanine Fund, L.P., and Charlesbank Equity Fund IV, Limited Partnership# 10.9 Securities Purchase Agreement, dated as of May 7, 1997, between The J.H. Heafner Company, Inc. and The Kelly-Springfield Tire and Rubber Company (the "Securities Purchase Agreement")* 10.10 Amendment to Securities Purchase Agreement, dated as of May 21, 1999, between and among the Company and The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company# 10.11 Termination and Release Agreement, dated as of May 22, 1999, among the Company and the Class B Stockholders party thereto# 10.12 Stock Purchase Agreement, dated as of March 11, 1998, among the Company, Arthur C. Soares and Ray C. Barney* 10.13 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")* 10.14 Letter of Credit, dated as of May 20, 1998, issued to First Union National Bank, as CPW Escrow Agent* 10.15 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the shareholders of Oliver & Winston, Inc.* 10.16 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998, by and between Michelin North America, Inc. and the Company** 10.17 Letter Agreements, dated as of November 24 and 25, 1998, respectively, by and between Michelin North America and the Company++ 10.18 The J. H. Heafner Company, Inc. Amended and Restated 1997 Stock Option Plan# 10.19 The J. H. Heafner Company, Inc. 1999 Stock Option Plan (including form of Stock Option Agreement)# 10.20 Stock Option Agreements, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson and P. Douglas Roberts#
II-3 185 10.21 The J.H. Heafner Company 1997 Restricted Stock Plan* 10.22 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders* 10.23 Securities Purchase and Stockholders' Agreement, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson, and P. Douglas Roberts# 10.24 Employment and Severance Agreement between the Company and Thomas J. Bonburg** 10.25 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C. Soares* 10.26 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc. and Ray C. Barney* 10.27 Letter Agreement, dated as of May 20, 1999, by and between the Company and William H. Gaither# 10.28 Executive Severance Agreements, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson, P. Douglas Roberts and J. Lewis McKnight, Jr.# 10.29 Stock Purchase Agreement, dated as of April 21, 1999, among the Company, Charlesbank Equity Fund IV, Limited Partnership and the stockholders party thereto# 11.1 Statement re: Computation of Per Share Earnings++ 11.2 Statement re: Computation of Per Share Earnings+++ 12.1 Statement re: Computation of Ratios++ 12.2 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++ 27.2 Financial Data Schedules+++ 99.1 Form of Letter of Transmittal++ 99.2 Form of Notice of Guaranteed Delivery++ 99.3 Form of Exchange Agent Agreement#
- --------------- * Incorporated by reference to Heafner's Registration Statement on Form S-4 filed with the SEC on August 18, 1998. ** Incorporated by reference to Amendment No. 1 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 2, 1998. *** Incorporated by reference to Amendment No. 2 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 14, 1998. herewith. All other exhibits were filed with the Registration Statement dated August 18, 1998 or Amendment No. 1 to the Registration Statement dated October 2, 1998. + Incorporated by reference to Heafner's Form 8-K filed on December 15, 1998. ++ Incorporated by reference to Heafner's Registration Statement on Form S-4 filed with the SEC on March 31, 1999. +++ Incorporated by reference to Heafner's Form 10-Q filed on March 31, 1999. # Filed herewith. II-4 186 (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-5 187 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 June 9, 1999. THE J. H. HEAFNER COMPANY, INC. By: /s/ DONALD C. ROOF Name: DONALD C. ROOF 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/ DONALD C. ROOF Director, President, Chief Executive June 9, 1999 - --------------------------------------------- Officer and Acting Chief Financial Donald C. Roof Officer * Chief Accounting Officer June 9, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. * Chairman of the Board June 9, 1999 - --------------------------------------------- William H. Gaither /s/ KIM G. DAVIS Director June 9, 1999 - --------------------------------------------- Kim G. Davis
II-6 188
SIGNATURE TITLE DATE --------- ----- ---- * Director June 9, 1999 - --------------------------------------------- Joseph P. Donlan /s/ MARK A. ROSEN Director June 9, 1999 - --------------------------------------------- Mark A. Rosen /s/ TIM R. PALMER Director June 9, 1999 - --------------------------------------------- Tim R. Palmer /s/ JON BIOTTI Director June 9, 1999 - --------------------------------------------- Jon Biotti *By: /s/ DONALD C. ROOF -------------------------------------- Donald C. Roof Attorney-in-fact
II-7 189 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 June 9, 1999. OLIVER & WINSTON, INC. By: /s/ DONALD C. ROOF Name: Donald C. Roof 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/ DONALD C. ROOF Director, Chief Executive Officer June 9, 1999 - --------------------------------------------- and Principal Financial Officer Donald C. Roof * Director, President and Chief June 9, 1999 - --------------------------------------------- Operating Officer P. Douglas Roberts * Director, Vice President and Secretary June 9, 1999 - --------------------------------------------- J. Michael Gaither
II-8 190
SIGNATURE TITLE DATE --------- ----- ---- * Chief Accounting Officer June 9, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. * Chairman of the Board June 9, 1999 - --------------------------------------------- William H. Gaither *By: /s/ DONALD C. ROOF -------------------------------------- Donald C. Roof Attorney-in-fact
II-9 191 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 June 9, 1999. THE SPEED MERCHANT, INC. By: /s/ DONALD C. ROOF -------------------------------------- Name: Donald C. Roof 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/ DONALD C. ROOF Director, Chief Executive Officer and June 9, 1999 - --------------------------------------------- Principal Financial Officer Donald C. Roof * Director, President and Chief June 9, 1999 - --------------------------------------------- Operating Officer Arthur C. Soares * Director, Vice President, General June 9, 1999 - --------------------------------------------- Counsel and Secretary J. Michael Gaither * Chief Accounting Officer June 9, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. * Chairman of the Board June 9, 1999 - --------------------------------------------- William H. Gaither *By: /s/ DONALD C. ROOF --------------------------------------- Donald C. Roof Attorney-in-fact
II-10 192 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 June 9, 1999. PHOENIX RACING, INC. By: /s/ DONALD C. ROOF -------------------------------------- Name: Donald C. Roof 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/ DONALD C. ROOF Director, Chief Executive Officer and June 9, 1999 - --------------------------------------------- Principal Financial Officer Donald C. Roof * Director, President and Chief June 9, 1999 - --------------------------------------------- Operating Officer P. Douglas Roberts * Director, Vice President and Secretary June 9, 1999 - --------------------------------------------- J. Michael Gaither * Chief Accounting Officer June 9, 1999 - --------------------------------------------- J. Lewis McKnight, Jr. * Chairman of the Board June 9, 1999 - --------------------------------------------- William H. Gaither *By: /s/ DONALD C. ROOF -------------------------------------- Donald C. Roof Attorney-in-fact
II-11 193 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 June 9, 1999. CALIFORNIA TIRE COMPANY By: /s/ DONALD C. ROOF -------------------------------------- Name: Donald C. Roof 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/ DONALD C. ROOF Director, Chief Executive Officer and June 9, 1999 - --------------------------------------------- Principal Financial Officer Donald C. Roof * President June 9, 1999 - --------------------------------------------- Michael Largent * Director, Vice President and Secretary June 9, 1999 - --------------------------------------------- J. Michael Gaither * Chairman of the Board June 9, 1999 - --------------------------------------------- William H. Gaither *By: /s/ DONALD C. ROOF -------------------------------------- Donald C. Roof Attorney-in-fact
II-12 EX-4.8 2 2ND SUPPLEMENTAL INDENTURE TO SERIES B INDENTURE 1 EXHIBIT 4.8 SECOND SUPPLEMENTAL INDENTURE, dated as of May 14, 1999 (the "Second Supplemental Indenture"), among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), the Subsidiary Guarantors party hereto (the "Subsidiary Guarantors"), and FIRST UNION NATIONAL BANK, as Trustee (the "Trustee") under the Indenture referred to below. ----------------------------------------------------------------------- The Company, the Subsidiary Guarantors and the Trustee are parties to an Indenture, dated as of May 15, 1998, as supplemented by the Supplemental Indenture dated February 22, 1999 (as so supplemented, the "Indenture"), providing, among other things, for the authentication, delivery and administration of the Company's 10% Senior Notes Due 2008, Series B (the "Securities"). Pursuant to a Consent Solicitation dated April 30, 1999 (the "Consent Solicitation"), the Company has proposed certain amendments (the "Proposed Amendments") to the Indenture. Pursuant to Section 9.02 of the Indenture, the Holders (as defined in the Indenture) of at least a majority of the outstanding principal amount of the Securities currently outstanding have approved such Proposed Amendments as described in this Second Supplemental Indenture. The Company has directed the Trustee to execute and deliver this Second Supplemental Indenture in accordance with the terms of the Indenture. In consideration of the foregoing premises, the parties mutually agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Securities: ARTICLE 1 Definitions SECTION 1.1 Defined Terms. As used in this Second Supplemental Indenture, terms defined in the Indenture or in the preamble or recital hereto are used herein as therein defined, except that the term "Holders" in this Second 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 Second Supplemental Indenture refer to this Second Supplemental Indenture as a whole and not to any particular section hereof. ARTICLE II Amendments to Indenture SECTION 2.1 Amendments to Indenture. The Indenture is hereby amended as follows: 2 (a) Section 1.01 of the Indenture is amended to add the following definitions in proper alphabetical order: (1) "`Stockholder Expenses' means the expenses incurred by or on behalf of Charlesbank Equity Fund IV, Limited Partnership and certain stockholders of the Company in the pursuit of the transactions contemplated by the Stock Purchase Agreement that the Company has agreed to be responsible for pursuant to the Stock Purchase Agreement."; and (2) "`Stock Purchase Agreement' means the Stock Purchase Agreement, dated as of April 21, 1999, as amended from time to time, among Charlesbank Equity Fund IV, Limited Partnership, the Company and the stockholders of the Company party thereto." (b) The definition of "Change of Control" in Section 1.01 of the Indenture is amended by adding the following clause at the end of clause (i) thereof: "provided, however, that a person shall not be deemed to be the `beneficial owner' (as defined in this clause (i)) of more than 50% of the total voting power of the Voting Stock of the Company solely by reason of such person having entered into a stockholders or similar agreement with a Permitted Holder;". (c) The definition of "Permitted Holders" in Section 1.01 of the Indenture is amended in its entirety and replaced with the following: "Permitted Holders" means Charlesbank Equity Fund IV, Limited Partnership, Charlesbank Equity Fund IV GP, Limited Partnership, Charlesbank Capital Partners, LLC, any other funds managed by Charlesbank Capital Partners, LLC, any person that, as of the date of closing of the transactions contemplated by the Stock Purchase Agreement, is a limited partner of Charlesbank Equity Fund IV, Limited Partnership, members of senior management of the Company that were employees of the Company on the date of closing of the transactions contemplated by the Stock Purchase Agreement, and any corporation, partnership or other entity a majority of the Voting Stock of which is owned by any of the foregoing. (d) The definition of "Permitted Investment" in Section 1.01 of the Indenture is amended by replacing the current clause (viii) of such definition to read in its entirety as follows: "(viii) promissory notes issued by members of management of the Company and its Subsidiaries as payment for restricted shares of Capital Stock of the Company not to exceed $2.5 million in aggregate principal amount outstanding at any time;". (e) Section 4.07 (Limitation on Affiliate Transactions) of the Indenture is amended by adding a new clause (ix) to subsection (b) of Section 4.07 which clause reads in its entirety as follows: or (ix) the payment of, or reimbursement for, up to $1.35 million in the aggregate of Stockholder Expenses, 2 3 and by replacing with a comma the word "or" in subsection (b) appearing after the word "Company" and before the roman numeral "(viii)." SECTION 2.2 Notification to Holders. The Company shall notify the Holders in accordance with Section 9.02 of the Indenture of the execution of this Second Supplemental Indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of this Second Supplemental Indenture. SECTION 2.3 Receipt by Trustee. In accordance with Section 11.04 of the Indenture, the parties acknowledge that the Trustee has received an Officers' Certificate and Opinion of Counsel as conclusive evidence that this Second Supplemental Indenture complies with the applicable requirements of the Indenture. ARTICLE III Miscellaneous SECTION 3.1 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 3.2 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 3.3 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 impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. SECTION 3.4 Ratification of Indenture; Second 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 Second 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 Second Supplemental Indenture. SECTION 3.5 Condition to Operative Effect. For purposes of Sections 9.02 and 9.04 of the Indenture only, this Second Supplemental Indenture shall have operative effect upon execution hereof by the Trustee, the Company and the Subsidiary Guarantors. For all other purposes, including Section 2.1 hereof, the operative effect of this Second Supplemental Indenture is conditioned upon the occurrence of the consummation of the transactions contemplated by the Stock Purchase Agreement dated as of April 21, 1999, as amended from time to time, among the Company, Charlesbank Equity Fund IV, Limited Partnership and the stockholders of the Company party thereto. 3 4 SECTION 3.6 Counterparts. The parties hereto may sign one or more copies of this Second 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 Second 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. 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Second 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 OLIVER & WINSTON, INC., as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer THE SPEED MERCHANT, INC., as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer 5 6 PHOENIX RACING, INC., as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer CALIFORNIA TIRE COMPANY, as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer FIRST UNION NATIONAL BANK, as Trustee By: /s/ Shannon Schwartz ---------------------------------------------- Name: SHANNON SCHWARTZ Title: Assistant Vice President 6 EX-4.9 3 2ND SUPPLEMENTAL INDENTURE TO SERIES C INDENTURE 1 EXHIBIT 4.9 SECOND SUPPLEMENTAL INDENTURE, dated as of May 14, 1999 (the "Second Supplemental Indenture"), among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), the Subsidiary Guarantors party hereto (the "Subsidiary Guarantors"), and FIRST UNION NATIONAL BANK, as Trustee (the "Trustee") under the Indenture referred to below. ----------------------------------------------------------------------- The Company, the Subsidiary Guarantors and the Trustee are parties to an Indenture, dated as of December 1, 1998, as supplemented by the Supplemental Indenture dated February 22, 1999 (as so supplemented, the "Indenture"), providing, among other things, for the authentication, delivery and administration of the Company's 10% Senior Notes Due 2008, Series C (the "Securities"). Pursuant to a Consent Solicitation dated April 30, 1999 (the "Consent Solicitation"), the Company has proposed certain amendments (the "Proposed Amendments") to the Indenture. Pursuant to Section 9.02 of the Indenture, the Holders (as defined in the Indenture) of at least a majority of the outstanding principal amount of the Securities currently outstanding have approved such Proposed Amendments as described in this Second Supplemental Indenture. The Company has directed the Trustee to execute and deliver this Second Supplemental Indenture in accordance with the terms of the Indenture. In consideration of the foregoing premises, the parties mutually agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Securities: ARTICLE 1 Definitions SECTION 1.1 Defined Terms. As used in this Second Supplemental Indenture, terms defined in the Indenture or in the preamble or recital hereto are used herein as therein defined, except that the term "Holders" in this Second 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 Second Supplemental Indenture refer to this Second Supplemental Indenture as a whole and not to any particular section hereof. ARTICLE II Amendments to Indenture SECTION 2.1 Amendments to Indenture. The Indenture is hereby amended as follows: 2 (a) Section 1.01 of the Indenture is amended to add the following definitions in proper alphabetical order: (1) "`Stockholder Expenses' means the expenses incurred by or on behalf of Charlesbank Equity Fund IV, Limited Partnership and certain stockholders of the Company in the pursuit of the transactions contemplated by the Stock Purchase Agreement that the Company has agreed to be responsible for pursuant to the Stock Purchase Agreement."; and (2) "`Stock Purchase Agreement' means the Stock Purchase Agreement, dated as of April 21, 1999, as amended from time to time, among Charlesbank Equity Fund IV, Limited Partnership, the Company and the stockholders of the Company party thereto." (b) The definition of "Change of Control" in Section 1.01 of the Indenture is amended by adding the following clause at the end of clause (i) thereof: "provided, however, that a person shall not be deemed to be the `beneficial owner' (as defined in this clause (i)) of more than 50% of the total voting power of the Voting Stock of the Company solely by reason of such person having entered into a stockholders or similar agreement with a Permitted Holder;". (c) The definition of "Permitted Holders" in Section 1.01 of the Indenture is amended in its entirety and replaced with the following: "Permitted Holders" means Charlesbank Equity Fund IV, Limited Partnership, Charlesbank Equity Fund IV GP, Limited Partnership, Charlesbank Capital Partners, LLC, any other funds managed by Charlesbank Capital Partners, LLC, any person that, as of the date of closing of the transactions contemplated by the Stock Purchase Agreement, is a limited partner of Charlesbank Equity Fund IV, Limited Partnership, members of senior management of the Company that were employees of the Company on the date of closing of the transactions contemplated by the Stock Purchase Agreement, and any corporation, partnership or other entity a majority of the Voting Stock of which is owned by any of the foregoing. (d) The definition of "Permitted Investment" in Section 1.01 of the Indenture is amended by replacing the current clause (viii) of such definition to read in its entirety as follows: "(viii) promissory notes issued by members of management of the Company and its Subsidiaries as payment for restricted shares of Capital Stock of the Company not to exceed $2.5 million in aggregate principal amount outstanding at any time;". (e) Section 4.07 (Limitation on Affiliate Transactions) of the Indenture is amended by adding a new clause (ix) to subsection (b) of Section 4.07 which clause reads in its entirety as follows: or (ix) the payment of, or reimbursement for, up to $1.35 million in the aggregate of Stockholder Expenses, 2 3 and by deleting the word "or" in subsection (b) appearing after the word "Company" and before the roman numeral "(viii)" and replacing it with a comma. SECTION 2.2 Notification to Holders. The Company shall notify the Holders in accordance with Section 9.02 of the Indenture of the execution of this Second Supplemental Indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of this Second Supplemental Indenture. SECTION 2.3 Receipt by Trustee. In accordance with Section 11.04 of the Indenture, the parties acknowledge that the Trustee has received an Officers' Certificate and Opinion of Counsel as conclusive evidence that this Second Supplemental Indenture complies with the applicable requirements of the Indenture. ARTICLE III Miscellaneous SECTION 3.1 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 3.2 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 3.3 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 impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. SECTION 3.4 Ratification of Indenture; Second 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 Second 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 Second Supplemental Indenture. SECTION 3.5 Condition to Operative Effect. For purposes of Sections 9.02 and 9.04 of the Indenture only, this Second Supplemental Indenture shall have operative effect upon execution hereof by the Trustee, the Company and the Subsidiary Guarantors. For all other purposes, including Section 2.1 hereof, the operative effect of this Second Supplemental Indenture is conditioned upon the occurrence of the consummation of the transactions contemplated by the Stock Purchase Agreement dated as of April 21, 1999, as amended from time to time, among the Company, Charlesbank Equity Fund IV, Limited Partnership and the stockholders of the Company party thereto. 3 4 SECTION 3.6 Counterparts. The parties hereto may sign one or more copies of this Second 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 Second 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. 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Second 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 OLIVER & WINSTON, INC., as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer THE SPEED MERCHANT, INC., as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer 5 6 PHOENIX RACING, INC. , as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer CALIFORNIA TIRE COMPANY, as a Subsidiary Guarantor By: /s/ William H. Gaither ---------------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer By: /s/ Donald C. Roof ---------------------------------------------- Name: Donald C. Roof Title: Sr. Vice President, Chief Financial Officer & Treasurer FIRST UNION NATIONAL BANK, as Trustee By: /s/ Shannon Schwartz ---------------------------------------------- Name: SHANNON SCHWARTZ Title: Assistant Vice President 6 EX-10.5 4 LETTER AGREEMENT DATED 5-5-1999 1 EXHIBIT 10.5 (Heafner letterhead) May 5, 1999 VIA FEDERAL EXPRESS AND FACSIMILE BankBoston, N.A., as Administrative Agent 115 Perimeter Center Place, N.E. Suite 500 Atlanta, Georgia 30346 Attention: Christopher R. Nairne Facsimile: 770-393-4166 Re: Stock Purchase Agreement between stockholders of The J. H. Heafner Company, Inc. and Charlesbank Equity Fund IV, Limited Partnership Ladies and Gentlemen: Reference is made to the Amended and Restated Loan and Security Agreement (the "Loan Agreement"), dated as of May 20, 1998, as amended by the letter dated November 30, 1998 from the Lenders to Heafner, by and between The J.H. Heafner Company, Inc. ("Heafner"), Oliver & Winston, Inc., The Speed Merchant, Inc. and ITCO Holding Company, Inc., as Borrowers, the financial institutions from time to time party thereto, as Lenders, Fleet Capital Corporation and First Union National Bank, as Co-Agents, and BankBoston, N.A., as Administrative Agent for the Lenders. Capitalized terms used and not defined in this letter are defined in the Loan Agreement. On April 21, 1999, the controlling stockholders of Heafner entered into a definitive agreement (the "Stock Purchase Agreement") for the sale of all of their shares of capital stock of Heafner to Charlesbank Equity Fund IV, Limited Partnership (the "Purchaser"). A copy of the Stock Purchase Agreement is attached as Exhibit A to this letter. The closing of the sale and purchase under the Stock Purchase Agreement would, if consummated, constitute a Change of Control for purposes of Section 12.1(o) of the Loan Agreement and be an Event of Default. Further, Section 3.14 of the Stock Purchase Agreement provides that, if requested by the Purchaser, the parties to the Stock Purchase Agreement will negotiate appropriate modifications so that the transactions contemplated thereby may be effected by means of a merger transaction involving Heafner. Certain management employees will also be offered the opportunity to purchase shares of the capital stock of Heafner on or after completion of the stock purchase 2 transaction contemplated by the Stock Purchase Agreement, and to borrow from Heafner the funds necessary to purchase such shares. Heafner is soliciting the consent of holders of its outstanding 10% Senior Notes Due 2008 to amendments to both of the Indentures under which such Notes were issued that would, in effect, avoid the applicability of Section 4.09 of each such Indenture to the transactions contemplated by the Stock Purchase Agreement. The consent solicitation is more fully described in the consent solicitation statement attached as Exhibit B to this letter. Certain persons have stock appreciation rights pursuant to agreements described in Schedule 6.1(b) to the Loan Agreement. The Loan Agreement provides that payments not greater than $1,500,000 in respect of such stock appreciation rights made by Heafner on or prior to the first anniversary of the Effective Date are to be excluded for purposes of determining the amount of Restricted Distributions and Restricted Payments permitted under Section 11.6 (Restricted Distributions and Payments, Etc.). Heafner currently anticipates that a portion of such $1,500,000 will be paid after the first anniversary of the Effective Date, but on or prior to June 30, 1999. Heafner hereby requests that the Administrative Agent and the Lenders or Required Lenders, as applicable, waive compliance and effects of non-compliance by the Borrowers with the following provisions of the Loan Agreement: 1. Section 11.4 (Acquisitions) arising out of up to $2.5 million principal amount of loans outstanding to management employees the proceeds of which have been applied exclusively to pay the purchase price of shares of capital stock of Heafner. 2. Section 11.7 (Merger, Consolidation and Sale of Assets) and Section 9.1 (Preservation of Corporate Existence and Similar Matters) arising out of completion of the acquisition of common stock of Heafner by Purchaser by merger, rather than purchase of stock, provided that the effect of the financial terms of any such merger on Heafner and the other Borrowers shall be equivalent to the effect of the stock purchase contemplated by the Stock Purchase Agreement and Heafner shall be the surviving corporation of any such merger or the survivor shall be satisfactory to the Lenders and shall assume the obligations of Heafner under the Loan Agreement and the other Loan Documents in a manner satisfactory to the Administrative Agent in its reasonable judgment. 3. Section 11.11 (Amendments of Other Agreements) arising out of the effectiveness of the supplemental indentures (as discussed in Exhibit B hereto and as modified to reflect any additional amendments necessary in connection with a transaction described in paragraph 2 above) to be executed and delivered in connection with the consent of the holders of Heafner's Senior Notes to the transactions contemplated by the Stock Purchase Agreement (the "Noteholders' Consents"). Heafner hereby further requests that: 2 3 A. the Lenders waive the Event of Default that would otherwise occur under Section 12.1(o) (Change of Control) upon consummation of the transactions contemplated by the Stock Purchase Agreement; B. Section 11.6 (Restricted Distributions and Payments, Etc.) of the Loan Agreement be amended by replacing the words "the first anniversary of the Effective Date" with "June 30, 1999"; and C. the definition of "Senior Notes Indenture" in Section 1.1 of the Loan Agreement be amended by replacing such definition in its entirety with the following: "Senior Notes Indenture" means (i) the Indenture dated as of May 15, 1998 between the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee, as supplemented by a Supplemental Indenture dated as of February 22, 1999, (ii) the Indenture dated as of December 1, 1998 between the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee, as supplemented by a Supplemental Indenture dated as of February 22, 1999, and (iii) any supplemental indenture entered into with the consent of the Lenders and the requisite holders of Senior Notes in connection with the Consent Solicitation Statement of the Company dated April 30, 1999. Heafner acknowledges and agrees (1) that the consent of the Administrative Agent and the Required Lenders or Lenders, as the case may be, except as such consent specifically relates to paragraphs B. and C. above, is conditioned upon receipt by the Administrative Agent of evidence satisfactory to it that the Noteholders' Consents have been obtained and are in full force and effect, prior to consummation of the transactions contemplated by the Stock Purchase Agreement, and (2) that, except as expressly waived or modified above, the terms and conditions of the Loan Agreement and the other Loan Documents remain in full force and effect and are hereby ratified and confirmed. If the foregoing is acceptable to you, please sign this letter in the space provided below (and ask the Lenders to do the same) to evidence the consent, acceptance and agreement of the Administrative Agent and the Lenders. Very truly yours, THE J. H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ------------------------------- Donald C. Roof Senior Vice President and Chief Financial Officer 3 4 Accepted and agreed: BANKBOSTON, N.A., as Administrative Agent and as a Lender By: /s/ Roger Arsham ------------------------------- Name: ROGER ARSHAM Title: Vice President Date: FIRST UNION NATIONAL BANK, as Co-Agent and as a Lender By: /s/ John T. Trainor ------------------------------- Name: JOHN T. TRAINOR Title: Vice President Date: FLEET CAPITAL CORPORATION, as Co-Agent and as a Lender By: /s/ Rooney E. McSwain ------------------------------- Name: ROONEY E. MCSWAIN Title: Sr. Vice President Date: May 14, 1999 4 EX-10.6 5 WARRANTHOLDER AGREEMENT DATED 5-21-1999 1 EXHIBIT 10.6 Execution Copy WARRANTHOLDER AGREEMENT (the "Agreement"), dated as of May 21, 1999, between The J. H. Heafner Company, Inc., a North Carolina corporation (the "Company"), The 1818 Mezzanine Fund, L.P., a Delaware limited partnership (the "Fund"), and Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership ("Charlesbank"). -------------------------------------------------------------- INTRODUCTION The Company and the Fund are parties to a Senior Subordinated Note and Warrant Purchase Agreement (the "Warrant Purchase Agreement"), dated as of May 7, 1997, pursuant to which the Fund purchased warrants (the "Warrants") which are currently exercisable for an aggregate of 1,034,000 shares of Class A Common Stock, par value $.01 per share, of the Company (the "Class A Common Stock"). The Company and the Fund are also parties to a Registration Rights Agreement (as amended from time to time in accordance with its terms, the "Registration Rights Agreement"), dated as of May 7, 1997. The Company, certain stockholders of the Company and Charlesbank have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of April 21, 1999, pursuant to which such stockholders have agreed to sell their shares of Common Stock of the Company to Charlesbank on the terms and conditions set forth therein. In consideration of the mutual benefits to be derived from the transactions contemplated by the Stock Purchase Agreement, and as a condition to the consummation of the transactions contemplated therein, the parties have agreed to enter into this Agreement. Capitalized terms used and not otherwise defined in the text of this Agreement shall have the meanings given in Annex A to this Agreement. The parties agree as follows: ARTICLE I EFFECTIVENESS OF AGREEMENT SECTION 1.1. Effective Date. This Agreement shall be effective upon the closing of the transactions contemplated by the Stock Purchase Agreement, and shall remain in effect from and after the date such closing occurs (the "Effective Date"). If, prior to the consummation of the transactions contemplated therein, the Stock Purchase 2 Agreement is terminated for any reason, this Agreement shall automatically terminate and be of no further force and effect. SECTION 1.2. Termination and Amendment of Existing Agreements. Effective as of the Effective Date, (i) the Warrant Purchase Agreement is hereby terminated and of no further force and effect, (ii) the certificate representing the Warrants (together with any replacement certificate or certificates therefor) shall be amended and restated as set forth in Article V and (iii) the Registration Rights Agreement shall be amended and restated as set forth in Article V. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Company. The Company represents and warrants to the Fund as follows: (a) Organization; Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) Authority; Binding Agreement. The Company has all requisite authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company are within its corporate powers and have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company, and constitutes the valid and binding obligation of the Company, enforceable against it in accordance with its terms. (c) Non-Contravention. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result (with or without due notice, the passage of time or both) in a breach of the articles of incorporation or by-laws of the Company, (ii) conflict with, breach or result in a default (or give rise to any right of termination, cancellation or acceleration) under any material provision of any material note, bond, lease, mortgage, indenture, agreement or other instrument or obligation to which the Company is a party, or by which the Company or its properties or assets are bound, or (iii) violate in any material respect any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to the Company or its properties or assets. (d) Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary in connection with the 2 3 execution, delivery and performance by the Company of this Agreement other than those that have been obtained or will have been obtained as of the Effective Date. (e) No Anti-Dilution Events. No event has occurred since May 20, 1998 that would result in an adjustment pursuant to Section 2 of the Warrant certificate. SECTION 2.2. Representations and Warranties of the Fund. The Fund represents and warrants to the Company as follows: (a) Organization; Good Standing. The Fund is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) Authority; Binding Agreement. The Fund has all requisite authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated. The execution, delivery and performance of this Agreement by the Fund are within its powers and have been duly and validly authorized by all necessary action on the part of the Fund. This Agreement has been duly executed and delivered by the Fund, and constitutes the valid and binding obligation of the Fund, enforceable against it in accordance with its terms. (c) Non-Contravention. The execution, delivery and performance by the Fund of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result (with or without due notice, the passage of time or both) in a breach of the constitutive documents of the Fund, (ii) conflict with, breach or result in a default (or give rise to any right of termination, cancellation or acceleration) under any material provision of any material note, bond, lease, mortgage, indenture, agreement or other instrument or obligation to which the Fund is a party, or by which the Fund or its properties or assets are bound, or (iii) violate in any material respect any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to the Fund or its properties or assets. (d) Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary in connection with the execution, delivery and performance by the Fund of this Agreement other than those that have been obtained or will have been obtained as of the Effective Date. (e) No Exercise of Tag-Along Rights. The Fund has waived its rights to exercise any tag-along rights previously granted to it pursuant to Section 9.16 of the Warrant Purchase Agreement. SECTION 2.3. Representations and Warranties of Charlesbank. Charlesbank represents and warrants to the Fund as follows: 3 4 (a) Organization; Good Standing. Charlesbank is a limited partnership duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) Authority; Binding Agreement. Charlesbank has all requisite authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement by Charlesbank are within its powers and have been duly and validly authorized by all necessary action on the part of Charlesbank. This Agreement has been duly executed and delivered by Charlesbank, and constitutes the valid and binding obligation of Charlesbank, enforceable against it in accordance with its terms. (c) Non-Contravention. The execution, delivery and performance by Charlesbank of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result (with or without due notice, the passage of time or both) in a breach of the constitutive documents of Charlesbank, (ii) conflict with, breach or result in a default (or give rise to any right of termination, cancellation or acceleration) under any material provision of any material note, bond, lease, mortgage, indenture, agreement or other instrument or obligation to which Charlesbank is a party, or by which Charlesbank or its properties or assets are bound, or (iii) violate in any material respect any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to Charlesbank or its properties or assets. (d) Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary in connection with the execution, delivery and performance by Charlesbank of this Agreement other than those that have been obtained or will have been obtained as of the Effective Date. ARTICLE III TRANSFERS SECTION 3.1. Transfers Generally. (a) Fund. The Fund shall not, and shall cause its Affiliates not to, effect any Transfer other than in accordance with the second sentence of this Section 3.1(a) and Sections 3.2, 3.3, 3.4 and 3.5, to the extent that such provisions have not terminated in accordance with their terms. The foregoing, however, shall not restrict any Transfer by the Fund or an Affiliate of the Fund (i) pursuant to the exercise of its rights under the Registration Rights Agreement or (ii) to its Affiliates so long as such Affiliates agree to be bound by the terms and conditions of this Agreement to the same extent as the Fund. When used in this Agreement, "Transfer" means any sale, disposition, pledge or other transfer of Warrants or shares of Capital Stock (including any New Issuance Securities 4 5 purchased pursuant to Section 4.1), whether directly or indirectly, and including by means of a change of control of the Person holding such securities. (b) Charlesbank. Charlesbank shall not, and shall cause its Affiliates not to, effect any Transfer other than in accordance with Section 3.2, to the extent that the provisions of Section 3.2 have not terminated in accordance with their terms. The foregoing, however, shall not restrict any Transfer by Charlesbank or an Affiliate of Charlesbank (i) pursuant to a registered offering or (ii) to its Affiliates so long as such Affiliates agree to be bound by the terms and conditions of this Agreement to the same extent as Charlesbank. SECTION 3.2. Tag-Along Right. (a) Applicability. If, at any time, Charlesbank desires to Transfer to any Person (other than in a transaction not restricted under Section 3.1(b)) any shares of Capital Stock then owned by Charlesbank, Charlesbank shall comply with the requirements of this Section 3.2. Notwithstanding the foregoing, Charlesbank may Transfer shares of Capital Stock on or prior to the first anniversary of the Effective Date to any Persons or groups of Persons, in one or more transactions, without complying with the requirements of this Section 3.2; provided, that, immediately after any such Transfer, Charlesbank and its Affiliates collectively continue to hold (i) more than 50% of the Voting Power of the Company and (ii) more than 50% of the total economic value of shares of outstanding Capital Stock of the Company (excluding shares of Series A and Series B Preferred Stock of the Company). "Voting Power" shall mean the total number of votes which the outstanding shares of Common Stock are normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors of the Company, assuming for this purpose the exercise or conversion of the Warrants and all other outstanding options, warrants or other rights to acquire Common Stock. (b) Tag-Along Offer. Prior to making any Transfer subject to this Section 3.2, Charlesbank shall submit a written notice to the Fund (the "Transferor's Notice") (i) specifying the number of shares of Capital Stock proposed to be transferred (the "Subject Shares"), the identity of the proposed transferee (if known) and the amount of consideration proposed to be received and (ii) containing the Tag-Along Offer. Charlesbank shall offer (the "Tag-Along Offer") to include in the proposed transfer a number of shares of Capital Stock and Warrants designated by the Fund (the "Tag-Along Shares"), provided, that the number of Tag-Along Shares shall not exceed the product of (x) the number of Subject Shares and (y) a fraction, the numerator of which is the number of shares of Capital Stock (assuming full exercise of the Warrants) held by the Fund and the denominator of which is the number of shares of Capital Stock outstanding on a fully diluted basis. The Tag-Along Offer shall be conditioned upon Charlesbank consummating a transfer on substantially the terms described in the Transferor's Notice to the transferee named in the Transferor's Notice, and nothing in this Agreement shall be construed as an obligation on the part of Charlesbank to consummate any such transfer. 5 6 (c) Acceptance. The rights set forth in this Section 3.2 shall be exercisable by the Fund by delivery of written notice of exercise (an "Acceptance Notice") to Charlesbank within 10 Business Days after receipt of the Transferor's Notice indicating the Fund's desire to exercise such rights and specifying the number of Tag-Along Shares the Fund desires to include. If the Fund does not indicate its desire to exercise the rights set forth in this Section 3.2 in an Acceptance Notice or fails to provide an Acceptance Notice in a timely manner, its rights under this Section 3.2 shall be deemed to have been waived with respect to the particular transfer described in the Transferor's Notice. (d) Sale of Shares. If Charlesbank consummates a transfer of Subject Shares pursuant to a Transferor's Notice, it shall transfer (or cause the transfer of) (i) all of the Tag-Along Shares included in such transfer by the Fund pursuant to a timely Acceptance Notice and (ii) the Subject Shares identified in the Transferor's Notice (reduced by the amount of such Tag-Along Shares) to the proposed transferee in accordance with the terms of such transfer set forth in such Transferor's Notice. The price per share and form of consideration for Tag-Along Shares shall be the same as the Transferor's consideration received for Subject Shares (as adjusted for the exercise price of any unexercised Warrants) and shall be subject, on a several and not joint basis, to the same representations and warranties, covenants, indemnities, holdbacks and escrow provisions, if any, and any similar components of the Tag-Along Offer to which Charlesbank is subject; provided, that (x) to the extent the Fund is required to provide indemnities in connection with the transfer of Tag-Along Shares, it shall in no event be required to provide indemnification that would result in an aggregate liability to the Fund in excess of its proceeds from the sale of Tag-Along Shares pursuant to this Section 3.2 and (y) such indemnities shall be made by the Fund severally and not jointly. All fees and expenses incurred by the Fund (including, without limitation, with respect to financial advisors, accountants and counsel to the Fund) in connection with a transfer pursuant to this Section 3.2 shall be borne by the Person incurring such fees and expenses. If a transfer pursuant to a Transferor's Notice does not occur on or before the later of 120 days after the date such Transferor's Notice was received by the Fund or five days after the expiration or waiver of any waiting period applicable to such proposed transfer pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the provisions of this Section 3.2 shall again apply as if no such Transferor's Notice had been given and no Tag-Along Offer made. (e) Termination of Tag-Along Right. The provisions of this Section 3.2 shall terminate and be of no further force and effect from and after the first to occur of (i) the consummation of an Initial Public Offering or (ii) the date on which the Fund owns less than 10% of the shares of Common Stock issuable upon exercise of the Warrants (assuming exercise of any unexercised Warrants). This Section 3.2 shall be binding on Charlesbank and any of its Affiliates which hold shares of Capital Stock. Any securities transferred in accordance with this Section 3.2 shall not thereafter be subject to the provisions of this Section 3.2. SECTION 3.3. Drag-Along Obligation. 6 7 (a) General. In the event that any Person or group (as such term is defined in Section 13(d) of the Exchange Act) desires to acquire shares of Common Stock representing at least 70% of the Voting Power of the Company, whether directly or indirectly, and the Board of Directors of the Company and the holders of shares of Common Stock representing at least 70% of the Voting Power of the Company approve of such acquisition, the Fund agrees to sell (and to cause its Affiliates to sell) to such Person or group all of the Warrants, shares of Common Stock and New Issuance Securities acquired pursuant to Section 4.1 owned by the Fund and its Affiliates and to execute and deliver all such documents and instruments and take all such other actions as may be reasonably necessary to effectuate such sale, provided that (i) each such Person receives in connection with such acquisition the same price per share and form of consideration (including any consideration allocated to employment, consulting or non-competition agreements, but adjusted for the exercise price of any unexercised Warrants) as all of the other holders of shares of Common Stock on a pro rata basis and (ii) the reasonable costs and expenses incurred by each such Person in connection with such sale are reimbursed on the same terms and conditions as those offered to such other holders. (b) Representations and Warranties Required. No Person required to sell securities pursuant to Section 3.3(a) shall be required to (i) make any representations and warranties to any Person in connection with such sale, except as to (A) good title to the securities being sold, (B) absence of Claims with respect to the securities being sold, (C) its valid existence and good standing (if applicable) and (D) the authority and authorization for, and validity, binding effect and enforceability of (as against such holder), any agreement entered into by such Person in connection with such sale, or (ii) provide any indemnities in connection with such sale except for breaches of the representations and warranties specifically required under clause (i). (c) Termination of Obligations. The provisions of this Section 3.3 shall be binding on the Fund and its Affiliates, and shall terminate and be of no further force and effect from and after the consummation of an Initial Public Offering. Compliance by the Fund and its Affiliates with their respective obligations under this Section 3.3 may only be waived at the sole discretion of Charlesbank. SECTION 3.4. Right of First Offer. (a) Applicability. If the Fund wishes at any time to Transfer any Warrants, shares of Common Stock or New Issuance Securities acquired pursuant to Section 4.1, in each case, held by the Fund or one or more of its Affiliates (collectively, the "Offered Shares") to any Person (other than an Affiliate of the Fund), the Fund shall (and shall cause its Affiliates to) first offer (the "First Offer") to sell such Offered Shares to the Company and to Charlesbank as provided in this Section 3.4. (b) First Offer. Prior to making any Transfer, the Fund shall submit a written notice to the Company and to Charlesbank (the "First Offer Notice") (i) specifying the number of Offered Shares the Fund and its Affiliates collectively 7 8 propose to Transfer and (ii) containing a copy of the terms and conditions of the First Offer. Upon receipt of a First Offer Notice, the Company (or, if the Company declines to exercise such right, Charlesbank and/or one or more of its Affiliates) shall be entitled to purchase all, but not less than all, of the Offered Shares upon the terms and conditions set forth in the First Offer Notice. The rights set forth in this Section 3.4 shall be exercisable by the Company or Charlesbank, as the case may be, by delivery of written notice of exercise (an "Exercise Notice") to the Fund within 10 days after submission of the First Offer Notice. If neither the Company nor Charlesbank responds to the Fund within such 10 day period, such failure shall be regarded as a rejection of the First Offer by the Company and by Charlesbank. (c) Sale of Shares. The closing of any purchase of Offered Shares by the Person(s) purchasing such Offered Shares under this Section 3.4 shall be held at the principal office of the Company on or before the 30th day following delivery of the Exercise Notice (or such later time as may be necessary to comply with any applicable legal requirements) or at such other time and place as the parties to the transaction may agree. At such closing, the Fund shall deliver or cause to be delivered certificates representing the Offered Shares being purchased by the purchaser(s), duly endorsed for transfer and accompanied by all requisite stock transfer taxes, and such Offered Shares shall be free and clear of any Claims or other restrictions on voting or other incidents of record and beneficial ownership (and the Fund shall so represent and warrant), and the Fund shall further represent and warrant that it (together with one or more of its Affiliates, as applicable) is the record and beneficial owner of all such Offered Shares, with full authority and power to transfer such Offered Shares. The Fund shall not be required to make any other representations or warranties in connection with such transfer. The Person(s) purchasing the Offered Shares shall deliver at the closing payment in full in cash for such shares. At such closing, all of the parties to the transaction shall execute and/or deliver such additional documents as are otherwise necessary or appropriate to effectuate the transfer of the Offered Shares. (d) Failure to Purchase. Notwithstanding anything to the contrary contained in this Section 3.4, if all of the Offered Shares are not purchased by the Company, Charlesbank or one or more of its Affiliates within the period specified in Section 3.4(c), the Fund may Transfer (or cause to be Transferred) to any other Person all, but not less than all, of the Offered Shares (i) for a purchase price that is no lower than 100% of that stated in the First Offer Notice and (ii) upon terms and conditions otherwise no more favorable to such other Person than those stated in the First Offer Notice; provided, however, that such transfer is bona fide and made before 90 days from the later of (i) the date of the rejection of the First Offer, if it is rejected, or the failure to consummate the purchase of the Offered Shares, if the First Offer is not rejected and (ii) the date which is 10 days after the expiration or waiver of any applicable waiting period to such proposed transfer pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. If such sale is not consummated within the period described in the proviso in the preceding sentence, the restrictions provided for in this Section 3.4 shall again become effective, and no transfer of Warrants, shares of Common Stock or New Issuance 8 9 Securities otherwise subject to this Section 3.4 may be made thereafter without again offering the same in accordance with the terms and conditions of this Agreement. (e) Termination of Right of First Offer. The provisions of this Section 3.4 shall be binding on the Fund and its Affiliates, and shall terminate and be of no further force and effect upon the first to occur of (i) the consummation of an Initial Public Offering or (ii) a Change of Control of the Company. Compliance by the Fund and its Affiliates with their respective obligations under this Section 3.4 may only be waived at the sole discretion of the Company and Charlesbank. SECTION 3.5. Securities Law Compliance. If the Fund or any of its direct or indirect transferees should in the future decide to dispose of any Warrants, shares of Common Stock or New Issuance Securities acquired pursuant to Section 4.1, such Person understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If the Fund or any of its direct or indirect transferees should decide to dispose of such securities (other than pursuant to its registration rights under the Registration Rights Agreement), such Person, if requested by the Company, will have the obligation in connection with such disposition, at such Person's expense, of delivering an opinion of counsel of recognized standing in securities laws matters, in connection with such disposition to the effect that the proposed disposition of such securities would not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. Each such Person agrees to the imprinting, so long as required by law, of a legend on certificates representing all of such securities to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES." ARTICLE IV ADDITIONAL AGREEMENTS SECTION 4.1. Preemptive Right. 9 10 (a) Preemptive Right. Except with respect to Exempt Issuances (as defined in Section 4.1(b)), if the Company proposes to issue any shares of Capital Stock ("New Shares"), warrants, options or other rights to acquire Capital Stock ("Rights") or notes, debentures or other securities convertible into or exchangeable for shares of Capital Stock ("Convertible Securities"), the Company will deliver to the Fund a written notice (the "New Issuance Notice") not more than 45 days, and not less than 15 days, prior to the date of completion of such issuance (the "New Issuance") or, if earlier, the date of execution of definitive documentation with respect thereto, stating the price and other terms and conditions thereof. The Fund shall have the right, exercisable within 10 days of the receipt by the Fund of the New Issuance Notice, to purchase (or be issued without consideration if the New Shares, Rights or Convertible Securities to be issued in the New Issuance (the "New Issuance Securities") are to be issued without consideration) all or any part of its Pro Rata Share of the New Issuance Securities at the price and on the terms on which the Company proposes to make the New Issuance, such price to be paid in full in cash or by check against the issuance and delivery of the New Issuance Securities; provided, however, that if the Company proposes to issue any notes, debentures or other debt securities of the Company to which are attached any Rights exercisable for a nominal exercise price, the Fund may purchase all or any part of its Pro Rata Share of such Rights by purchasing the note, debenture or other debt security to which such Right is attached, in the time period and at the price and terms (including payment therefor) specified above for New Issuance Securities. "Pro Rata Share" means the product of (x) the number of New Issuance Securities and (y) a fraction, the numerator of which is the number of shares of Capital Stock (assuming full exercise of the Warrants) held by the Fund and the denominator of which is the number of shares of Capital Stock outstanding on a fully diluted basis. Any New Issuance Securities (including any securities acquired upon exercise, conversion or exchange of any Rights or Convertible Securities) acquired by the Fund pursuant to this Section 4.1(a) shall be subject to all the restrictions on Transfer set forth in this Agreement. (b) Exempt Issuances. Notwithstanding Section 4.1(a), the Fund shall have no rights to subscribe for New Issuance Securities issued by the Company (i) upon conversion or exercise of any Convertible Securities or Rights outstanding or in effect on the Effective Date, (ii) to directors, officers, employees, advisors or consultants of the Company or one of its Subsidiaries pursuant to an incentive compensation, bonus, stock option, stock grant, stock purchase or other similar plan or arrangement approved by the Board of Directors of the Company, including without limitation upon the exercise of stock options outstanding as of the Effective Date, (iii) to equipment lessors, banks, financial institutions, manufacturers, vendors, suppliers or similar entities in transactions approved by the Board of Directors, the principal purpose of which is other than the raising of capital, (iv) as consideration in connection with an acquisition by the Company or one of its Subsidiaries on an arm's-length basis, (v) in a merger involving the Company that is approved by the Board of Directors, the principal purpose of which is other than the raising of capital, (vi) that are issued with any debt securities of the Company, so long as the New Issuance Securities represent less than 5% of the outstanding Capital Stock, (vii) pursuant to an Initial Public Offering or (viii) pursuant to 10 11 a stock split, stock dividend, reclassification or other distribution made on a pro rata basis to all holders of Capital Stock or a transaction which would result in an adjustment under Section 2 of the Warrant certificate, as amended by this Agreement (each, an "Exempt Issuance"). (c) Termination of Preemptive Rights. The provisions of this Section 4.1 shall terminate and be of no further force and effect from and after the first to occur of (i) the date on which the Fund owns less than 10% of the shares of Common Stock issuable upon exercise of the Warrants (assuming exercise of any unexercised Warrants) or (ii) an Initial Public Offering. The Fund's rights to purchase New Issuance Securities under this Section 4.1 may be assigned (x) to an Affiliate of the Fund, so long as such Affiliate agrees to be bound by the terms and conditions of this Agreement with respect to such New Issuance Securities to the same extent as the Fund, or (y) subject to Section 4.1(d), to a Fund Designee (as defined below). (d) Fund Designee. If the Fund is "unable to exercise" its rights (or cause an Affiliate to exercise its rights) to purchase all or a portion of an issuance of New Issuance Securities in any transaction subject to this Section 4.1, it shall have the right to transfer such rights with respect to all or a portion of such issuance to a Person who is not an Affiliate of the Fund (a "Fund Designee") as if such rights constituted Offered Shares under Section 3.4, subject to the terms and conditions thereof. For purposes of this Section 4.1(d), "unable to exercise" means (i) with respect to the Fund, that the Fund has insufficient investable funds available to it to purchase New Issuance Securities, is otherwise precluded under its partnership agreement from purchasing New Issuance Securities or, in the good faith judgment of Brown Brothers Harriman & Co., the general partner of the Fund, it is imprudent or unreasonable to invest additional capital in such New Issuance Securities, and (ii) with respect to Affiliates of the Fund, that, in the good faith judgment of Brown Brothers Harriman & Co., the general partner of the Fund, it is imprudent or unreasonable to invest in New Issuance Securities through an Affiliate of the Fund. SECTION 4.2. Board Representation. (a) Fund Nominee. The Company and Charlesbank shall promptly after the date hereof cause a person designated by the Fund to be elected to its Board of Directors, to the extent that there is not a designee of the Fund already serving as a member of the Board of Directors. Such designee shall serve until the annual meeting of stockholders of the Company immediately following the election of such person to the Board of Directors. Commencing with the annual meeting of stockholders of the Company immediately following the election of such person to the Board of Directors, and at each annual meeting of stockholders of the Company thereafter, the Fund shall be entitled to nominate (in addition to any rights granted to the holders of Common Stock as set forth in the Company's articles or certificate of incorporation), from time to time, one director to the Company's Board of Directors. The Company shall cause such nominee of the Fund to be included in the slate of nominees recommended by the Board to the 11 12 Company's stockholders for election as directors, and the Company shall use its best efforts to cause the election of such nominee or nominees, including voting all shares for which the Company holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such person. The Company shall ensure that any decision to delegate all or substantially all of the duties of the Board of Directors to an executive or similar committee shall require the consent of the Fund's nominee unless he or she is appointed to serve on such committee. (b) Vacancies. In the event any Board nominee of the Fund shall cease to serve as a director for any reason, other than by reason of the Fund not being entitled to nominate a nominee as provided in 4.2(d), the Company shall use its best efforts to cause the vacancy resulting thereby to be filled by a nominee of the Fund acceptable to a majority of the Board of Directors of the Company, acting reasonably. (c) Voting Agreement. Charlesbank shall, and shall cause its Affiliates to, vote all shares of Common Stock it is entitled to vote in support of the arrangements contemplated by this Section 4.2. The Fund shall, and shall cause its Affiliates to, vote all shares of Common Stock they are entitled to vote in favor of all persons nominated for election to the Board of Directors by the Board of Directors, so long as Charlesbank and its Affiliates complied with the obligations set forth in the preceding sentence. (d) Termination of Rights. The provisions of this Section 4.2 shall terminate and be of no further force and effect from and after the first to occur of (i) the consummation of an Initial Public Offering or (ii) the date on which the Fund owns less than 33% of the shares of Common Stock issuable upon exercise of the Warrants (assuming exercise of any unexercised Warrants). SECTION 4.3. Issue Taxes. The Company shall pay, or cause to be paid, all documentary and similar taxes levied under the laws of any applicable jurisdiction in connection with the issuance of the Common Stock to be issued upon exercise of the Warrants and the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and any modification of the Warrants or such other agreements and documents and will hold the Fund harmless, without limitation as to time, against any and all liabilities with respect to all such taxes. SECTION 4.4. Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue or delivery upon exercise of all outstanding Warrants as provided therein, such number of shares of Common Stock as shall then be issuable or deliverable upon the exercise of all outstanding Warrants. Such shares of Common Stock shall, when issued or delivered in accordance with the terms of the Warrants, be duly and validly issued and fully paid and non-assessable. The Company shall issue the Common Stock into which the Warrants are convertible upon the proper surrender of the Warrants in accordance with the provisions therein and shall otherwise comply with the terms thereof. 12 13 SECTION 4.5. Registration and Listing. If any shares of Common Stock required to be reserved for purposes of exercise of the Warrants as provided in the Warrants require registration with or approval of any Governmental Authority under any federal or state or other applicable law before such Common Stock may be issued or delivered upon exercise of the Warrants, the Company will in good faith and as expeditiously as possible endeavor to cause such Common Stock to be duly registered or approved, as the case may be, unless such registration or approval is required solely because of a breach of Section 3.5. In the event that, and so long as, the Common Stock is listed on the New York Stock Exchange or quoted or listed on any other national securities exchange or Nasdaq, the Company will, if permitted by the rules of such system or exchange, quote or list and keep quoted or listed on such exchange or Nasdaq, upon official notice of issuance, all Common Stock issuable or deliverable upon exercise of the Warrants. SECTION 4.6. Sale of Company. In the event of a contemplated sale of all of the Capital Stock of the Company (by way of merger or otherwise), the Company shall, if requested by the Fund, use its reasonable best efforts to cause such sale transaction to be structured in a manner that requires the purchaser(s) to purchase the Warrants held by the Fund and its Affiliates at a price equal to the consideration such Persons would have received had the Warrants been exercised immediately prior to the consummation of such sale transaction (less the exercise price of such Warrants). SECTION 4.7. Transactions with Affiliates. Until the earlier of (i) the time the Fund is no longer entitled to designate a member of the Board of Directors of the Company pursuant to Section 4.2 and (ii) an Initial Public Offering, without the prior approval of a majority of the members of the Board of Directors of the Company (including the director nominated by the Fund pursuant to Section 4.2), the Company shall not, and shall not allow any of its Subsidiaries to, enter into any transaction with Charlesbank or any Affiliate of Charlesbank on terms less favorable to the Company or such Subsidiary than those obtainable in a comparable arm's-length transaction with a Person other than Charlesbank or an Affiliate of Charlesbank. This Section 4.7 shall not apply to (x) transactions entered into pursuant to an agreement or arrangement in effect on the Effective Date or (y) payments by the Company of monitoring fees to Charlesbank and its Affiliates not to exceed $250,000, in the aggregate, in any fiscal year. SECTION 4.8. Charter Amendment. At any time as Charlesbank requests prior to an Initial Public Offering, the Fund agrees to vote and cause its Affiliates to vote all shares of Common Stock such Persons are entitled to vote in favor of an amendment to the Company's articles of incorporation to convert shares of Class B Common Stock, par value $.01, of the Company into shares of Class A Common Stock. SECTION 4.9. Certain Acknowledgments. The Fund has reviewed the Stock Purchase Agreement and the forms, terms and provisions of each of (i) the Amendment to the Company's 1997 Stock Option Plan, (ii) the Company's 1999 Stock Option Plan, (iii) Stock Option Agreements between the Company and each of Donald C. 13 14 Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson and P. Douglas Roberts (collectively, the "Executives"), (iv) the Securities Purchase and Stockholders' Agreement among the Company and the Executives (including the form and amount of payment for shares of Common Stock purchased thereunder) and (v) Executive Severance Agreements between the Company and each of the Executives and between the Company and J. Lewis McKnight, Jr., in each case, to be entered into by the Company on or promptly after the Effective Date. The Fund hereby ratifies, approves and consents to the foregoing agreements and arrangements in its capacity as an equity investor in the Company, and further confirms that none of the transactions contemplated thereby will result in an adjustment under Section 2 of the Warrant certificate (as in effect immediately prior to the Effective Date). The Fund further acknowledges and agrees that by executing and delivering this Agreement it waives any rights it may have under Section 3(b) of the Warrant certificate (as in effect immediately prior to the Effective Date) as the result of the transactions contemplated by the Stock Purchase Agreement. The Fund further acknowledges and agrees that by executing and delivering this Agreement it consents and waives any rights with respect to the transfer (effective April 30, 1999) of shares of Common Stock held by Ann H. Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones to AHG Partners, WHG Partners and ST Partners, respectively. SECTION 4.10. Inspection Rights. So long as the Fund or any of its Affiliates holds equity securities of the Company, the Company will permit, and will cause each of its Subsidiaries to permit, representatives of the Fund to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with their respective directors, officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice to the Company. ARTICLE V MODIFICATION OF EXISTING AGREEMENTS SECTION 5.1. Warrants. On or prior to the Effective Date, the Company shall execute and deliver an Amended and Restated Warrant in the form attached as Exhibit A. SECTION 5.2. Registration Rights Agreement. On or prior to the Effective Date, the Company, the Fund and Charlesbank shall execute and deliver an Amended and Restated Registration Rights Agreement in the form attached as Exhibit B. ARTICLE VI MISCELLANEOUS PROVISIONS 14 15 SECTION 6.1. Expenses; Attorneys' Fees. The Company shall reimburse the Fund for all reasonable out-of-pocket expenses (including legal fees and disbursements) incurred in connection with the negotiation, execution and delivery of this Agreement, whether or not the Effective Date occurs. In any action or proceeding brought to enforce any provision of this Agreement, the Warrants or the Registration Rights Agreement or any other document or instrument contemplated hereby or thereby, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees, charges and disbursements in addition to any other available remedy. SECTION 6.2. Confidentiality. Each of the Fund and its direct and indirect transferees will (subject to the Company's sole discretion to waive compliance) utilize best efforts to maintain as confidential any confidential or proprietary information obtained by such Person from the Company (other than information which (i) at the time of disclosure or thereafter is generally available to and known by the public (other than as a result of a disclosure directly or indirectly by such Person or any of its representatives), (ii) is available to such Person on a non-confidential basis from a source other than the Company or its Subsidiaries, provided that such source was not known by such Person to be bound by a confidentiality agreement (or other duty not to disclose) with the Company or any of its Subsidiaries or (iii) has been independently developed by such Person), and shall not disclose any such information required to be maintained as confidential pursuant hereto, except (a) to the Fund and its advisors, representatives, agents, partners and employees who need to know such information (provided that the Fund shall be responsible for any breach of this Section 6.2 by any such Person), (b) to its advisors, representatives, agents, partners (and their representatives and advisors) and employees (provided that the Fund shall be responsible for any breach of this Section 6.2 by any such Person), (c) to any prospective transferee of the Warrants or the shares of Common Stock issued upon the exercise of the Warrants or of an interest in the Fund or in a successor fund sponsored by Brown Brothers Harriman & Co., (d) as may be required by law (including a court order, subpoena or other administrative order or process) or applicable regulations to which the Fund is or becomes subject, (e) in connection with any litigation arising out of or related to this Agreement, (f) to the executive officers of the Company or any of its Subsidiaries, or (g) with the prior written consent of the Company. SECTION 6.3. Successors and Assigns; Further Assurances. Except as otherwise expressly provided herein, the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as otherwise expressly provided herein, no party hereto may assign any of its rights or obligations hereunder without the prior written consent of each other party hereto. Any purported assignment in violation of this Section 6.3 shall be void. To the extent that Affiliates or direct or indirect transferees of any party to this Agreement are expressly intended to be legally bound by any provision hereof, each party agrees upon the request of any other party to use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, 15 16 proper or advisable, including without limitation the execution and delivery of assignments or joinder agreements or similar documents, to evidence such binding effect. SECTION 6.4. Entire Agreement. Effective as of the Effective Date, this Agreement and the Warrants and the Registration Rights Agreement (each as amended or and modified hereby) shall embody the entire agreement and understanding of the parties hereto and supersede all other agreements or understandings, written or oral, with respect to the subject matter hereof and thereof. SECTION 6.5. Parties In Interest. Except as otherwise expressly provided herein, this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns, and no term or provision in this agreement is for the benefit of any other Person. SECTION 6.6. Amendment and Waiver. No modification, amendment or waiver of any provision of, or consent required by, this Agreement, nor any consent to any departure from the terms of this Agreement, shall be effective unless it is in writing and signed by the Company, the Fund and Charlesbank. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose given. SECTION 6.7. Notices. All notices, demands and other communications provided for or permitted under this Agreement shall be made in writing and shall be delivered by facsimile, overnight courier service or personal delivery addressed as follows: If to the Company: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Facsimile: (704) 423-8987 Attention: J. Michael Gaither with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith If to Charlesbank, to: Charlesbank Capital Partners, LLC 16 17 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Facsimile: (617) 619-5402 Attention: Mark A. Rosen and Tami E. Nason with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Fund, to: The 1818 Mezzanine Fund, L. P. c/o Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attention: Joseph P. Donlan Facsimile: 212-493-8429 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Marilyn Sobel, Esq. Facsimile: 212-757-3990 All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; on the first Business Day after delivered to a courier, if delivered by overnight courier service; and when receipt is acknowledged, if sent by facsimile. SECTION 6.8. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 17 18 SECTION 6.9. Rules of Interpretation. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a Person includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; (vii) a reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article, Section, Annex, Exhibit or Schedule of this Agreement; and (viii) a reference to an agreement or instrument includes any annexes, exhibits or schedules to the specified agreement or instrument. SECTION 6.10. Remedies. The parties to this Agreement acknowledge that damages at law would be an inadequate remedy for the breach of any provision contained in Section 3.2, 3.3, 3.4, 3.5, 4.1, 4.2 or 6.2 of this Agreement, and agree in the event of such breach or threatened breach that the non-breaching party may (i) obtain temporary and permanent injunctive relief restraining the breaching party from such breach or threatened breach, and, to the extent permissible under the applicable statutes and rules of procedure, that a temporary injunction may be granted immediately upon the commencement of a proceeding commenced under this Section 6.10 and (ii) enforce specifically such provisions in any legal proceeding. Nothing contained in the preceding sentence shall be construed as prohibiting any party from pursuing any other remedies available at law or in equity for such breach or threatened breach of any such provision of this Agreement. SECTION 6.11. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY PROCEDURAL LAW OF SUCH STATE REQUIRING THE APPLICATION OF THE LAWS OF A DIFFERENT JURISDICTION). EACH PARTY TO THIS AGREEMENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT 18 19 HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 6.7 AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION SUCH PARTY MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. SECTION 6.12. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same Agreement. 19 20 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Warrantholder Agreement as of the date first written above. THE J. H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither ----------------------------------------- Name: J. MICHAEL GAITHER Title: Sr. Vice President, General Counsel & Secretary THE 1818 MEZZANINE FUND, L. P. Per Pro Brown Brothers Harriman & Co., General Partner By: /s/ Joseph P. Donlan ------------------------------ Name: Joseph P. Donlan CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP By: Charlesbank Equity Fund IV GP, Limited Partnership, its general partner By: Charlesbank Capital Partners, LLC Its general partner By: /s/ Kim Davis ------------------------------------- Name: KIM DAVIS Title: Managing Director By: /s/ Mark A. Rosen ------------------------------------- Name: MARK A. ROSEN Title: Managing Director 20 21 ANNEX A TO WARRANTHOLDER AGREEMENT DEFINED TERMS "Affiliate" shall mean (i) with respect to any Person who is not a natural person, any Person directly or indirectly controlling or controlled by or under common control with such Person (where "control" means the direct or indirect possession of the power to elect at least a majority of the Board of Directors or other governing body or appoint the managing member of a Person through the ownership of voting securities, ownership, membership or partnership interests, by contract or otherwise, or if no such governing body or managing member exists, the direct or indirect ownership of 50% or more of the equity interests of a Person), (ii) with respect to Charlesbank, any limited or general partner of Charlesbank or any of its Affiliates, (iii) with respect to the Fund, any limited or general partner of the Fund or any of its Affiliates and (iv) with respect to any Person who is a natural person, a Family Member of such Person. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York or the City of Atlanta are authorized or required by law or executive order to close. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests in a Person not a corporation) whether now outstanding or hereafter issued, including, without limitation, all common stock and preferred stock and any rights, warrants or options to purchase such Person's capital stock. "Change of Control" shall have the meaning set forth in the Indenture, dated as of December 1, 1998, between the Company and the subsidiary guarantors party thereto and First Union National Bank, as trustee, as supplemented and amended from time to time in accordance with its terms. "Claims" shall mean any and all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money, to which any property or asset is subject or by which such property or asset is bound. "Class B Common Stock" shall mean the Class B Common Stock, $.01 par value, of the Company. "Common Stock" shall mean the Class A Common Stock and the Class B Common Stock. 22 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission hereunder. "Family Member" of a Person shall mean (x) a member of the specified Person's immediate family, which shall include his or her ancestors, spouse, siblings, descendants or spouses (or surviving spouses) of descendants, or (y) a trust, corporation, limited liability company, partnership or other entity, all of the beneficial interests in which shall be held directly or indirectly by such Person or one or more persons described in clause (x); provided, however, that during the period any such trust, corporation, limited liability company, partnership or other entity holds any right, title or interest in any Common Stock, no Person other than such Person or one or more Family Members of such Person of the type listed in clause (x) may be or become beneficiaries, stockholders or limited or general partners or owners thereof. "Governmental Authority" shall mean the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Initial Public Offering" shall mean the initial public offering of the Common Stock with gross proceeds of at least $25 million or representing at least 20% of the Common Stock on a fully diluted basis and such Common Stock is listed or quoted on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq. "Person" shall mean any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of any such entity. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. "Subsidiary" shall mean, with respect to any Person, a corporation or other entity of which 50% or more of the combined voting power of the then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors is owned, directly or indirectly, by such Person. A-2 EX-10.7 6 AMENDED & RESTATED WARRANT #2 1 EXHIBIT 10.7 1 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. WARRANT NO. 2 AMENDED AND RESTATED WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE J.H. HEAFNER COMPANY, INC. THIS IS TO CERTIFY THAT THE 1818 MEZZANINE FUND, L.P. or its registered assigns (the "Purchaser"), is the owner of one million thirty-four thousand (1,034,000) Warrants (the "Warrants"), each of which entitles the registered holder thereof to purchase from THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), one fully paid, duly authorized and nonassessable share of Class A Common Stock, par value $.01 per share, of the Company (the "Common Stock"), at any time or from time to time on or before 5:00 p.m., New York City time, on May 7, 2007 (subject to earlier expiration in certain events), at an exercise price of $.01 per share (the "Exercise Price"), all on the terms and subject to the conditions hereinafter set forth. 2 2 The number of shares of Common Stock issuable upon exercise of each such Warrant (the "Number Issuable"), which is initially one (1) share, is subject to adjustment from time to time pursuant to the provisions of Section 2 of this Warrant Certificate. Capitalized terms used herein but not otherwise defined shall have the meanings given them in Section 12 hereof or, if not therein defined, in the Warrantholder Agreement. Section 1. Exercise of Warrant. Subject to the last paragraph of this Section 1, the Warrants evidenced hereby may be exercised, in whole or in part, by the registered holder hereof at any time or from time to time on or before 5:00 p.m., New York City time, on May 7, 2007, but in any event no later than the date of the consummation of the earlier to occur of an IPO or a Sale Transaction upon delivery to the Company at the principal executive office of the Company in the United States of America, of (a) this Warrant Certificate, (b) a written notice stating that such holder elects to exercise the Warrants evidenced hereby in accordance with the provisions of this Section 1 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued and (c) payment of the Exercise Price for the shares of Common Stock issuable upon exercise of such Warrants, which shall be payable (i) in cash or (ii) by a certified or official bank check payable to the order of the Company (collectively, the "Warrant Exercise Documentation"). As promptly as practicable, and in any event within five Business Days after receipt of the Warrant Exercise Documentation, the Company shall deliver or cause to be delivered (a) certificates representing the number of validly issued, fully paid and nonassessable shares of Common Stock specified in the Warrant Exercise Documentation, (b) if applicable, cash in lieu of any fraction of a share, as hereinafter provided, and (c) if less than the full number of Warrants evidenced hereby are being exercised, a new Warrant Certificate or Certificates, of like tenor, for the number of Warrants evidenced by this Warrant Certificate, less the number of Warrants then being exercised. Such exercise shall be deemed to have been made at the close of business on the date of delivery of the Warrant Exercise Documentation so that the Person entitled to receive shares of Common Stock upon such exercise shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. No such surrender shall be effective to constitute the person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant Certificate for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant Certificate was surrendered and for the Number Issuable of Common Stock specified in the Warrant Exercise Documentation and at the Exercise Price. The Company shall pay all expenses in connection with, and all taxes and other governmental charges (other than income taxes of the holder) that may be imposed in respect of, the issue or delivery of any shares of Common Stock issuable upon the exercise of the Warrants evidenced hereby. The Company shall not be required, however, to pay any tax or other charge 3 3 imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrants evidenced hereby. In connection with the exercise of any Warrants evidenced hereby, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price per share of Common Stock on the Business Day which next precedes the day of exercise. If more than one such Warrant shall be exercised by the holder thereof at the same time, the number of full shares of Common Stock issuable on such exercise shall be computed on the basis of the total number of Warrants so exercised. Section 2. Adjustments. (a) Adjustment of Number Issuable. The Number Issuable shall be subject to adjustment from time to time as follows: (i) In case the Company shall at any time or from time to time after the Issue Date: (A) pay a dividend or make a distribution on the outstanding shares of Common Stock in capital stock of the Company; (B) subdivide the outstanding shares of Common Stock into a larger number of shares; (C) combine the outstanding shares of Common Stock into a smaller number of shares; or (D) issue any shares of its capital stock in a reclassification of the Common Stock; then, and in each such case, the Number Issuable in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Company) so that the holder of any Warrant evidenced hereby thereafter exercised shall be entitled to receive the number of shares of Common Stock or other securities of the Company which such holder would have owned or had been entitled to receive upon or by reason of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event. An adjustment made pursuant to this clause (i) shall become effective retroactively (x) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of any such subdivision, combination or reclassification, to the close of 4 4 business on the date upon which such corporate action becomes effective. (ii) Reserved. (iii) Reserved. (iv) Reserved. (v) Notwithstanding anything herein to the contrary, no adjustment under this Section 2(a) need be made to the Number Issuable unless such adjustment would require an increase or decrease of at least 2% of the Number Issuable then in effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 2% of such Number Issuable. Any adjustment to the Number Issuable carried forward and not theretofore made shall be made immediately prior to the exercise of any Warrants pursuant hereto. (vi) The Company promptly shall deliver to each registered holder of Warrants at least five Business Days prior to effecting any transaction which would result in an increase or decrease in the Number Issuable pursuant to this Section 2 a notice thereof, together with a certificate, signed by the Chief Executive Officer or an Executive Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Number Issuable then in effect following such adjustment. (vii) Notwithstanding anything contrary contained in this Section 2(a), the Company shall be entitled to make such upward adjustments in the Number Issuable, in addition to those otherwise required by this Section 2(a), as the Board of Directors of the Company in their discretion shall determine to be advisable in order that any stock dividend, subdivision or combination of shares, distribution of rights or warrants to purchase stock or securities, or distribution of securities convertible into or exchangeable for Common Stock, hereafter made by the Company to its shareholders shall not be taxable; provided, however, that any such adjustment shall be made, as nearly as practicable, in a manner which treats all holders of Warrants with similar protections on an equal basis. (b) Reorganization, Reclassification, Consolidation, Merger or Sale of Assets. In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another Person (other than a consolidation or merger in which the Company is the resulting or surviving person and which does not result in 5 5 any reclassification or change of outstanding Common Stock) (any of the foregoing, a "Transaction"), the Company, or such successor or purchasing Person, as the case may be, shall execute and deliver to each holder of the Warrants evidenced hereby, at least five Business Days prior to effecting any of the foregoing Transactions, a certificate that the holder of each such Warrant then outstanding shall have the right thereafter to exercise such Warrant into the kind and amount of shares of stock or other securities (of the Company or another issuer) or property or cash receivable upon such Transaction by a holder of the number of shares of Common Stock into which such Warrant could have been exercised immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2 and shall contain other terms identical to the terms hereof. If, in the case of any such Transaction, the stock, other securities, cash or property receivable thereupon by a holder of Common Stock includes shares of stock or other securities of a Person other than the successor or purchasing Persons and other than the Company, which controls or is controlled by the successor or purchasing Person or which, in connection with such Transaction, issues stock, securities, other property or cash to holders of Common Stock, then such certificate also shall be executed by such Person, and such Person shall, in such certificate, specifically assume the obligations of such successor or purchasing Person and acknowledge its obligations to issue such stock, securities, other property or cash to holders of the Warrants upon exercise thereof as provided above. The provisions of this Section 2(b) similarly shall apply to successive Transactions. (c) Special Distributions. If the holder so elects by sending a Special Notice to the Company, in the event that the Company shall declare a dividend or make any other distribution (including, without limitation, in cash, in capital stock (which shall include, without limitation, any options, warrants or other rights to acquire capital stock of the Company, whether or not pursuant to a shareholder rights plan, "poison pill" or similar arrangement) or in other property or assets (including without limitation evidences of indebtedness of the Company or another issuer or securities of the Company or another issuer)) to holders of Common Stock (a "Special Distribution"), then the Board of Directors shall set aside the amount of such dividend or distribution that any holder of Warrants would have been entitled to receive had it exercised such Warrants prior to the record date for such dividend or distribution. Upon the exercise of a Warrant evidenced hereby, the holder shall be entitled to receive, such dividend or distribution that such holder would have received had such Warrant been exercised immediately prior to the record date for such dividend or distribution. Prior to any Special Distribution described in this section 2(c), the Company shall as provided in Section 4 hereof notify each holder (not less than ten Business Days prior to the occurrence of each Special Distribution) of its intent to make such Special Distribution and the holder, if it elects to have such distribution set aside the amount thereof rather than have an adjustment to the Number Issuable as provided in Section 2(a)(iii), shall notify the Company by sending a Special Notice prior to the date of any such Special Distribution. Section 3. Redemption. 6 6 (a) Company's Right to Require Redemption. The Company shall not have any right to redeem any of the Warrants evidenced hereby. Section 4. Notice of Certain Events. In case at any time or from time to time the Company shall declare any dividend or any other distribution to the holders of its Common Stock, or shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any additional shares of stock of any class or any other right, or shall authorize the issuance or sale of any other shares or rights which would result in an adjustment to the Number Issuable pursuant to Section 2(a)(i) or would result in a Special Distribution pursuant to Section 2(c) hereof, or there shall be any capital reorganization or reclassification of the Common Stock of the Company or consolidation or merger of the Company with or into another Person, or any sale or other disposition of all or substantially all the assets of the Company, or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then, in any one or more of such cases the Company shall mail to each holder of the Warrants evidenced hereby at such holder's address as it appears on the transfer books of the Company, as promptly as practicable but in any event at least 20 days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (b) the date on which such reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up is expected to become effective; provided that in the case of any event to which Section 2(b) applies, the Company shall give at least ten Business Days' prior written notice as aforesaid. Such notice also shall specify the date as of which it is expected that the holders of Common Stock of record shall be entitled to exchange their Common Stock for shares of stock or other securities or property or cash deliverable upon such reorganization, reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up. Section 5. Certain Covenants. The Company covenants and agrees that all shares of capital stock of the Company which may be issued upon the exercise of the Warrants evidenced hereby will be duly authorized, validly issued and fully paid and nonassessable. The Company shall at all times reserve and keep available for issuance upon the exercise of the Warrants, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the exercise of all outstanding Warrants, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the exercise of all outstanding Warrants. The Company shall prepare and file, and cooperate with the holder of this Warrant so that it may prepare and file, in each case within five Business Days of a request by such holder, notification and report forms in compliance with the HSR Act, and shall otherwise fully comply with the requirements of the HSR Act, to the extent required in connection with the exercise of the Warrant. The Company shall bear all of its own expenses and all of its own out-of-pocket expenses (including reasonable attorneys' fees, charges and expenses) and filing fees of such holder in connection with any such preparation and filing. 7 7 Section 6. Registered Holder. The person in whose name this Warrant Certificate is registered shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Warrant Certificate, in its capacity as such, shall not be entitled to any rights whatsoever as a stockholder of the Company, except as herein provided. Section 7. Transfer of Warrants. Any transfer of the rights represented by this Warrant Certificate shall be subject to compliance with the Warrantholder Agreement and shall be effected by the surrender of this Warrant Certificate, along with the form of assignment attached hereto, properly completed and executed by the registered holder hereof, at the principal executive office of the Company in the United States of America, together with an appropriate investment letter, if deemed reasonably necessary by counsel to the Company to assure compliance with applicable securities laws. Thereupon, the Company shall issue in the name or names specified by the registered holder hereof and, in the event of a partial transfer, in the name of the registered holder hereof, a new Warrant Certificate or Certificates evidencing the right to purchase such number of shares of Common Stock as shall be equal to the number of shares of Common Stock then purchasable hereunder. Section 8. Denominations. The Company covenants that it will, at its expense, promptly upon surrender of this Warrant Certificate at the principal executive office of the Company in the United States of America, execute and deliver to the registered holder hereof a new Warrant Certificate or Certificates in denominations specified by such holder for an aggregate number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. Section 9. Replacement of Warrants. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, upon delivery of an indemnity reasonably satisfactory to the Company (in the case of an insurance company or other institutional investor, its own unsecured indemnity agreement shall be deemed to be reasonably satisfactory), or, in the case of mutilation, upon surrender and cancellation thereof, the Company will issue a new Warrant Certificate of like tenor for a number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. Section 11. Rights Inure to Registered Holder. The Warrants evidenced by this Warrant Certificate will inure to the benefit of and be binding upon the registered holder thereof and the Company and their respective successors and permitted assigns. Nothing in this Warrant 8 8 Certificate shall be construed to give to any Person other than the Company and the registered holder thereof any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and such registered holder. Nothing in this Warrant Certificate shall be construed to give the registered holder hereof any rights as a holder of shares of Common Stock until such time, if any, as the Warrants evidenced by this Warrant Certificate are exercised in accordance with the provisions hereof. Section 12. Definitions. For the purposes of this Warrant Certificate, the following terms shall have the meanings indicated below: "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York or the City of Atlanta, are authorized or required by law or executive order to close. "Current Market Price" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 15 days, ending on such date, on which the national securities exchanges were open for trading, and (b) if the Common Stock is not then listed or quoted in the over-counter market, the Market Price on such date. "Effective Date" shall have the meaning given in the Warrantholder Agreement. "Exercise Price" shall have the meaning given it in the first paragraph hereof. "Fair Market Value" shall mean the amount which a willing buyer, under no compulsion to buy, would pay a willing seller, under no compulsion to sell, in an arm's-length transaction (assuming that the Common Stock is valued "as if fully distributed," meaning that no consideration is given to minority investment discounts, discounts related to illiquidity or restrictions on transferability). "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "HSR Act" shall mean the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended and the rules and regulations of the Federal Trade Commission promulgated thereunder. "IPO" shall mean the initial public offering of the Company's Common Stock with gross proceeds of at least $25 million or representing at least 20% of the Common Stock on 9 9 a fully diluted basis and such Common Stock is listed on the NYSE or quoted or listed on any other national securities exchange or the Nasdaq. "Issue Date" shall mean May 7, 1997. "Market Price" shall mean, per share of Common Stock, on any date specified herein: (a) if the Common Stock is then listed or admitted to trading on any national securities exchange, the closing price of the Common Stock on such date; (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security, the last sale price of the Common Stock on such date; or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked price of the Common Stock, on such date as shown by Nasdaq and reported by any member firm of the NYSE selected by the Company; or (d) if neither (a), (b) nor (c) is applicable, the Fair Market Value per share determined in good faith by the Board of Directors of the Company which shall be deemed to be Fair Market Value unless holders of at least 33% of Common Stock issued or issuable upon exercise of the Warrants request that the Company obtain an opinion of a nationally recognized investment banking firm chosen by the Company (who shall bear the expense) and reasonably acceptable to such requesting holders of the Warrants, in which event the Fair Market Value shall be as determined by such investment banking firm. "Nasdaq" shall mean the National Market System of the Nasdaq Stock Market. "Number Issuable" shall have the meaning given it in the second paragraph hereof. "NYSE" shall mean the New York Stock Exchange, Inc. "Person" shall mean any individual, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Sale Transaction" means the merger or consolidation with or into another entity by the Company or the conveyance, transfer, lease or other disposition of (whether in one transaction or in a series of transactions) all or substantially all of the Company's assets (whenever acquired). "Special Notice" shall mean the notice sent by a holder to the Company indicating its preference to have any special distribution set aside for its benefit upon exercise of the Warrant. "Warrant Exercise Documentation" shall have the meaning given it in Section 1 hereof. 10 10 "Warrantholder Agreement" shall mean the Warrantholder Agreement, dated as of May 21, 1999, between the Company, Charlesbank Equity Fund IV, Limited Partnership and The 1818 Mezzanine Fund, L.P., as the same may be amended or modified from time to time in accordance with its terms. Section 13. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier services or personal delivery, (a) if to the holder of a Warrant, at such holder's last known address appearing on the books of the Company; and (b) if to the Company, at its principal executive office in the United States located at the address designated for notices in the Warrantholder Agreement, or such other address as shall have been furnished to the party given or making such notice, demand or other communication. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier if delivered by commercial overnight courier service; and five Business Days after being deposited in the mail, postage prepaid, if mailed. Section 14. Effectiveness. This Amended and Restated Warrant is executed and delivered pursuant to Section 5.1 of the Warrantholder Agreement, and shall become effective on the Effective Date. If, prior to the Effective Date, the Warrantholder Agreement is terminated for any reason, this Warrant shall automatically terminate and be of no further force and effect. From and after the Effective Date, Warrant No. 2 (issued on May 20, 1998) shall be superseded in its entirety by this Amended and Restated Warrant and have no further force and effect. (Signature page follows.) 11 11 IN WITNESS WHEREOF, the Company has caused this Amended and Restated Warrant Certificate to be duly executed as of May 24, 1999. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither --------------------------------------------- J. Michael Gaither Vice President, General Counsel and Secretary 12 12 [Form of Assignment Form] [To be executed upon assignment of Warrants] The undersigned hereby assigns and transfers this Warrant Certificate to ____________________ whose Social Security Number or Tax ID Number is _________________ and whose record address is __________________________ ___________, and irrevocably appoints ________________ as agent to transfer this security on the books of the Company. Such agent may substitute another to act for such agent. Signature: ------------------------------------ Signature Guarantee: ------------------------------------ Date: ------------------------ EX-10.8 7 AMENDED & RESTATED REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.8 Execution Copy AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of May 21, 1999, between and among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), THE 1818 MEZZANINE FUND, L.P., a Delaware limited partnership (the "Fund"), and CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP, a Massachusetts limited partnership ("Charlesbank"). 1. Background. The Fund is the holder of warrants exercisable immediately to purchase initially 1,034,000 shares of the Company's Class A Common Stock, par value $.01 per share, at an exercise price of $.01 per share (the "Warrants"). The Company, the Fund and Charlesbank are parties to a Warrantholder Agreement, dated as of the date hereof (the "Warrantholder Agreement"), pursuant to which such parties have agreed to enter into this Agreement. Capitalized terms used herein but not otherwise defined shall have the meanings given them in the Warrantholder Agreement or in Section 3. 2. Registration Under Securities Act, etc. 2.1 Registration on Request. (a) Request. At any time, or from time to time following an Initial Public Offering, one or more holders (the "Initiating Holders") of 33% or more of the shares of Common Stock issued upon exercise of the Warrants (assuming exercise of any unexercised Warrants), may, upon written request, require the Company to effect the registration under the Securities Act of any Registrable Securities held by such Initiating Holders. The Company promptly will give written notice of such requested registration to all other holders of Registrable Securities who may join in such registration, and thereupon the Company will use its reasonable best efforts to effect, at the earliest possible date, the registration under the Securities Act, including by means of an "evergreen" shelf registration on Form S-3 (or any successor form) pursuant to Rule 415 under the Securities Act if so requested in such request (but only if the Company is then eligible to use such a shelf registration and if Form S-3 (or such successor form) is then available to the Company), of (i) the Registrable Securities that the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities that the Company has been requested to register by the holders thereof (such holders together with the Initiating Holders hereinafter are referred to as the "Selling Holders") by written request given to the Company within 20 days after the giving of such written notice by the Company, all to the extent requisite to permit the disposition of the Registrable Securities so to be registered. (b) Registration of Other Securities. Whenever the 2 Company shall effect a registration pursuant to this Section 2.1, no securities other than Registrable Securities or securities to be offered and sold by the Company for its own account shall be included among the securities covered by such registration unless the Selling Holders of not less than 51% of all Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of such other securities. (c) Registration Statement Form. Registrations under this Section 2.1 shall be on such appropriate registration form of the Commission as shall be reasonably selected by the Company. (d) Effective Registration Statement. A registration requested pursuant to this Section 2.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (x) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (y) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act, in which case the Company shall use its best efforts to keep such registration statement effective until such time as all of the Registrable Securities cease to be Registrable Securities, (ii) if after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and has not thereafter become effective, or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Selling Holders. (e) Selection of Underwriters. The underwriter or underwriters of each underwritten offering of the Registrable Securities so to be registered shall be selected by the Company and shall be reasonably acceptable to the Selling Holders of more than 50% of each class of Registrable Securities to be included in such registration. (f) Priority in Requested Registration. If the managing underwriter of any underwritten offering shall advise the Company in writing (and the Company shall so advise each Selling Holder of Registrable Securities requesting registration of such advice) that, in its opinion, the number of securities requested to be included in such registration exceeds the number that can be sold in such offering within a price range acceptable to the Selling Holders of 66-2/3% of the Registrable Securities requested to be included in such registration, the Company, except as provided in the following sentence, will include in such registration, to the extent of the number and type that the Company is so advised can be sold in such offering, prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included in such registration, pro rata among the Selling Holders 2 3 requesting such registration on the basis of the estimated gross proceeds from the sale thereof. If the total number of Registrable Securities requested to be included in such registration cannot be included as provided in the preceding sentence, holders of Registrable Securities requesting registration thereof pursuant to Section 2.1, representing not less than 33-1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66-2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 15 days after receipt of such notice by the Company and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 2.1 hereof. (g) Limitations on Registration on Request. Notwithstanding anything in this Section 2.1 to the contrary, in no event will the Company be required to (i) effect, in the aggregate, more than two registrations pursuant to this Section 2.1 or (ii) effect more than one registration pursuant to this Section 2.1 within the twelve-month period occurring immediately subsequent to the effectiveness (within the meaning of Section 2.1(d)) of a registration statement filed pursuant to this Section 2.1. (h) Listing. The Company shall list the Registrable Securities subject to Section 2.1(a) on the National Market System of the Nasdaq Stock Market or another of the national securities exchanges or automated quotation systems. (i) Expenses. The Company will pay all Registration Expenses (except for any underwriting commissions or discounts) in connection with any registration requested pursuant to this Section 2.1. 2.2 Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time, other than in connection with an Initial Public Offering, proposes to register any shares of Common Stock or any securities convertible into Common Stock under the Securities Act by registration on any form other than Forms S-4 or S-8, whether or not for sale for its own account, it will each such time give prompt written notice to all registered holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 2.2. Upon the written request of any such holder (a "Requesting Holder") made as promptly as practicable and in any event within 20 days after the receipt of any such notice, the Company will use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by the Requesting Holders thereof; provided, however, that prior to the effective date of the registration statement filed in connection with such registration, immediately upon notification to the Company from the managing underwriter of the price at which such securities are to be sold, if such price is below the price that any Requesting Holder shall have indicated to be acceptable to such Requesting Holder, the Company shall so advise such Requesting Holder of such price, and such Requesting Holder shall then have the right to withdraw its request to have its Registrable 3 4 Securities included in such registration statement; provided further, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Requesting Holder of Registrable Securities and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to cause such registration to be effected as a registration under Section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. Notwithstanding anything contained in this Section 2.2(a), the Company shall not, if any Requesting Holder shall have requested the registration of shares of Common Stock issuable upon exercise of any Warrant in the registration, consummate the sale of the securities included in the registration until such time as any applicable waiting period under the Hart-Scott-Rodino Act shall have expired or early termination thereunder shall have been granted if such Requesting Holder notifies the Company that it is required to make a filing under the Hart-Scott-Rodino Act before it may exercise its Warrants. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration upon request under Section 2.1. (b) Priority in Incidental Registrations. If the managing underwriter of any underwritten offering shall inform the Company in writing of its opinion that the number or type of Registrable Securities requested to be included in such registration would materially adversely affect such offering, and the Company has so advised the Requesting Holders in writing, then the Company will include in such registration, to the extent of the number and type that the Company is so advised can be sold in (or during the time of) such offering, first, all securities proposed by the Company to be sold for its own account, second, if such offering has been requested by a Person pursuant to any registration rights agreement between the Company and such Person and by the terms of such registration rights agreement the securities subject to such registration rights agreement must be included in such registration prior to those held by the Requesting Holders, the securities requested to be included in such offering by such Person, third, Registrable Securities requested to be included in such registration pursuant to this Agreement and such other securities proposed to be registered by the Company for the accounts of each other Person that by the terms of any applicable registration rights agreement in effect as of the date hereof between the Company and such Person must be included in the same proportion as the Registrable Securities of any Requesting Holder under this Agreement, pro rata among such Requesting Holders and such other Persons on the basis of the estimated proceeds from the sale thereof and fourth, all other securities proposed to be registered. (c) Expenses. The Company will pay all Registration Expenses in connection with any registration effected pursuant to this Section 2.2. 4 5 2.3 Registration Procedures. If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 2.1 and 2.2, the Company will, as expeditiously as possible: (i) prepare and (within 90 days after the end of the period within which requests for registration may be given to the Company or in any event as soon thereafter as practicable) file with the Commission the requisite registration statement to effect such registration and thereafter use its reasonable best efforts to cause such registration statement to become effective; provided, however, that the Company may discontinue any registration of its securities that are not Registrable Securities (and, under the circumstances specified in Section 2.2(a), its securities that are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (a) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (b) 180 days after the effective date of such registration statement, except with respect to any registration statement filed pursuant to Rule 415 under the Securities Act if the Company is eligible to file a registration statement on Form S-3, in which case the Company shall use its reasonable best efforts to keep the registration statement effective and updated, from the date such registration statement is declared effective until such time as all of the Registrable Securities cease to be Registrable Securities; (iii) furnish to each seller of Registrable Securities covered by such registration statement, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (iv) use its reasonable best efforts (x) to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the sellers of Registrable Securities covered by such registration statement shall reasonably request, (y) to keep such registration or qualification in effect for so 5 6 long as such registration statement remains in effect and (z) to take any other action that may be reasonably necessary or advisable to enable such sellers to consummate the disposition in such jurisdictions of the securities to be sold by such sellers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the seller or sellers of Registrable Securities to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) in the case of an underwritten or "best efforts" offering, furnish, if reasonably available, at the effective date of such registration statement to each seller of Registrable Securities, and each such seller's underwriters, if any, a signed counterpart of: (x) an opinion of counsel for the Company, dated the effective date of such registration statement and, if applicable, the date of the closing under the underwriting agreement, and (y) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' comfort letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as the underwriters may reasonably request; (vii) cause representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any underwriter of an underwritten or "best efforts" offering of any Registrable Securities; (viii) notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, 6 7 or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (ix) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of Registrable Securities a copy of any amendment or supplement to such registration statement or prospectus; (x) provide and cause to be maintained a transfer agent and registrar (which, in each case, may be the Company) for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration; and (xi) use its reasonable best efforts to list all Registrable Securities covered by such registration statement on the National Market System of the Nasdaq Stock Market or any national securities exchange on which Registrable Securities of the same class covered by such registration statement are then listed and, if no such Registrable Securities are so listed, on the National Market System of the Nasdaq Stock Market or any national securities exchange on which the Common Stock is then listed. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company in a reasonably prompt manner such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subdivision (viii) of this Section 2.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such 7 8 holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of this Section 2.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 2.4 Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering by holders of Registrable Securities pursuant to a registration requested under Section 2.1, the Company will use its reasonable best efforts to enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnities to the effect and to the extent provided in Section 2.7. The holders of the Registrable Securities proposed to be sold by such underwriters will reasonably cooperate with the Company in the negotiation of the underwriting agreement. Such holders of Registrable Securities to be sold by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. No holder of Registrable Securities shall be required to make any representations or warranties to, or agreements with, the Company other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution or any other representations required by applicable law. (b) Incidental Underwritten Offerings. If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Requesting Holder of Registrable Securities, use its reasonable best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such Requesting Holder among the securities of the Company to be distributed by such underwriters, subject to the provisions of Section 2.2(b). The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such 8 9 Requesting Holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such Requesting Holder, such Requesting Holder's Registrable Securities and such Requesting Holder's intended method of distribution or any other representations required by applicable law. (c) Underwriting Discounts and Commission. The holders of Registrable Securities sold in any offering pursuant to Section 2.4(a) or Section 2.4(b) shall pay all underwriting discounts and commissions of the underwriter or underwriters with respect to the Registrable Securities sold thereby. 2.5 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such reasonable access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6 Limitations, Conditions and Qualifications to Obligations under Registration Covenants. The Company shall be entitled to postpone for a reasonable period of time (but not exceeding 90 days) the filing of any registration statement otherwise required to be prepared and filed by it pursuant to Section 2.1 if the Company determines, in its good faith judgment, that such registration and offering would interfere with any material financing, acquisition, corporate reorganization or other material transaction involving the Company or any of its affiliates and promptly gives the holders of Registrable Securities requesting registration thereof pursuant to Section 2.1 written notice of such determination, containing a general statement of the reasons for such postponement and an approximation of the anticipated delay. If the Company shall so postpone the filing of a registration statement, holders of Registrable Securities requesting registration thereof pursuant to Section 2.1, representing not less than 33-1/3% of the Registrable Securities with respect to which registration has been requested and constituting not less than 66-2/3% of the Initiating Holders, shall have the right to withdraw the request for registration by giving written notice to the Company within 30 days after receipt of the notice of postponement and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders of Registrable Securities are entitled pursuant to Section 2.1 hereof. 2.7 Indemnification. (a) Indemnification by the Company. The Company will, and hereby does, indemnify and hold harmless, in the case of any registration 9 10 statement filed pursuant to Section 2.1 or 2.2, each seller of any Registrable Securities covered by such registration statement and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, and their respective directors, officers, partners, members, agents and affiliates against any losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or any such director, officer, partner, member, agent, affiliate or controlling person may become subject under the Securities Act or otherwise, including, without limitation, the reasonable fees and expenses of legal counsel (including those incurred in connection with any claim for indemnity hereunder), insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such seller or underwriter and each such director, officer, partner, member, agent, affiliate and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such seller or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof; and provided further, that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, partner, member, agent or controlling person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. As a condition to including any Registrable Securities in any registration statement, the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the 10 11 same extent as set forth in Section 2.7(a)) the Company, and each director of the Company, each officer of the Company and each other Person, if any, who participates as an underwriter in the offering or sale of such securities and each other Person who controls the Company or any such underwriter within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of such indemnifying party under this Section 2.7(b) shall be limited to the amount of the net proceeds received by such indemnifying party in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 2.7(a) or (b), such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 2.7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Section 2.7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement that does not include as an 11 12 unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. (d) Contribution. If the indemnification provided for in this Section 2.7 shall for any reason be held by a court to be unavailable to an indemnified party under Section 2.7(a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 2.7(a) or (b), the indemnified party and the indemnifying party under Section 2.7(a) or (b) shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same, including those incurred in connection with any claim for indemnity hereunder), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement; provided, however, that for purposes of this clause (ii), the relative benefits received by the prospective sellers shall be deemed not to exceed the amount of proceeds received by such prospective sellers. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this Section 2.7(d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 2.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. (f) Indemnification Payments. The indemnification and contribution required by this Section 2.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. SECTION 2.8. Additional Agreements. 12 13 (a) Requested Registrations. In any requested registration initiated by one of more holders of Registrable Securities under Section 2.1, the parties agree (notwithstanding any contrary provision of this Agreement) that Charlesbank and its Affiliates may request that the Company include shares of Common Stock held by them in the proposed registration as set forth in Section 2.1; provided, that in connection with the any such requested registration (provided that such request has not been withdrawn in accordance with Section 2.1(f)), if the managing underwriter of any underwritten offering shall advise the Company in writing that, in its opinion, the total number of securities requested to be included in such registration exceeds the number that can be sold within the price range and time period acceptable to the initiating holders thereof as provided in Section 2.1(f), (i) in the case of the first such registration, shares of Common Stock held by Charlesbank and its Affiliates shall be included in the proposed registration only to the extent that all of the securities to be sold by the Selling Holders can be included, and (ii) in the case of the second such requested registration, Registrable Securities held by Selling Holders and shares of Common Stock held by Charlesbank and its Affiliates shall be included in the proposed registration pro rata among such Persons on the basis of the estimated gross proceeds thereof. (b) Priority in Incidental Registrations. In any registration of securities as to which incidental registration rights under Section 2.2 apply, the parties agree (notwithstanding any contrary provision of this Agreement) that Charlesbank and its Affiliates shall have the right to participate on an equal basis with the holders of Registrable Securities in such registration to the full extent provided in this Agreement. (c) Expenses and Indemnification. The indemnification and expense reimbursement provisions contained in this Agreement shall apply to Charlesbank and its Affiliates as if such Persons were holders of Registrable Securities. (d) Transferability of Rights. The rights of Charlesbank and its Affiliates under this Section 2.8 shall be transferable and inure to the benefit of such Persons and their direct and indirect transferees. 3. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Affiliate" shall have the meaning given to such term in the Warrantholder Agreement. "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean and include the Class A Common Stock, par value $.01 per share, of the Company and each other class of capital stock of the Company that does not have a preference over any other class of capital stock of the 13 14 Company as to dividends or upon liquidation, dissolution or winding up of the Company and, in each case, shall include any other class of capital stock of the Company into which such stock is reclassified or reconstituted. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Initial Public Offering" means the initial public offering of the Common Stock and such Common Stock is listed on the New York Stock Exchange, Inc. or quoted or listed on the National Market System of the Nasdaq Stock Market. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Registrable Securities" means any shares of Common Stock issuable upon exercise of the Warrants and any Related Registrable Securities and any shares of Common Stock owned by the Fund. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been sold as permitted by Rule 144 (or any successor provision) under the Securities Act and the purchaser thereof does not receive "restricted securities" as defined in Rule 144, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not, in the opinion of counsel for the holders, require registration of them under the Securities Act or (d) they shall have ceased to be outstanding. All references to percentages of Registrable Securities shall be calculated pursuant to Section 9. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with Section 2, including, without limitation, all registration and filing fees, all fees of the New York Stock Exchange, Inc., other national securities exchanges or the National Association of Securities Dealers, Inc., all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of "cold comfort" letters required by or incident to such performance and 14 15 compliance, any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions with respect to the Registrable Securities) and the reasonable fees and expenses of one counsel to the Selling Holders (selected by Selling Holders representing at least 50% of the Registrable Securities covered by such registration). Notwithstanding the foregoing, in the event the Company shall determine, in accordance with Section 2.2(a) or Section 2.6, not to register any securities with respect to which it had given written notice of its intention to so register to holders of Registrable Securities, all of the costs of the type (and subject to any limitation to the extent) set forth in this definition and incurred by Requesting Holders in connection with such registration on or prior to the date the Company notifies the Requesting Holders of such determination shall be deemed Registration Expenses. "Related Registrable Securities" means with respect to shares of Common Stock issuable upon exercise of the Warrants, any securities of the Company issued or issuable with respect to such shares of Common Stock by way of a dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act of 1933, as amended, shall include a reference to the comparable section, if any, of any such similar Federal statute. 4. Rule 144 and Rule 144A. Following an Initial Public Offering, the Company shall take all actions reasonably necessary to enable holders of Registrable Securities to sell such securities without registration under the Securities Act within the limitation of the provisions of (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, (b) Rule 144A under the Securities Act, as such Rule may be amended from time to time, or (c) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 5. Amendments and Waivers. This Agreement may be amended with the consent of the Company and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of at least 50% of the Registrable Securities affected by such amendment, action or omission to act. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner 15 16 thereof may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: (a) if to the Fund, addressed to it in the manner set forth in the Warrantholder Agreement, or at such other address as it shall have furnished to the Company in writing in the manner set forth herein; (b) if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing in the manner set forth herein, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or (c) if to the Company, addressed to it in the manner set forth in the Warrantholder Agreement, or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding in the manner set forth herein. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier, if delivered by overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and, with respect to the Company, its respective successors and permitted assigns and, with respect to the Fund, any holder of any Registrable Securities, subject to the provisions respecting the minimum numbers of percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. Except by operation of law, this Agreement may not be assigned by the Company without the prior written consent of the holders of a majority in interest of the Registrable Securities outstanding at the time such consent is requested. 9. Calculation of Percentage Interests in Registrable Securities. For purposes of this Agreement, all references to a percentage of the Registrable Securities shall be calculated based upon the number of shares of Registrable Securities outstanding at the time such calculation is made, assuming the conversion of all Warrants into shares 16 17 of Common Stock. 10. No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement. Without limiting the generality of the foregoing, the Company will not hereafter enter into any agreement with respect to its securities that grants, or modify any existing agreement with respect to its securities to grant, to the holder of its securities in connection with an incidental registration of such securities higher priority to the rights granted to the Fund under Section 2.2(b). Without the prior written consent of the Fund, the Company will not hereafter enter into any agreement with respect to its securities that grants Charlesbank or its Affiliates demand registration rights unless such agreement permits the Fund to include its pro rata share (based on the estimated gross proceeds of a proposed registration) of Registrable Securities in any proposed demand registration under such agreement on a pari passu basis with Charlesbank and its Affiliates. 11. Remedies. Each holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 12. Certain Distributions. The Company shall not at any time make a distribution on or with respect to the Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the resulting or surviving corporation and such Registrable Securities are not changed or exchanged) of securities of another issuer if holders of Registrable Securities are entitled to receive such securities in such distribution as holders of Registrable Securities and any of the securities so distributed are registered under the Securities Act, unless the securities to be distributed to the holders of Registrable Securities are also registered under the Securities Act. 13. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Fund shall be enforceable to the fullest extent permitted by law. 14. Effectiveness; Entire Agreement. This Amended and Restated Registration Rights Agreement shall become effective on the Effective Date (as defined in the Warrantholder Agreement). If, prior to the Effective Date, the Warrantholder Agreement is terminated for any reason, this Agreement shall automatically terminate and be of no further force and effect. From and after the Effective Date, the Registration 17 18 Rights Agreement, dated May 7, 1997, between the Company and the Fund shall be superseded in its entirety by this Amended and Restated Registration Rights Agreement and have no further force and effect. From and after the Effective Date, this Agreement, together with the Warrantholder Agreement and the Warrants, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. From and after the Effective Date, this Agreement, the Warrantholder Agreement and the Warrants shall supersede all other agreements and understandings between the parties with respect to such subject matter. 15. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 17. Counterparts. This Agreement may be executed in multiple counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute one and the same instrument. 18 19 IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Registration Rights Agreement to be executed and delivered by their respective representatives hereunto duly authorized as of the date first above written. THE J. H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither --------------------------------------- Name: J. Michael Gaither Title: Sr. Vice President, General Counsel & Secretary THE 1818 MEZZANINE FUND, L. P. Per Pro Brown Brothers Harriman & Co., General Partner By: /s/ Joseph P. Donlan ---------------------------- Name: JOSEPH P. DONLAN CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP By: Charlesbank Equity Fund IV GP, Limited Partnership, its general partner By: Charlesbank Capital Partners, LLC Its general partner By: /s/ Kim Davis ----------------------------------- Name: KIM DAVIS Title: Managing Director By: /s/ Mark A. Rosen ----------------------------------- Name: MARK A. ROSEN Title: Managing Director 19 EX-10.10 8 AMENDMENT TO SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.10 AMENDMENT (the "Amendment"), dated as of May 19, 1999, between The J. H. Heafner Company, Inc., a North Carolina corporation ("Buyer"), and The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company ("Seller") -------------------------------------------------------------- The Buyer and the Seller are parties to an Agreement, dated as of May 7, 1997 (the "Supply Agreement"), and a Securities Purchase Agreement, dated as of May 7, 1997 (the "Securities Purchase Agreement"). The Buyer, certain stockholders of the Buyer and Charlesbank Equity Fund IV, Limited Partnership ("Charlesbank") have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of April 21, 1999, pursuant to which such stockholders have agreed to sell their shares of common stock of the Company to Charlesbank on the terms and conditions set forth therein. In consideration of the mutual benefits to be derived from the transactions contemplated by the Stock Purchase Agreement, and as a condition to the consummation of the transactions contemplated therein, the parties have agreed to enter into this Amendment. Capitalized terms used and not otherwise defined in the text of this Amendment shall have the meanings given in the Supply Agreement. The parties agree as follows: 1. Amendment to Supply Agreement. The Supply Agreement is hereby amended by adding the following immediately after Section 23 thereof: "SECTION 24. SUPPLEMENTAL PAYMENT. Subject to the restrictions contained in Section 6.6 of the Second Amended and Restated Articles of Incorporation of the Buyer or any successor document (the "Articles"), if the Buyer and its affiliates do not purchase from the Seller tires with an aggregate purchase price in an amount equal to or greater than (i) for 1999, $125,000,000 and (ii) for each calendar year thereafter, an amount averaging 104% of the Base Purchase Requirement for the prior calendar year as determined in accordance with this Section 24, and no Series B Dividends (as defined in the Articles) are payable in accordance with Section 6.2(a) thereof, the Buyer agrees to make additional payments to the Seller for tires purchased under this Agreement to the extent necessary to put the Seller in the same economic position as if Series B Dividends (as defined in the Articles) had been payable on the Series B Dividend Payment Date (as defined in the Articles) scheduled to occur in the following calendar year. For any calendar year, the Base Purchase Requirement shall be the sum of (x) the aggregate purchase price for tires purchased by the Buyer and its subsidiaries (provided such subsidiaries were owned by the Buyer on January 1 of such 2 calendar year) from Goodyear during such year and (y) 75% of the aggregate purchase price for tires purchased from Goodyear during such year by subsidiaries of the Buyer that were acquired during such year; provided, in each case, that purchases from Goodyear in any calendar year shall include purchases of tires from a business acquired by Goodyear after May 1, 1999 only if Goodyear or such acquired business agrees to continue to supply such products to the Buyer on substantially the same terms and conditions on and after the date of acquisition by Goodyear as were offered before the date of such acquisition, in which case 75% of the aggregate purchase price for tires purchased from such business shall be included. When used in this Section 24, "Goodyear" means, collectively, The Goodyear Tire and Rubber Company, the Seller and any other subsidiary or division of Goodyear that supplies tires to the Buyer and/or its subsidiaries." 2. Amendment to Securities Purchase Agreement. The Securities Purchase Agreement is hereby amended as follows: (a) Section 4.2 is restated to read in its entirety as follows: "SECTION 4.2. Change of Control Notice. So long as the Purchaser holds all of the outstanding Kelly Preferred Shares, at least 30 days prior to the occurrence of any Change of Control (as defined in the Amended and Restated Articles), the Company shall notify the Purchaser of such pending Change of Control." (b) The following text is added immediately after Section 4.5: "SECTION 4.6. Required Redemption of Preferred Stock. (a) Redemption Right. Subject to the restrictions contained in Section 4.6(e), 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 Section 6.5(f) of the Articles 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. 2 3 (b) Certain Definitions. When used in this Section 4.6, capitalized terms used and not defined in this Section 4.6 shall have the meanings given in the Second Amended and Restated Articles of Incorporation of the Corporation. "Change of Control" means such time as (i) any person or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") other than the Principal Shareholders (as defined below) or Kelly-Springfield 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), provided, however, that a person or group shall not be deemed to be the "beneficial owner" of capital stock of the Corporation solely by reason of such person or group having entered into a stockholders or similar agreement with a Principal Shareholder, (ii) a majority of the Board of Directors shall consist of persons other than Continuing Directors (the term "Continuing Director" shall mean any member of the Board of Directors immediately following the closing of the transactions contemplated by the Stock Purchase Agreement, any member of the Board of Directors elected by Kelly-Springfield pursuant to Section 6.4(c) of the Articles and any other member of the Board of Directors who shall be recommended or elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors), (iii) the stockholders of the 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. "Principal Shareholders" means Charlesbank Equity Fund IV, Limited Partnership, Charlesbank Equity Fund IV GP, Limited Partnership, Charlesbank Capital Partners, LLC, any other funds managed by Charlesbank Capital Partners, LLC, any person that, as of the closing of the transactions contemplated by the Stock Purchase Agreement, is a limited partner of Charlesbank Equity Fund IV, Limited Partnership, members of senior management of the Corporation that were employees of the Corporation as of the closing of the transactions contemplated by the Stock Purchase Agreement, and any corporation, partnership, limited liability company or other entity a majority of the voting capital stock or partnership, membership or equity interests of which is owned by any of the foregoing. 3 4 (c) Redemption Procedures. Notice of any redemption of shares of Kelly Preferred Stock pursuant to this Section 4.6 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 4.6, 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. (d) Consequences of Redemption. 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 4.6, 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. (e) Limitations on Mandatory Redemption. Notwithstanding anything to the contrary in this Section 4.6, 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 this Section 4.6, 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). (f) Reacquired Shares. Any shares of Kelly Preferred Stock exchanged, redeemed, purchased or otherwise acquired by the Corporation in any manner 4 5 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 Corporation's jurisdiction of incorporation, 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." 3. Charter Amendment. In consideration of the amendments to the Securities Purchase Agreement set forth in Section 2(b) above, the parties agree to do all things necessary (including voting shares of capital stock of the Buyer held by the Seller) to ensure that Section 6.5(d) of the Second Amended and Restated Articles of Incorporation will be deleted at such time as the Buyer effects any amendment to or restatement of such Articles (including in connection with reincorporation to a jurisdiction other than North Carolina). 4. Effective Date; Continuing Effectiveness. This Amendment shall be effective upon the closing of the transactions contemplated by the Stock Purchase Agreement, and shall remain in effect from and after the date such closing occurs. If, prior to the consummation of the transactions contemplated therein, the Stock Purchase Agreement is terminated for any reason, this Amendment shall automatically terminate and be of no further force and effect. Except as expressly set forth above, the terms and conditions of the Supply Agreement, the Securities Purchase Agreement and the Buyer's Second Amended and Restated Articles of Incorporation shall remain in full force and effect and are hereby ratified and confirmed. In the event of any conflict between a provision of this Amendment and any provision of the Buyer's Second Amended and Restated Articles of Incorporation, the provision of this Amendment shall be deemed to control to the extent of such conflict. 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Ohio. (Signature page follows.) 5 6 IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the date first written above. THE KELLY-SPRINGFIELD TIRE COMPANY, a division of The Goodyear Tire and Rubber Company By: /s/ Gary L. Sutherland ---------------------------------------- Name: Gary L. Sutherland Title: Vice President THE J. H. HEAFNER COMPANY, INC. By: /s/ William H. Gaither ---------------------------------------- Name: William H. Gaither Title: President and Chief Executive Officer 6 EX-10.11 9 TERMINATION & RELEASE AGREEMENT 1 EXHIBIT 10.11 Execution Version TERMINATION AND RELEASE AGREEMENT, dated as of May 22, 1999 (the "Agreement"), among The J. H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and the stockholders of the Company signing this Agreement as Class B Stockholders (the "Class B Stockholders"). -------------------------------------------------------------- INTRODUCTION The Company, certain stockholders of the Company and Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership (the "Purchaser"), have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of April 21, 1999, pursuant to which such stockholders have agreed to sell their shares of common stock of the Company to the Purchaser on the terms and conditions set forth therein. The Class B Stockholders have exercised their rights to sell their shares of Class B Common Stock of the Company to the Purchaser under the "tag-along" provision set forth in Section 1.2 of the Class B Stockholder Agreement (as defined below). In consideration of the mutual benefits to be derived from the transactions contemplated by the Stock Purchase Agreement and the execution and delivery thereof by the Class B Stockholders and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and as a condition to the consummation of the transactions contemplated therein, the parties have agreed to enter into this Agreement. The parties agree as follows: SECTION 1. Termination and Release. (a) Release by Class B Stockholders. Effective upon the closing of the transactions contemplated by the Stock Purchase Agreement (the "Closing"), each Class B Stockholder, by executing this Agreement, hereby (i) acknowledges and agrees that the amount of the Aggregate Purchase Price (as defined in the Stock Purchase Agreement) paid to such Class B Stockholder is in full satisfaction of any rights of such Class B Stockholder in respect of such Class B Stockholder's Additional Shares (as defined in the Stock Purchase Agreement) and (ii) releases, remises, acquits and forever discharges each of the Company, each of its subsidiaries, the Purchaser, and each of their respective affiliates, stockholders, partners, officers, directors, employees, agents, attorneys and representatives from any and all actions, liabilities, charges, complaints, causes of action, suits, proceedings, demands, costs, losses, damages, expenses and all other claims whatsoever (whether in contract, tort, pursuant to statute, known or unknown) of whatever nature and kind (collectively, "Claims") arising against such person by such Class B Stockholder in such Class B Stockholder's capacity as a stockholder of the 2 Company or under any of the agreements terminated in accordance with Section 1(c) or the course of dealing or relationships in connection therewith, from the beginning of time through the date hereof (other than, in any case, Claims arising out of the express provisions of (A) this Agreement, (B) the Stock Purchase Agreement or (C) Section 3.13 of the Merger Agreement (as defined below in Section 1(c)). (b) Release by Company. Effective upon the Closing, the Company, by executing this Agreement, hereby releases, remises, acquits and forever discharges each Class B Stockholder, each of their respective subsidiaries and each of their respective affiliates, stockholders, partners, officers, directors, employees, agents, attorneys and representatives from any and all Claims arising against such person by the Company under any of the agreements terminated in accordance with Section 1(c) or the course of dealing or relationships in connection therewith, from the beginning of time through the date hereof (other than, in any case, Claims arising out of the express provisions of (A) this Agreement, (B) the Stock Purchase Agreement, (C) Section 2.2(a) or 3.6 of the Merger Agreement, (D) Section 3.12 of the Merger Agreement (as amended and modified in Section 3(a) below) or (E) Section 4.1 of the Class B Stockholder Agreement (as defined below in Section 1(c)). (c) Termination of Agreements. Effective upon the Closing, the following agreements are hereby terminated and shall be of no further force and effect: (i) the Agreement and Plan of Merger, dated as of March 10, 1998 (the "Merger Agreement"), between and among the Company, ITCO Merger Corporation, ITCO Logistics Corporation and each of the stockholders of ITCO Logistics Corporation party thereto, (ii) the Escrow Agreement, dated as of May 20, 1998 (the "Escrow Agreement"), between and among the Company, the holders of Class B Common Stock party thereto and Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), (iii) the Class B Stockholder Agreement, dated as of May 20, 1998 (the "Class B Stockholder Agreement"), between the Company and each of the stockholders party thereto and (iv) the Class B Registration Rights Agreement, dated as of May 20, 1998, between the Company and each of the stockholders party thereto. Notwithstanding the foregoing, (x) the Class B Stockholders' obligations under Sections 2.2(a) and 3.6 of the Merger Agreement, Section 3.12 of the Merger Agreement (as amended and modified in Section 3(a) below) and Section 4.1 of the Class B Stockholder Agreement (and any other provisions of such agreements solely to the extent necessary to give effect to such Sections) shall remain in full force and effect from and after the Closing in accordance with their respective terms, and are hereby ratified and confirmed by each Class B Stockholder, (y) the Company's obligations under Section 3.13 of the Merger Agreement shall remain in full force and effect from and after the Closing in accordance with their terms, and are hereby ratified and confirmed by the Company, and (z) Sections 6, 7 and 8 of the Escrow Agreement shall survive such termination in accordance with their terms. (d) Instructions to Escrow Agent. The parties agree to execute and deliver the joint instruction attached as Annex B to the Escrow Agent on the date hereof, and to do all things necessary or desirable to effect the release of the stock certificates 2 3 being held in escrow thereunder and their delivery to the Purchaser at the Closing. Upon termination of this Agreement pursuant to Section 3(a), the parties agree promptly to return such stock certificates to the escrow agent (to the extent still required to be held in escrow under the Escrow Agreement). (e) Binding Effect. For purposes of this Section 1 only, the term Class B Stockholders shall include Richard P. Johnson and William E. Berry and their respective successors and permitted assigns. All other references in this Agreement to Class B Stockholders shall exclude Richard P. Johnson and William E. Berry. The parties further acknowledge and agree that Section 1(a) shall not operate to release any claims against the Company in respect of stock appreciation rights held by Leon R. Ellin or William E. Berry under agreements currently in force, which claims are to be addressed separately. SECTION 2. Class B Stockholder Representative. (a) Appointment. Each Class B Stockholder constitutes and appoints Wingate Management Company II, L. P. (the "Class B Stockholder Representative") to act as such Class B Stockholder's representative under the Stock Purchase Agreement, with full authority to act on behalf of, and to bind, each Class B Stockholder for purposes of the Stock Purchase Agreement, and the Class B Stockholder Representative agrees to accept such appointment. Without limiting the generality of the foregoing, each Class B Stockholder hereby irrevocably constitutes and appoints, with full power of substitution, the Class B Stockholder Representative as its true and lawful attorney-in-fact, with full power and authority in such Class B Stockholder's name, place and stead to take all actions and execute and deliver all documents and instruments described in Section 3.9(a) of the Stock Purchase Agreement. Each Class B Stockholder's appointment of the Class B Stockholder Representative as its attorney-in-fact shall be deemed to be a power coupled with an interest and still survive the death, incapacity, bankruptcy or dissolution of the Class B Stockholder giving such power. (b) Successor Representatives. The Class B Stockholder Representative shall designate one or more persons to serve as successor Class B Stockholder Representative in the event of his or its death or incapacity or bankruptcy or dissolution, as applicable, which person or persons shall in such event succeed to and become vested with all the rights, powers, privileges and duties of the Class B Stockholder Representative under this Agreement. Each successor Class B Stockholder Representative shall designate one or more successors to serve as Class B Stockholder Representative in the event of such successor Class B Stockholder Representative's death, incapacity, bankruptcy or dissolution. In the event that the Class B Stockholder Representative dies or becomes incapacitated, or in the event of the Class B Stockholder Representative's bankruptcy or dissolution, as applicable, without having designated a successor Class B Stockholder Representative, such Class B Stockholder Representative's executors, administrators or personal representatives, or successors in interest, as the case may be, shall succeed to and 3 4 become vested with all the rights, powers, privileges and duties of the Class B Stockholder Representative under this Agreement. SECTION 3. Additional Agreements. (a) Amendment of Covenant Not to Compete. Effective upon the Closing, Section 3.12(b)(i) of the Merger Agreement is hereby amended by (i) deleting from the second sentence the words "during the four-year period commencing on the Closing Date and ending on the fourth anniversary of the Closing Date" and replacing the same with the words "during the period commencing on the Closing Date and ending on May 24, 2001", (ii) inserting at the end of clause (2) of the second sentence, after the words "their respective affiliates", the words "with respect to the businesses described in clause (1)" and (iii) inserting at the end of clause (3) of the second sentence, after the words "such person", the words "and engage in any of the businesses described in clause (1) for any other person". Except as expressly set forth in this Section 3(a), the terms and conditions of Section 3.12(b)(i) of the Merger Agreement shall remain in full force and effect and are hereby ratified and confirmed. (b) Notices of Indemnity Claims. From the date of the Closing until the Expiration Date (as defined in the Stock Purchase Agreement), the Company shall, within five business days after the last day of each month, submit to the Class B Stockholder Representative a certificate signed by an officer of the Company stating whether or not the Company has knowledge of any claim or potential claim for indemnification against the Class B Stockholders under Article V of the Stock Purchase Agreement and briefly describing the nature of such claim or potential claim (if any). The Company shall promptly forward to the Class B Stockholder Representative a copy of any written notice received by the Company seeking indemnification under Article V of the Stock Purchase Agreement. Nothing in this Section 3(b) shall require the Company to waive any privilege that may apply to the information to be provided hereunder. (c) Stock Purchase Agreement. In connection with the execution and delivery of this Agreement by the parties hereto, the Company hereby represents and warrants to the Class B Stockholders that (i) the Stock Purchase Agreement has not been amended or modified on or prior to the date of this Agreement and remains in full force and effect and (ii) there is no consideration paid or payable by the Purchaser for the Shares and the Additional Shares (as defined in the Stock Purchase Agreement) other than as expressly set forth therein (including the exhibits thereto). (d) Investor Letters. The Company agrees, subject to the due execution and delivery of this Agreement, the Stock Purchase Agreement and the joint instruction to the Escrow Agent attached as Annex B, and the irrevocable release of signature pages evidencing such execution and delivery by the Class B Stockholders, to immediately make available for inspection by the Class B Stockholders at the offices of Haynes and Boone, LLP copies of all written proposals or indications of interest from potential investors (the "Investor Letters") received by the Company or the Principal Stockholders (as defined in 4 5 the Stock Purchase Agreement) in connection with the sale process that was initiated by the Principal Stockholders. Each Class B Stockholder (i) acknowledges and agrees that the Investor Letters are subject to the confidentiality obligations of such Class B Stockholder under Section 4.1 of the Class B Stockholder Agreement and are not to be distributed, reproduced or retained for any purpose and (ii) agrees to return, and direct its counsel to return, all copies of the Investor Letters within their respective possession promptly but in no event later than one business day after the Closing. SECTION 4. Miscellaneous Provisions. (a) Termination. If, prior to the Closing, the Stock Purchase Agreement is terminated according to its terms for any reason, this Agreement shall automatically terminate and be of no further force and effect. (b) 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, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person or legal entity includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article, Section, Annex, Exhibit or Schedule of this Agreement. (c) Notices. All notices, requests and other communications to any party under this Agreement shall be in writing and sufficient if delivered personally or sent by facsimile (with confirmation of receipt) or by guaranteed overnight courier, addressed as follows: If to the Company, to: Donald C. Roof J. Michael Gaither c/o The J. H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Facsimile: (704) 423-8987 with a copy to: 5 6 Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith and, if to any Class B Stockholder, to the address or facsimile number for such Class B Stockholder on Annex A, or to such other address or facsimile number as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by guaranteed overnight courier, when delivered at the address specified in this Section or on the second business day following the date on which such communication is delivered to such courier, whichever occurs first. (d) Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (e) Benefits of Agreement. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third person. (f) 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. (g) Assignment. This Agreement and the rights and obligations hereunder shall not be assignable by any party hereto without the prior written consent of the other parties. Any instrument purporting to make an assignment in violation of this Section shall be null and void. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. (i) CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE FOR PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND EACH PARTY TO THIS AGREEMENT AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING 6 7 RELATED THERETO EXCEPT IN SUCH COURT. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE IN ANY SUCH COURT OR ANY CLAIM THAT A LEGAL PROCEEDING COMMENCED IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 4(C) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION SUCH PARTY MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY SUCH PROCEEDING. 7 8 IN WITNESS WHEREOF, each of the Company, the Class B Stockholders and the Class B Stockholder Representative has caused this Agreement to be duly executed and delivered as of the day and year first written above. COMPANY: THE J. H. HEAFNER COMPANY, INC. By: /s/ J. MICHAEL GAITHER ----------------------------------- Name: J. MICHAEL GAITHER Title: Sr. Vice President, General Counsel, & Secretary Date: CLASS B STOCKHOLDERS: WINGATE PARTNERS II, L.P. By: WINGATE MANAGEMENT COMPANY II, L.P., its General Partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ----------------------------------- Name: V. EDWARD EASTERLING, JR. Title: Principal WINGATE AFFILIATES II, L.P. By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ----------------------------------- Name: V. EDWARD EASTERLING, JR. Title: Principal CALLIER INVESTMENT COMPANY By: /s/ James T. Callier, Jr. ----------------------------------- Name: JAMES T. CALLIER, JR. Title: General Partner /s/ Armistead Burwell, Jr. -------------------------------------- ARMISTEAD BURWELL, JR. 8 9 /s/ Leon R. Ellin --------------------------------------- LEON R. ELLIN REPRESENTATIVE: WINGATE MANAGEMENT COMPANY II, L.P., its General Partner By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. ------------------------------------ Name: V. EDWARD EASTERLING, JR. Title: Principal The following holders of shares of Class B Common Stock hereby execute and deliver this Agreement solely for the purposes of evidencing their consent to, acceptance of and agreement with Section 1: --------------------------------- RICHARD P. JOHNSON --------------------------------- WILLIAM E. BERRY 9 10 ANNEX A TO TERMINATION AND RELEASE AGREEMENT Wingate Partners II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 copy to: Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 Facsimile: (214) 651-5940 Attention: David H. Oden, Esq. Armistead Burwell, Jr. 1311 Forest Hills Road, B-8 Wilson, NC 27896 Leon R. Ellin 7308 Bay Hill Court Raleigh, NC 27615 Wingate Affiliates II, L.P. 750 North St. Paul, Suite 1200 Dallas, Texas 75201 Callier Investment Company c/o Wingate Partners 750 North St. Paul, Suite 1200 Dallas, Texas 75201 11 ANNEX B TO TERMINATION AND RELEASE AGREEMENT FORM OF JOINT INSTRUCTION May 22, 1999 The Chase Manhattan Bank 450 West 33rd Street Escrow Administration, 15th Floor New York, New York 10001 Facsimile: (212) 946-8156 Attention: Angela Taveras Re: Escrow Agreement, dated as of May 20, 1998, among The J. H. Heafner Company, Inc., a North Carolina corporation ("Heafner"), the stockholders (the "Company Stockholders") of ITCO Logistics Corporation, a Delaware corporation (the "Company"), and The Chase Manhattan Bank, a New York State chartered bank, as escrow agent (the "Escrow Agent"). Ladies and Gentlemen: The undersigned, The J. H. Heafner Company, Inc. ("Heafner"), and Wingate Management Company II, L. P. (the "Representative"), representing all of the parties (other than the Escrow Agent) to the above-referenced Escrow Agreement, hereby advise you that such parties have agreed, pursuant to a Termination and Release Agreement, dated as of May 22, 1999 (the "Termination Agreement"), to terminate the Escrow Agreement (other than Sections 6, 7 and 8 thereof), subject to certain conditions, prior to the Termination Date specified therein. Capitalized terms used and not defined in this joint instruction are defined in the Escrow Agreement. Accordingly, the undersigned hereby jointly instruct you to deliver the Stock Certificates constituting the Escrow to be held for release upon the closing of the transactions contemplated under the Termination Agreement (the "Closing"), which is scheduled to occur at 9:00 a.m. on Monday, May 24, 1999 at the offices of Howard, Smith & Levin LLP, 1330 Avenue of the Americas, New York, New York 10019. If the Closing does not occur, the Stock Certificates will be returned to escrow under the Escrow Agreement (to the extent required to be held in escrow thereunder) and the Escrow Agreement will remain in full force and effect. If you have any questions, please do not hesitate to call Taylor Wilson of Haynes and Boone, LLP at 214-651-5615 or John Maclay of Howard, Smith & Levin LLP at 212-841-1169. 12 Very truly yours, THE J. H. HEAFNER COMPANY, INC. By: ------------------------------------- Name: Title: WINGATE MANAGEMENT COMPANY II, L.P., as Representative By: ------------------------------------- Name: Title: The Escrow Agent hereby consents and agrees as of the date of this letter to the termination of the Escrow Agreement (other than Sections 6, 7 and 8), effective upon the Closing as described above, and acknowledges and confirms that the Escrow Agreement shall remain in full force and effect if and to the extent not so terminated. THE CHASE MANHATTAN BANK, as Escrow Agent By: ------------------------------------- Name: Title: EX-10.18 10 AMENDED & RESTATED 1997 STOCK OPTION PLAN 1 EXHIBIT 10.18 THE J.H. HEAFNER COMPANY AMENDED AND RESTATED 1997 STOCK OPTION PLAN 1. Purpose. This Amended and Restated 1997 Stock Option Plan (the "Plan") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), hereby amends and restates in its entirety the terms and conditions of The J.H. Heafner Company 1997 Stock Option Plan, which was adopted by the Board of Directors of the Company and effective as of [ ], 1997 (the "Effective Date"). The purpose of this Plan is to attract and retain employees (including officers), directors and independent contractors of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons to enhance the value of the Company over the long term by encouraging them to acquire a proprietary interest in the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity if, at the time of granting of an Option, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (b) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Optionee in his or her most recent written beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or, if there is no such designation or no such designated person survives the Optionee, then the person, persons, trust or trusts entitled by will or applicable law to receive such rights or, if no such person has such right then the Optionee's executor or administrator. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means any of the following: (i) the acquisition by any person or entity not controlled by the Company's stockholders of more than 50% of the shares of the common stock of the Company, (ii) the sale of all or substantially all of the Company's assets, (iii) the majority of the Board of Directors of the Company consisting of persons other than any member of the Board of Directors of the Company on the Effective Date (a "Continuing Director") and any other member of the Board of Directors who is recommended or elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors of the Company, (iv) a transaction resulting in Ann Heafner 2 Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones owning, collectively, less than 50% of the combined voting power of the then outstanding shares of common stock of the Company, or (v) the issuance of common stock of the Company in a public offering. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee, consisting of at least two members of the Board, established by the Board to administer the Plan. (g) "Company" means The J. H. Heafner Company, Inc., a corporation organized under the laws of the State of North Carolina, or any successor corporation. (h) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. (i) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (j) "NQSO" means any Option not designated as an ISO. (k) "Option" means a right, granted to an Optionee under Section 6(b) of the Plan, to purchase shares of Stock, subject to the terms and conditions of this Plan. An Option may be either an ISO or an NQSO, provided that ISOs may be granted only to employees of the Company or a Subsidiary. (l) "Optionee" means a person who, as an employee, director or independent contractor of the Company, a Subsidiary or an Affiliate, has been granted an Option. (m) "Plan" means The J.H. Heafner Company, Inc. Amended and Restated 1997 Stock Option Plan, as amended from time to time. (n) "Stock" means the common stock, par value $.01 per share, of the Company. (o) "Stock Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (p) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. (q) "Ten Percent Shareholder" means a person or persons who own, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries. 2 3 3. Administration. The Plan shall be administered by the Committee which shall consist of a committee of not less than two persons appointed by the Board. The Committee shall have full power to construe and interpret the Plan, to establish rules for its administration and to grant Options. The Committee may establish rules setting forth terms and conditions for a specified group of Options. The Committee may act by a majority of a quorum (a quorum being a majority of the members of such Committee) present at a called meeting or by unanimous written consent of all of its members. All actions taken and decisions made by the Board or the Committee pursuant to the Plan shall be binding and conclusive on all persons interested in the Plan. 4. Eligibility. Options may be granted in the discretion of the Committee to employees (including officers), directors and independent contractors of the Company and its present or future Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted and the type of Options granted (including the number of shares to be covered by such Options), the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 265,000 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in private transactions or otherwise. The number of shares of Stock available for issuance under the Plan shall be reduced by the number of shares of Stock subject to outstanding Options. If any shares subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Optionee, the shares of Stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan. In no event shall any Optionee acquire, pursuant to any awards of Options under this Plan, more than 80% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, stock split, reverse split, any reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, license arrangement, strategic alliance or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of any Optionees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock which may thereafter be issued in connection with Options, (ii) the number and kind of shares of Stock issued or issuable in respect of outstanding Options, and (iii) the exercise price, grant price, or purchase price relating to any Option; 3 4 provided that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code. 6. Specific Terms of Options. (a) General. Options may be granted at the discretion of the Committee. The term of each Option shall be for such period as may be determined by the Committee. The Committee may make rules relating to Options, and may impose on any Option or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. (b) Options. The Committee is authorized to grant Options to Optionees on the following terms and conditions: (i) Type of Option. The Stock Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO (in the event its terms, and the individual to whom it is granted, satisfy the requirements for ISOs under the Code), or an NQSO. (ii) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided that, in the case of an ISO, (i) such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option or such other exercise price as may be required by the Code, (ii) if the Optionee is a Ten Percent Shareholder, such exercise price shall not be less than 110% of the Fair Market Value of a share of Stock on the date of grant of such Option and in no event shall the exercise price for the purchase of shares of Stock be less than par value. Options shall be exercised by (i) giving written notice thereof to the Company, and (ii) paying the exercise price. In addition to any other method of payment which may be acceptable to the Committee, payment may be effected, either in whole or in part, by the surrender to the Company of outstanding Stock. Any Stock so surrendered shall be valued at the Fair Market Value on the date on which such shares are surrendered. (iii) Term and Exercisability of Options. The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Stock Option Agreement. As a condition to exercising any Option, the Optionee shall exercise and deliver to the Company an agreement in substantially the form of Exhibit A hereto or in such other form as the Company may reasonably require. (iv) Termination of Employment, etc. An Option may not be exercised unless the Optionee is then in the employ or a director of, or then maintains an independent contractor relationship with, the Company or any Subsidiary or Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has 4 5 continuously maintained any of such relationships since the date of grant of the Option; provided that, the Stock Option Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option. The Committee may establish a period during which the Beneficiaries of an Optionee who died while an employee, director or independent contractor of the Company or any Subsidiary or Affiliate or during any extended period referred to in the immediately preceding proviso may exercise those Options which were exercisable on the date of the Optionee's death; provided that no Option shall be exercisable after its expiration date. (v) Transferability. Except as otherwise provided in this Section 6(b)(v), Options are not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer Options for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer Options shall apply to the right to consent to amendments to the Stock Option Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with Options. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (vi) Other Provisions. Options may be subject to such other conditions as the Committee may prescribe in its discretion. 7. Change in Control Provisions. Upon a Change in Control, any and all Options then outstanding shall become fully vested and immediately exercisable by the Optionee and may be exercised by the Optionee in accordance with the terms and conditions set forth in the Stock Option Agreement. Nothing contained herein shall prevent the substitution of a new option by the Company after a Change in Control. 8. General Provisions. (a) Fair Market Value of Common Stock. In determining the Fair Market Value of the Stock for purposes of the Plan, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. In the event the Stock becomes listed on any national stock exchange or quoted on the national market quotations system, the Fair Market Value of the Stock shall, as of any day, be the closing price for the immediately preceding trading day. 5 6 (b) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan and any Stock Option Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Optionee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (c) No Right to Continued Employment, etc. Nothing in the Plan or in any Option granted or Stock Option Agreement entered into pursuant to the Plan shall confer upon any Optionee the right to continue in the employ of, or to continue as a director of or an independent contractor to, the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Stock Option Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Optionee's employment, directorship or independent contractor relationship. (d) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Option granted, any payment relating to an Option under the Plan (including from a distribution of Stock), or any other payment to an Optionee, amounts of withholding and other taxes due in connection with any transaction involving an Option, and to take such other action as the Committee may deem advisable to enable the Company and an Optionee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Optionee's tax obligations. (e) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. (f) No Rights to Options; No Stockholder Rights. No person shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Optionees. Except as provided specifically herein, an Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to such Optionee for such shares. (g) Unfunded Status of Options. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained in the Plan or any Option shall give any such Optionee any rights that are greater than those of a general creditor of the Company. 6 7 (h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of North Carolina without giving effect to the conflict of laws principles thereof. (i) Effectiveness; Plan Termination. This Amended and Restated 1997 Stock Option Plan shall take effect upon its adoption by the Board. The Board may terminate the Plan at any time with respect to any shares of Stock that are not subject to Options. Unless terminated earlier by the Board, the Plan shall terminate ten years after the Effective Date and no Options shall be granted under the Plan after such date. Termination of the Plan under this Section 8(i) will not affect the rights and obligations of any Optionee with respect to Options granted prior to termination. 7 EX-10.19 11 1999 STOCK OPTION PLAN 1 EXHIBIT 10.19 THE J.H. HEAFNER COMPANY, INC. 1999 STOCK OPTION PLAN 1. Purpose. The purpose of the 1999 Stock Option Plan (the "Plan") of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), is to attract and retain employees (including officers), directors and independent contractors of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons to enhance the value of the Company over the long term by encouraging them to acquire a proprietary interest in the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity if, at the time of granting of an Option, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (b) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Optionee in his or her most recent written beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or, if there is no such designation or no such designated person survives the Optionee, then the person, persons, trust or trusts entitled by will or applicable law to receive such rights or, if no such person has such right then the Optionee's executor or administrator. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of the Company, (v) the adoption of a plan relating to the liquidation or 2 dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board of the Company deems to be a Change in Control. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Company. (g) "Committee" means the committee, consisting of at least two members of the Board, established by the Board to administer the Plan. (h) "Company" means The J.H. Heafner Company, Inc., a corporation organized under the laws of the State of North Carolina, or any successor corporation. (i) "Effective Date" is defined in Section 8(i). (j) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. (k) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (l) "NQSO" means any Option not designated as an ISO. (m) "Option" means a right, granted to an Optionee under Section 6(b) of the Plan, to purchase shares of Stock, subject to the terms and conditions of this Plan. An Option may be either an ISO or an NQSO, provided that ISOs may be granted only to employees of the Company or a Subsidiary. (n) "Optionee" means a person who, as an employee, director or independent contractor of the Company, a Subsidiary or an Affiliate, has been granted an Option. (o) "Plan" means The J.H. Heafner Company, Inc. 1999 Stock Option Plan, as amended from time to time. (p) "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Company is approved by the representative of management on the board of the Company, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (q) "Stock" means the Class A Common Stock, par value $.01 per share, of the Company. 2 3 (r) "Stock Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (s) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. (t) "Ten Percent Shareholder" means a person or persons who own, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries. 3. Administration. The Plan shall be administered by the Committee which shall consist of a committee of not less than two persons appointed by the Board. The Committee shall have full power to construe and interpret the Plan, to establish rules for its administration and to grant Options. The Committee may establish rules setting forth terms and conditions for a specified group of Options. The Committee may act by a majority of a quorum (a quorum being a majority of the members of such Committee) present at a called meeting or by unanimous written consent of all of its members. All actions taken and decisions made by the Board or the Committee pursuant to the Plan shall be binding and conclusive on all persons interested in the Plan. 4. Eligibility. Options may be granted in the discretion of the Committee to employees (including officers), directors and independent contractors of the Company and its present or future Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted and the type of Options granted (including the number of shares to be covered by such Options), the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 1,050,000 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in private transactions or otherwise. The number of shares of Stock available for issuance under the Plan shall be reduced by the number of shares of Stock subject to outstanding Options. If any shares subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Optionee, the shares of Stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan. In no event shall any Optionee acquire, pursuant to any awards of Options under this Plan, more than 80% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan and the maximum limitation upon Options to be granted to any Optionee, in the number, kind and 3 4 option price of shares subject to outstanding Options and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. In such event, the aggregate number of shares of the Stock available for issuance under this Section 5 will be increased to reflect such substitution or assumption. 6. Specific Terms of Options. (a) General. Options may be granted at the discretion of the Committee. The term of each Option shall be for such period as may be determined by the Committee. The Committee may make rules relating to Options, and may impose on any Option or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. (b) Options. The Committee is authorized to grant Options to Optionees on the following terms and conditions: (i) Type of Option. The Stock Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO (in the event its terms, and the individual to whom it is granted, satisfy the requirements for ISOs under the Code), or an NQSO. (ii) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided that, in the case of an ISO, (i) such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option or such other exercise price as may be required by the Code, and (ii) if the Optionee is a Ten Percent Shareholder, such exercise price shall not be less than 110% of the Fair Market Value of a share of Stock on the date of grant of such Option, in no event shall the exercise price for the purchase of shares of Stock be less than par value and the term of the Option shall be no more than five years. Options shall be exercised by (i) giving written notice thereof to the Company, and (ii) paying the exercise price. In addition to any other method of payment which may be acceptable to the Committee, if permitted by the Committee in its sole discretion at the time of exercise, payment may be effected, either in whole or in part, by the surrender to the Company of outstanding Stock. Any Stock so surrendered shall be valued at the Fair Market Value on the date on which such shares are surrendered. (iii) Term and Exercisability of Options. The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Stock Option Agreement. As a condition to exercising any Option, the Optionee shall exercise and deliver to the Company an agreement in substantially the form of Exhibit A hereto or in such other form as the Company may reasonably require. (iv) Termination of Employment, etc. An Option may not be exercised unless the Optionee is then in the employ or a director of, or then maintains an independent contractor relationship with, the Company or any Subsidiary or 4 5 Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has continuously maintained any of such relationships since the date of grant of the Option; provided that, the Stock Option Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option. The Committee may establish a period during which the Beneficiaries of an Optionee who died while an employee, director or independent contractor of the Company or any Subsidiary or Affiliate or during any extended period referred to in the immediately preceding proviso may exercise those Options which were exercisable on the date of the Optionee's death; provided that no Option shall be exercisable after its expiration date. (v) Transferability. Except as otherwise provided in this Section 6(b)(v), Options are not transferable other than as designated by the Optionee, in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer Options for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer Options shall apply to the right to consent to amendments to the Stock Option Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with Options. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (vi) Other Provisions. Options may be subject to such other conditions as the Committee may prescribe in its discretion. 7. Change in Control Provisions. Upon a Change in Control, the treatment of each Option issued under the Plan shall be as set forth in the applicable Stock Option Agreement. Nothing contained herein shall prevent the substitution of a new option by the Company after a Change in Control. 8. General Provisions. (a) Fair Market Value of Common Stock. In determining the Fair Market Value of the Stock for purposes of the Plan, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. In the event the Stock becomes listed on any national stock exchange or quoted on the national market quotations system, the Fair Market Value of the Stock shall, as of any day, be the closing price for the immediately preceding trading day. (b) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan and any Stock Option Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock under any Option 5 6 until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Optionee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (c) No Right to Continued Employment, etc. Nothing in the Plan or in any Option granted or Stock Option Agreement entered into pursuant to the Plan shall confer upon any Optionee the right to continue in the employ of, or to continue as a director of or an independent contractor to, the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Stock Option Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Optionee's employment, directorship or independent contractor relationship. (d) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Option granted, any payment relating to an Option under the Plan (including from a distribution of Stock), or any other payment to an Optionee, amounts of withholding and other taxes due in connection with any transaction involving an Option, and to take such other action as the Committee may deem advisable to enable the Company and an Optionee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Optionee's tax obligations. (e) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. (f) No Rights to Options; No Stockholder Rights. No person shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Optionees. Except as provided specifically herein, an Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to such Optionee for such shares. (g) Unfunded Status of Options. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained in the Plan or any Option shall give any such Optionee any rights that are greater than those of a general creditor of the Company. (h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of North Carolina without giving effect to the conflict of laws principles thereof. (i) Effective Date; Plan Termination. (i) The Plan shall take effect upon its adoption by the Board (the "Effective Date"), but the Plan (and any grants of Options made prior to the stockholder approval mentioned herein), shall be subject to the approval of the holder(s) of a majority of the issued and outstanding shares of voting securities of the Company entitled to vote, which approval must occur within twelve months of the date the Plan is adopted by the Board. In the absence of such approval, such Options shall be null and void. (ii) The Board may terminate the Plan at any time with respect to any shares of Stock that are not subject to Options. Unless terminated earlier by the Board, the Plan shall terminate ten years after the Effective Date and no Options shall be granted under the Plan after 6 7 such date. Termination of the Plan under this Section 8(h) will not affect the rights and obligations of any Optionee with respect to Options granted prior to termination. 7 8 Exhibit A to 1999 Stock Option Plan and 1999 Stock Option Agreement Form of Stockholders' Agreement to be entered into upon exercise of Options under Option Agreement STOCKHOLDERS' AGREEMENT, dated as of ________________, _____, between THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and _______________________ (the "Purchaser"). Introduction The Purchaser is, upon the date hereof, exercising the Purchaser's option to purchase _________ shares (the "Shares") of the Company's Class A common stock, par value $.01 per share (the "Common Stock"), at a price of $__________ per Share (the "Purchase Price"), pursuant to the Company's 1999 Stock Option Plan (the " Option Plan"). As a condition to the Purchaser's exercise of his option to acquire the Shares, the Purchaser is entering into this agreement. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Transferability of Shares SECTION 1.1. Stock Transfer Restrictions. The Purchaser shall not sell, assign, pledge, give away or otherwise transfer (a "Transfer") any Shares except in accordance with the procedures set forth in this Agreement. Any attempted Transfer of Shares not permitted by this Agreement shall be null and void, and the Company shall not in any way give effect to any such Transfer. Any proposed Transfer of Shares shall be null and void, and the Company shall not in any way give effect to any such Transfer, unless the transferee of such Shares who is not, immediately prior to such Transfer, a management stockholder shall agree in writing to be bound by and comply with the provisions of this Agreement. SECTION 1.2. Termination of Employment. (a) Termination by Company for Cause or by Purchaser without Good Reason. If the Company shall terminate the Purchaser's employment for "Cause" or the Purchaser shall terminate his employment with the Company other than for "Good Reason" (as such terms are defined below), the Company shall have the right, commencing on the date of such termination and continuing until the first anniversary 9 thereof, to purchase all or part of such Purchaser's Shares at the Repurchase Price (as defined below) applicable thereto, provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from making such repurchase, in whole or in part, the Company shall have the right to purchase such Shares until the expiration of 45 days after such first anniversary. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the first anniversary of the date of termination triggering the right to purchase, and for a period of 60 days following the first anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC.) shall have all the rights conferred on the Company pursuant to this Section 1.2(a). For purposes of this Section 1.2, "Company" shall include any subsidiary of the Company with respect to a Purchaser employed directly by such subsidiary. For purposes of this Agreement, "Cause", with respect to the Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean (i) the Purchaser's conviction of, or plea of guilty or nolo contendere to a felony, (ii) the Purchaser's gross negligence in the performance of his employment services to the Company, which is not corrected within 15 business days after written notice, (iii) the Purchaser's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of such services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Purchaser's other material breach of his obligations as an employee or officer of the Company which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of the directors of the Company. "EBITDA" means earning before interest, taxes, depreciation, and amortization as reflected in the Company's financial statements for the four full fiscal quarters immediately preceding the date on which such termination shall have occurred. Adjustments for unusual items will be made in the reasonable discretion of the Board of Directors of the Company, after consultation with the Chief Executive Officer of the Company. "Good Reason", with respect to the Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean any of the following, unless the basis for such Good Reason is cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business 2 10 days) after the Company receives written notice specifying the basis of such Good Reason: (i) the failure of the Company to pay any undisputed amount due to the Purchaser in connection with his employment by the Company or a substantial diminution in benefits provided pursuant to such employment other than a reduction in benefits or salary applicable to all of the Company's bonus eligible employees, (ii) a substantial diminution in the status, position and responsibilities of the Purchaser that is not instituted to all employees of the Company or (iii) the Company requiring the Purchaser to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Purchaser is currently assigned; provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Purchaser's employment services. "Principal Shareholders" means any of the following (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, L.L.C. (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Company is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. "Repurchase Price" means, with respect to each Share owned by any Purchaser, (a) in the event of any termination, excluding a termination described in clause (b) below, the greater of (i) the Purchase Price applicable thereto, and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of such Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants), (b) in the event of a termination (i) by the Company for Cause or (ii) within 24 months of the date hereof, by a Purchaser other than for Good Reason, the Purchase Price applicable thereto, and (c) notwithstanding the terms of clauses (a) and (b) above, in the event of a termination by the Company for a Specified Cause Event or in the event that following termination for any reason the Purchaser violates the confidentiality or non-compete provisions of any executive severance, employment or non-competition agreement with the Company, the lesser of (i) the Purchase Price applicable thereto and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of such Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants). "Net Equity Value" means the sum of (x) 6 times the Company's EBITDA plus (y) the aggregate exercise price of all in-the-money options granted under the Option Plans and all in-the-money Warrants, less (z) the aggregate amount of principal of and interest on (in the case of debt) and liquidation value of (in the case of capital stock) all debt for borrowed money and Preferred Stock (or any replacements therefor) owed or outstanding as of the date of such termination. 3 11 "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Purchaser that is detrimental to the Company or (2) the Purchaser's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Purchaser's services for the Company. (b) Termination by Company other than for Cause or by Purchaser with Good Reason. If the Company shall terminate the Purchaser's employment other than for Cause or the Purchaser shall terminate his employment with the Company for Good Reason, the Purchaser shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to require the Company to purchase all or part of the Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from purchasing such Shares to the extent so required by the Purchaser borrowed money from purchasing such Shares to the extent so required by the Purchaser, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the option is not exercised, the Company shall have the right, commencing on the first anniversary and continuing until the second anniversary thereof, to purchase all of the Purchaser's Shares at the Repurchase Price applicable thereto. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the second anniversary of the date of termination triggering the right to purchase, and for a period of 60 days following the second anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 1.2(b). (c) Termination or Repurchase upon Death. If the Purchaser's employment with the Company shall terminate due to the Purchaser's death, or, if within one year after any other termination of employment with the Company, the Purchaser shall die, the Company shall have the right to purchase, and the Purchaser's descendants shall have the right to require the Company to purchase, all or part of the Purchaser's Shares at the Repurchase Price applicable thereto, commencing on the date of death of the Purchaser and continuing until the first anniversary thereof; provided that if and to the extent that, prior to such anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note, or other agreement from purchasing such Shares to the extent so required by the Purchaser's descendants, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing not later than the first anniversary of the date of the death triggering the right to purchase, and for a period of 60 days following the first anniversary of the date of death the Principal Shareholders (through their agent Charlesbank 4 12 Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 1.2(c). (d) Delivery of Payment. The Company or the Principal Shareholders or the Purchaser, as the case may be, shall notify the other of such party's exercise of its rights under this Section 1.2 by giving written notice of such exercise at least 10 and not more than 30 days before the date established by such electing party for such purchase or sale, as the case may be. On the date so designated, the Company or the Principal Shareholders shall deliver the appropriate Repurchase Price to the Purchaser by certified check or money order and the Purchaser shall deliver the certificates evidencing the Shares being purchased, duly endorsed for transfer as the Company or the Principal Shareholders may direct, and free and clear of any claim, encumbrance, pledge, lien, security interest or other restriction ("Claim"). If any Shares evidenced by a certificate so surrendered are not being purchased pursuant to the terms hereof, the Company shall promptly issue to the Purchaser a replacement certificate evidencing the Shares not so purchased. SECTION 1.3. Transfers Among Management or to Descendants. The Purchaser may, so long as any right has not been exercised with respect to such Shares pursuant to Section 1.2, Transfer any Shares to a management employee of the Company or one of its subsidiaries who has acquired or does acquire shares of Common Stock pursuant to a purchase agreement containing transfer and other restrictions substantially similar to, and no less favorable to the Company than, those contained herein or pursuant to an exercise of any option under the Option Plan (a "Management Employee"). The Purchaser may Transfer all or any portion of the Purchaser's Shares to the Purchaser's spouse or descendants or a trust for the benefit of the Purchaser or his or her spouse or descendents or to a partnership or corporation controlled by the Purchaser or his or her spouse or descendants. Such Transfer shall be effective only if the transferee agrees to be bound by the terms of this Agreement. SECTION 1.4. Right of First Offer. With respect to any Shares that a Purchaser wishes to Transfer, other than pursuant to Section 1.3 hereof, the following provisions shall apply. (a) If the Purchaser desires to Transfer any such Shares, the Purchaser shall deliver to the Company, the Principal Shareholder, and the Management Employees a written notice, which shall be irrevocable for a period of 60 days after delivery, offering all of such Shares to the Company and the Management Employees, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, the Principal Shareholders, at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase all (but not part) of such Shares at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within such 30-day period. (b) If the Company fails to accept such offer, then upon the earlier of the expiration of such 30-day period or upon the receipt of a written rejection of such offer from the 5 13 Company, the Principal Shareholders shall have the second right and option, until 15 days after the expiration of the 30-day period, to purchase all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the transferring Purchaser within the 15-day period. (c) If the Principal Shareholders fail to accept such offer, then upon the earlier of the expiration of such 15-day period or upon the receipt of a written rejection of such offer from the Principal Shareholders, the Management Employees (as a group) shall have the third right and option, until 15 days after the expiration of the 15-day period, to purchase on a pro rata basis with all Management Employees so electing all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within the second 15-day period. (d) If the Company, Principal Shareholders, and the Management Employees do not elect to purchase the Shares so offered, then the Purchaser may Transfer all (but not part) of such Shares at a price not less than the price, and on terms not more favorable to the transferee of such Shares than the terms, stated in the original written notice of intention to sell, at any time within 15 days after the expiration of the period in which the Management Employees could elect to purchase such Shares. If such Shares are not sold by the Purchaser during such 15-day period, the right of the Purchaser to sell such Shares shall expire and the rights and obligations set forth in this Section 1.4 shall be reinstated with respect to such Shares. (e) The rights of the Principal Shareholders under this Section 1.4 shall terminate if at the time of the proposed Transfer the Principal Shareholders do not own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company. SECTION 1.5. Lock-up Agreements. If the Company proposes to register under the Securities Act any of its Common Stock for sale to the public, the Purchaser shall enter into such agreement (a "Lock-up Agreement") as may be requested by the underwriters of such registered offering, pursuant to which Lock-up Agreement the Purchaser shall refrain from selling any Shares during the period of distribution of Common Stock by such underwriters and for a period of up to 180 days following the effective date of such registration. SECTION 1.6 Take-Along. If Charlesbank Capital Partners, LLC agrees to transfer all of the shares of Common Stock which it owns and which are owned by funds that it manages to any person or entity other than an affiliate of the Principal Shareholders, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then Charlesbank Capital Partners, LLC shall have the right to require the Purchasers to sell their Shares to such person or entity upon the same terms and subject to the same conditions as the Principal Shareholders have agreed to sell their shares. The Principal Shareholders shall provide a written notice of such sale not less than 30 days prior to the closing of such sale. 6 14 ARTICLE II Representations and Warranties of the Purchaser The Purchaser represents and warrants to the Company as follows: SECTION 2.1. Capacity; Binding Agreements. The Purchaser has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. SECTION 2.2. Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Purchaser with any of the provisions hereof do not and will not (i) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser is a party, or by which the Purchaser or any of the Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or any of the Purchaser's properties or assets or (iii) result in the creation or imposition of any Claim upon any of the Purchaser's properties or assets. SECTION 2.3. Purchase for Own Account. (a) The Shares to be acquired by the Purchaser pursuant to this Agreement are being acquired for his own account and the Purchaser has no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state thereof. If the Purchaser should in the future decide to dispose of any of the Shares, the Purchaser understands and agrees that he may do so only in compliance with this Agreement and with the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If the Purchaser should decide to dispose of any Shares, the Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at the Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law in connection with such disposition to the effect that the proposed disposition of the Shares will not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. (a) The Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR 7 15 OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE IS FURTHER LIMITED BY THE PROVISIONS OF THE STOCKHOLDER'S AGREEMENT BETWEEN THE J.H. HEAFNER COMPANY, INC. AND THE MANAGEMENT STOCKHOLDER IDENTIFIED THEREIN, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICE OF THE COMPANY." SECTION 2.4. Nature of Purchaser. The Purchaser has such knowledge and experience in financial and business matters so that he is capable of evaluating the relative merits and risks of purchasing the Shares. The Purchaser has adequate means of providing for his current economic needs and possible personal contingencies, has no need for liquidity in his investment in the Company and is able financially to bear the risks of such investment. ARTICLE III Miscellaneous SECTION 3.1. Option Shares; Dividends; Reclassifications. If, subsequent to the date hereof, any additional shares of Common Stock are issued to the Purchaser pursuant to the exercise of any option (including options granted under the Option Plan), warrant or other security convertible into or exercisable for shares of Common Stock, or any shares or other securities are issued with respect to, or in exchange for, any of the Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares of Common Stock and such other shares or securities shall be deemed to be Shares for all purposes of this Agreement. SECTION 3.2. Survival of Provisions; Termination. (a) All of the representations, warranties and covenants made herein and each of the provisions of this Agreement shall, except as otherwise expressly set forth herein, survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchaser, the acceptance of the Shares and payment therefor or the termination of this Agreement. (b) This Agreement shall terminate upon the earliest to occur of the (i) issuance by the Company or sale by the shareholders of the Company to the public on a Form S-1 under the Securities Act of 1933, as amended, of shares of Common Stock representing at least 40% of the Common Stock outstanding after such issuance or sale, (ii) tenth anniversary of the date of this Agreement and (iii) written consent of the Purchaser, all Management Employees and the Company. Upon such a termination, all rights and obligations under this Agreement shall terminate, except the Purchaser's obligations under Section 1.5 with respect to a Lock-up 8 16 Agreement entered into in connection with a public offering referred to in the foregoing clause (i), if applicable. SECTION 3.3. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 3.3: (a) if to the Company: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Attention: J. Michael Gaither Telecopier No.: (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, Esq. Telecopier No.: (212) 841-1010 (b) if to the Purchaser, at the address set forth opposite the Purchaser's name on the signature pages hereof; and (c) if to the Principal Shareholders: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Telecopier: (617) 619-5402 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman 9 17 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 3.4. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The provisions of Article I also shall inure to the benefit of and be enforceable by any Management Employee and the Principal Shareholders. The Purchaser may assign its rights hereunder only in conjunction with, and to a transferee of, a Transfer permitted pursuant to the terms of Article I, and any such assignee shall be deemed to be a "Purchaser" for purposes of this Agreement. The Company may not assign any of its rights or obligations hereunder without the consent of the Purchaser; provided that any successor by merger or consolidation of the Company or similar transaction shall be bound by and benefit from the terms hereof as if named as the Company hereunder. SECTION 3.5. Amendment and Waiver. No failure or delay on the part of the Company or the Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof; provided that notice of any such waiver shall be given to each party hereto as set forth herein. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and the Purchaser and with respect to any amendment, modification or termination of the rights or obligations of the Principal Shareholders under Article I, the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC). Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchaser from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchaser in any case shall entitle the Company or the Purchaser to any other or further notice or demand in similar or other circumstances. SECTION 3.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 3.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 10 18 SECTION 3.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 3.10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. SECTION 3.11. Entire Agreement. This Agreement, together with the terms of the Common Stock, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the Common Stock, supersede all prior agreements and understandings among the parties with respect to such subject matter. SECTION 3.12. Expenses. Each party to this Agreement shall each bear its or his own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of lawyers, financial advisors and accountants. SECTION 3.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article or Section is to the Article or Section of this Agreement. [FOR OPTIONEES PARTY TO 1997 PURCHASE AGREEMENT AND NOT 1999 PURCHASE AGREEMENT -- SECTION 3.14. 1997 Purchase Agreement. The Purchaser is party to a Securities Purchase and Stockholders' Agreement, dated as of May 27, 1997 (the "1997 Purchase Agreement'), with the Company pursuant to which the Purchaser purchased shares (the "1997 Shares") of Class A Common Stock in the Company and pursuant to which the Purchaser agreed to certain terms and conditions regarding the Purchaser's ownership of such shares of Class A Common Stock. The Purchaser and the Company agree that, with respect to the 1997 Shares, in the event of any conflict between the terms and conditions of this Agreement and the terms and 11 19 conditions of the 1997 Purchase Agreement, the terms and conditions of this Agreement shall control. IN WITNESS WHEREOF, the parties hereto have caused this Stockholders' Agreement to be executed and delivered as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: ----------------------------------------- Name: Title: ----------------------------------------- Address for Notices: Name: 12 EX-10.20 12 STOCK OPTION AGREEMENTS 1 EXHIBIT 10.20 THE J.H. HEAFNER COMPANY, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 200,000 This Agreement (the "Agreement") made this 24th day of May, 1999, between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and Donald C. Roof (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of The J.H. Heafner Company, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 200,000 shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. 2 (A) Tier 1 Options. The Company hereby grants to the Optionee 50,000 Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- --------------------------- May 24, 2000 12,500 May 24, 2001 25,000 May 24, 2002 37,500 May 24, 2003 50,000
Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's 2 3 stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee 50,000 Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the 3 4 Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee 100,000 Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, 4 5 Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. 5 6 "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a 6 7 valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit 7 8 his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, 8 9 consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. (h) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any 9 10 government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 10 11 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 11 12 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither ----------------------------------------- J. Michael Gaither Executive Vice President, General Counsel and Secretary /s/ Donald C. Roof - ------------------------------- Donald C. Roof 6705 Seton House Lane Charlotte, NC 28277 12 13 THE J.H. HEAFNER COMPANY, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 75,000 This Agreement (the "Agreement") made this 24th day of May, 1999, between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and J. Michael Gaither (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of The J.H. Heafner Company, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 75,000 shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. 14 (A) Tier 1 Options. The Company hereby grants to the Optionee 25,000 Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- --------------------------- May 24, 2000 6,250 May 24, 2001 12,500 May 24, 2002 18,750 May 24, 2003 25,000
Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the 2 15 Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee 25,000 Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. 3 16 "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee 25,000 Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 4 17 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market 5 18 Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" 6 19 means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the 7 20 Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. 8 21 (h) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 9 22 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10 23 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 11 24 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ J. Michael Gaither - ----------------------------- J. Michael Gaither 315 West 7th Street Newton, NC 28658 12 25 THE J.H. HEAFNER COMPANY, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 75,000 This Agreement (the "Agreement") made this 24th day of May, 1999, between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and Daniel K. Brown (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of The J.H. Heafner Company, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 75,000 shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. 26 (A) Tier 1 Options. The Company hereby grants to the Optionee 25,000 Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- ----------------------------------- May 24, 2000 6,250 May 24, 2001 12,500 May 24, 2002 18,750 May 24, 2003 25,000
Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the 2 27 Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee 25,000 Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. 3 28 "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee 25,000 Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 4 29 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market 5 30 Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" 6 31 means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the 7 32 Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. 8 33 (h) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 9 34 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10 35 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 11 36 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ Daniel K. Brown - ------------------------------- Daniel K. Brown 17915 Jetton Road Cornelius, NC 28031 12 37 THE J.H. HEAFNER COMPANY, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 75,000 This Agreement (the "Agreement") made this 24th day of May, 1999, between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and Richard P. Johnson (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of The J.H. Heafner Company, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 75,000 shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. 38 (A) Tier 1 Options. The Company hereby grants to the Optionee 25,000 Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- ----------------------------------- May 24, 2000 6,250 May 24, 2001 12,500 May 24, 2002 18,750 May 24, 2003 25,000
Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the 2 39 Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee 25,000 Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. 3 40 "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee 25,000 Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 4 41 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market 5 42 Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" 6 43 means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the 7 44 Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. 8 45 (h) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 9 46 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10 47 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 11 48 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ Richard P. Johnson - ----------------------------- Richard P. Johnson 18816 Balmore Pines Lane Cornelius, NC 28031 12 49 THE J.H. HEAFNER COMPANY, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 75,000 This Agreement (the "Agreement") made this 24th day of May, 1999, between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), and P. Douglas Roberts (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of The J.H. Heafner Company, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 75,000 shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. 50 (A) Tier 1 Options. The Company hereby grants to the Optionee 25,000 Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule:
Options Exercisable with respect to On or After Cumulative Number of Shares ----------- ----------------------------------- May 24, 2000 6,250 May 24, 2001 12,500 May 24, 2002 18,750 May 24, 2003 25,000
Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the 2 51 Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee 25,000 Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. 3 52 "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee 25,000 Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 4 53 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market 5 54 Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" 6 55 means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the 7 56 Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. 8 57 (h) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 9 58 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10 59 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 11 60 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ----------------------------------------- Donald C. Roof President and Chief Executive Officer /s/ P. Douglas Roberts - ----------------------------- P. Douglas Roberts 4520 Golf Course Drive Westlake Village, CA 91362 12 EX-10.23 13 SECURITIES PURCHASE & STOCKHOLDERS' AGREEMENT 1 EXHIBIT 10.23 SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT, dated as of May 24, 1999, among THE J.H. HEAFNER COMPANY, INC., a North Carolina corporation (the "Company"), and each management stockholder named on the signature pages hereto (a "Purchaser" and, collectively, the "Purchasers"). Introduction The Company desires to issue and sell to each Purchaser, and each Purchaser desires to purchase from the Company, that number of shares (the "Purchased Shares") of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), set forth in Exhibit A attached hereto. Certain of the Purchasers are also parties to a Securities Purchase and Stockholders' Agreement, dated as of May 27, 1997 (the "1997 Purchase Agreement"), with the Company, pursuant to which such Purchasers (the "1997 Purchasers") purchased shares (the "1997 Shares") of Class A Common Stock in the Company and pursuant to which the Purchasers agreed to certain terms and conditions regarding their ownership of such shares of Class A Common Stock. The 1997 Purchasers and the Company desire that, with respect to the 1997 Shares, in the event of any conflict between the terms and conditions of this Agreement and the terms and conditions of the 1997 Purchase Agreement, the terms and conditions of this Agreement shall control. In addition to the terms of the issuance, sale and purchase of the Purchased Shares, the Company and the Purchasers desire to set forth herein certain matters regarding the continued ownership of shares of Class A Common Stock by the Purchasers (the 1997 Shares and the shares of Class A Common Stock now or hereafter acquired by the Purchasers are referred to herein as the "Shares"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Purchase and Sale SECTION 1.1. Purchase and Sale of Common Stock. The Company hereby issues and sells to each Purchaser, and each Purchaser hereby acquires from the Company, on the date hereof, that number of Purchased Shares set forth on Exhibit A hereto for a purchase price of $9.00 per Share (the "Purchase Price"), in cash, payable by wire transfer of immediately available funds to an account heretofore designated to the Purchaser by the Company, by certified bank check or money order payable to the Company, or pursuant to the terms of a promissory note in the form attached to this Agreement as Exhibit B. The Purchased Shares shall have the respective rights and preferences of other shares of Class A Common Stock as set forth in the Company's Amended and Restated Articles of Incorporation, a copy of which is attached to this Agreement as Exhibit C. 2 SECTION 1.2. Delivery of Certificates. The Company is hereby issuing and selling to each Purchaser such Purchaser's Purchased Shares by delivering to such Purchaser a duly executed certificate or certificates representing the Purchased Shares registered in the name of such Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of all security interests, liens, pledges, charges, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money ("Claims"), and the Purchaser is hereby purchasing the Shares for the Purchase Price applicable thereto. ARTICLE II Representations and Warranties of the Company The Company represents and warrants to the Purchasers as follows: SECTION 2.1. Organization Standing and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. SECTION 2.2. Authority; Binding Agreements. The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. SECTION 2.3. Conflicts; Consents. The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby and compliance by the Company with any of the provisions hereof do not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company is a party, or by which the Company or any of the Company's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of the Company's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Company's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby. SECTION 2.4. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 10,000,000 shares 2 3 consists of Class A Common Stock and 20,000,000 shares consists of Class B Common Stock, 7,000 shares of Series A Cumulative Redeemable Preferred Stock, par value $.01 per share, and 4,500 shares of Series B Cumulative Redeemable Preferred Stock, par value $.01 per share (collectively, with the Series A Cumulative Redeemable Preferred Stock, the "Preferred Stock"), and as of the date hereof, all of such securities are issued and outstanding except for 24,902,333 shares of Common Stock authorized but not issued, of which 6,303,000 shares consists of authorized but unissued Class A Common Stock and 18,599,333 shares consists of authorized but unissued Class B Common Stock. All such issued shares of capital stock of the Company have been duly authorized and are fully paid and non-assessable. Except for (i) 1,034,000 shares of Class A Common Stock reserved for issuance upon exercise of the warrants held by The 1818 Mezzanine Fund, L.P. (the "Warrants"), (ii) 522,500 shares of Class A Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (the "1997 Option Plan") and (iii) 1,050,000 shares of Class A Common Stock reserved for issuance under the Company's 1999 Stock Option Plan (the "1999 Option Plan", and collectively with the 1997 Option Plan, the "Option Plans"), there are no shares of capital stock of the Company reserved for issuance. Except for options granted under the Option Plans and for the Warrants, there are no options, warrants or other rights to purchase shares of capital stock or other securities of the Company or any of its subsidiaries, nor is the Company or any of its subsidiaries obligated in any manner to issue shares of its capital stock or other securities. ARTICLE III Representations and Warranties of the Purchasers Each of the Purchasers severally represents and warrants to the Company as follows: SECTION 3.1. Capacity; Binding Agreements. Such Purchaser has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Purchaser, and constitutes the valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms. SECTION 3.2. Conflicts; Consents. The execution and delivery by such Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by such Purchaser with any of the provisions hereof do not and will not (i) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which such Purchaser is a party, or by which such Purchaser or any of such Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to such Purchaser or any of such Purchaser's properties or assets or (iii) result in the creation or imposition of any Claim upon any of such Purchaser's properties or assets. 3 4 SECTION 3.3. Purchase for Own Account. (a) The Purchased Shares to be acquired by such Purchaser pursuant to this Agreement are being acquired for his own account and the Purchaser has no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state thereof. If such Purchaser should in the future decide to dispose of any of the Purchased Shares, such Purchaser understands and agrees that he may do so only in compliance with this Agreement and with the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If such Purchaser should decide to dispose of any Shares, such Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at such Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law in connection with such disposition to the effect that the proposed disposition of the Shares will not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. (b) Such Purchaser agrees to the imprinting of a legend on certificates representing all of the Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE IS FURTHER LIMITED BY THE PROVISIONS OF THE SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT AMONG THE J.H. HEAFNER COMPANY, INC. AND THE MANAGEMENT STOCKHOLDERS IDENTIFIED THEREIN, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICE OF THE COMPANY." SECTION 3.4. Nature of Purchaser. Such Purchaser acknowledges that the offer and sale of the Purchased Shares is intended to be exempt from registration under the Securities Act. Such Purchaser is (i) a director, president, vice president in charge of a principal business unit, division or function or other officer of the Company who performs a policy making function for the Company, (ii) an individual with a net worth, or joint net worth with such Purchaser's spouse, at the date hereof in excess of $1,000,000, (iii) an individual with an income in excess of $200,000 in each of the two most recent years or joint income with such Purchaser's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching 4 5 the same income level in the current year or (iv) an individual who has appointed a "purchaser representative" as described in Section 5.6 to act as such Purchaser's representative to assist such Purchaser in evaluating the purchase of the Purchased Shares. Such Purchaser has such knowledge and experience in financial and business matters so that he is capable of evaluating the relative merits and risks of purchasing the Purchased Shares. Such Purchaser has adequate means of providing for his current economic needs and possible personal contingencies, has no need for liquidity in his investment in the Company and is able financially to bear the risks of such investment. SECTION 3.5. Information. All documents, records and books pertaining to the investment in the Purchased Shares and requested by such Purchaser or his purchaser representative, if any, have been made available or delivered to such Purchaser. Each Purchaser has been given full access to all material information concerning the condition, business, operations, proposed operations and prospects of Purchaser, including (i) the Annual Report on Form 10-K most recently filed with the SEC by the Company, (ii) all Quarterly Reports on Form 10-Q filed with the SEC by the Company since the date of such Annual Report and (iii) all Reports on Form 8-K filed with the SEC by the Company since the date of such Annual Report (receipt of copies of each of which is hereby acknowledged by each Purchaser). Such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and to ask questions of and receive answers from the Company concerning such matters. All such questions, if any, have been answered to the full satisfaction of such Purchaser and his purchaser representative, if any, and such Purchaser has received all information about the Company which such Purchaser or his purchaser representative, if any, desires, including information which such Purchaser or purchaser representative deems necessary to verify the accuracy of information the Company has furnished to such Purchaser. ARTICLE IV Transferability of Shares SECTION 4.1. Stock Transfer Restrictions. None of the Purchasers shall sell, assign, pledge, give away or otherwise transfer (a "Transfer") any Shares except in accordance with the procedures set forth in this Agreement. Any attempted Transfer of Shares not permitted by this Agreement shall be null and void, and the Company shall not in any way give effect to any such Transfer. Any proposed Transfer of Shares shall be null and void, and the Company shall not in any way give effect to any such Transfer, unless the transferee of such Shares who is not, immediately prior to such Transfer, a Purchaser shall agree in writing to be bound by and comply with the provisions of this Agreement SECTION 4.2. Termination of Employment. (a) Termination by Company for Cause or by Purchaser without Good Reason. If the Company shall terminate a Purchaser's employment for "Cause" or a Purchaser shall terminate his employment with the Company other than for "Good Reason" (as such terms are defined below), the Company shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to purchase all of such Purchaser's Shares at the Repurchase Price (as defined below) applicable 5 6 thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from making such repurchase, in whole or in part, the Company shall have the right to purchase such Shares until the expiration of 45 days after such first anniversary. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the first anniversary of the date of the termination triggering the right to purchase, and for a period of 60 days following the first anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(a). For purposes of this Section 4.2, "Company" shall include any subsidiary of the Company with respect to a Purchaser employed directly by such subsidiary. For purposes of this Agreement, "Cause", with respect to any Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and such Purchaser or, in the absence of such an agreement, shall mean (i) such Purchaser's conviction of, or plea of guilty or nolo contendere to a felony, (ii) such Purchaser's gross negligence in the performance of his employment services to the Company, which is not corrected within 15 business days after written notice, (iii) such Purchaser's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of such services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) such Purchaser's other material breach of his obligations as an employee or officer of the Company which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of the directors of the Company. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's financial statements for the four full fiscal quarters immediately preceding the date on which such termination shall have occurred. Adjustments for unusual items will be made in the reasonable discretion of the Board of Directors of the Company, after consultation with the Chief Executive Officer of the Company. "Good Reason", with respect to any Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and such Purchaser or, in the absence of such an agreement, shall mean any of the following, unless the basis for such Good Reason is cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Company receives written notice specifying the basis of such Good Reason: (i) 6 7 the failure of the Company to pay any undisputed amount due to such Purchaser in connection with his employment by the Company or a substantial diminution in benefits provided pursuant to such employment other than a reduction in benefits or salary applicable to all of the Company's bonus eligible employees, (ii) a substantial diminution in the status, position and responsibilities of such Purchaser that is not instituted to all employees of the Company or (iii) the Company requiring the Purchaser to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which such Purchaser is currently assigned; provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Purchaser's employment services. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Company is approved by the representative of management on the board of the Company, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. "Repurchase Price" means, with respect to each Share owned by any Purchaser, (a) in the event of any termination, excluding a termination described in clause (b) below, the greater of (i) the Purchase Price applicable thereto, and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of such Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants), (b) in the event of a termination (i) by the Company for Cause or (ii) within 24 months of the date hereof, by a Purchaser other than for Good Reason, the Purchase Price applicable thereto, and (c) notwithstanding the terms of clauses (a) and (b) above, in the event of a termination by the Company for a Specified Cause Event or in the event that following termination for any reason the Purchaser violates the confidentiality or non-compete provisions of any executive severance, employment or non-competition agreement with the Company, the lesser of (i) the Purchase Price applicable thereto and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of such Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants). "Net Equity Value" means the sum of (x) 6 times the Company's EBITDA plus (y) the aggregate exercise price of all in-the-money options granted under the Option Plans and all in-the-money Warrants, less (z) the aggregate amount of principal of and interest on (in the case of debt) and liquidation value of (in the case of capital stock) all debt for borrowed money and Preferred Stock (or any replacements therefor) owed or outstanding as of the date of such termination. 7 8 "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Purchaser that is detrimental to the Company or (2) the Purchaser's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Purchaser's services for the Company. (b) Termination by Company other than for Cause or by Purchaser with Good Reason. If the Company shall terminate a Purchaser's employment other than for Cause or a Purchaser shall terminate his employment with the Company for Good Reason, such Purchaser shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to require the Company to purchase all of such Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from purchasing such Shares to the extent so required by a Purchaser, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the option is not exercised, the Company shall have the right, commencing on the first anniversary and continuing until the second anniversary thereof, to purchase all of such Purchaser's Shares at the Repurchase Price applicable thereto. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the second anniversary of the date of termination triggering the right to purchase, and for a period of 60 days following the second anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(b). (c) Termination or Repurchase upon Death. If a Purchaser's employment with the Company shall terminate due to such Purchaser's death, or, if within one year after any other termination of employment with the Company, a Purchaser shall die, the Company shall have the right to purchase, and such Purchaser's descendants shall have the right to require the Company to purchase, all of such Purchaser's Shares at the Repurchase Price applicable thereto, commencing on the date of death of such Purchaser and continuing until the first anniversary thereof; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note, or other agreement from purchasing such Shares to the extent so required by a Purchaser's descendants, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the first anniversary of the date of the death triggering the right to purchase, and for a period of 60 days following the first anniversary of the date of death the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(c). 8 9 (d) Delivery of Payment. The Company or the Principal Shareholders or the Purchaser, as the case may be, shall notify the other of such party's exercise of its rights under this Section 4.2 by giving written notice of such exercise at least 10 and not more than 30 days before the date established by such electing party for such purchase or sale, as the case may be. On the date so designated, the Company or the Principal Shareholders shall deliver the appropriate Repurchase Price to such Purchaser by certified check or money order and such Purchaser shall deliver the certificates evidencing the Shares being purchased, duly endorsed for transfer as the Company or the Principal Shareholders may direct, and free and clear of any Claim. If any Shares evidenced by a certificate so surrendered are not being purchased pursuant to the terms hereof, the Company shall promptly issue to such Purchaser a replacement certificate evidencing the Shares not so purchased. SECTION 4.3. Transfers Among Management or to Descendants. Any Purchaser may, so long as any right has not been exercised with respect to such Shares pursuant to Section 4.2, Transfer any Shares to another Purchaser or other management employee of the Company or one of its subsidiaries who has acquired or does acquire shares of Common Stock pursuant to a purchase agreement containing transfer and other restrictions substantially similar to, and no less favorable to the Company than, those contained herein or pursuant to an exercise of any option under the Option Plans (a "Management Employee"). Any Purchaser may Transfer all or any portion of such Purchaser's Shares to such Purchaser's spouse or descendants or a trust for the benefit of the Purchaser or his or her spouse or descendants or to a partnership or corporation controlled by the Purchaser or his or her spouse or descendants. Such Transfers shall be effective only if the transferee agrees to be bound by the terms of this Agreement. SECTION 4.4. Right of First Offer. With respect to any Shares that a Purchaser wishes to Transfer, other than pursuant to Section 4.3 hereof, the following provisions shall apply. (a) If a Purchaser desires to Transfer any such Shares, such Purchaser shall deliver to the Company, the Principal Shareholders, and the other Purchasers and Management Employees a written notice, which shall be irrevocable for a period of 60 days after delivery, offering all of such Shares to the Company, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, the Principal Shareholders, and the other Purchasers and Management Employees at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase all (but not part) of such Shares at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to such transferring Purchaser within such 30-day period. (b) If the Company fails to accept such offer, then upon the earlier of the expiration of such 30-day period or upon the receipt of a written rejection of such offer from the Company, the Principal Shareholders shall have the second right and option, until 15 days after the expiration of the 30-day period, to purchase all (but not part) of such Shares offered at the 9 10 purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the transferring Purchaser within the 15-day period. (c) If the Principal Shareholders fail to accept such offer, then upon the earlier of the expiration of such 15-day period or upon the receipt of a written rejection of such offer from the Principal Shareholders, the other Purchasers and Management Employees (as a group) shall have the third right and option, until 15 days after the expiration of the 15-day period, to purchase on a pro rata basis with all other Purchasers and Management Employees so electing all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the transferring Purchaser within the second 15-day period. (d) If the Company, Principal Shareholders, and the other Purchasers and Management Employees do not elect to purchase the Shares so offered, then the transferring Purchaser may Transfer all (but not part) of such Shares at a price not less than the price, and on terms not more favorable to the transferee of such Shares than the terms, stated in the original written notice of intention to sell, at any time within 15 days after the expiration of the period in which the other Purchasers and Management Employees could elect to purchase such Shares. If such Shares are not sold by the transferring Purchaser during such 15-day period, the right of the transferring Purchaser to sell such Shares shall expire and the rights and obligations set forth in this Section 4.4 shall be reinstated with respect to such Shares. (e) The rights of the Principal Shareholders under this Section 4.4 shall terminate if at the time of the proposed Transfer the Principal Shareholders do not own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company. SECTION 4.5. Lock-up Agreements. If the Company proposes to register under the Securities Act any of its Common Stock for sale to the public, each Purchaser shall enter into such agreement (a "Lock-up Agreement") as may be requested by the underwriters of such registered offering, pursuant to which Lock-up Agreement such Purchaser shall refrain from selling any Shares during the period of distribution of Common Stock by such underwriters and for a period of up to 180 days following the effective date of such registration. SECTION 4.6. Take-Along. If Charlesbank Capital Partners, LLC agrees to transfer all of the shares of Common Stock which it owns and which are owned by funds that it manages to any person or entity other than an affiliate of the Principal Shareholders, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then Charlesbank Capital Partners, LLC shall have the right to require the Purchasers to sell their Shares to such person or entity upon the same terms and subject to the same conditions as the Principal Shareholders have agreed to sell their shares. The Principal Shareholders shall provide a written notice of such sale not less than 30 days prior to the closing of such sale. 10 11 ARTICLE V Miscellaneous SECTION 5.1. Option Shares; Dividends; Reclassifications. If, subsequent to the date hereof, any shares of Common Stock are issued to a Purchaser pursuant to the exercise of any option (including options granted under the Option Plans), warrant or other security convertible into or exercisable for shares of Common Stock, or any shares or other securities are issued with respect to, or in exchange for, any of the Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares of Common Stock and such other shares or securities shall be deemed to be Shares for all purposes of this Agreement. SECTION 5.2. Survival of Provisions; Termination. (a) All of the representations, warranties and covenants made herein and each of the provisions of this Agreement shall, except as otherwise expressly set forth herein, survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchasers, the acceptance of the Purchased Shares and payment therefor or the termination of this Agreement. (b) This Agreement shall terminate upon the earliest to occur of the (i) issuance by the Company or sale by the shareholders of the Company to the public on a Form S-1 under the Securities Act of shares of Common Stock representing at least 40% of the Common Stock outstanding after such issuance or sale, (ii) tenth anniversary of the date of this Agreement and (iii) written consent of all of the Purchasers, the Management Employees and the Company. Upon such a termination, all rights and obligations under this Agreement shall terminate, except the Purchasers' obligations under Section 4.5 with respect to a Lock-up Agreement entered into in connection with a public offering referred to in the foregoing clause (i), if applicable. SECTION 5.3. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 5.3: (a) if to the Company: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Attention: J. Michael Gaither Telecopier No.: (704) 423-9469 with a copy to: Howard, Smith & Levin LLP 11 12 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 (b) if to a Purchaser, at the address set forth opposite such Purchaser's name on the signature pages hereof; and (c) if to the Principal Shareholders: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Telecopier: (617) 619-5402 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 5.4. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The provisions of Article IV also shall inure to the benefit of and be enforceable by the Management Employees and the Principal Shareholders. A Purchaser may assign its rights hereunder only in conjunction with, and to a transferee of, a Transfer permitted pursuant to the terms of Article IV, and any such assignee shall be deemed to be a "Purchaser" for purposes of this Agreement. The Company may not assign any of its rights or obligations hereunder without the consent of Purchasers holding a majority of the Shares outstanding; provided that any successor by merger or consolidation of the Company or similar transaction shall be bound by and benefit from the terms hereof as if named as the Company hereunder. SECTION 5.5. Amendment and Waiver. No failure or delay on the part of the Company or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchasers from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit 12 13 thereof; provided that notice of any such waiver shall be given to each party hereto as set forth herein. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and Purchasers holding at least a majority of the Shares issued and outstanding and with respect to any amendment, modification or termination of the rights or obligations of the Principal Shareholders under Article IV, the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC); provided that the provisions of Section 5.2(b) and of this sentence shall not be amended or waived without the written consent of all of the Purchasers and the Company. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchasers from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchasers in any case shall entitle the Company or the Purchasers to any other or further notice or demand in similar or other circumstances. SECTION 5.6. Purchaser Representative. If the Purchaser has been represented by a purchaser representative in connection with his investment in the Shares, in evaluating the Purchaser's investment in the Shares the Purchaser has been advised by such purchaser representative as to the merits and risks of the investment in general and the suitability of the investment for the Purchaser in particular, and the purchaser representative has disclosed in writing any material relationship, actual or contemplated, between the purchaser representative and any entity connected to the transactions contemplated hereby, or affiliate of any such entity, and any compensation received or to be received as a result of such relationship. SECTION 5.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 5.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 5.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 5.10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 13 14 SECTION 5.11. Entire Agreement; 1997 Purchase Agreement. This Agreement, together with the exhibits hereto and the terms of the Common Stock, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits hereto and the Common Stock, supersede all prior agreements and understandings among the parties with respect to such subject matter hereof. In addition, the 1997 Purchasers and the Company agree that, with respect to the 1997 Shares, in the event of any conflict between the terms and conditions of this Agreement and the terms and conditions of the 1997 Purchase Agreement, the terms and conditions of this Agreement shall control. SECTION 5.12. Expenses. Each party to this Agreement shall each bear its or his own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of lawyers, financial advisors and accountants. SECTION 5.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section or Exhibit is to the Article, Section or Exhibit of this Agreement. 14 15 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase and Stockholders' Agreement to be executed and delivered as of the date first above written. THE J.H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ---------------------------------------- Donald C. Roof President and Chief Executive Officer Address for Notices: /s/ Daniel K. Brown 17915 Jetton Road ---------------------------------------- Cornelius, NC 28031 Daniel K. Brown Address for Notices: /s/ J. Michael Gaither 315 West 7th Street ---------------------------------------- Newton, NC 28658 J. Michael Gaither Address for Notices: /s/ Richard P. Johnson 18816 Balmore Pines Lane ---------------------------------------- Cornelius, NC 28031 Richard P. Johnson Address for Notices: /s/ P. Douglas Roberts 4520 Golf Course Drive ---------------------------------------- Westlake Village, CA 91362 P. Douglas Roberts Address for Notices: /s/ Donald C. Roof 6705 Seton House Lane ---------------------------------------- Charlotte, NC 28277 Donald C. Roof 15 16 Exhibit A to Securities Purchase and Stockholders' Agreement
Purchase Price Shareholder Number of Purchased Shares Cash Notes Total ----------- -------------------------- ---- ----- ----- Daniel K. Brown 25,000 $ 25,000 $200,000 $225,000 J. Michael Gaither 25,000 $ 25,000 $200,000 $225,000 Richard P. Johnson 25,000 $ 25,000 $200,000 $225,000 P. Douglas Roberts 25,000 $ 25,000 $200,000 $225,000 Donald C. Roof 50,000 $450,000 0 $450,000
17 Exhibit B to Securities Purchase and Stockholders' Agreement FORM OF FULL RECOURSE PROMISSORY NOTE $[ ] May [ ], 1999 For value received, [ ] (the "Payor"), promises to pay to the order of The J.H. Heafner Company, Inc., a North Carolina corporation ("Payee"), the aggregate principal sum of $[ ] (the "Principal Sum"), subject to the terms of, and payable as set forth in, Section 1 hereof, and to pay interest from the date hereof as provided herein. Interest shall be calculated on the basis of a 365-day year and shall be payable in arrears on the last day of April of each year, commencing April 30, 2000, on the unpaid balance of the principal amount of the Note, at the rate per annum equal to the Borrowing Rate. The "Borrowing Rate" means, for any period, a fluctuating interest rate per annum equal for each 30-day period during such period to the 30-day LIBOR rate published by the Wall Street Journal on the first business day of each such 30-day period during the period plus 1.75%. The Borrowing Rate will be calculated for each period ending on (but not including) an interest payment date under this Note. The first period of calculation of the Borrowing Rate shall commence on the date hereof and each subsequent period shall commence on the immediately preceding interest payment date under this Note. Unless sooner paid, all unpaid principal of and interest on this Note shall be due and payable on May [ ], 2006. Section 1 - Payments of Principal and Interest Subject to the Payor's right to prepay this Note at any time, the Payor shall make annual principal payments on the last day of each April beginning April 30, 2002 equal to the greater of (x) 20% of the original Principal Sum of this Note and (y) 50% of the Payor's annual after-tax bonus on account of the preceding fiscal year under the Executive Bonus Plan or such other annual bonus plan of the Payee adopted in lieu of the Executive Bonus Plan. In the event of the termination of employment of Payor for any reason and the exercise by Payee (or others) of the right to repurchase the Pledged Securities (as defined below) pursuant to the Securities Purchase and Stockholders' Agreement, dated May [ ], 1999, among the Payor, the Payee and others, the Payor shall promptly after such repurchase repay all then outstanding principal and interest under this Note. The Payee may setoff against any amounts owed to the Payor in connection with the repurchase of the Pledged Securities, amounts outstanding under this Note. Upon payment in full of all outstanding principal of and interest on this Note, the Payor's obligations in respect of this Note shall terminate, the Collateral (as 18 defined below) will immediately be released from the Payee's security interest under Section 4, and the Payee shall deliver to the Payor the Pledged Securities and all stock powers and other documents and instruments delivered to Payee in connection with the grant of a security interest in the Collateral. Payments of principal of and interest on this Note shall be made to Payee in lawful money of the United States of America by check payable to the order of The J.H. Heafner Company, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina, 28217, or such other place or places within the United States as may be specified by Payee in a written notice to the Payor at least 10 business days before any payment date. The Payor shall have the right at any time and from time to time to prepay this Note in whole or in part, together with interest on the amount prepaid to the date of prepayment, without penalty or premium. Section 2 - Events of Default (a) The following shall constitute an "Event of Default" under this Note. (i) Default shall be made in the payment of the principal of or interest on this Note, when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration or otherwise, and such default shall continue unremedied for 45 days after notice thereof shall have been given by Payee to Payor; (ii) Payor shall have filed or have filed against Payor a petition in bankruptcy or for similar relief pursuant to present or future federal bankruptcy, insolvency or similar law or the law of any other jurisdiction or consented to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for all or any substantial part of Payor's property: or (iii) Payor shall have made a general assignment for the benefit of creditors or shall admit in writing Payor's inability to pay Payor's debts generally as they become due. (b) In case of the happening of an Event of Default, Payee may, by written notice to Payor, declare due and payable this Note, whereupon the same shall be due an payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. In the case of the happening of an Event of Default under Section 2(a)(ii) or (iii), this Note shall automatically become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. 19 Section 3 - Set Off The Payee shall have the right to setoff against any amount of principal due and payable hereunder as provided in the first paragraph of Section 1 hereof, amounts owed to Payor under the Executive Bonus Plan or any other annual bonus plan of the Payee adopted in lieu of the Executive Bonus Plan. Section 4 - Grant of Security Interest (a) As security for the full and punctual payment of the Principal Sum and accrued interest on this Note when due and payable (whether upon stated maturity, by acceleration or otherwise), the Payor hereby grants and pledges a continuing lien on and security interest in, and, as a part of such grant and pledge, hereby pledges, assigns, transfers and conveys to the Payee as collateral security, the securities to be acquired from the Payee in exchange for this Note (the "Pledged Securities") and the proceeds of any and all dividends and other distributions made in respect of the Pledged Securities (collectively, the "Collateral"). (b) The Payor will defend the Payee's right, title and interest in and to the Collateral against the claims and demands of all other persons. (c) The Payor hereby delivers to the Payee the certificates representing the Pledged Securities, together with appropriate undated stock powers duly executed in blank for the Pledged Securities and agrees that it will deliver, if necessary or appropriate, additional updated stock powers duly executed in blank for the Collateral from time to time hereafter. (d) So long as there has not been an Event of Default, the Payor shall be entitled to vote the Pledged Securities and to give all consents, waivers and ratifications in respect of the Pledged Securities. Upon the occurrence of an Event of Default, all voting and other consensual rights of the Payor in the Pledged Securities shall cease and may be exercised by the Payee. (e) Upon the occurrence of an Event of Default, the Payee shall have and may exercise all rights and remedies afforded to a secured party hereunder and under applicable law, and shall have the right to retain the Collateral in partial or full satisfaction of the Payor's obligations under this Note, with the Payor remaining liable for any deficiency. (f) The Payor agrees that at any time and from time to time upon the written request of the Payee, the Payor will execute and deliver such further documents and do or cause to be done such further acts and things as the Payee may reasonably request in order to effect the grant of the security interest hereunder. 20 Section 5 - Governing Law THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PAYOR AND PAYEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. IN WITNESS WHEREOF, the Payor has executed this Note as of the day and year first above written. ----------------------------------- [INSERT NAME OF PAYOR] EX-10.27 14 LETTER AGREEMENT/5-2-1999/GAITHER 1 EXHIBIT 10.27 May 20, 1999 William H. Gaither 234 Webster Brewlands Iron Station, NC 28080 Re: Consulting Arrangement Dear Bill: We are pleased to confirm the following arrangements concerning your consulting relationship with The J. H. Heafner Company, Inc. (the "Company") from and after the closing of the transactions contemplated by the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of April 21, 1999, among the Company, Charlesbank Equity Fund IV, Limited Partnership, certain stockholders of the Company and the other individuals or entities who subsequently join in the Stock Purchase Agreement: 1. Consulting Services. Effective upon the closing (the "Closing") under the Stock Purchase Agreement and for three years thereafter (the "Consulting Period"), you will be retained by the Company as Chairman of its Board of Directors and will perform such services as are consistent with such position and other consulting services as the Board of Directors may from time to time reasonably request (the "Services"). The Board of Directors shall cooperate with you in scheduling mutually acceptable times for you to provide such Services. Without limiting the foregoing, you will be responsible for attending (in person or by telephone) all regular and special meetings of the Board of Directors and participating in all other official Board actions. Either you or the Company may terminate your consultancy with the Company at any time for any reason. 2. Compensation. The Company will pay you a consulting fee of $125,000 per year during the Consulting Period in exchange for your performance of the Services. During the Consulting Period, the Company will continue your employment benefits coverages on the same basis as the coverages you are currently receiving or provide you comparable coverages at no additional after-tax cost to you, or if the Company changes such coverages for its most senior officers, then on the same basis as the Company is then providing such coverages to such officers. The Company will reimburse you for reasonable expenses incurred in connection with your performance of the Services during the Consulting Period. Your fee will be payable to you (or your estate or personal representative) in accordance with the Company's normal payroll practices during the Consulting Period through and including the effective date of termination of your consulting relationship with the Company (including by reason of your death or permanent disability). In addition, if your consulting relationship with the Company is terminated by the Company without Cause (as defined), you (or your estate or personal representative) will be entitled to continue to receive your salary for the remainder of the Consulting Period in accordance with the Company's normal payroll practices. The Company shall be entitled to 2 William H. Gaither -2- set off or apply all or a portion of any amounts payable to you under this Agreement against any Losses (as defined in the Stock Purchase Agreement) incurred or suffered by the Company arising from, by reason of or in connection with your violation of the covenants contained in Section 3.6(c) of the Stock Purchase Agreement or paragraph 3 of this Agreement. "Cause" shall mean (i) your conviction of or plea of guilty or nolo contendere to a felony or (ii) your knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company which is not corrected within 15 business days after written notice, or (iii) your breach of any of the covenants contained in paragraph 3 of this Agreement or Section 3.6(c) of the Stock Purchase Agreement to the material detriment of the Company. 3. Confidentiality. (a) Non-Disclosure Obligation. Except as provided in this paragraph 3, you shall not disclose any Confidential Information of the Company or any of its affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, 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 Company has received assurances that the Confidential Information shall be kept confidential), nor shall you make use of any such Confidential Information for your own purposes or for the benefit of any person, firm, corporation or other entity, except the Company. As used in this Section, the term "Confidential Information" means all information which is or becomes known to you 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 Company's 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 you or by a person who received such information from you in violation of this Agreement). (b) Compulsory Disclosures. If you are requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, you shall provide the Company with prompt notice of any such request or requirement so that the Company may seek an appropriate protective order or waiver of your compliance with the provisions of this paragraph 3. You will not oppose any reasonable action by, and will cooperate with, the Company 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, you are, in the opinion of your counsel, compelled by law to disclose a portion of the Confidential Information, you may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises you that you are 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 3 William H. Gaither -3- Information. During the Consulting Period, and for matters arising from events or circumstances occurring during the Consulting Period, the Company will provide for the defense of matters arising under this provision. 4. Other Agreements. From and after the Closing, this Agreement and the Stock Purchase Agreement (including without limitation Sections 3.6 and 3.11 thereof) will contain the entire agreement among the parties with respect to your Services to the Company and supersede all other or prior written or oral agreements or understandings among the parties with respect to your consulting relationship with the Company. Upon the Closing, the Employment Agreement, dated as of May 7, 1997, between you and the Company shall be terminated and have no further force and effect. 5. Miscellaneous Provisions. This Agreement is personal in its nature and shall not be assignable or transferable without the prior written consent of the other; provided, that the Company may assign this Agreement and its rights and obligations hereunder to any transferee of all or substantially all of the Company's business (whether by merger, consolidation, sale of stock or assets or otherwise) without your consent. This Agreement shall be governed by and construed in accordance with the internal laws of the State of North Carolina. If the foregoing is acceptable to you, please evidence your acceptance and agreement by signing this letter in the space provided below. Very truly yours, THE J. H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither -------------------------------------- J. Michael Gaither Senior Vice President, General Counsel and Secretary Accepted and agreed on May 20, 1999: /s/ William H. Gaither - ------------------------------- William H. Gaither EX-10.28 15 EXECUTIVE SEVERANCE AGREEMENTS 1 EXHIBIT 10.28 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 24, 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 Amended and Restated Employment Agreement, dated as of January 1, 1999 (the "Existing Employment Agreement"), and desire to amend and restate, and have this Agreement supersede, the Existing 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 President and Chief Executive 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 $400,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee the following amount: (x) with respect to calendar year 1999, an annual bonus payment at the "Minimum," "Plan" or "Maximum" percentage payment 2 levels, as the case may be, in accordance with the terms of the Employer's 1999 Executive Bonus Plan and (y) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 0 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan or other incentive plans (excluding the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant to the Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Purchase Agreement"), and the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Purchase Agreement", and collectively, with the 1997 Purchase Agreement, the "Purchase Agreements"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Stock Option Agreement"), the Stock Option Agreement, dated as of September 26, 1998, between the Employer and the Employee (the "1998 Stock Option Agreement") and the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement" and collectively, with the 1997 Stock Option Agreement and the 1998 Stock Option Agreement, the "Stock Option Agreements"). The stock options granted to the Employee under the 1997 Stock Option Agreement and the 1998 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The Purchase Agreements and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. 2 3 (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 1 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of two years after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the 3 4 Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) two. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is 4 5 entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together 5 6 with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the 6 7 Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; 7 8 (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. 8 9 (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Employer, its subsidiaries, officers or employees, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Employee make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Employer. As used in this Section, the term "Confidential Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the 9 10 Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such 10 11 provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the 11 12 Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (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: 12 13 Heafner Tire Group, 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 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: Donald C. Roof 6705 Seton House Lane Charlotte, NC 28277 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 13 14 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 Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 14 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. THE J.H. HEAFNER COMPANY, INC. By: /s/ J. Michael Gaither ---------------------------------------------- J. Michael Gaither Executive Vice President, General Counsel and Secretary /s/ Donald C. Roof ------------------------------------------------- Donald C. Roof 15 16 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 24, 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 Amended and Restated Employment Agreement, dated as of January 1, 1999 (the "Existing Employment Agreement"), and desire to amend and restate, and have this Agreement supersede, the Existing 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 Executive Vice President - Administration 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 $246,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to the greater of (x) with respect to calendar years 1999, 2000 and 2001, annual fixed bonus payments (the "Fixed Bonus") equal to 17 15% of the Employee's Base Salary for such year, and (y) (i) with respect to calendar year 1999, an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's 1999 Executive Bonus Plan, or (ii) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 1 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder and the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant to the Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Purchase Agreement"), and the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Purchase Agreement", and collectively, with the 1997 Purchase Agreement, the "Purchase Agreements"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Stock Option Agreement"), the Stock Option Agreement, dated as of September 26, 1998, between the Employer and the Employee (the "1998 Stock Option Agreement") and the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement" and collectively, with the 1997 Stock Option Agreement and the 1998 Stock Option Agreement, the "Stock Option Agreements"). The stock options granted to the Employee under the 1997 Stock Option Agreement and the 1998 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The Purchase Agreements and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. 2 18 (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 2 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of 18 months after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the 3 19 Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary, Fixed Bonus or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. Upon the termination of the Employment Period at any time during calendar year 1999, 2000, or 2001 for any reason other than the reasons set forth in Section 3(e)(ii) or 3(e)(iii) below, the Employer shall pay to the Employee within five business days after such termination, a lump-sum amount equal to the Fixed Bonus earned to the date of termination. Any Fixed Bonus payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date such bonuses are otherwise declared or payable. 4 20 (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) 1.5. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the 5 21 Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. 6 22 SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: 7 23 (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made 8 24 ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its 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 9 25 Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. 10 26 SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. 11 27 (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, 12 28 amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 13 29 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: J. Michael Gaither 315 West 7th Street Newton, NC 28658 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 Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN 14 30 MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 15 31 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/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ J. Michael Gaither --------------------------------------------- J. Michael Gaither 16 32 EXECUTIVE SEVERANCE AGREEMENT, dated as of May, 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 Amended and Restated Employment Agreement, dated as of January 1, 1999 (the "Existing Employment Agreement"), and desire to amend and restate, and have this Agreement supersede, the Existing 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 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 $210,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to the greater of (x) with respect to calendar years 1999, 2000 and 2001, annual fixed bonus payments (the "Fixed Bonus") equal to 33 15% of the Employee's Base Salary for such year, and (y) (i) with respect to calendar year 1999, an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's 1999 Executive Bonus Plan, or (ii) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 1 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder and the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant to the Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Purchase Agreement"), and the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Purchase Agreement", and collectively, with the 1997 Purchase Agreement, the "Purchase Agreements"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Stock Option Agreement"), the Stock Option Agreement, dated as of September 26, 1998, between the Employer and the Employee (the "1998 Stock Option Agreement") and the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement" and collectively, with the 1997 Stock Option Agreement and the 1998 Stock Option Agreement, the "Stock Option Agreements"). The stock options granted to the Employee under the 1997 Stock Option Agreement and the 1998 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The Purchase Agreements and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. 2 34 (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 2 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of 18 months after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the 3 35 Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary, Fixed Bonus or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. Upon the termination of the Employment Period at any time during calendar year 1999, 2000, or 2001 for any reason other than the reasons set forth in Section 3(e)(ii) or 3(e)(iii) below, the Employer shall pay to the Employee within five business days after such termination, a lump-sum amount equal to the Fixed Bonus earned to the date of termination. Any Fixed Bonus payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date such bonuses are otherwise declared or payable. 4 36 (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) 1.5. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the 5 37 Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. 6 38 SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: 7 39 (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made 8 40 ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its 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 9 41 Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. 10 42 SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. 11 43 (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, 12 44 amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 13 45 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: Daniel K. Brown 17915 Jetton Road Cornelius, NC 28031 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 Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN 14 46 MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 15 47 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/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ Daniel K. Brown --------------------------------------------- Daniel K. Brown 16 48 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 24, 1999 (the "Agreement"), between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and Richard P. Johnson (the "Employee"). The Employer and the Employee are parties to an Employment Agreement, dated as of May 20, 1998 (the "Existing Employment Agreement"), and desire to amend and restate, and have this Agreement supersede, the Existing 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 President - Heafner/Itco 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 $275,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to the greater of (x) with respect to calendar years 1999, 2000 and 2001, annual fixed bonus payments (the "Fixed Bonus") equal to 15% of the Employee's Base Salary for such year, and (y) (i) with respect to calendar year 1999, 49 an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's 1999 Executive Bonus Plan, or (ii) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 1 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder and the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "Purchase Agreement"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of September 26, 1998, between the Employer and the Employee (the "1998 Stock Option Agreement") and the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement" and collectively, with the 1998 Stock Option Agreement, the "Stock Option Agreements"). The stock options granted to the Employee under the 1998 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The Purchase Agreement and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to 2 50 maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 2 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of 18 months after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time 3 51 (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 reduction in Base Salary, Fixed Bonus or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. Upon the termination of the Employment Period at any time during calendar year 1999, 2000, or 2001 for any reason other than the reasons set forth in Section 3(e)(ii) or 3(e)(iii) below, the Employer shall pay to the Employee within five business days after such termination, a lump-sum amount equal to the Fixed Bonus earned to the date of termination. Any Fixed Bonus payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date such bonuses are otherwise declared or payable. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date 4 52 of termination and the Severance Bonus Amount, multiplied by (y) 1.5. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of 5 53 determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as 6 54 amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, 7 55 accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment 8 56 that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Employer, its subsidiaries, officers or employees, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Employee make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Employer. As used in this Section, the term "Confidential Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver 9 57 hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if 10 58 any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. 11 59 (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (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 12 60 or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: Richard P. Johnson 18816 Balmore Pines Lane Cornelius, NC 28031 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. 13 61 (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 Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 14 62 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/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ Richard P. Johnson ------------------------------------------ Richard P. Johnson 15 63 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 24, 1999 (the "Agreement"), between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and P. Douglas Roberts (the "Employee"). The Employer and the Employee are parties to an Employment Agreement, dated as of November 15, 1998 (the "Existing Employment Agreement"), and desire to amend and restate, and have this Agreement supersede, the Existing 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 President - Winston of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $230,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to the greater of (x) with respect to calendar years 1999, 2000 and 2001, annual fixed bonus payments (the "Fixed Bonus") equal to 15% of the Employee's Base Salary for such year, and (y) (i) with respect to calendar year 1999, 64 an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's 1999 Executive Bonus Plan, or (ii) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 1 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder and the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Purchase Agreement"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of September 26, 1998, between the Employer and the Employee (the "1998 Stock Option Agreement") and the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement" and collectively, with the 1998 Stock Option Agreement, the "Stock Option Agreements"). The stock options granted to the Employee under the 1998 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The 1999 Purchase Agreement and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to 2 65 maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 2 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of 18 months after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time 3 66 (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 reduction in Base Salary, Fixed Bonus or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. Upon the termination of the Employment Period at any time during calendar year 1999, 2000, or 2001 for any reason other than the reasons set forth in Section 3(e)(ii) or 3(e)(iii) below, the Employer shall pay to the Employee within five business days after such termination, a lump-sum amount equal to the Fixed Bonus earned to the date of termination. Any Fixed Bonus payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date such bonuses are otherwise declared or payable. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date 4 67 of termination and the Severance Bonus Amount, multiplied by (y) 1.5. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of 5 68 determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as 6 69 amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, 7 70 accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment 8 71 that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Employer, its subsidiaries, officers or employees, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Employee make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Employer. As used in this Section, the term "Confidential Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver 9 72 hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if 10 73 any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. 11 74 (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (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 12 75 or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: P. Douglas Roberts 4520 Golf Course Drive Westlake Village, CA 91362 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. 13 76 (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 Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 14 77 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/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ P. Douglas Roberts --------------------------------------------- P. Douglas Roberts 15 78 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 24, 1999 (the "Agreement"), between The J.H. Heafner Company, Inc., a North Carolina corporation (the "Employer"), and J. Lewis McKnight, Jr. (the "Employee"). In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as Vice President - Corporate Controller 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 $100,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee the following amount: (x) with respect to calendar year 1999, an annual bonus payment at the "Minimum," "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms of the Employer's 1999 Executive Bonus Plan and (y) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in the 1999 Executive Bonus Plan as a Level 2 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan or other incentive plans (excluding the 1999 Executive Bonus Plan as in effect and applied to the 79 Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant to the Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Purchase Agreement") and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of May 28, 1997, between the Employer and the Employee (the "1997 Stock Option Agreement"). The stock options granted to the Employee under the 1997 Stock Option Agreement were granted pursuant to the Employer's 1997 Stock Option Plan and are fully vested and exercisable as of the date hereof. The 1997 Purchase Agreement and the 1997 Stock Option Agreement are referred to in this Agreement as the "Other Agreements." Except as otherwise provided in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 3 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of one year after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of two years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. 2 80 (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or 3 81 reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) one. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by two, and (B) the Severance Bonus Amount multiplied by two. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the 4 82 first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period 5 83 from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense 6 84 incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other 7 85 tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its 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 8 86 in this Section, the term "Confidential Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for 9 87 any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. 10 88 (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with 11 89 the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 12 90 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: J. Lewis McKnight, Jr. 8955 Harris Road Concord, NC 28027 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. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH 13 91 CAROLINA SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. 14 92 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/ Donald C. Roof ------------------------------------------ Donald C. Roof President and Chief Executive Officer /s/ J. Lewis McKnight, Jr. --------------------------------------------- J. Lewis McKnight, Jr. 15 EX-10.29 16 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.29 Execution Copy ================================================================================ STOCK PURCHASE AGREEMENT AMONG CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP AND THE STOCKHOLDERS OF THE J. H. HEAFNER COMPANY, INC. SIGNATORIES HERETO DATED AS OF APRIL 21, 1999 ================================================================================ 2 TABLE OF CONTENTS Introduction......................................................................................................1 ARTICLE I Purchase and Sale of Shares SECTION 1.1. The Shares and the Additional Shares.................................................................1 SECTION 1.2. Purchase Price and Additional Purchase Price.........................................................1 SECTION 1.3. Closing..............................................................................................2 ARTICLE II Representations and Warranties SECTION 2.1. Representations and Warranties of the Stockholders...................................................2 (a) Organization, Standing and Power................................................................2 (b) Authority; Binding Agreement....................................................................3 (c) Capitalization; Equity Interests................................................................3 (d) Conflicts; Consents.............................................................................4 (e) Financial Information and SEC Reports...........................................................5 (f) Absence of Changes..............................................................................6 (g) Assets and Properties...........................................................................7 (h) Intellectual Property...........................................................................8 (i) Year 2000.......................................................................................9 (j) Agreements......................................................................................9 (k) Litigation.....................................................................................10 (l) Compliance; Licenses and Permits...............................................................10 (m) Environmental Matters..........................................................................10 (n) Labor Relations; Employees.....................................................................11 (o) Potential Conflicts of Interest................................................................14 (p) Tax Matters....................................................................................14 (q) Inventory......................................................................................15 (r) Trade Relations................................................................................15 (s) Insurance......................................................................................15 (t) Brokers........................................................................................16 (u) Full Disclosure................................................................................16 SECTION 2.2. Representations and Warranties of Each Stockholder........................................16 (a) Authority; Binding Agreement; Title to Shares..................................................16 (b) Conflicts; Consents............................................................................17 (c) Brokers........................................................................................17 (d) Litigation.....................................................................................17 SECTION 2.3. Representations and Warranties of the Purchaser...........................................17
3 (a) Organization; Power and Authority..............................................................17 (b) Binding Agreement..............................................................................18 (c) Conflicts; Consents............................................................................18 (d) Investment Representation......................................................................18 (e) Brokers........................................................................................18 (f) Litigation.....................................................................................18 (g) Funds Available................................................................................19 ARTICLE III Additional Agreements SECTION 3.1. Expenses............................................................................................19 SECTION 3.2. Conduct of Business.................................................................................19 (a) In General.....................................................................................19 (b) Employees......................................................................................20 (c) Taxes..........................................................................................20 SECTION 3.3. Reasonable Efforts; Further Assurances..............................................................20 SECTION 3.4. No Shopping.........................................................................................20 SECTION 3.5. Access and Information..............................................................................21 SECTION 3.6. Confidentiality; Restrictive Covenants..............................................................21 (a) Confidential Information.......................................................................21 (b) Acknowledgments by Controlling Stockholders....................................................22 (c) Non-Competition; Non-Solicitation..............................................................22 (d) Enforceability.................................................................................22 SECTION 3.7. Public Announcements................................................................................23 SECTION 3.7. Indemnification of Directors and Officers...........................................................23 SECTION 3.9. Stockholder Representative..........................................................................23 (a) Appointment....................................................................................23 (b) Successor Representatives......................................................................24 SECTION 3.10. Escrow Agreement...................................................................................24 SECTION 3.11. Release............................................................................................24 SECTION 3.12. Joinder............................................................................................25 SECTION 3.13. Termination of Guarantees..........................................................................25 SECTION 3.14. Merger Transaction.................................................................................25 ARTICLE IV Conditions Precedent
ii 4 SECTION 4.1. Conditions to Obligations of the Purchaser..........................................................25 (a) Representations, Warranties and Covenants......................................................25 (b) Certificates...................................................................................26 (c) Legal Opinions.................................................................................26 (d) HSR Act........................................................................................26 (e) No Legal Bar...................................................................................26 (f) Consents, Amendments and Terminations..........................................................26 (g) Company Directors..............................................................................27 (h) Share Certificates.............................................................................27 (i) Consulting Agreement...........................................................................27 (j) Management.....................................................................................27 (k) No Material Adverse Change.....................................................................27 (l) Other Deliveries...............................................................................27 SECTION 4.2. Conditions to Obligations of the Stockholders.......................................................27 (a) Representations, Warranties and Covenants......................................................27 (b) Certificate....................................................................................27 (c) Legal Opinion..................................................................................27 (d) HSR Act........................................................................................28 (e) No Legal Bar...................................................................................28 (f) Other Deliveries...............................................................................28 ARTICLE V Indemnity SECTION 5.1. Indemnification.....................................................................................28 (a) Indemnification by Stockholders................................................................28 (b) Indemnification by Purchaser...................................................................29 (c) Indemnification Procedures.....................................................................30 (d) Company Participation..........................................................................30 (e) Asserted Liabilities Involving the Company.....................................................30 (f) Treatment of Payments..........................................................................31 SECTION 5.2. Limitations.........................................................................................31 (a) Expiration Date................................................................................31 (b) Caps...........................................................................................31 (c) Threshold; Minimum Claim Amount................................................................31 (d) Tax Benefits...................................................................................32 (e) Insurance Proceeds.............................................................................32 (f) Additional Exclusions..........................................................................33 (g) Remedy.........................................................................................33
iii 5 ARTICLE VI Miscellaneous SECTION 6.1. Entire Agreement....................................................................................33 SECTION 6.2. Termination.........................................................................................33 SECTION 6.3. Descriptive Headings; Certain Interpretations.......................................................34 SECTION 6.4. Notices.............................................................................................34 SECTION 6.5. Counterparts........................................................................................36 SECTION 6.6. Survival............................................................................................36 SECTION 6.7. Benefits of Agreement...............................................................................36 SECTION 6.8. Amendments and Waivers..............................................................................36 SECTION 6.9. Assignment..........................................................................................36 SECTION 6.10. Enforceability; Equitable Relief...................................................................37 SECTION 6.11. Arbitration; Consent to Jurisdiction; Waiver of Jury Trial.........................................37 SECTION 6.12. Governing Law......................................................................................38
ANNEXES A Dispute Resolution Procedures SCHEDULES Disclosure Schedule 2.2(b) Stockholder Consents 3.2 Conduct of Business 3.11 Exceptions to Stockholder Release 4.1(f) Consents EXHIBITS A-1 Form of Officers' Certificate A-2 Form of Stockholder's Certificate B Form of Consulting Agreement C Form of Purchaser's Certificate iv 6 STOCK PURCHASE AGREEMENT, dated as of April 21, 1999 (the "Agreement"), among Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership (the "Purchaser"), each of the stockholders of The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company") signing this Agreement on the date first written above (the "Principal Stockholders"), each other stockholder of the Company who joins in this Agreement pursuant to Section 3.12 (the "Other Stockholders" and, together with the Principal Stockholders, the "Stockholders"), and, from and after such time as it may elect to join in this Agreement pursuant to Section 3.12, the Company. ----------------------------------------------------- INTRODUCTION The Company owns and operates a nationwide wholesale and retail tire and automotive parts business. Each Stockholder desires to sell the number of shares (the "Shares") of Class A Common Stock, $.01 par value (the "Class A Common Stock"), of the Company set forth opposite such Stockholder's name on the signature page to this Agreement to the Purchaser, and the Purchaser desires to purchase the Shares, together with any additional shares of common stock of the Company (the "Additional Shares") to be sold by the Other Stockholders, on the terms and conditions set forth in this Agreement. The parties agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES SECTION 1.1. The Shares and the Additional Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (defined below), (i) each Principal Stockholder shall sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from each Principal Stockholder, the Shares owned by such Principal Stockholder and set forth opposite such Principal Stockholder's name on the signature pages to this Agreement, free and clear of all security interests, liens, pledges, charges, escrows, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, "Claims") and (ii) each Other Stockholder shall sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from each Other Stockholder, the Additional Shares owned by such Other Stockholder and set forth opposite such Other Stockholder's name on the signature pages to this Agreement, free and clear of all Claims. SECTION 1.2. Purchase Price and Additional Purchase Price. The purchase price for the Shares and the Additional Shares shall be cash in the amount of $9.00 per share. At the Closing, the Purchaser shall pay an aggregate amount equal to the sum of (i) $9.00 multiplied by 7 the total number of Shares being sold by the Principal Stockholders as set forth on the signature pages to this Agreement (the "Purchase Price") and (ii) $9.00 multiplied by the number of Additional Shares being sold by the Other Stockholders as set forth on the signature pages to this Agreement (the "Additional Purchase Price" and, together with the Purchase Price, the "Aggregate Purchase Price"), in each case, by wire transfer of immediately available funds to accounts designated by William H. Gaither (the "Stockholder Representative") or, if applicable, the stockholder representatives designated by the Other Stockholders pursuant to Section 3.9, in writing no later than two business days prior to the Closing Date. The provisions of Sections 1.1 and 1.2 notwithstanding, The 1818 Mezzanine Fund, L. P. shall be entitled to transfer the warrants held by it to the Purchaser, rather than the Additional Shares underlying the warrants, for the Additional Purchase Price per share for which the warrants are exercisable less the $.01 per Additional Share exercise price and, in such event, the representations and warranties made by The 1818 Mezzanine Fund, L. P. shall apply to the warrants and the shares of Class A Common Stock issuable upon exercise thereunder (assuming the Purchaser were to exercise the warrants immediately following the Closing). The Purchaser shall convert any warrants acquired pursuant to the foregoing sentence into Class A Common Stock on or promptly after the Closing Date. SECTION 1.3. Closing. The closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall take place at the offices of Howard, Smith & Levin LLP, 1330 Avenue of the Americas, New York, New York 10019, or such other place or places as the Stockholders and the Purchaser shall agree, at 10:00 a.m. (New York time) on the later of May 21, 1999 and four business days following the date on which all conditions set forth in Article IV shall have been satisfied or waived, or such other date and time agreed to by the Stockholders and the Purchaser (such date, the "Closing Date"). ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. Representations and Warranties of the Stockholders. The Stockholders severally and not jointly represent and warrant to the Purchaser as follows: (a) Organization, Standing and Power. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which such qualification is necessary because of the property owned, leased or operated by it or because of the nature of its business as now being conducted, except for any failure so to qualify or be in good standing which, individually, would not have a material adverse effect on the business, assets, condition (financial or otherwise), financial position, results of operations or prospects of the Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect"). Section 2.1(a) of the disclosure schedule being delivered to the Purchaser simultaneously with the execution of this Agreement (the "Disclosure Schedule") lists the jurisdictions of 2 8 incorporation and foreign qualification of the Company and each of its Subsidiaries (as defined below). The Company has delivered to the Purchaser complete and correct copies of the constitutive documents of each of the Company and its Subsidiaries, in each case as amended to the date of this Agreement, and has made available to the Purchaser each such entity's minute books and stock records. Section 2.1(a) of the Disclosure Schedule contains a true and correct list of the directors and officers of each of the Company and its Subsidiaries as of the date of this Agreement and at all times since the last action of their respective boards of directors and stockholders. For purposes of this Agreement, a "Subsidiary" of any person means another person under the control of such person (where "control" means the direct or indirect possession of the power to elect at least a majority of the board of directors or other governing body of a Person through the ownership of voting securities, ownership or partnership interests, by contract or otherwise or, if no such governing body exists, the direct or indirect ownership of 50% or more of the equity interests of a Person); and a "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity (governmental or private). (b) Authority; Binding Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby are within its corporate powers and, when executed and delivered by the Company in accordance with Section 3.12, will have been duly and validly authorized by all necessary corporate action on the part of the Company. When executed and delivered by the Company in accordance with Section 3.12, this Agreement will have been duly executed and delivered by the Company, and will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. (c) Capitalization; Equity Interests. (i) Company. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock (as defined below) and 11,500 shares of Preferred Stock, $.01 par value (the "Preferred Stock"). At the time of execution of this Agreement, 3,697,000 shares of Class A Common Stock, 1,400,667 shares of Class B Common Stock, $.01 par value (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), and 11,500 shares of Preferred Stock were issued and outstanding. The outstanding capital stock of the Company is owned of record as set forth in Section 2.1(c)(i) of the Disclosure Schedule. (ii) Subsidiaries. Section 2.1(c)(ii) of the Disclosure Schedule sets forth a complete list of all of the Company's Subsidiaries as of the date of this Agreement, together with their respective jurisdictions of incorporation, authorized capital stock, number of shares issued and outstanding and record ownership of such shares. Except as set forth in Section 2.1(c)(ii) of the Disclosure Schedule, the Company does not have any Subsidiaries or own or hold any equity or other security interest in any other Person. All issued and outstanding shares of capital stock of the Company's Subsidiaries have been duly authorized, were validly issued, are fully paid and non-assessable and subject to no preemptive rights and are directly or indirectly owned beneficially and of record by the Company, free and clear of all Claims, and free of any other 3 9 limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). (iii) Other Equity Interests. Except as set forth in Section 2.1(c)(iii) of the Disclosure Schedule, at the time of execution of this Agreement, no shares of capital stock or other voting securities of the Company or any of its Subsidiaries are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company and its Subsidiaries were duly authorized and validly issued and are fully paid and nonassessable subject to no preemptive rights. Except as set forth in Section 2.1(c)(iii) of the Disclosure Schedule, there are no bonds, debentures, notes or other indebtedness or securities of the Company or any of its Subsidiaries having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company or such Subsidiary may vote. Except as set forth in Section 2.1(c)(iii) of the Disclosure Schedule, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any such Person is bound obligating such Person to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of such Person or obligating such Person to issue, grant, extend or enter into any such security, option, warrant, call right, commitment, agreement, arrangement or undertaking. Except as set forth in Section 2.1(c)(iii) of the Disclosure Schedule, there are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock or other voting securities of the Company or any of its Subsidiaries or any securities of the type described in the two immediately preceding sentences. Except as set forth on Section 2.1(c)(iii) of the Disclosure Schedule, no former holder of a security of the Company or any of its Subsidiaries is, or will become, entitled to any payment with respect to such security. Set forth in Section 2.1(c)(iii) of the Disclosure Schedule is a list of each option or Warrant outstanding, the exercise price thereof and the holder of such option or Warrant. (d) Conflicts; Consents. The execution, delivery and performance by the Principal Stockholders and, when executed and delivered by the Company and the Other Stockholders in accordance with Section 3.12, by the Company and the Other Stockholders of this Agreement and the consummation of the transactions contemplated hereby do not (in the case of the Principal Stockholders) and will not (in the case of the Stockholders and the Company) (i) except as specifically set forth in Section 2.1(d) of the Disclosure Schedule, conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company or any of its Subsidiaries, (ii) except as set forth in Section 2.1(d) of the Disclosure Schedule, conflict with, breach or result (with or without due notice, the passage of time or both) in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which any of the Company or its Subsidiaries is a party, or by which any such Person or its properties or assets are bound, except for such conflicts, breaches or defaults (x) as to which requisite waivers or consents have been obtained before the Closing (which waivers or consents are set forth in Section 4.1(f) of the Disclosure Schedule) or (y) which individually or in the aggregate could not reasonably be expected to have a Material 4 10 Adverse Effect, (iii) violate any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to the Company or any of its Subsidiaries or any such Person's properties or assets or (iv) result in the creation or imposition of any Claim upon any property or assets used or held by the Company or any of its Subsidiaries. Except for the filing of a premerger notification and report form under the Hart-Scott-Rodino Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act") and the expiration or early termination of the applicable waiting period thereunder, no consent or approval by, or notification of or registration or filing with, any Person will be required in connection with the execution, delivery and performance by the Company of this Agreement or the consummation of the transactions contemplated hereby except as set forth in Section 2.1(d) of the Disclosure Schedule. (e) Financial Information and SEC Reports. (i) SEC Reports. The Company has previously furnished or made available to the Purchaser true and complete copies of all reports (the "SEC Reports") filed by the Company and its Subsidiaries with the Securities and Exchange Commission (the "SEC") through and including the date of this Agreement. Each of the balance sheets (including the related notes) included in the Company SEC Reports presents fairly, in all material respects, the consolidated financial position of the Person (consolidated with its Subsidiaries, as applicable) to which it relates as of the date thereof, and each of the other related statements (including the related notes) included in the Company SEC Reports presents fairly, in all material respects, the results of operations and changes in financial position of the Person (consolidated with its Subsidiaries, as applicable) to which it relates for the period or as of the date set forth therein, all in conformity with generally accepted accounting principles consistently applied during the periods involved, except as otherwise noted therein and subject, in the case of the unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein. Each Company SEC Report, as of its date (as amended through the date of this Agreement), complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the applicable rules and regulations thereunder. (ii) Undisclosed Liabilities. Except as set forth in Section 2(e)(ii) of the Disclosure Schedule or as reflected in the consolidated balance sheets of the Company and its Subsidiaries at December 31, 1998 (the "Balance Sheet") and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal year then ended with the opinion of Arthur Andersen LLP thereon (the "1998 Financials"), true and complete copies of which are attached as part of Section 2.1(e)(ii) of the Disclosure Schedule, which financial statements were filed with the SEC by the Company on March 31, 1999 in its Annual Report on Form 10-K (as amended by the Company's Annual Report on Form 10-K/A-1 filed with the SEC on April 5, 1999) and furnished to the Purchaser, the Company and its Subsidiaries do not have, and as a result of the transactions contemplated by this Agreement, will not have, any liabilities or obligations (whether absolute, accrued, contingent or otherwise, and whether due or to become due), except for liabilities and obligations (1) incurred in the ordinary course of business consistent with past practice since December 31, 1998 or (2) which individually do not exceed $250,000 or $1,000,000 in the aggregate. 5 11 (iii) Books and Records. The books of account, minute books, stock record books and other records of the Company and its Subsidiaries are complete and correct in all material respects. True and complete copies of all minute books and all stock record books of the Company and each of its Subsidiaries have heretofore been made available to Purchaser. (f) Absence of Changes. Except in each case as set forth in Section 2.1(f) of the Disclosure Schedule, since December 31, 1998, the Company and its Subsidiaries have been operated in the ordinary course consistent with past practice and there has not been: (i) any material adverse change in the business, assets, condition (financial or otherwise), financial position, results of operations or prospects (other than changes resulting from general economic or market conditions) of the Company and its Subsidiaries, taken as a whole; (ii) any material obligation or liability (whether absolute, accrued, contingent or otherwise, and whether due or to become due) incurred by the Company or any of its Subsidiaries, other than obligations under customer contracts, current obligations and other liabilities incurred in the ordinary course of business and consistent with past practice; (iii) any payment, discharge, satisfaction or settlement of any material claim or obligation of the Company or any of its Subsidiaries, except in the ordinary course of business and consistent with past practice; (iv) other than regularly scheduled dividends on the Preferred Stock, any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or any of its Subsidiaries or any direct or indirect redemption, purchase or other acquisition of any such shares; (v) any issuance or sale, or any contract entered into for the issuance or sale, of any shares of capital stock or securities convertible into or exercisable for shares of capital stock of the Company or any of its Subsidiaries; (vi) any sale, assignment, pledge, encumbrance, transfer or other disposition of any material asset of the Company or any of its Subsidiaries (excluding in all events sales of assets no longer useful in the operation of the business and sales of inventory to customers in the ordinary course of business consistent with past practice), or any sale, assignment, transfer or other disposition of any patents, trademarks, service marks, trade names, copyrights, licenses, franchises, know-how or any other intangible assets of the Company or any of its Subsidiaries; (vii) any creation of any Claim on any property of the Company or any of its Subsidiaries, except for Claims created in the ordinary course of business consistent with past practice or which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect; 6 12 (viii) any write-down of the value of any asset of the Company or any of its Subsidiaries or any write-off as uncollectible of any accounts or notes receivable or any portion thereof, other than write-downs or write-offs which do not exceed $250,000, in the aggregate, as of the date of this Agreement; (ix) any cancellation of any material debts or claims or any amendment, termination or waiver of any rights of material value to the Company or any of its Subsidiaries; (x) any material capital expenditures or commitments or additions to property, plant or equipment of the Company and its Subsidiaries other than in the ordinary course of business and consistent with the Company's capital expenditure plan; (xi) except in each case for regular annual increases, any material or general increase in the compensation of employees of the Company or any of its Subsidiaries (including any increase pursuant to any written bonus, pension, profit-sharing or other benefit or compensation plan, policy or arrangement or commitment), or any increase in any such compensation or bonus payable to any officer, stockholder, director, consultant or agent of the Company or any of its Subsidiaries having an annual salary or remuneration in excess of $150,000; (xii) any damage, destruction or loss not covered by insurance affecting any asset or property of the Company or any of its Subsidiaries resulting in liability or loss in excess of $250,000; (xiii) any change in the independent public accountants of the Company and its Subsidiaries or any material change in the accounting methods or accounting practices followed by the Company or any material change in depreciation or amortization policies or rates; or (xiv) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing items (i) through (xiii), subject to any dollar thresholds set forth in items (i) through (xiii) above. (g) Assets and Properties. Section 2.1(g) of the Disclosure Schedule sets forth a true and complete list of all real property owned or leased by the Company or any of its Subsidiaries. Except as set forth in Section 2.1(g) of the Disclosure Schedule, each of the Company and its Subsidiaries has good record and marketable title to, or a valid leasehold interest in, as applicable, all of its owned or leased real property, except for defects in title or failures to be in full force and effect which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. Each of the Company and its Subsidiaries has good title to, or a valid leasehold interest in, as applicable, all personal property used in their respective businesses, except for defects in title or failures to be in full force and effect which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. Such personal property (taken as a whole) is in good operating condition and repair, ordinary wear and tear and deferred maintenance excepted. 7 13 (h) Intellectual Property. (i) Intellectual Property Rights. Section 2.1(h) sets forth a true and complete list of all Intellectual Property described in clauses (A), (B) and (C) of the definition thereof. Except as set forth in Section 2.1(h) of the Disclosure Schedule, the Company and its Subsidiaries own or have licensed or otherwise have the right to use all Intellectual Property, free and clear of all liens, charges or encumbrances. Except as set forth in Section 2.1(h) of the Disclosure Schedule, any Intellectual Property owned or, to the knowledge of the Company, used by the Company or any Subsidiary is valid and subsisting in full force and effect and has not been canceled, expired or abandoned, and neither the Company nor any Subsidiary has received any notice to the contrary. (ii) Infringement by Company. Except as set forth in Section 2.1(h) of the Disclosure Schedule, to the knowledge of the Company, no Intellectual Property owned, sold, licensed or employed by the Company or any of its Subsidiaries, or which the Company or any of its Subsidiaries contemplates owning, selling, licensing or employing, infringes upon intellectual property that is owned or licensed by others. (iii) Third Party Claims. Except as set forth in Section 2.1(h) of the Disclosure Schedule, there is no pending or, to the knowledge of the Company, threatened claim, action or proceeding against the Company or any of its Subsidiaries contesting the right of the Company or any of its Subsidiaries to own, sell, license or use any Intellectual Property owned, sold, licensed or employed by the Company or any of its Subsidiaries. There is no pending claim, action or proceeding initiated by the Company or any of its Subsidiaries against a third party alleging any infringement, misappropriation, dilution or violation of any Intellectual Property, and, to the knowledge of the Company, there is no basis for such a claim, action or proceeding, in each case, which infringement, misappropriation, dilution or violation could reasonably be expected to have a Material Adverse Effect. (iv) Confidential Information. The Company and each Subsidiary take reasonable measures to protect their confidential information. (v) License Agreements. Except as set forth in Section 2.1(h) of the Disclosure Schedule, the License Agreements are in full force and effect, and neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any other party to any of the License Agreements is in breach of or default under any obligation thereunder or has given notice of default to any other party thereunder and, to the knowledge of the Company, no condition exists that with notice or lapse of time would constitute a material default thereunder. (vi) Effect of Transaction. Except as set forth in Section 2.1(h) of the Disclosure Schedule, the execution, delivery and performance by the Stockholders and, when executed and delivered by the Company in accordance with Section 3.12, by the Company of this Agreement and the consummation of the transactions contemplated hereby do not (in the case of the Stockholders) and will not (x) result in the loss or impairment of the Company's or any Subsidiary's rights to own or use any of the Intellectual Property or (y) require the consent of any third party, including for the avoidance of doubt any governmental authority, in respect of any 8 14 Intellectual Property, except for such losses or impairments as, or consents the failure to obtain which, individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (vi) Definitions. When used in this Agreement: "Intellectual Property" means any and all (A) trademarks, service marks, trade names and Internet domain names, together with all registrations thereof and applications therefor, (B) patents, (C) registered and unregistered copyrights, (D) the software identified in Section 2.1(h)(vi) of the Disclosure Schedule, (E) confidential information and (F) other intellectual property rights that in each case are used in, and material to, the operation of the business of the Company and its Subsidiaries (taken as a whole), together with any licenses to use any of the foregoing. "License Agreements" means agreements granting or obtaining any right to use or practice any rights under any Intellectual Property, to which the Company or any Subsidiary is a party or otherwise bound as licensee or licensor thereunder. (i) Year 2000. Except as set forth in Section 2.1(i) of the Disclosure Schedule, the Company has (i) undertaken a detailed inventory, review and assessment of all areas within the business and operations of the Company and its Subsidiaries that could be materially and adversely affected by the failure of any such entity to be Year 2000 Compliant on a timely basis, (ii) developed a detailed plan and time schedule for becoming Year 2000 Compliant on a timely basis, and (iii) has implemented such plan in accordance with such time schedule in all material respects, such that the Company anticipates that it and its Subsidiaries will be Year 2000 Compliant on a timely basis. "Year 2000 Compliant" as to the Company and its Subsidiaries means that all software, embedded microchips and other processing capabilities utilized by, and material to the business, operations or financial condition of, the Company and its Subsidiaries are able to interpret and manipulate data on and involving all calendar dates correctly, including without limitation in relation to dates in and after the calendar year 2000, and will do so after the calendar year 2000 without any material loss of functionality. (j) Agreements. Section 2.1(j) of the Disclosure Schedule lists as of the date of this Agreement each contract (other than purchase orders and standard sales contracts in the ordinary course of business), agreement, commitment or lease of the Company and its Subsidiaries currently in effect which by its terms (i) is not terminable at will within 12 months and requires future expenditures or receipts or other performance with respect to goods or services having an annual value in excess of $500,000, (ii) is with any officer or employee and provides for annual compensation of $150,000 or more, (iii) is with any officer or key employee and contains any severance or termination or change in control pay liability or obligation, (iv) involves indebtedness for borrowed money and (v) expressly limits, in any material respect, the ability of the Company or any of its Subsidiaries to compete in any line of business or restricts, in any material respect, the geographic area in which the Company or any of its Subsidiaries may conduct its business, or (vi) is material to business, assets, condition (financial or otherwise), financial position, results of operations or prospects of the Company and its Subsidiaries, taken as a whole. Copies of all such documents have previously been made available to the Purchaser. All of such contracts, agreements, commitments and leases are in full force and effect. Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any other party 9 15 to such contracts, agreements, commitments and leases is in breach of or default under any obligation thereunder or has given notice of default to any other party thereunder and, to the knowledge of the Company, no condition exists that with notice or lapse of time would constitute a material default thereunder. (k) Litigation. Except as set forth in Section 2.1(k) of the Disclosure Schedule, there are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Company, threatened by or before any court or governmental authority or agency against the Company or any of its Subsidiaries which (i) bring into question the validity of this Agreement, (ii) seek damages in excess of $250,000 or (iii) individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or governmental authority or agency seeking or purporting to enjoin or restrain the execution, delivery and performance by the Stockholders of this Agreement or the consummation by the Stockholders of the transactions contemplated hereby. (l) Compliance; License and Permits. Except as set forth in Section 2.1(l) of the Disclosure Schedule, each of the Company and its Subsidiaries has complied and is in compliance in all material respects with all Federal, state, local and foreign laws, ordinances, rules, regulations and orders applicable to the Company, any of its Subsidiaries or their respective businesses. There are no conditions relating to the Company or any of its Subsidiaries, or relating to any real property owned or leased by the Company or any of its Subsidiaries (each, a "Company Property") or any appurtenances thereto or improvements thereon, that could reasonably be expected to lead to any material liability against the Company or any of its Subsidiaries for violation of any health or safety laws. Each of the Company and its Subsidiaries holds all Federal, state, local and foreign governmental licenses, approvals and permits that are necessary to conduct their respective businesses as presently being conducted, except for such licenses, approvals and permits the failure to hold which could not reasonably be expected to have a Material Adverse Effect. Except as set forth in Section 2.1(l) of the Disclosure Schedule and except for breaches, violations, revocations, limitations, non-renewals and failures to be in full force and effect which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect, (i) such licenses, approvals and permits are in full force and effect, (ii) no violations are or have been recorded in respect of any thereof, (iii) no proceeding is pending or, to the knowledge of the Company, threatened, to revoke or limit any thereof and (iv) the consummation of the transactions contemplated by this Agreement will not result in the non-renewal, revocation or termination of any such license, approval or permit. (m) Environmental Matters. (i) Environmental Permits and Compliance. Each of the Company and its Subsidiaries holds all licenses, permits and other governmental authorizations (A) required under all applicable Federal, state, county or local laws, ordinances, regulations, official interpretations and orders relating to the handling, storage or disposal of materials or the discharge of chemicals, gases or other substances or Hazardous Materials (defined below) into the environment or to the 10 16 safety or protection of the environment ("Environmental Laws", which definition shall include as hereinafter used common law duties) and (B) which are material to the conduct of their respective businesses as presently being conducted. Except as set forth in Section 2.1(m) of the Disclosure Schedule, none of the Company or any of its Subsidiaries is in violation in any material respects of any requirements of any Environmental Laws in connection with the conduct of its business or in connection with the use, maintenance or operation of any Company Property. Except as set forth in Section 2.1(m) of the Disclosure Schedule, there are no conditions relating to the Company or any of its Subsidiaries or relating to any Company Property that in any such case could reasonably be expected to lead to any material liability of the Company or any of its Subsidiaries under any Environmental Law. (ii) Notices of Non-Compliance. Except as set forth in Section 2.1(m) of the Disclosure Schedule, or except as any of the matters set forth in this sentence have been fully resolved with no remaining obligation on the behalf of the Company or any of its Subsidiaries, neither the Company nor any of its Subsidiaries has received a notice of claim or potential liability or administrative or judicial proceeding or written request for information, or is subject to an administrative or judicial order, decree, or other enforceable agreement, under any Environmental Law, including, but not limited to, claims, proceedings or inquiries relating to potential violations of Environmental Law or the disposal or release (as such term is defined in the Comprehensive Environmental Response, Compensation and Liability Act) of Hazardous Materials on Company Property or any other property (including property formerly owned or operated by the Company or its subsidiaries or by any third-party). Except as set forth on Schedule 2.1(m), the Company is not aware of any property to which Hazardous Materials generated by the Company or any of its Subsidiaries have been transported (for any purpose) that is currently listed on the federal National Priorities List or an analogous state list or that is currently under investigation or remediation by a federal or state environmental agency. (iii) Environmental Reports. The Company has made available to the Purchaser copies of all environmental studies, investigations, reports, audits, and assessments known by the Company to be in the possession of the Company or its Subsidiaries related to the operations of the Company, its Subsidiaries, or any current or former properties owned, leased or otherwise operated by the Company or its Subsidiaries. (iv) "Hazardous Materials" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; (B) any "hazardous waste" or "petroleum," as defined by the Resource Conservation and Recovery Act, as amended; (C) any petroleum product; (D) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law, as amended or hereafter amended; or (E) any radioactive material, including any source, special nuclear or by-product material as defined at 42 U.S.C. ss. 2011 et seq., as amended or hereafter amended. (n) Labor Relations; Employees. 11 17 (i) Labor Relations. Except as set forth in Section 2.1(n)(i) of the Disclosure Schedule, (A) there is no labor strike, dispute, slowdown, stoppage or lockout pending, affecting, or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries; (B) there are no union claims to represent the employees of the Company or any of its Subsidiaries; (C) neither the Company nor any of its Subsidiaries is a party to or bound by any collective bargaining or similar agreement; (D) there is no representation of the employees of the Company or any of its Subsidiaries by any labor organization and, to the knowledge of the Company, there are no union organizing activities among the employees of the Company or any of its Subsidiaries; (E) Section 2.1(n)(i) of the Disclosure Schedule sets forth all written personnel policies, rules or procedures applicable to employees of the Company or any of its Subsidiaries, and the Company has delivered to the Company complete and accurate copies of all such written policies, rules or procedures; (F) neither the Company nor any of its Subsidiaries has engaged in any act or practice which could reasonably be expected to constitute an unfair labor practice as defined in the National Labor Relations Act or other applicable law, ordinance, regulation, interpretation or order and each of the Company and its Subsidiaries is in compliance in all material respects with all applicable laws, ordinances, regulations, interpretations or orders respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; (G) there is no unfair labor practice charge or complaint against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before the National Labor Relations Board or any similar state or foreign agency; (H) there are no charges with respect to or relating to the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before the Equal Employment Opportunity Commission or any other governmental entity responsible for the prevention of unlawful employment practices; (I) neither the Company nor any of its Subsidiaries has received notice of the intent of any governmental entity responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or any of its Subsidiaries and no such investigation is in progress; (J) no complaints, lawsuits or other proceedings are pending or, to the knowledge of the Company, threatened in any forum by or on behalf of any present or former employee of the Company or any of its Subsidiaries, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract, commitment, agreement, understanding or other arrangement for employment, any law governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with any employment relationship; and (K) since the enactment of the Worker Adjustment and Retraining Notification Act (the "WARN Act"), neither the Company nor any of its Subsidiaries has effectuated (1) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Company or any of its Subsidiaries; or (2) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or facility of the Company or any of its Subsidiaries; nor has the Company or its Subsidiaries been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state, local or foreign law or regulation; and (L) none of the employees of the Company or any of its Subsidiaries has suffered an "employment loss" (as defined in the WARN Act) during the 180-day period prior to the date of this Agreement. 12 18 (ii) Plans. Section 2.1(n)(ii) of the Disclosure Schedule contains a list of each pension, retirement, savings, deferred compensation, and profit-sharing plan and each stock option, stock appreciation, stock purchase, performance share, bonus or other incentive plan, employment or severance plan, health, group insurance or other welfare plan, or other similar plan and any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), under which the Company or any of its Subsidiaries has or may have any current or future obligation or liability (including any potential, contingent or secondary liability under Title IV of ERISA) or under which any employee or former employee (or beneficiary of any employee or former employee) of the Company or any of its Subsidiaries has or may have any current or future right to benefits (the term "plan" shall include any contract, agreement, policy or understanding, each such plan being hereinafter referred to in this Agreement individually as a "Plan"). The Company has delivered to the Purchaser true and complete copies of (A) each Plan, (B) the summary plan description for each Plan for which a summary plan description is required, (C) the latest annual report, if any, which has been filed with the IRS for each Plan, and (D) the most recent IRS determination letter for each Plan that is a pension plan (as defined in ERISA) intended to be qualified under Code Section 401(a). Except as set forth in Section 2.1(n)(ii) of the Disclosure Schedule, each Plan intended to be tax qualified under Sections 401(a) and 501(a) of the Code is and has been determined by the IRS to be tax qualified under Sections 401(a) and 501(a) of the Code and, since such determination, no amendment to or failure to amend any such Plan (other than a failure to amend for which the remedial amendment period has not expired) and, to the knowledge of the Company, no other event or circumstance has occurred that could reasonably be expected to adversely affect its tax qualified status. There has been no prohibited transaction within the meaning of Section 4975 of the Code and Section 406 of Title I of ERISA with respect to any Plan. (iii) ERISA. Except as set forth in Section 2.1(n)(iii) of the Disclosure Schedule, no Plan is subject to the provisions of Section 412 of the Code or Part 3 of Subtitle B of Title I of ERISA, no Plan is subject to Title IV of ERISA and no liability under Title IV or Section 302 of ERISA has been incurred by the Company or by any trade or business that together with the Company would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA. (iv) Compliance. There are no actions, claims, lawsuits or arbitrations (other than routine claims for benefits) pending, or, to the knowledge of the Company, threatened, with respect to any Plan or the assets of any Plan. Each Plan has been administered in all respects accordance with its terms and with all applicable laws (including without limitation ERISA), except for failures to be so administered which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (v) Scope of Coverage. Except as set forth in Section 2.1(n)(v) of the Disclosure Schedule, no Plan provides or is required to provide, now or in the future, health, medical, dental, accident, disability, death or survivor benefits to or in respect of any person beyond termination of employment, except to the extent required under any state insurance law or under Part 6 of Subtitle B of Title I of ERISA and under Section 4980(B) of the Code. Except as set forth in 13 19 Section 2.1(n)(v) of the Disclosure Schedule, no Plan covers any individual other than employees of the Company or one or more of its Subsidiaries, other than spouses and dependents of employees under health and child care policies listed in Section 2.1(n)(ii) of the Disclosure Schedule, true and complete copies of which have been delivered to the Purchaser. (vi) Severance; Accelerated Vesting. Except as set forth in Section 2.1(n)(vi) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement either alone or in combination with another event will not (A) entitle any employee of the Company or any of its Subsidiaries to severance pay or termination benefits and (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee. (vii) Stock Appreciation Rights. Section 2.1(n)(vii) of the Disclosure Schedule describes the material terms of any stock appreciation rights with respect to the capital stock of the Company or any of its Subsidiaries which are currently outstanding, as well as the numbers and holders thereof and the total amount that would be payable with respect to the stock appreciation rights if such rights were exercised upon the Closing. (o) Potential Conflicts of Interest. To the knowledge of the Company, except as set forth in Section 2.1(o) of the Disclosure Schedule, no executive officer, director or affiliate of the Company or any of its Subsidiaries, and no relative or spouse of any such officer, director or affiliate: (i) owns, directly or indirectly, any interest in (excepting less than 1% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person which is a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, the Company or any of its Subsidiaries; (ii) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Company or any of its Subsidiaries uses in the conduct of its business; or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any of its Subsidiaries, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements arising in the ordinary course of business. (p) Tax Matters. Except as set forth in Section 2.1(p) of the Disclosure Schedule: (i) Returns. All Federal, state, local and foreign tax returns and tax reports required to be filed on or prior to the Closing Date by the Company or any of its Subsidiaries have been or will be filed or a valid request for extension has been or will be filed with respect thereto, on a timely basis (including any extensions) with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed. All such returns and reports were or will be prepared in the manner required by applicable law, and reflect or will reflect the liability for Taxes (as defined below) of the Company and its Subsidiaries in all material respects. All Federal, state, local and foreign income, profits, franchise, sales, use, occupation, property, excise, employment and other Taxes (including interest, penalties and withholdings of Tax) (collectively, "Taxes") due from and payable by the Company or any of its Subsidiaries on or prior to the Closing Date have been or will be fully paid on a timely basis or 14 20 will be adequately reserved for on the Company's financial statements. There are no liens for Taxes upon the assets of the Company or any of its Subsidiaries except for statutory liens for current Taxes not yet due. The Company has filed, as a common parent corporation of an affiliated group (within the meaning of Section 1504(a) of the Code), a consolidated return for Federal income tax purposes on behalf of such affiliated group. (ii) Compliance. Each of the Company and its Subsidiaries has complied in all material respects with all applicable laws relating to the payment and withholding of Taxes (including withholding and reporting requirements under Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and similar provisions under any other laws) and, within the time and in the manner prescribed by law, has withheld from wages, fees and other payments and paid over to the proper governmental or regulatory authorities all amounts required. (iii) Certain Arrangements. Neither the Company nor any of its Subsidiaries is a party to any Tax sharing agreement or any other agreement of a similar nature that remains in effect. (iv) Audit Matters. No material deficiencies for any Taxes have been threatened, proposed, asserted or assessed (either in writing or orally) to the knowledge of the Company against the Company or any of its Subsidiaries which have not been fully paid or finally settled. No governmental entity is conducting or has proposed in writing to conduct an audit with respect to Taxes or any Tax returns of the Company or any of its Subsidiaries. (v) Validity of Subchapter S Election. The Company was a valid S corporation for federal and state income tax purposes for all years in which it submitted tax returns as an S corporation. (vi) Deductibility of Payments. No amounts payable under the Plans (as defined in Section 2.1(n)) will fail to be deductible for federal income tax purposes by reason of Section 162(a), 162(m) or 280G of the Code. (q) Inventory. The inventory described in the 1998 Financials is the only inventory used or held for use in the business of the Company and its Subsidiaries, is valued for financial statement purposes at the lower of cost or market value. (r) Trade Relations. Except as set forth in Section 2.1(r) of the Disclosure Schedule, the Company has received no oral or written notice from any material supplier or vendor of products to the Company or any of its Subsidiaries informing the Company (i) that it intends to terminate its business relationship with the Company or such Subsidiary or (ii) that it intends to modify its business relationship with the Company or such Subsidiary in such a way as could reasonably be expected to have a Material Adverse Effect. (s) Insurance. Section 2.1(s) of the Disclosure Schedule sets forth all policies of fire, liability, workman's compensation, vehicular, life or other insurance held by or on behalf of the Company and its Subsidiaries (specifying the insurer, the coverage amounts and describing 15 21 each pending claim thereunder of more than $100,000). Such policies and binders are in full force and effect. Neither the Company nor any of its Subsidiaries is in default under any material provision contained in any such policy or binder and, to the knowledge of the Company, none of them has failed to give any notice or present any claim under such policy or binder in due and timely fashion. In addition, (i) neither the Company nor any of its Subsidiaries has received any written notice of cancellation or non-renewal of any such material policy or arrangement nor to the knowledge of the Company is the termination of any such material policies or arrangements threatened, (ii) there is no material claim pending under any of such policies or arrangements as to which coverage has been questioned, denied or disputed in writing by the underwriters of such policies or arrangements, and (iii) neither the Company nor any of its Subsidiaries has received any written notice from any of its insurance carriers that any material insurance coverage presently provided for will not be available to the Company or any of its Subsidiaries in the future on substantially the same terms (other than premium) as are now in effect. (t) Brokers. Except as set forth in Section 2.1(t) of the Disclosure Schedule, no agent, broker, investment banker, person or firm acting on behalf of the Company or any of its Subsidiaries or under the authority of the Company or any of its Subsidiaries is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. (u) Full Disclosure. Neither any representation or warranty contained in this Section 2.1 nor any statement contained in the Disclosure Schedule or the Company's Annual Report on Form 10-K filed with the SEC on March 31, 1999 (as amended by the Company's Annual Report on Form 10-K/A-1 filed with the SEC on April 5, 1999) contains any untrue statement of material fact necessary in order to make the statements herein or therein, in light of the circumstances under which it was made, not misleading. SECTION 2.2. Representations and Warranties of Each Stockholder. Each Stockholder severally and not jointly represents and warrants to the Purchaser as follows: (a) Authority; Binding Agreement; Title to Shares. Such Stockholder has all requisite authority (or legal capacity, as the case may be) to enter into this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by such Stockholder (if not a natural person) and the consummation of the transactions contemplated hereby are within its corporate or other powers and have been duly and validly authorized by all necessary corporate or other action on the part of such Stockholder (if not a natural person). This Agreement has been duly executed and delivered by such Stockholder, and constitutes the valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms. Such Stockholder is the lawful owner of record and beneficially (or has the right to acquire pursuant to the exercise of warrants or conversion rights) of the number of Shares or Additional Shares set forth opposite such Stockholder's name on the signature pages to this Agreement, and such Stockholder has, and will transfer to the Purchaser at the Closing, good and marketable title to such number of Shares or Additional Shares, free and clear of all Claims and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). 16 22 Section 2.1(c)(ii) of the Disclosure Schedule sets forth the number of Shares or Additional Shares, as the case may be, owned by such Stockholder, identifying those which are currently outstanding and those which are issuable upon the exercise of warrants, conversion rights or options. (b) Conflicts; Consents. The execution and delivery and performance by such Stockholder of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) if applicable, conflict with or result (with or without due notice, the passage of time or both) in a breach of any articles of incorporation, by-laws or other constitutive documents of such Stockholder, (ii) conflict with, breach or result in a default (or give rise to any right of termination, cancellation or acceleration) under any material provision of any material note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which such Stockholder is a party, or by which such Stockholder or its properties or assets are bound, or (iii) violate any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to such Stockholder or its properties or assets, except for violations which individually or in the aggregate could not reasonably be expected to have a material adverse effect on such Stockholder's ability to execute, deliver and perform this Agreement or consummate the transactions contemplated hereby. No consent or approval by, or notification of or registration or filing with, any Person is required in connection with the execution, delivery and performance by such Stockholder of this Agreement and the consummation of the transactions contemplated hereby, except, if applicable, for the filing of a premerger notification and report form by such Stockholder under the HSR Act and the expiration or early termination of the applicable waiting period thereunder. (c) Brokers. Except as set forth in Section 2.1(t) of the Disclosure Schedule, no agent, broker, investment banker, person or firm acting on behalf of such Stockholder or under the authority of such Stockholder is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. (d) Litigation. There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of such Stockholder, threatened by or before any court or governmental authority or agency against such Stockholder or any of its affiliates which bring into question the validity of this Agreement or could reasonably be expected to affect such Stockholder's ability to consummate the transactions contemplated hereby. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or governmental authority or agency seeking or purporting to enjoin or restrain the execution, delivery and performance by such Stockholder of this Agreement or the consummation by such Stockholder of the transactions contemplated hereby. SECTION 2.3. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Stockholders and the Company as follows: (a) Organization; Power and Authority. The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of 17 23 Delaware. The execution, delivery and performance of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby are within its corporate or other powers and have been duly and validly authorized by all necessary corporate or other action on the part of the Purchaser. (b) Binding Agreement. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. (c) Conflicts; Consents. The execution and delivery and performance by the Purchaser of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Purchaser, (ii) conflict with, breach or result (with or without due notice, the passage of time or both) in a default (or give rise to any right of termination, cancellation or acceleration) under any material provision of any material note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser is a party, or by which the Purchaser or its properties or assets are bound, or (iii) violate any law, statute, rule or regulation or judgment, order, writ, injunction or decree applicable to the Purchaser or its properties or assets, except for violations which individually or in the aggregate could not reasonably be expected to have a material adverse effect on the Purchaser's ability to execute, deliver and perform this Agreement or consummate the transactions contemplated hereby. No consent or approval by, or notification of or registration or filing with, any Person is required in connection with the execution, delivery and performance by the Purchaser of this Agreement and the consummation of the transactions contemplated hereby, except for the filing of a premerger notification and report form by the Purchaser under the HSR Act and the expiration or early termination of the applicable waiting period thereunder. (d) Investment Representation. The Purchaser is acquiring the Shares for its own account and not with a view to distribution within the meaning of the applicable Federal securities laws. (e) Brokers. No agent, broker, investment banker, person or firm acting on behalf of the Purchaser or under the authority of the Purchaser is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. (f) Litigation. There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Purchaser, threatened by or before any court or governmental authority or agency against the Purchaser or any of its affiliates which bring into question the validity of this Agreement or could reasonably be expected to adversely affect the Purchaser's ability to consummate the transactions contemplated hereby. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or governmental authority or agency seeking or purporting to enjoin or restrain the execution, 18 24 delivery and performance by the Purchaser of this Agreement or the consummation by the Purchaser of the transactions contemplated hereby. (g) Funds Available. The Purchaser will at the Closing have sufficient funds available (either cash on hand or pursuant to current capital commitments) to pay the Aggregate Purchase Price and satisfy all of its other obligations under this Agreement. ARTICLE III ADDITIONAL AGREEMENTS SECTION 3.1. Expenses. If the Closing occurs, the Company shall be responsible for the fees, costs and expenses incurred by the Purchaser in the pursuit of the transactions contemplated by this Agreement, including the fees and expenses of its counsel, financial advisors and accountants, and the Company shall in any event be responsible for all such fees, costs and expenses incurred by the Stockholders and the Company. Each Stockholder shall pay and be responsible for all Taxes on income payable by such Person arising out of the sale of the Shares to the Purchaser and the transactions contemplated by this Agreement. Neither any Stockholder nor the Company will incur any such fees, costs or expenses in connection with obtaining the consents set forth on Schedule 4.1(f) without the approval of the Purchaser; provided, that if the Purchaser unreasonably withholds such approval, the relevant consent shall be deemed deleted from Schedule 4.1(f) for all purposes under this Agreement, including the satisfaction of the condition set forth in Section 4.1(f). SECTION 3.2. Conduct of Business. (a) In General. From the date of this Agreement until the Closing Date, except as set forth on Schedule 3.2 or as contemplated by this Agreement or otherwise consented to by the Purchaser in writing, the Company shall operate its business only in the ordinary course of business consistent with past practice. The Company shall preserve intact the present organization of the Company and its Subsidiaries; keep available the services of the present officers and employees of the Company; preserve the Company's goodwill and relationships with customers, suppliers, licensors, licensees, contractors, distributors, lenders and other persons having significant business dealings with the Company and its Subsidiaries; continue all current sales, marketing and other promotional policies, programs and activities; maintain the assets of the Company and its Subsidiaries in good repair, order and condition; and maintain the Company's insurance policies and risk management programs and in the event of casualty, loss or damage to any assets of the Company or any of its Subsidiaries, repair or replace such assets with assets of comparable quality, as the case may be. Without limiting the generality of the foregoing, the Company shall not, without the prior written consent of the Purchaser, directly or indirectly (i) cause or permit any state of affairs, action or omission described in clauses (i) through (xiv) of Section 2.1(f) or (ii) take or agree in writing or otherwise to take, any action which could reasonably be expected to make any representation or warranty contained in Section 2.1 untrue or incorrect as of the date when made or as of any future date or which could reasonably be expected to prevent the satisfaction of any condition to closing set forth in Article IV. 19 25 (b) Employees. Prior to the Closing Date, the Company shall take all actions that are necessary and appropriate (including, without limitation, obtaining the consent of each option holder to the amendment described in this sentence, in a form reasonably satisfactory to Purchaser) so that each option to acquire Common Stock which is outstanding as of the Closing Date is amended to provide that the expiration date of such option shall be extended to a date to be mutually agreed upon by Purchaser and the Company (with such adjustment provisions as appropriate in the event of a merger or other extraordinary transaction ). Except as required by applicable law, as contemplated in connection with the transactions contemplated by this Agreement or as required to maintain qualification pursuant to the Code, the Company shall not (A) adopt, amend, or terminate (i) any employee benefit plan or any agreement, arrangement, plan or policy or (ii) any agreement or arrangement between the Company and one or more of its current or former directors, officers or employees, or (iii) any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, employee stock ownership, deferred compensation, employment termination, severance or other plan, agreement, trust, fund, policy or arrangement or (B) increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any employee benefit plan or agreement as in effect as of the date of this Agreement (including, without limitation, the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares) except in each case for regular annual increases. (c) Taxes. From the date of this Agreement until the Closing Date, the Company shall not make any Tax elections or settle or compromise any Tax liability or, except as required by law, change any tax accounting policies or procedures. SECTION 3.3. Reasonable Efforts; Further Assurances. The Purchaser, the Company and the Stockholders each agree to use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as practicable and to ensure that the conditions set forth in Article IV are satisfied, insofar as such matters are within the control of any of them. Each Stockholder hereby assigns, effective upon the Closing, any and all rights such Person may have to register any securities of the Company under the Securities Act of 1933, as amended, under any agreement currently in effect, and the Company shall acknowledge and accept such assignment (such acknowledgment and acceptance to be conclusively evidenced by the Company's execution and delivery of this Agreement pursuant to Section 3.12). In case at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties to this Agreement shall take or cause to be taken all such necessary action, including the execution and delivery of such further instruments and documents, as may be reasonably requested by any party for such purposes or otherwise to complete or perfect the transactions contemplated by this Agreement. SECTION 3.4. No Shopping. From the date of this Agreement (or, in the case of the Company or any Other Stockholder, the date the Company or such Other Stockholder joins this Agreement in accordance with Section 3.12) until the earlier of (i) the Closing Date and (ii) the date this Agreement is terminated in accordance with Section 6.2, none of the Stockholders shall, and 20 26 the Company shall not and shall not cause or allow any partner, director, officer or agent of the Company to, directly or indirectly, solicit or initiate, enter into or conduct, discussions concerning, or exchange information (including by way of furnishing information concerning the Company or its business) or enter into any negotiations concerning, or respond to any inquiries or solicit, receive, entertain or agree to or vote for any proposals for, the acquisition of the assets of, or any substantial part thereof, or a merger, tender offer, share exchange offer or similar type of transaction involving, the Company or the transfer of such Stockholder's Shares or Additional Shares, as the case may be, or all or a substantial part of the capital stock of the Company to any person other than the Purchaser or one of its affiliates. In addition, during such time period, the Company shall not authorize, direct or knowingly permit any employee or agent of the Company to do any of the foregoing, and each of the Company and the Stockholders shall notify the Purchaser of the identity of any person who approaches the Company or such Stockholder with respect to any of the foregoing. SECTION 3.5. Access and Information. (a) From the date of this Agreement until the first to occur (i) of the Closing Date and (ii) the termination of this Agreement in accordance with Section 6.2, the Company shall allow the Purchaser and its financing parties and their respective representatives to make such investigation of the business, operations and properties of the Company as the Purchaser deems necessary or desirable in connection with the transactions contemplated by this Agreement, including any environmental testing that the Purchaser in its reasonable business judgment deems necessary. Such investigation shall include access to the respective directors, officers, employees, agents and representatives (including legal counsel and independent accountants) of the Company and the properties, books, records and commitments of the Company. The Company shall furnish the Purchaser and its representatives with such financial, operating and other data and information and copies of documents with respect to the Company or any of the transactions contemplated by this Agreement as the Purchaser shall from time to time request. All access and investigation pursuant to this Section 3.5 shall be coordinated through representatives of the Company designated by the Stockholders and shall occur only upon reasonable notice and during normal business hours. SECTION 3.6. Confidentiality; Restrictive Covenants. (a) Confidential Information. Each of the parties to this Agreement agrees that all financial or other information about any party or other information of a confidential or proprietary nature disclosed to another party at any time in connection with transactions contemplated by this Agreement shall be kept confidential by the party receiving such information and shall not be disclosed to any person or used by the receiving party (other than to its agents or employees, and, in the case of the Purchaser, its financing parties, in connection with the transactions contemplated by this Agreement) except with the prior written consent of the disclosing party or as may be required by applicable law or court process. This Section 3.6(a) shall not apply to information which may have been acquired or obtained by the receiving party other than through disclosure by the other party in connection with the transaction contemplated by this Agreement or which is or becomes generally available to the public other than as a result of a violation of this Section 3.6. 21 27 (b) Acknowledgments by Controlling Stockholders. Each of Ann H. Gaither and William H. Gaither (each, a "Controlling Stockholder") acknowledges and recognizes that such Controlling Stockholder, as a result of such Controlling Stockholder's longstanding service to the Company in a fiduciary capacity, has learned of and been exposed to confidential and proprietary information (including information concerning the customers and clients and prospective customers and clients of the Company and its Subsidiaries) that is of unique value to the Company. Each Controlling Stockholder further acknowledges that, should such Controlling Stockholder seek to divert, take away, or solicit any of the customers or clients or prospective customers or clients of the Company or its Subsidiaries, such Controlling Stockholder will of necessity make use of or disclose such confidential and proprietary information, to the irreparable detriment of the Company. Each Controlling Stockholder further acknowledges that the Company and its Subsidiaries have each expended large sums in the recruitment, training and development of their respective employees, that the continued employment of such individuals by the Company and its Subsidiaries constitutes a substantial benefit to the Company, and that the business of the Company would be severely disrupted and injured in the event that another person, firm, company or corporation were to attempt to induce any or all of their respective employees to terminate their employment with the Company or its Subsidiaries. (c) Non-Competition; Non-Solicitation. In recognition of the Section 3.6(b) and the highly competitive nature of the business of the Company and its Subsidiaries, each Controlling Stockholder agrees that such Controlling Stockholder will not, from and after the Closing Date until the later of the second anniversary of (x) the Closing Date and (y) the date on which such Controlling Stockholder is no longer paid a salary or consulting fee by the Company, either individually or as an officer, director, member, stockholder, partner, agent or principal of another business firm, directly or indirectly (i) engage in any location where the Company or its Subsidiaries is presently engaged or proposes to engage in business and in North America in any competitive business, (ii) assist others in engaging in any competitive business in the manner described in clause (i), (iii) divert, take away or solicit, or attempt to divert, take away or solicit, any customers or clients or prospective customers or clients of the Company or its Subsidiaries or (iv) induce any employee of the Company or any of its Subsidiaries to terminate such person's employment with the Company or such Subsidiary or hire any employee of the Company or such Subsidiary to work with any businesses affiliated with the Controlling Stockholder. A Controlling Stockholder's ownership of not more than 5% 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 3.6(c). Each Controlling Stockholder acknowledges that it is entering into the covenants contained in this Section 3.6(c), inter alia, as a seller of Shares under this Agreement. Each party acknowledges and agrees that the obligations of each Controlling Stockholder under this Section 3.6(c) are for the benefit of, and shall be enforceable by, the Purchaser and the Company. (d) Enforceability. It is expressly understood and agreed that although the parties to this Agreement consider the restrictions contained in Section 3.6(c) 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 a Controlling Stockholder, the provisions of this Agreement shall be deemed amended to apply as to such maximum time 22 28 and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable with respect to such Controlling Stockholder. SECTION 3.7. Public Announcements. The parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be required by applicable law or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. SECTION 3.8. Indemnification of Directors and Officers. For six years from and after the Closing Date, the Company and its successors shall indemnify and hold harmless the present and former officers, directors, employees and agents of the Company and its Subsidiaries in respect of acts or omissions occurring on or prior to the Closing Date to the extent provided under the Company's certificate of incorporation and bylaws in effect on the date of this Agreement; provided that such indemnification shall be subject to any limitation imposed from time to time under applicable law. For three years from and after the Closing Date, the Company and its successors shall maintain officers' and directors' liability insurance in respect of acts or omissions occurring on or prior to the Closing Date covering each Person currently covered by the Company's officers' and directors' liability insurance policy on terms and in amounts comparable to those currently maintained by the Company or, at the Purchaser's election, those maintained with respect to officers, agents, employees, members, partners or representatives of the Purchaser nominated by the Purchaser to serve as directors of the Company. SECTION 3.9. Stockholder Representative. (a) Appointment. Each Principal Stockholder constitutes and appoints the Stockholder Representative to act as such Principal Stockholder's representative under this Agreement, with full authority to act on behalf of, and to bind, each Principal Stockholder for purposes of this Agreement, and the Stockholder Representative agrees to accept such appointment. Without limiting the generality of the foregoing, each Principal Stockholder hereby irrevocably constitutes and appoints, with full power of substitution, the Stockholder Representative as its true and lawful attorney-in-fact, with full power and authority in such Principal Stockholder's name, place and stead (i) to determine whether any condition to Closing contained in Section 4.2 has been satisfied or to waive any such condition, (ii) to terminate this Agreement pursuant to Section 6.2, (iii) to execute, certify, acknowledge, deliver and release any document, certificate or instrument required to be delivered by the Principal Stockholder at the Closing, including without limitation such Principal Stockholder's Shares, (iv) to take all actions or execute, certify, acknowledge, deliver, file and record all agreements, certificates, instruments and other documents and any amendment thereto which the Stockholder Representative deems necessary or appropriate in connection with such Principal Stockholder's obligations under Article V, (v) to execute and deliver any consents, amendments, waivers, modifications or supplements required under this Agreement or which the Stockholder Representative deems necessary or appropriate in connection with such Principal Stockholder's obligations under this Agreement and (vi) to give and receive all notices, requests and other communications to or from such Principal Stockholder's under this Agreement. Each Principal Stockholder's appointment 23 29 of the Stockholder Representative as its attorney-in-fact shall be deemed to be a power coupled with an interest and still survive the death, incapacity, bankruptcy or dissolution of the Principal Stockholder giving such power. Each Other Stockholder shall, when joining in this Agreement pursuant to Section 3.12, constitute and appoint a stockholder representative to act as its representative under this Agreement; provided, that the parties to this Agreement shall be obligated to recognize no more than one additional stockholder representative for each of (i) the Other Stockholders holding Class B Common Stock of the Company and (ii) the Other Stockholders holding warrants to acquire Class A Common Stock of the Company (or Additional Shares for which such warrants are exercisable); and, provided that the Stockholder Representative shall serve as the stockholder representative for any other holders of Class A Common Stock and, if holders of less than a majority of Class B Common Stock join the Agreement, the holders of Class B Common Stock who join in the Agreement. (b) Successor Representatives. The Stockholder Representative shall designate one or more Persons to serve as successor Stockholder Representative in the event of his death or incapacity, which Person or Persons shall in such event succeed to and become vested with all the rights, powers, privileges and duties of the Stockholder Representative under this Agreement. Each successor Stockholder Representative shall designate one or more successors to serve as Stockholder Representative in the event of such successor Stockholder Representative's death, incapacity, bankruptcy or dissolution. In the event that the Stockholder Representative dies or becomes incapacitated without having designated a successor Stockholder Representative, his executors, administrators or personal representatives shall succeed to and become vested with all the rights, powers, privileges and duties of the Stockholder Representative under this Agreement. SECTION 3.10. Escrow Agreement. At the Closing, the Purchaser, the Stockholders, and the Escrow Agent (as defined in the Indemnity Escrow Agreement) shall enter into an escrow agreement substantially in the form of Exhibit C hereto (the "Indemnity Escrow Agreement"). At the Closing, the Purchaser will deliver an amount equal to seven and one-half percent (7.5%) of the Aggregate Purchase Price (the "Escrow Fund") to the Escrow Agent in accordance with the terms of the Indemnity Escrow Agreement to secure certain obligations of the Sellers pursuant to this Agreement. Pursuant to the Indemnity Escrow Agreement, the Escrow Agent shall hold the Escrow Fund for a period of eighteen months following the Closing subject to asserted claims for indemnification. SECTION 3.11. Release. Each Stockholder, by executing this Agreement, hereby, effective as of the Closing, (i) acknowledges and agrees that the portion of the Aggregate Purchase Price paid to such Stockholder pursuant to the terms of this Agreement is in full satisfaction of any rights of such Stockholder in respect of such Stockholder's Shares or Additional Shares, as the case may be, and (ii) releases, remises, acquits and forever discharges each of the Company, any of its Subsidiaries, the Purchaser, and each of their respective affiliates, officers, directors, employees and agents from any and all actions, liabilities, charges, complaints, causes of action, suits, proceedings, demands, costs, losses, damages, expenses and all other claims whatsoever (whether in contract, tort, pursuant to statute, known or unknown) of whatever nature and kind arising against such party by such Stockholder solely in such Stockholder's capacity as a stockholder of the Company; provided, however, that the release 24 30 given in this Section 3.11 shall not operate to release or discharge the Company or any of its Subsidiaries or the Purchaser from claims (w) for compensation earned and not yet received or benefits under any Plans to which such Stockholder may be entitled, (x) arising under any contractual obligation identified on Schedule 3.11 and in effect on the date hereof and not otherwise terminated, released, waived or discharged on or prior to the Closing Date, (y) for indemnification pursuant to this Agreement or the constitutive documents of the Company or any of its Subsidiaries or (z) for reimbursement for taxes due (up to $200,000 in the aggregate for all Stockholders) relating to the Company's 1997 final Subchapter S Federal Tax Return. Each party acknowledges and agrees that this Section 3.11 is for the benefit of, and enforceable by, Purchaser and/or the Company. SECTION 3.12. Joinder. Each of the Company and each Other Stockholder may, at any time prior to May 7, 1999 (and thereafter with the consent of the Purchaser), join in and become a party to this Agreement by executing and delivering a counterpart copy of the signature page hereto, and such execution and delivery by such Person shall conclusively evidence such Person's agreement to be legally bound by all of the terms and provisions of this Agreement applicable to such party from and after the date of such execution and delivery. Notwithstanding any contrary provision of this Agreement, neither the Company nor any Other Stockholder shall have any rights or obligations under any provision of this Agreement (including without limitation Section 3.4) unless and until such Person has joined in this Agreement in accordance with this Section 3.12. SECTION 3.13. Termination of Guarantees. Each Stockholder will take all actions necessary to release the Company on or prior to the Closing from any guarantee given by the Company for personal indebtedness of such Stockholder or otherwise provide appropriate assurances that such guarantee will be released as soon as reasonably practicable after the Closing. SECTION 3.14. Merger Transaction. If requested by the Purchaser, the parties to this Agreement shall negotiate appropriate modifications to this Agreement so that the transactions contemplated hereby may be effected by means of a merger transaction. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Obligations of the Purchaser. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by the Purchaser: (a) Representations, Warranties and Covenants. The representations and warranties in Section 2.1 (other than those made in the first sentence of Section 2.1(a) and in Sections 2.1(b) and 2.1(c)) shall be true and correct in all material respects as of the date of this Agreement and as 25 31 of the Closing Date as if made on and as of the Closing Date (except for those representations and warranties expressly made as of a particular date, which shall be true and correct only as of such date); provided that the foregoing condition shall be deemed satisfied if the facts, events or circumstances underlying any inaccuracies in any such representations and warranties (without regard to any materiality or Material Adverse Effect limitation) as of the Closing Date, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. The representations and warranties in the first sentence of Section 2.1(a) and in Sections 2.1(b) and 2.1(c) shall be true and correct in all respects as of the Closing Date as if made on and as of the Closing Date (except for those representations and warranties expressly made as of a particular date, which shall be true and correct only as of such date). The representations and warranties in Section 2.2 shall be true and correct in all material respects (other than those made in Section 2.2(a), which shall be true and correct in all respects) as of the Closing Date as if made on and as of the Closing Date. The Company and each Stockholder shall have performed and complied with in all material respects all covenants and agreements required to be performed or complied with on or prior to the Closing Date. (b) Certificates. The Purchaser shall have received a certificate of the chief executive officer and chief financial officer of the Company and a certificate of each Stockholder, each dated the Closing Date, substantially in the forms attached as Exhibit A-1 and Exhibit A-2, respectively. (c) Legal Opinions. The Purchaser shall have received opinions of counsel to the Company and the Stockholders, dated the Closing Date, in form and substance reasonably satisfactory to the Purchaser. (d) HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (e) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit the transactions contemplated by this Agreement. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or other legal restraint or prohibition preventing the transactions contemplated by this Agreement shall be in effect. (f) Consents, Amendments and Terminations. The Purchaser shall have received duly executed and delivered copies of all waivers, consents, terminations and approvals listed in Schedule 2.2(b) and (subject to Section 3.1) Schedule 4.1(f) (as well as all other waivers, consents, terminations and approvals (i) discovered after the date of this Agreement by the parties to be necessary in connection with the transactions contemplated hereunder and (ii) the failure of which to obtain, either individually or in the aggregate, (when taken together with those identified in Section 2.1(d) of the Disclosure Schedule and not listed on Schedule 4.1(f)) could reasonably be expected to have a Material Adverse Effect), all in form and substance reasonably satisfactory to the Purchaser. 26 32 (g) Company Directors. At the request of the Purchaser, the Purchaser shall have received the resignations (effective upon Closing) of the directors of the Company (subject to any contractual rights) so requested to resign, and the Board of Directors shall have been reconstituted so that a majority of the directors are persons designated by Purchaser. (h) Share Certificates . The Purchaser shall have received certificates representing all of the Shares and the Additional Shares, together with stock powers duly endorsed in blank. (i) Consulting Agreement. A consulting agreement dated on or prior to the Closing Date between the Company and William H. Gaither in the form attached as Exhibit B shall have been executed and delivered by the parties thereto. (j) Management. Arrangements concerning the compensation of senior members of management and their participation in the transactions contemplated by this Agreement shall have been entered into (and to the extent necessary approved by the Board of Directors of the Company) on terms reasonably satisfactory to the Purchaser. (k) No Material Adverse Change. Since the date of this Agreement, there shall have been no material adverse change in the business, assets, condition (financial or otherwise), financial position, results of operations or prospects (other than changes resulting from general economic or market conditions) of the Company and its Subsidiaries, taken as a whole. (l) Other Deliveries. The Purchaser shall have received such other documents, certificates or instruments or customary closing deliveries as it may reasonably request. SECTION 4.2. Conditions to Obligations of the Stockholders. The obligations of the Stockholders to consummate the transactions contemplated by this Agreement are subject to the satisfaction of each of the following conditions unless waived on or prior to the Closing Date by the Stockholder Representative: (a) Representations, Warranties and Covenants. The representations and warranties in Section 2.3 shall be true and correct in all material respects (other than those made in Sections 2.3(a) and 2.3(b), which shall be true and correct in all respects) as of the Closing Date as if made on and as of the Closing Date. The Purchaser shall have performed and complied with in all material respects all covenants and agreements required to be performed or complied with on or prior to the Closing Date. (b) Certificate. The Stockholder Representative shall have received a certificate of the chief executive officer of the Purchaser, dated the Closing Date, substantially in the form attached as Exhibit C. (c) Legal Opinion. The Stockholder Representative shall have received an opinion of counsel to the Purchaser, dated the Closing Date, in form and substance reasonably satisfactory to the Stockholder Representative. 27 33 (d) HSR Act. The waiting period (and any extension thereof) applicable to the transactions contemplated by this Agreement under the HSR Act shall have been terminated or shall have expired. (e) No Legal Bar. No action or proceeding by or before any governmental authority or agency shall be pending or threatened challenging or seeking to restrain or prohibit the transactions contemplated by this Agreement. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary injunction, permanent injunction or other order enacted, entered, promulgated, enforced or issued by any governmental authority or agency or other legal restraint or prohibition preventing the transactions contemplated by this Agreement shall be in effect. (f) Other Deliveries. The Stockholders shall have received such other documents, certificates or instruments or customary closing deliveries as any of them may reasonably request. ARTICLE V INDEMNITY SECTION 5.1. Indemnification. (a) Indemnification by Stockholders. Each Stockholder, severally and not jointly, and limited to and in proportion to such Stockholder's aggregate percentage ownership of Shares and Additional Shares (which percentage shall be 100% for matters set forth in Section 2.1(c)(i) (as it relates to such Stockholder) and Section 2.2 or for a breach of a covenant of such Stockholder), indemnifies and holds harmless the Purchaser and its affiliates, directors, officers, employees and other agents and representatives from and against any and all losses, liabilities, judgments, claims, settlements, damages, fees, liens, Taxes, penalties, obligations and expenses (including without limitation reasonable attorneys' fees and disbursements and Defense Costs incurred by the Company pursuant to Section 5.1(e)) (collectively, "Losses") incurred or suffered by any such Person arising from, by reason of or in connection with: (i) any misrepresentation by, or breach of any representation or warranty of, the Company or such Stockholder contained in this Agreement or any certificate or other document delivered by the Company or such Stockholder under this Agreement; (ii) any breach or non-performance by the Company or such Stockholder of any covenant or agreement made by the Company or such Stockholder in this Agreement; (iii) (A) any payment required to be made by the Company as a result of Taxes paid by any third party pursuant to any agreement entered into between January 1, 1997 and June 30, 1998 pursuant to which the Company acquired stock of a Subsidiary (other than Itco Logistics Corporation) or (B) any disallowance of a deduction by the Company for any payments made by the Company other than as purchase price in connection with any such acquisition (collectively, the "Surviving Tax Matters"); or 28 34 (iv) any action, suit, proceeding or demand incident to any of the matters referred to in the foregoing clauses (i) through (iii). Notwithstanding the foregoing, and except as provided in Section 6.10, no Stockholder shall be liable under any provision of this Agreement for Losses arising from, by reason of or in connection with any misrepresentation by another Stockholder or breach or non-performance by another Stockholder of a representation, warranty, covenant or agreement made by such other Stockholder in this Agreement or any certificate or other document delivered by such other Stockholder under this Agreement, it being understood that, for these purposes, covenants of the Company shall not be deemed to be covenants of any particular Stockholder. With respect to breaches of representations and warranties set forth in Section 2.1 causing the Company to incur Losses, the Purchaser's Losses shall be deemed to be the Company's Losses multiplied by a fraction, the numerator of which is the number of Shares and Additional Shares acquired by the Purchaser at the Closing and the denominator of which is the total number of shares of Common Stock outstanding as of the Closing Date. For the purposes of clarification, the parties acknowledge that the several liability of each Stockholder shall under this Section 5.1 equal the Purchaser's Losses multiplied by the Stockholder's ownership percentage as determined in accordance with Section 5.2(b) (except in the limited circumstances where a Stockholder is expressly obligated for 100% of the Purchaser's Losses as set forth above), subject to the limitations set forth in Section 5.2(b). For purposes of this Agreement, a breach of the representations and warranties contained in Section 2.1 shall be deemed to be a breach by all Stockholders rather than a breach of a particular Stockholder (except for the provisions of Section 2.1(c) which relate specifically to such Stockholder, which shall be deemed to be a breach only by such Stockholder), but shall nevertheless be subject to all of the limitations contained in Section 5.2. For purposes of Article V, shares issuable upon exercise of any Warrant held by The 1818 Mezzanine Fund, L. P. shall be treated as outstanding. For purposes of this Section 5.1, a Stockholder's ownership percentage will be determined in accordance with Section 5.2(b). The parties acknowledge and agree that the Company shall have the same rights as the Purchaser under this Section 5.1(a) (subject to the limitations, if any, set forth in this Article V) to be indemnified by each Controlling Stockholder from and against any and all Losses that arise from, by reason of or in connection with such Controlling Stockholder's breach of Section 3.6(c). (b) Indemnification by Purchaser. The Purchaser indemnifies and holds harmless the Stockholders and their respective affiliates, directors, officers, employees and other agents and representatives from and against any and all Losses incurred or suffered by any such Person arising from, by reason of or in connection with: (i) any misrepresentation by, or breach of any representation or warranty of, the Purchaser contained in this Agreement or any certificate or other document delivered by the Purchaser under this Agreement; (ii) any breach or non-performance by the Purchaser of any covenant or agreement made by the Purchaser in this Agreement; or 29 35 (iii) any action, suit, proceeding or demand incident to any of the matters referred to in the foregoing clauses (i) and (ii). (c) Indemnification Procedures. In case any claim or litigation which might give rise to any indemnification obligation (an "Asserted Liability") of a party under this Article V (each an "Indemnifying Party") shall come to the attention of the party seeking indemnification hereunder (the "Indemnified Party"), the Indemnified Party shall promptly notify the Indemnifying Party (in the case of a claim for indemnification pursuant to Section 5.1(a), by notice to the Stockholder Representative) in writing of the existence, nature and amount of the potential Loss for which indemnification may be sought. Failure to give such notice shall not prejudice the rights of the Indemnified Party, except to the extent that the Indemnifying Party shall have been materially prejudiced by such failure. With respect to claims or litigation concerning third parties, the Indemnifying Party may defend against an Asserted Liability on behalf of the Indemnified Party utilizing counsel reasonably acceptable to the Indemnified Party, unless (i) the Indemnified Party reasonably objects to such assumption of the defense on the ground that counsel for such Indemnifying Party cannot represent both the Indemnified Party and the Indemnifying Party because such representation would be reasonably likely to result in a conflict of interest or because there may be defenses available to the Indemnified Party that are not available to such Indemnifying Party or (ii) the action or proceeding seeks injunctive or other equitable relief against the Indemnified Party that would materially affect, restrain or interfere with the business of the Indemnified Party. If the Indemnifying Party defends an Asserted Liability, it shall do so at its own expense and shall not be responsible for the costs of defense, investigative costs, attorney's fees or other expenses incurred to defend the Asserted Liability (collectively, "Defense Costs") of the Indemnified Party (which may continue to defend, at its own expense). If the Indemnified Party assumes or maintains the defense of an Asserted Liability by reason of clause (i) or (ii) above, or because the Indemnifying Party has not elected to assume the defense, then such Indemnifying Party shall indemnify the Indemnified Party for its reasonable Defense Costs. The Indemnifying Party may settle any Asserted Liability only with the consent of the Indemnified Party, which consent shall not be unreasonably withheld. If the Indemnifying Party assumes or maintains the defense of an Asserted Liability as set forth above, then the Indemnified Party may settle such Asserted Liability only with the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. (d) Company Participation. The Company shall be entitled to participate in the defense of any claim or litigation concerning third parties for which indemnification may be sought pursuant to this Article V to the extent that the Company or one of its Subsidiaries is not a party to such claim or litigation, provided that such claim or litigation could in the Company's sole determination result in an adverse effect on the business, assets, condition (financial or otherwise), financial position, results of operations or prospects of the Company or any of its Subsidiaries. Each party shall cooperate in all reasonable respects with the Company and furnish or make available to the Company and its legal counsel all access and information reasonably necessary to give effect to the Company's rights under this Section 5.1(d). (e) Asserted Liabilities Involving the Company. Notwithstanding Sections 5.1(c) and 5.1(d), if an Asserted Liability relates to a third party claim involving the Company, the 30 36 Company shall be entitled to defend or assume the defense of such Asserted Liability using counsel of its own choosing. If the Company chooses to defend an Asserted Liability, the Indemnified Party and Indemnifying Party shall be entitled to participate or continue to participate at its own expense in the defense of such Asserted Liability except to the extent that the Company reasonably determines that such participation could materially and adversely affect the ability of the Company or its counsel to conduct such defense. If the Company chooses to defend an Asserted Liability, the Company shall be entitled, in its sole discretion, to settle or resolve the Asserted Liability. If the Company settles or resolves an Asserted Liability or chooses counsel to defend an Asserted Liability without the approval of the Indemnifying Party, then the Indemnified Party shall not be entitled to indemnification under Article V unless the approval of the Indemnifying Party has been unreasonably withheld. (f) Treatment of Payments. Any payment made pursuant to this Section 5.1 shall be treated as an adjustment to the Aggregate Purchase Price for all Tax purposes. SECTION 5.2. Limitations. (a) Expiration Date. The indemnification and reimbursement obligations under Section 5.1 shall expire on the date that is 18 months from and after the Closing Date (the "Expiration Date"), except (i) as to any claims for, or any claims that may result in, any Loss for which indemnity may be sought hereunder of which the Indemnifying Party has received written notice from the Indemnified Party on or before the Expiration Date or (ii) as to any representations, warranties, covenants or agreements expressly surviving such 18-month period as set forth in Section 6.6. (b) Caps. The total indemnification obligations of the Stockholders (other than for claims relating to or arising out of Sections 2.1(b), 2.1(c), 2.1(t), 2.2(a), 2.2(b), 2.2(c) or 3.6 (collectively, the "Excluded Claims")) pursuant to this Article V shall not exceed (i) for all Stockholders in the aggregate an amount equal to 15% of the Aggregate Purchase Price and (ii) for each Stockholder an amount equal to the product of (x) 15% of the Aggregate Purchase Price and (y) the quotient obtained by dividing (1) the number of Shares and Additional Shares owned by such Stockholder as specified on the signature pages to this Agreement by (2) total number of Shares and Additional Shares acquired by the Purchaser at the Closing. Notwithstanding anything to the contrary set forth in this Agreement, the indemnification obligations of the Stockholders with respect to Excluded Claims shall not count towards, or be subject to, the limitations set forth in the first sentence of this Section 5.2(b) or in Section 5.2(c), provided that the total indemnification obligations of each Stockholder pursuant to this Article V shall not exceed the amount of the Aggregate Purchase Price allocated to such Stockholder's Shares or Additional Shares, as the case may be. Excluded Claims for which a Stockholder is 100% responsible shall be satisfied personally by such Stockholder and not from amounts held in escrow pursuant to the Indemnity Escrow Agreement. (c) Threshold; Minimum Claim Amount. The Purchaser shall not be entitled to indemnification pursuant to this Article V with respect to any claim for indemnification (other than an Excluded Claim) unless the aggregate Losses for which the Purchaser would be entitled 31 37 to indemnification pursuant to this Article V exceed $425,000 (after which the Stockholders shall be obligated, subject to the limitations set forth in Section 5.2(b), to indemnify the Purchaser for amounts in excess of such $425,000). (d) Tax Benefits. The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be (i) increased to take account of any net Tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder ("grossed-up" for taxes on such increase), provided that any net tax cost incurred shall not include any increase in Tax resulting from decrease in the Purchase Price of the Shares or Additional Purchase Price of the Additional Shares as the case may be and (ii) reduced to take account of any net Tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Losses; provided that any net Tax cost incurred and any net Tax benefit realized shall be attributable to those Losses taken into account on a Tax return for a year not later than the year in which the indemnity payment is made. In computing the amount of any such Tax cost or Tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any and all Losses. (e) Insurance Proceeds. The amount of any and all Losses for which indemnification is provided pursuant to this Article V shall be net of any amounts actually received by the Indemnified Party (or the Company, if applicable) under insurance policies in effect at the Closing (other than self insurance, retrospective or similar insurance) with respect to such Losses. In the event that any claim for indemnification asserted under this Article V is, or may be, the subject of insurance coverages of the Company or any other party to this Agreement or other right to indemnification or contribution from any third party (a "Third Party Contributor"), each of the Company and the Indemnified Party agrees to promptly notify the applicable insurance carrier of such claim and tender defense thereof to such carrier, and shall also promptly notify any potential Third Party Contributor. Each of the Company and each Indemnified Party agrees to pursue, at the sole cost and expense of the Indemnifying Party, such claims diligently and to reasonably cooperate, at the sole cost and expense of the Indemnifying Party, with each such insurance carrier and Third Party Contributor, and the Indemnified Party agrees to make no claim for indemnification under this Article V for a period of 180 days after such claim for insurance or contribution is made. If insurance coverage or contribution is denied (in whole or in part), or if no resolution of an insurance or contribution claim shall have occurred within such 180 days, the Indemnified Party may proceed for indemnification under this Article V, and such Indemnifying Party shall be surrogated to the rights of the Indemnified Party against such insurance carrier or Third Party Contributor. (f) Additional Exclusions. Notwithstanding any contrary provision of this Agreement, no Stockholder shall have any liability to any Person under this Article V or otherwise for any of the matters described in Item 14 of Section 2.1(e)(ii) of the Disclosure Schedule, including without limitation Losses arising from Riggs v. Winston Tire or Losses arising from any other facts or circumstances described in Item 14 of Section 2.1(e)(ii) of the Disclosure Schedule except to the extent there is an inaccuracy in the last sentence thereof. 32 38 (g) Remedy. Upon and after the Closing, and subject to the parties' rights to seek equitable relief pursuant to Section 6.10 for breaches of Section 3.6 or 3.7, the provisions of this Article V represent the sole and exclusive remedy available to any party to this Agreement for any breach by any other party of any representation, warranty, covenant or agreement contained herein. Notwithstanding any contrary provision of this Agreement, if the Closing occurs, the Stockholders shall have no liability for indemnification pursuant to this Article V for any breach or non-performance of any representation, warranty, covenant or agreement that was within the Purchaser's knowledge at the time of the Closing. ARTICLE VI MISCELLANEOUS SECTION 6.1. Entire Agreement. This Agreement and the annexes, schedules and exhibits hereto contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and supersede all prior agreements or understandings among the parties with respect to the subject matter hereof. SECTION 6.2. Termination. (a) This Agreement shall terminate on the first to occur of any of the following events: (i) the mutual written agreement of the Purchaser and the Stockholder Representative; (ii) written notice from the Purchaser, on the one hand, or the Stockholder Representative, on the other hand, to the other, if the Closing shall not have occurred prior to the close of business on June 30, 1999; provided, that, if the Closing shall not have occurred prior to such time as a result of the failure to obtain the consents of holders of the Company's 10% Senior Notes Due 2008 as described on Schedule 4.1(f), such date shall be extended to the earlier of four business days following the date on which the consent has been obtained or a date to be mutually agreed by the Purchaser and the Stockholder Representative, but in no event later than October 31, 1999; (iii) written notice from the Purchaser to the Stockholders, in the event that the Company shall not have joined in this Agreement in accordance with Section 3.12 on or before the 10th business day after the date of this Agreement, provided, that this termination right shall not be exercisable by the Purchaser if such joinder shall have occurred prior to a termination pursuant to this clause (iii); (iv) written notice from the Purchaser to the Stockholders, in the event that (x) the Company or any Stockholder shall have materially breached any representations, warranties, covenants or agreements contained in this Agreement if not cured within 15 business days following written notice from the Purchaser specifying such breach or (y) the satisfaction of any condition to the Purchaser's obligations under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach of this Agreement by the Purchaser; or 33 39 (v) written notice from the Stockholder Representative to the Purchaser, in the event that (x) the Purchaser shall have materially breached any representations, warranties, covenants or agreements contained in this Agreement if not cured within 15 business days following written notice from the Stockholder Representative specifying such breach or (y) the satisfaction of any condition to the Stockholders' obligations under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach of this Agreement by the Stockholders. (b) The sole remedy of any party for a breach by the other party of this Agreement prior to the Closing shall be to terminate this Agreement in accordance with the applicable provision of Section 6.2(a). Upon the termination of this Agreement, all rights and obligations of the parties under this Agreement shall terminate, except their obligations under Sections 3.1, 3.6(a), 3.7, 6.4, 6.9, 6.11 and 6.12, and no party shall have any further liability hereunder. SECTION 6.3. 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, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person or legal entity includes its permitted successors and assigns; (vi) a reference to generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article, Section, Annex, Exhibit or Schedule of this Agreement. SECTION 6.4. Notices. All notices, requests and other communications to any party under this Agreement shall be in writing and sufficient if delivered personally or sent by facsimile (with confirmation of receipt) or by guaranteed overnight courier, addressed as follows: 34 40 If to the Company or the Principal Stockholders, to: William H. Gaither c/o The J. H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Facsimile: (704) 423-8987 with copies to: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Facsimile: (704) 423-8987 Attention: J. Michael Gaither Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Facsimile: (212) 841-1010 Attention: Scott F. Smith and Moore & Van Allen PLLC 100 North Tryon Street, 47th Floor Charlotte, NC 28202 Facsimile: (704) 331-1159 Attention: Hal Levinson, Esq. If to the Purchaser, to: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Facsimile: (617) 619-5402 Attention: Mark A. Rosen and Tami E. Nason with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 35 41 Attention: David J. Friedman and, if to any Other Stockholder, to the address or facsimile number furnished by such Other Stockholder in writing upon joining this Agreement, or to such other address or facsimile number as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by guaranteed overnight courier, when delivered at the address specified in this Section or on the second business day following the date on which such communication is delivered to such courier, whichever occurs first. SECTION 6.5. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 6.6. Survival. All representations, warranties, agreements and covenants contained in this Agreement or in any document delivered pursuant to this Agreement or in connection with this Agreement (unless otherwise expressly provided therein) shall survive the Closing and shall remain in full force and effect until the Expiration Date; provided that the representations and warranties in Sections 2.1(b), 2.1(c), 2.1(t), 2.2(a), 2.2(b), 2.2(c), 2.3(a), 2.3(b), 2.3(d) and 2.3(e), the covenants and agreements in Sections 3.3, 3.6, 3.8, 3.9, 3.10 and 3.11 and claims in respect of any Surviving Tax Matters (as defined in this Section 6.6) shall not expire on the Expiration Date and shall survive for the duration specified in such Sections or, if no duration is specified, forever or until the expiration of the applicable statute of limitations; and provided further, that the Surviving Tax Matters as defined in Section 5.1(a)(iii) shall not expire on the Expiration Date and shall survive until the expiration of the statute of limitations applicable to the federal income tax return to be filed by the Company in connection with its 1998 fiscal year. SECTION 6.7. Benefits of Agreement. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any third person. SECTION 6.8. Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. SECTION 6.9. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable by any party hereto without the prior written consent of the other parties. Notwithstanding the foregoing, the Purchaser may assign this Agreement and all of its rights and obligations to an affiliate of the Purchaser, provided that no such assignment shall relieve the Purchaser of any of its obligations under this Agreement. Any instrument purporting to make an assignment in violation of this Section shall be null and void. 36 42 SECTION 6.10. Enforceability; Equitable Relief. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. The parties acknowledge that damages at law would be an inadequate remedy for the breach by any party of Sections 3.6 or 3.7 and agree in the event of such breach that the non-breaching party may obtain temporary and permanent injunctive relief restraining the breaching party from such breach, and, to the extent permissible under applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained in the foregoing sentence shall be construed as prohibiting the non-breaching party from pursuing any other remedies available at law or equity for such breach or threatened breach of this Agreement nor limiting the amount of damages recoverable in the event of a breach or threatened breach by any party of such provisions. SECTION 6.11. ARBITRATION; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE ARBITRATION AND DISPUTE RESOLUTION PROVISIONS SET FORTH IN ANNEX A. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA OR THE COURTS OF THE STATE OF NORTH CAROLINA, SITTING IN MECKLENBURG COUNTY, FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS ARBITRATION AGREEMENT INCLUDING ACTIONS FOR TEMPORARY INJUNCTIVE RELIEF IN AID OF ARBITRATION OR TO COMPEL ARBITRATION, AND AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS AND EXCEPT FOR ANY ACTION TO ENFORCE AN ARBITRAL AWARD. EACH OF THE PARTIES TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 6.4 AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION SUCH PARTY MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY SUCH PROCEEDING. 37 43 SECTION 6.12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. 38 44 IN WITNESS WHEREOF, each of the Principal Stockholders, the Stockholder Representative and the Purchaser has caused this Agreement to be duly executed and delivered as of the day and year first above written. PRINCIPAL STOCKHOLDERS: Number of Shares: 1,992,293 shares of Class A Common Stock /s/ Ann H. Gaither ----------------------------------- ANN H. GAITHER Number of Shares: 1,060,288 shares of Class A Common Stock /s/ William H. Gaither ----------------------------------- WILLIAM H. GAITHER Number of Shares: 462,790 shares of Class A Common Stock /s/ Susan Gaither Jones ----------------------------------- SUSAN GAITHER JONES Number of Shares: 13,129 shares of Class A Common Stock /s/ Thomas R. Jones ----------------------------------- THOMAS R. JONES STOCKHOLDER REPRESENTATIVE: /s/ William H. Gaither ----------------------------------- WILLIAM H. GAITHER, as Stockholder Representative PURCHASER: CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP By: Charlesbank Equity Fund IV GP, Limited Partnership, its general partner By: Charlesbank Capital Partners, LLC Its general partner By: /s/ Mark A. Rosen --------------------------------- MARK A. ROSEN MANAGING DIRECTOR By: /s/ Kim G. Davis --------------------------------- KIM G. DAVIS MANAGING DIRECTOR 39 45 IN WITNESS WHEREOF, each of the Company and the Other Stockholders has caused this Agreement to be duly executed and delivered as of the day and year set forth opposite such Person's name below. COMPANY: THE J. H. HEAFNER COMPANY, INC. By: /s/ Donald C. Roof ------------------------------- Name: DONALD C. ROOF Title: Sr. Vice President, Chief Financial Officer and Treasurer Date: April 27, 1999 OTHER STOCKHOLDERS: WINGATE PARTNERS II, L.P. Number of Additional Shares: By: WINGATE MANAGEMENT COMPANY II, L.P., its General Partner 1,277,167 shares of Class B Common Stock By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner By: /s/ V. Edward Easterling, Jr. -------------------------------- Name: V. EDWARD EASTERLING, JR. Title: Principal Date: WINGATE AFFILIATES II, L.P. By: WINGATE MANAGEMENT LIMITED, L.L.C., its sole general partner Number of Additional Shares: By: /s/ V. Edward Easterling, Jr. -------------------------------- 24,097 shares of Class B Common Stock Name: V. EDWARD EASTERLING, JR. Title: Principal Date: CALLIER INVESTMENT COMPANY Number of Additional Shares: By: /s/ James T. Callier, Jr. -------------------------------- 9,037 shares of Class B Common Stock Name: JAMES T. CALLIER, JR. Title: G.P. Date: 5/7/99 40 46 /s/ Armistead Burwell, Jr. Number of Additional Shares: ------------------------------ ARMISTEAD BURWELL, JR. 27,110 shares of Class B Common Stock Date: 5/5/99 /s/ Leon R. Ellin Number of Additional Shares: ------------------------------ LEON R. ELLIN 18,073 shares of Class B Common Stock Date: 5/20/99 41 47 ANNEX A TO STOCK PURCHASE AGREEMENT DISPUTE RESOLUTION PROCEDURE The parties to the Agreement submit to final and binding arbitration as the sole and exclusive remedy for all disputes, controversies or claims for damages arising out of, involving, or relating to (a) the Agreement or any amendment thereto or (b) the events giving rise to the Agreement, including any and all non-contractual claims for damages related to the Agreement or the events giving rise to it (including claims for fraudulent inducement of contract) ("Dispute"). The arbitration shall be held in accordance with the Commercial Arbitration Rules of The American Arbitration Association then in effect except as modified herein ("Rules"). Any arbitration under this Agreement shall be decided by a panel of three arbitrators, one chosen by the Stockholders, one by the Purchaser (in either instance within 20 days of the receipt by the respondent of a copy of the demand for arbitration) and a third by the first two arbitrators chosen. The three arbitrators shall determine all matters, including the panel's final decision with respect to the claims presented in the arbitration, by majority vote. If the two arbitrators selected by the parties are unable to agree upon the appointment of the third arbitrator within seven days of appointment of the second arbitrator, both shall give written notice of such failure to agree to the parties, and if the parties fail to agree upon the selection of such third arbitrator within five days thereafter, such third arbitrator shall be appointed pursuant to the Rules. The arbitration shall be held in Charlotte, North Carolina. The parties shall be entitled to have reasonable access (subject to the confidentiality provisions in Section 3.6(b)) to information, documents and other materials in the possession of the Company directly related to any dispute arising from, relating to or in connection with the Company's business. Any arbitration proceedings, decision or award rendered hereunder and the validity, effect and interpretation of this arbitration agreement shall be governed by the Federal Arbitration Act of the United States, 9 U.S.C. ss. 1 et seq. By agreeing to arbitration, the parties do not intend to deprive any court of its jurisdiction to issue a pre-arbitral injunction, pre-arbitral attachment or other order in aid of arbitration proceedings and the enforcement of any award. Without prejudice to such provisional remedies in aid of arbitration as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect. The arbitral award shall be final and binding on the parties and may be enforced in any court having jurisdiction. EX-23.1 17 CONSENT DELOITTE & TOUCHE 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement Nos. 333-75313, 333-75313-01, 333-75313-02, 333-75313-03 and 333-75313-04 of the J.H. Heafner Company, Inc. of our report dated December 7, 1995, appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the headings "Selected Historical Financial Data" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Raleigh, North Carolina June 7, 1999 EX-23.2 18 CONSENT ERNST & YOUNG 1 EXHIBIT 23.2 Consent of Ernst & Young LLP We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 31, 1997 (except for Note 13, as to which the date is January 14, 1998) with respect to the consolidated financial statements of ITCO Logistics Corporation and subsidiaries included in the Amendment No. 1 to 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 June 7, 1999 EX-23.3 19 CONSENT 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 June 7, 1999 EX-23.4 20 CONSENT 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, June 7, 1999. EX-25.1 21 STATEMENT OF ELIGIBILITY 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 16th day of April, 1999. FIRST UNION NATIONAL BANK (trustee) By: /s/ Shannon Schwartz ---------------------------- Its: Assistant Vice President --------------------------- CONSENT OF TRUSTEE Under section 321(b) of the Trust Indenture Act of 1939, as amended, and in connection with the proposed issuance by The J.H. Heafner Company, 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: /s/ Shannon Schwartz ------------------------------ Name: Shannon Schwartz ---------------------------- Title: Assistant Vice President --------------------------- Dated: April 16, 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-99.3 22 FORM OF EXCHANGE AGENT AGREEMENT 1 EXHIBIT 99.3 _______________, 1999 FORM OF EXCHANGE AGENT AGREEMENT First Union National Bank 230 South Tryon Street, 9th Floor Charlotte, NC 28288-1179 Attention: Corporate Trust Group Ladies and Gentlemen: The J.H. Heafner Company, Inc., a North Carolina corporation (the "Company"), proposes to make an offer (the "Exchange Offer") to exchange with the holders thereof (i) up to $150,000,000 of its 10% Senior Notes due 2008, Series D (the "Exchange Notes") for a like principal amount of its outstanding 10% Senior Notes due 2008, Series B and Series C (the "Outstanding Notes"), which Exchange Notes have been registered under the Securities Act of 1933, as amended. The terms and conditions of the Exchange Offer as currently contemplated are set forth in a Prospectus (the "Prospectus") dated _______________, 1999, distributed to record holders of the Outstanding Notes on or about such date. The Outstanding Notes and the Exchange Notes are collectively referred to herein as the "Notes." Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Prospectus. The Company hereby appoints First Union National Bank to act as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. References hereinafter to "you" shall refer to First Union National Bank. The Exchange Offer is expected to be commenced by the Company on or about _______________, 1999. The Letter of Transmittal accompanying the Prospectus is to be used by the holders of the Outstanding Notes to accept the Exchange Offer and contains certain instructions with respect to (i) the delivery of certificates for Outstanding Notes tendered in connection therewith, (ii) the book entry transfer of Notes to the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility"), and (iii) other matters relating to the Exchange Offer. The Exchange Offer shall expire at 5:00 p.m., New York City time, on _______________, 1999 or on such later date or time to which the Company may extend the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions set forth in the Prospectus, the Company expressly reserves the right to extend the Exchange Offer from time to 2 time by giving oral (to be confirmed in writing) or written notice to you no later than 1:00 p.m., New York City time, on the business day following the previously scheduled Expiration Date. The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Outstanding Notes not theretofore accepted for exchange, upon the occurrence of any failure of the conditions of the Exchange Offer specified in the Prospectus under the caption "The Exchange Offer - Certain Conditions to the Exchange Offer." The Company will give oral (to be confirmed in writing) or written notice of any amendment, termination or nonacceptance of Outstanding Notes to you as promptly as practicable. In carrying out your duties as Exchange Agent, you are to act in accordance with the following instructions: 1. You will perform such duties and only such duties as are specifically set forth herein and in the Letter of Transmittal. 2. You will establish an account with respect to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Agreement, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of the Outstanding Notes by causing the Book-Entry Transfer Facility to transfer such Outstanding Notes into your account in accordance with the Book-Entry Transfer Facility's procedure for such transfer. You are not required to collect Letters of Transmittal from persons tendering Notes through the Book-Entry Transfer Facility. 3. You are to examine each of the Letters of Transmittal, certificates for Outstanding Notes (or confirmations of book-entry transfers into your account at the Book-Entry Transfer Facility) and any Agent's Message or other documents delivered or mailed to you by or for holders of the Outstanding Notes to ascertain whether (i) the Letters of Transmittal and any such other documents are executed and properly completed in accordance with instructions set forth therein and (ii) the Outstanding Notes have otherwise been properly tendered. In each case where the Letter of Transmittal or any other document has been improperly completed or executed or any of the certificates for Outstanding Notes are not in proper form for transfer or some other irregularity in connection with the acceptance of the Exchange Offer exists, you will endeavor to inform the presenters of the need for fulfillment of all requirements and to take any other action as may be necessary or advisable to cause such irregularity to be corrected. 4. With the approval of J. Michael Gaither or any other person designated in writing by the Company (a "Designated Officer") (such approval, if given orally, to be confirmed in writing) or any other party designated by any such Designated Officer in writing, you are authorized to waive any irregularities in connection with any tender of Outstanding Notes pursuant to the Exchange Offer. 2 3 5. Tenders of Outstanding Notes may be made only as set forth in the Letter of Transmittal and in the section of the Prospectus captioned "The Exchange Offer - Procedures for Tendering Outstanding Notes," and Outstanding Notes shall be considered properly tendered to you only when tendered in accordance with the procedures set forth therein. Notwithstanding the provisions of this paragraph 5, Outstanding Notes that the Designated Officer of the Company shall approve as having been properly tendered shall be considered to be properly tendered (such approval, if given orally, shall be confirmed in writing). 6. You shall advise the Company with respect to any Outstanding Notes delivered subsequent to the Expiration Date and accept the Company's instructions (if given orally, to be confirmed in writing) with respect to the disposition of such Outstanding Notes. 7. You shall accept tenders: (a) in cases where the Outstanding Notes are registered in two or more names only if signed by all named holders; (b) in cases where the signing person (as indicated on the Letter of Transmittal) is acting in a fiduciary or a representative capacity only when proper evidence of such person's authority to so act is submitted; and (c) from persons other than the registered holder of Outstanding Notes provided that customary transfer requirements, including payment of any applicable transfer taxes, are fulfilled. You shall accept partial tenders of Outstanding Notes where so indicated and as permitted in the Letter of Transmittal and deliver certificates for Outstanding Notes to the Transfer Agent for split-up and return any untendered Outstanding Notes to the holder (or to such other person as may be designated in the Letter of Transmittal) as promptly as practicable after expiration or termination of the Exchange Offer. 8. Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will notify you (such notice, if given orally, to be confirmed in writing) of the Company's acceptance, promptly after the Expiration Date, of all Outstanding Notes properly tendered and you, on behalf of the Company, will exchange such Outstanding Notes for Exchange Notes and will deliver such Outstanding Notes as directed by the Company. Delivery of Exchange Notes will be made on behalf of the Company by you at the rate of $1,000 principal amount of Exchange Notes for each $1,000 principal amount of Outstanding Notes tendered promptly after notice (such notices, if given orally, to be confirmed in writing) of acceptance of said Outstanding Notes by the Company; provided, however, that in all cases Outstanding Notes tendered pursuant to the Exchange Offer will be exchanged only after timely receipt by you of certificates for such Outstanding Notes (or confirmation of book-entry transfer into your account at the Book-Entry Transfer Facility), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or an Agent's Message in lieu thereof) and any other required documents. You shall issue Exchange Notes only in 3 4 denominations of $1,000 or in any integral multiple in excess thereof. Outstanding Notes may be tendered in whole or in part in integral multiples of $1,000 in aggregate principal amount. 9. Tenders pursuant to the Exchange Offer are irrevocable, except that, subject to the terms and upon the conditions set forth in the Prospectus and the Letter of Transmittal, Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn at any time on or prior to the Expiration Date. 10. The Company shall not be required to exchange any Outstanding Notes tendered if any of the conditions set forth in the Exchange Offer are not met. Notice of any decision by the Company not to exchange any Outstanding Notes tendered shall be given (such notice, if given orally, shall be confirmed in writing) by the Company to you. 11. If, pursuant to the Exchange Offer, the Company does not accept for exchange all or part of the Outstanding Notes tendered because of an invalid tender, the occurrence of certain other events set forth in the Prospectus under the caption "The Exchange Offer - Certain Conditions to the Exchange Offer" or otherwise, you shall as soon as practicable after the expiration or termination of the Exchange Offer return those certificates for unaccepted Outstanding Notes (or effect the appropriate book-entry transfer of the unaccepted Outstanding Notes), together with any related required documents and the Letter of Transmittal relating thereto that are in your possession, to the persons who deposited them. 12. All certificates for reissued Outstanding Notes, unaccepted Outstanding Notes or Exchange Notes shall be forwarded at the Company's expense by (a) first-class mail, return receipt requested, under a blanket surety bond protecting you and the Company from loss or liability arising out of the nonreceipt or nondelivery of such certificates or (b) registered mail insured separately for the replacement value of each of such certificates. 13. You are not authorized to pay or offer to pay any concessions, commissions or solicitation fees to any broker, dealer, bank or other persons or to engage or utilize any person to solicit tenders. 14. As Exchange Agent hereunder, you (a) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any of the certificates or the Outstanding Notes represented thereby deposited with you pursuant to the Exchange Offer, and will not be required to and will make no representation as to the validity, sufficiency, value or genuineness of the Exchange Offer including without limitation the Prospectus, the Letter of Transmittal or the instructions related thereto; (b) shall not be obligated to take any action hereunder that might in your reasonable judgment involve any expense or liability, unless you shall have been furnished with reasonable indemnity satisfactory to you; 4 5 (c) may conclusively rely on and shall be fully protected in acting in good faith in reliance upon any certificate, instrument, opinion, notice, letter, facsimile or other document or security delivered to you and reasonably believed by you to be genuine and to have been signed by the proper party or parties; (d) may conclusively act upon any tender, statement, request, agreement or other instrument whatsoever not only as to its due execution and validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein that you shall in good faith reasonably believe to be genuine or to have been signed or represented by a proper person or persons; (e) may conclusively rely on and shall be fully protected in acting upon written or oral instructions from any Designated Officer of the Company with respect to the Exchange Offer; (f) shall not advise any person tendering Outstanding Notes pursuant to the Exchange Offer as to the wisdom of making such tender or as to the market value or decline or appreciation in market value of any Outstanding Notes; and (g) may consult with your counsel with respect to any questions relating to your duties and responsibilities, and the advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by you hereunder in good faith and in accordance with such advice or written opinion of such counsel. 15. You shall take such action as may from time to time be requested by any Designated Officer of the Company (and such other action as you may reasonably deem appropriate) to furnish copies of the Prospectus, the Letter of Transmittal and the Notice of Guaranteed Delivery, or such other forms as may be approved from time to time by the Company, to all persons requesting such documents and to accept and comply with telephone requests for information relating to the Exchange Offer, provided that such information shall relate only to the procedures for accepting (or withdrawing from) the Exchange Offer. The Company shall furnish you with copies of such documents at your request. 16. You shall advise by facsimile transmission or telephone, and promptly thereafter confirm in writing to J. Michael Gaither, Senior Vice President, General Counsel and Secretary of the Company and Eulalia M. Mack of Howard, Smith & Levin LLP, and such other person or persons as the Company may request, daily (and more frequently during the week immediately preceding the Expiration Date, if reasonably requested by the Company or less frequently prior to such time upon your reasonable request) up to and including the Expiration Date, as to the principal amount of the Outstanding Notes that have been tendered pursuant to the Exchange Offer and the items received by you pursuant to this Agreement, separately reporting and giving cumulative totals as to items properly received and items improperly received and items covered by Notices of Guaranteed Delivery. In addition, you will also inform, and cooperate in making available to, the Company or any such other person or persons as the 5 6 Company reasonably requests from time to time prior to the Expiration Date of such other information as they or such person or persons reasonably request. Such cooperation shall include, without limitation, the granting by you to the Company and such person or persons as the Company may reasonably request of access to those persons on your staff who are responsible for receiving tenders, in order to ensure that immediately prior to the Expiration Date the Company shall have received information in sufficient detail to enable it to decide whether to extend the Exchange Offer. 17. Letters of Transmittal and Notices of Guaranteed Delivery shall be stamped by you as to the date and the time of receipt thereof and shall be preserved by you for a period of time at least equal to the period of time you preserve other records pertaining to the transfer of securities. You shall dispose of unused Letters of Transmittal and other surplus materials by returning them to the Company at the address set forth below for notices. 18. For services rendered as Exchange Agent hereunder, you shall be entitled to compensation of One Thousand Five Hundred Dollars ($1,500) plus Twenty-Five Dollars ($25) per each holder that exchanges Outstanding Notes for Exchange Notes in the Exchange Offer, and reimbursement of reasonable out-of-pocket expenses incurred in connection with the Exchange Offer. 19. You hereby acknowledge receipt of the Prospectus and the Letter of Transmittal and further acknowledge that you have examined each of them to the extent necessary to perform your duties hereunder. Any inconsistency between this Agreement, on the one hand, and the Prospectus and the Letter of Transmittal (as they may be amended from time to time), on the other hand, shall be resolved in favor of the latter two documents, except with respect to the rights, duties, liabilities and indemnification of you as Exchange Agent, which shall be controlled by this Agreement. 20. (a) The Company agrees to indemnify and hold you harmless in your capacity as Exchange Agent hereunder against any liability, cost, tax (other than any income tax), claim or expense, including reasonable attorneys' fees and disbursements, arising out of or in connection with any action taken or omitted to be taken by the Exchange Agent in connection with its acceptance or performance of it duties under the Agreement and the documents related thereto, including without limitation, any act, omission, delay or refusal made by you in reasonable reliance upon any signature, endorsement, assignment, certificate, order, request, notice, instruction or other instrument or document reasonably believed by you to be valid, genuine and sufficient and in accepting any tender or effecting any transfer of Outstanding Notes reasonably believed by you in good faith to be authorized, and in delaying or refusing in good faith to accept any tenders or effect any transfer of Outstanding Notes; provided, however, that the Company shall not be liable for indemnification or otherwise for any loss, liability, cost or expense to the extent arising out of your negligence, willful breach of this Agreement, willful misconduct or bad faith. You shall notify the Company in writing of the assertion of any claim against you; provided however, that your failure so to notify shall not excuse the Company from its obligations hereunder except to the extent such failure to notify shall prejudice or cause damage to the Company. The Company shall be entitled to participate at its own expense in the 6 7 defense of any such claim or other action, and, if the Company so elects, shall assume the defense of any suit brought to enforce any such claim. In the event that the Company shall assume the defense of any such suit, it shall not be liable for the fees and expenses of any additional counsel thereafter retained by you so long as the Company shall retain counsel reasonably satisfactory to you to defend such suit. You shall not compromise or settle any such action or claim without the consent of the Company, provided that the Company shall not be entitled to assume the defense of any action if representation of the parties by the same legal counsel would, in the reasonable opinion of counsel for the Exchange Agent, be inappropriate due to actual or potential conflicting interests between the parties. This indemnification shall survive the release, discharge, termination and/or satisfaction of this Agreement. (b) You agree that, without the prior written consent of the Company (which consent shall not be unreasonably withheld), you will not settle, compromise or consent to the entry of judgment in any pending or threatened claim, action, or proceeding in respect of which indemnification could be sought in accordance with the indemnification provisions of this Agreement (whether or not you or the Company or any of its controlling persons is an actual or potential party to such claim, action or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company and controlling persons from all liability arising out of such claim, action or proceeding. 21. This Agreement and your appointment as Exchange Agent hereunder shall be construed and enforced in accordance with the laws of the State of North Carolina applicable to agreements made and to be performed entirely within such state, and without regard to conflicts of law principles, and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successors and assigns of each of the parties hereto. 22. All communications, including notices, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered personally with receipt acknowledged, (ii) sent by registered or certified mail, return receipt requested, (iii) transmitted by facsimile (which shall be confirmed by telephone and by a writing sent by registered or certified mail on the business day that such facsimile is sent), or (iv) sent by recognized overnight courier for next business day delivery, addressed to the parties at the addresses or facsimile numbers as any party shall hereafter specify by communication to the other parties in the manner provided herein: If to the Company: The J.H. Heafner Company, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Fax No.: (704) 423-8987 Attn: J. Michael Gaither Senior Vice President/Strategic Planning, General Counsel and Secretary with a copy to: 7 8 Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, NY 10019 Fax No.: (212) 841-1010 Attention: Eulalia M. Mack, Esq. 8 9 If to the Exchange Agent: First Union National Bank 230 South Tryon Street, 9th Floor Charlotte, NC 28288-1179 No.: (704) 383-7316 Attention: Shannon Schwartz 23. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 24. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 25. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days following the Expiration Date. Notwithstanding the foregoing, paragraph 18 and 20 and any outstanding obligation of the Exchange Agent shall survive the termination of this Agreement. Please acknowledge receipt of this Agreement and confirm the arrangements herein provided by signing and returning the enclosed copy. THE J.H. HEAFNER COMPANY, INC. By: ----------------------------------- J. Michael Gaither Senior Vice President, General Counsel and Secretary Accepted as of the date first above written: FIRST UNION NATIONAL BANK, as Exchange Agent By: ------------------------------------ Name: Title: 9 -----END PRIVACY-ENHANCED MESSAGE-----