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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 33-
THE J.H. HEAFNER COMPANY, INC.
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 56-0754594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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2105 WATER RIDGE PARKWAY, SUITE 500
CHARLOTTE, NORTH CAROLINA 28217
(Address, including zip code, of principal executive offices)
(704) 423-8989
(Registrant's telephone number, including area code)
Securities registered pursuant To Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant: NONE
Number of common shares outstanding at March 29, 1999: COMMON STOCK: 5,097,667
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TABLE OF CONTENTS
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PART I
ITEM 1. Description of Business..................................... 1
General Development of Business............................. 1
The Transactions............................................ 2
Financial Information about Industry Segments............... 3
Narrative Description of Business........................... 3
Industry Overview........................................... 4
Operations.................................................. 4
Products.................................................... 5
Suppliers................................................... 6
Customers................................................... 6
Competition................................................. 7
Trademarks.................................................. 7
Seasonality and Inventory................................... 7
Working Capital Practices................................... 7
Information System and Technology........................... 8
Environmental Matters....................................... 8
Employees................................................... 8
Business Subject to Governmental Contracts.................. 9
Cautionary Statement on Forward-Looking Statements.......... 9
ITEM 2. Description of Properties................................... 9
ITEM 3. Legal Proceedings........................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security
Holder Matters.............................................. 12
ITEM 6. Selected Financial Data..................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
ITEM 7A Quantitative and Qualitative Disclosure About Market Risk... 19
ITEM 8. Financial Statements and Supplementary Data................. 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 41
ITEM 11. Executive Compensation...................................... 43
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
ITEM 13. Certain Relationships and Related Transactions.............. 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 53
Signatures.................................................. 58
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This report 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.
GENERAL DEVELOPMENT OF BUSINESS
The J.H. Heafner Company, Inc. (together with its subsidiaries, "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 Oliver & Winston ("Winston") in 1997, it entered
the retail tire distribution market in California, becoming one of the nation's
largest tire retailers in terms of number of outlets. With the acquisitions of
Speed Merchant, d/b/a Speed Merchant and Competitive Parts Warehouse, and its
subsidiary ("CPW") and ITCO Logistics Corporation and its subsidiaries ("ITCO")
in 1998, Heafner expanded its West Coast distribution network and solidified its
position in the Southeastern wholesale tire distribution market. See "The
Transactions," below. 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
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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 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%.
THE TRANSACTIONS
ITCO merger and CPW acquisition. On May 20, 1998, a wholly-owned
subsidiary of Heafner was merged with ITCO Logistics Corporation (the "ITCO
merger"), with ITCO Logistics Corporation surviving as a new, wholly-owned
subsidiary of Heafner. 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. Also on May 20, 1998, Heafner acquired all of the issued and
outstanding shares of CPW from CPW's stockholders (the "CPW acquisition").
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 (the
"credit facility"). The credit facility replaced Heafner's then-existing senior
credit facility, referred to as the "old credit facility." An ITCO facility with
Fleet Capital Corporation (the "ITCO facility"), was repaid and terminated on
July 15, 1998. For purposes of the financial and other information in this
report, 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.
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 (the "Series A notes offering") of $100.0 million aggregate principal
amount of its Series A 10% Senior Notes Due 2008 (the "Series A notes"). 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 "Securities Act"). 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 (the "Series B 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 (the "Series B notes"), identical in all material
respects to the Series A notes except that the Series B notes are freely
transferable. That registration statement, as amended, was declared effective by
the SEC and the Series B exchange offer was commenced on October 16, 1998. The
Series B exchange offer closed on November 16, 1998. All of the outstanding
Series A notes were tendered in the Series B exchange offer, and no additional
Series A notes are outstanding or permitted to be issued.
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 (the "Series C notes") 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.
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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 as the
"Transactions."
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of Heafner is principally conducted in three industry
segments: Eastern wholesale, Western wholesale and Western retail. The financial
statements for the years ended December 31, 1998, 1997 and 1996, which are
included in Item 8 of this report, reflect the information relating to these
segments for each of Heafner's last three fiscal years.
NARRATIVE DESCRIPTION OF BUSINESS
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.
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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.
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
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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:
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REGION WINSTON CPW TOTAL
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Southern California......................................... 130 0 130
Sacramento/California Central Valley........................ 33 1 34
Northern California......................................... 24 8 32
Arizona..................................................... 3 11 14
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Totals.................................................... 190 20 210
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Through Winston's retail locations, the average size of which is
approximately 4,400 square feet, Heafner also provides automotive repair and
service, such as wheel alignment, oil changes and brake repair. These services
accounted for approximately 43.9% of Winston's total net sales in 1998.
Winston provides its customers with a guarantee on all products and
services and believes that its emphasis on customer service distinguishes it
from many of its competitors. Winston also conducts an eight-week training
course for its store managers and mechanics and routinely monitors the
performance of its customer service representatives. Through its strong consumer
protection program, which includes sending mystery shoppers to store locations,
Winston seeks to ensure that services and sales tactics comply with California
consumer protection regulations covering the automotive services industry.
Winston's programs have been highlighted by the California Bureau of Automotive
Repair in its publications as examples of how compliance with such regulations
can and should be achieved.
PRODUCTS
Heafner sells a broad selection of tires, custom wheels, automotive service
equipment and related products manufactured by the leading manufacturers of
those products. Heafner's products include flag brand tires manufactured by
Michelin, including the B.F. Goodrich and Uniroyal brands, private-label
products such as Regul tires, Winston tires and Pacer custom wheels, and house
brand products such as Monarch tires, manufactured by Kelly-Springfield. Heafner
generally stocks approximately 12,000 SKUs of tires in its distribution centers.
Heafner also distributes alignment service equipment manufactured by Hunter
Engineering Company and tire changers and balancers built by Hennessey
Industries, Inc. (a division of the Danaher Corporation), both leading
manufacturers in their respective fields. Heafner sells many other products,
including tires for the medium truck, farm and industrial markets, automotive
service equipment, wheel
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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.
Heafner purchases certain private-label and house brand tires, including
the Winston and Monarch products, from Kelly-Springfield. Purchases under the
Kelly-Springfield Supply Agreement are made at prices specified from time to
time in the manufacturer's pricing schedule. Under the Kelly-Springfield Supply
Agreement, Heafner must purchase all of its requirements of Winston brand tires
from Kelly-Springfield during the term of the agreement, except that it may
purchase Winston brand tires from other manufacturers if Kelly-Springfield is
unable or unwilling to meet its supply obligations under the agreement. The
initial term of the Kelly-Springfield Supply Agreement expires on May 7, 2007
and the agreement is automatically renewable for successive three-year terms
after then. The Kelly-Springfield Supply Agreement may be terminated by either
party upon twelve months' advance notice. Kelly-Springfield is the sole holder
of Heafner's Series A preferred stock and Series B preferred stock, as discussed
below under "Certain Relationships and Related Transactions -- Preferred Stock."
CUSTOMERS
Wholesale. Through its Heafner-ITCO and CPW wholesale divisions, Heafner
distributes tires and related automotive products principally to independent
tire dealers. Heafner's other customers include national retail chains, service
stations, general automotive repair facilities, auto parts stores, automobile
dealers and specialty automotive repair facilities. Heafner generally requires
payment from its customers within 30 days, although it may tailor programs for
its larger customers. In 1998, Heafner's wholesale divisions
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served an average of more than 25,000 customers in each month. Heafner's largest
customer accounted for less than 0.6% of Heafner's pro forma net sales for 1998
and Heafner's top 25 customers accounted for less than 5% of Heafner's pro forma
net sales for 1998.
Retail. Heafner's retail operations attract a variety of individual
consumers in the areas they serve. Through the Winston retail chain, Heafner
also offers accounts to its corporate retail customers. Winston's corporate
accounts represent approximately 17.0% of its tire business.
COMPETITION
The industry in which Heafner does business is highly competitive, and many
of Heafner's competitors have resources significantly greater than Heafner's.
Tire manufacturers distribute tires to the retail market by direct shipments to
independent tire dealers, national retail chains such as Sears and Wal-Mart and
manufacturer-owned retail stores as well as through shipments to independent
wholesale distributors. A number of independent wholesale tire distributors also
compete in the regions in which Heafner does business. In its retail business,
Heafner also faces competition from national chains and department stores, other
independent tire stores, tire manufacturer-owned stores, discount and warehouse
clubs and other automotive product retailers.
Heafner believes that the principal competitive factors in its business are
reputation, breadth of product offering, delivery frequency, price and service.
Heafner believes that it competes effectively in all aspects of its business due
to its ability to offer a broad selection of flag and private-label branded
products, its competitive prices and its ability to provide quality services in
a timely manner.
TRADEMARKS
The major brand names under which Heafner markets its products are
trademarks of Heafner. Those brand names are considered to be of material
importance to Heafner's business because they both develop brand identification
and foster customer loyalty. All of Heafner's trademarks are of perpetual
duration so long as periodically renewed, and Heafner currently intends to
maintain all of them in force. The major brand names under which Heafner markets
its products are:
- Regul tires,
- Winston tires,
- Pacer custom wheels,
- ICW custom wheels, and
- Magnum automotive lifts.
SEASONALITY AND INVENTORY
Heafner's wholesale distribution and retail service operations typically
experience their highest levels of sales from March through October of each
fiscal year, with the period from November through February generally
experiencing the lowest levels of sales. Heafner's inventories generally
fluctuate with anticipated seasonal sales volumes. Heafner believes it maintains
levels of inventory that are adequate to meet its customers' needs on short
notice. The average of beginning- and end-of-year inventories of Heafner in 1998
was $87.4 million.
Backlog of orders is not currently significant and has not been for the
1997 and 1998 fiscal years. Orders are filled shortly after receipt from
inventories.
WORKING CAPITAL PRACTICES
Heafner must maintain substantial inventories in connection with its
wholesale distribution and retail service operations throughout the year, which
fluctuate with anticipated seasonal sales volume. These inventories are
generally financed through borrowings under the credit facility, which provides
for a revolving
7
<PAGE> 10
credit facility of up to $100 million. The amount of borrowings under the credit
facility fluctuates throughout the year. On December 31, 1998, $21.9 million of
borrowing was outstanding and an additional $64.7 million could have been
borrowed under the credit facility.
Both the maintenance of substantial inventories and the practice of
seasonal borrowing are common to the wholesale tire distribution and retail tire
and automotive service industry.
INFORMATION SYSTEMS AND TECHNOLOGY
Heafner believes that software and on-line programs will play an
increasingly important role in linking Heafner to its distribution and retail
customers and improving Heafner's management of inventories of tires, wheels and
related products.
Heafner is able to offer reliable, timely and frequent deliveries to its
customers by utilizing inventory-management systems that link directly to its
major customers and among its distribution facilities and electronic data
interlinks directly with Michelin and Kelly-Springfield, its two largest
suppliers. Heafner supplies a number of customers with its proprietary "HeafNet"
system, which gives customers electronic access to Heafner's warehouses to
locate, price and order inventory. Heafner believes this system allows its
customers to respond more quickly and efficiently to retail customers' requests
for products. Heafner intends to implement a company-wide inventory management
system based on the strongest attributes of Heafner's, CPW's and ITCO's existing
systems in order to improve the operation of its overall distribution network.
Heafner also intends to make available to Heafner's retail stores in the
West and independent tire dealer customer base in the Southeast interactive
software programs focused on the retail customer that are currently offered by
CPW to independent tire dealers in the West. For example, CPW currently is a
distributor of a software product called Wheel Wizard that allows customers to
view a wide assortment of wheels in combination with the make and color of their
automobiles. Heafner believes that interactive software programs such as these
enhance its ability to market wheels by providing retail dealers devices that
take up little floor space, are relatively easy to use and are customer
oriented.
ENVIRONMENTAL MATTERS
Heafner's operations and properties are subject to federal, state and local
laws, regulations and ordinances relating to the use, storage, handling,
generation, transportation, treatment, emission, release, discharge and disposal
of certain materials, substances and wastes under which Heafner could be held
strictly, jointly and severally liable for costs associated with the
investigation and clean-up of contaminated properties. The nature of Heafner's
existing and historical operations exposes it to the risk of liabilities or
claims with respect to environmental matters, including off-site disposal
matters. For example, in its automotive service operations Heafner handles waste
motor oil and hydraulic brake fluid, the storage and disposal of which is
strictly regulated by federal and state authorities. Heafner contracts with
outside services to handle disposal of these materials.
Heafner believes that it currently complies with all relevant environmental
regulations and it does not incur significant costs maintaining compliance with
those laws. However, Heafner could incur material costs in connection with
environmental liabilities or claims. In addition, future events such as changes
in existing laws and regulations or in their interpretation, could give rise to
additional compliance costs or liabilities that could have a material effect on
Heafner's business or earnings. Expenditures related to environmental matters
have not had, and are not expected to have, a material effect on Heafner's
business or earnings.
EMPLOYEES
Heafner employed approximately 3,241 people as of December 31, 1998, of
whom approximately 1,631 were employed in its wholesale divisions and
approximately 1,610 were employed in its retail division. None of Heafner's
employees are represented by a union. Heafner believes its employee relations
are satisfactory.
8
<PAGE> 11
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of Heafner is subject to renegotiation
of contracts with, or termination by, any governmental agency.
CAUTIONARY STATEMENTS ON FORWARD-LOOKING INFORMATION
This report contains "forward looking statements," which are statements
other than statements of historical facts. These forward-looking statements are
principally contained under Items 1 and 7 and in statements using phrases such
as "expects" or "anticipates" located throughout this report. The forward-
looking statements include, among other things, Heafner's expectations and
estimates about its business operations, strategy, future 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
report, including in conjunction with the forward-looking statements included in
this report. All subsequent written or oral forward-looking statements
attributable to Heafner or to persons acting on behalf of Heafner are expressly
qualified in their entirety by those cautionary statements.
Heafner undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report may not occur.
ITEM 2. DESCRIPTION OF PROPERTIES.
Heafner's principal properties are geographically situated to meet sales
and operating requirements. All of Heafner's properties are considered to be
both suitable and adequate to meet current operating requirements. 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:
<TABLE>
<CAPTION>
OWNED/
LOCATION COMPANY LEASED
- -------- ------- ------
<S> <C> <C>
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
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
OWNED/
LOCATION COMPANY LEASED
- -------- ------- ------
<S> <C> <C>
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
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
OWNED/
LOCATION COMPANY LEASED
- -------- ------- ------
<S> <C> <C>
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
</TABLE>
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 three 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.
<TABLE>
<CAPTION>
LOCATION COMPANY USE
- -------- ------- -----------------
<S> <C> <C>
Charlotte, North Carolina.................... Heafner Executive offices
Lincolnton, North Carolina................... Heafner Corporate offices
Burbank, California.......................... Winston Corporate offices
San Jose, California......................... CPW Corporate offices
</TABLE>
ITEM 3. 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
11
<PAGE> 14
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Not applicable.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
data of Heafner for the periods indicated. The selected historical financial
data as of and for the years ended December 31, 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 in Item 8 of this report. The following selected historical
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included as Item 7, and the consolidated financial statements of
Heafner and the related notes, included as Item 8, in this report.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997(A) 1998(B)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................................ $161,786 $169,031 $190,535 $311,839 $713,672
Costs of goods sold...................................... 134,625 140,811 158,880 233,941 548,035
-------- -------- -------- -------- --------
Gross profit............................................. 27,161 28,220 31,655 77,898 165,637
Selling, general and administrative expenses............. 25,420 26,584 29,660 74,441 153,153
Special charges.......................................... -- -- -- -- 1,409
-------- -------- -------- -------- --------
Income from operations................................... 1,741 1,636 1,995 3,457 11,075
Interest and other expense, net.......................... 520 946 944 3,710 13,294
-------- -------- -------- -------- --------
Income (loss) from operations before provision (benefit)
for income taxes and extraordinary charge.............. 1,221 690 1,051 (254) (2,219)
Provision (benefit) for income taxes..................... -- -- -- (240) 289
-------- -------- -------- -------- --------
Net income (loss) from operations before extraordinary
charge................................................. 1,221 690 1,051 (14) (2,508)
Extraordinary charge..................................... -- -- -- -- (2,216)
-------- -------- -------- -------- --------
Net income (loss)........................................ 1,221 690 1,051 (14) (4,724)
Pro forma provision for income taxes..................... 520 325 439 -- --
-------- -------- -------- -------- --------
Pro forma net income (loss).............................. $ 701 $ 365 $ 612 $ (14) $ (4,724)
======== ======== ======== ======== ========
CASH FLOWS DATA:
Net cash provided by (used in) operating activities...... $ 4,525 $ (363) $ 4,008 $ 6,703 $ (9,684)
Net cash used in investing activities.................... (1,350) (2,200) (7,626) (46,459) (58,070)
Net cash provided by (used in) financing activities...... (2,702) 2,630 3,711 41,252 71,900
Depreciation and amortization............................ 1,232 1,062 1,331 5,399 12,316
Capital expenditures..................................... 1,687 2,205 7,865 4,908 8,697
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital.......................................... $ 16,957 $ 19,148 $ 16,913 $ 20,582 $ 56,562
Total assets............................................. 44,844 55,458 59,551 146,508 430,821
Total debt............................................... 12,515 15,632 21,003 64,658 185,336
Stockholders' equity..................................... 11,640 11,719 11,574 7,659 18,124
OTHER DATA:
EBITDA(c)................................................ $ 3,352 $ 3,060 $ 3,847 $ 9,987 $ 19,130
Ratio of earnings to fixed charges(d).................... 1.9x 1.4x 1.5x -- --
</TABLE>
- ---------------
(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.
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<PAGE> 16
(c) EBITDA represents net income before extraordinary item plus income taxes,
depreciation and amortization and interest expense. EBITDA for the year
ended December 31, 1998 includes $733,000 related to amortization of
deferred financing charges that is included as amortization expense for cash
flow purposes and interest expense in the consolidated statements of
operations. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service or incur indebtedness. However,
EBITDA should not be considered an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of liquidity
in accordance with generally accepted accounting principles. EBITDA as
calculated and presented here may not be comparable to EBITDA as calculated
and presented by other companies.
(d) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense (which includes amortization of deferred financing costs
and debt issuance cost) and one-third of rental expense, deemed
representative of that portion of rental expense estimated to be
attributable to interest. For the years ended December 31, 1997 and 1998,
earnings were insufficient to cover fixed charges by $254,000 and $2.2
million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the results of operations,
financial condition and liquidity of Heafner should be read in conjunction with
the financial statements and the related notes included in this report.
OVERVIEW
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 acquisitions of ITCO and CPW (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 has
established 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 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.
14
<PAGE> 17
The following table sets forth each category of statements of operations
data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DEC. 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 83.4 75.0 76.8
Gross profit................................................ 16.6 25.0 23.2
Selling, general and administrative expenses................ 15.6 23.9 21.7
Income from operations...................................... 1.0 1.1 1.6
Interest and other expense.................................. 0.4 1.2 1.9
Income (loss) from operations before benefit for income
taxes..................................................... 0.6 (0.1) (0.3)
Income taxes................................................ 0.0 (0.1) (0.0)
Net income (loss) before extraordinary charge............... 0.6 0.0 (0.4)
Extraordinary charge........................................ -- -- (0.3)
Net income (loss)........................................... 0.6 0.0 (0.7)
Pro forma provision for income taxes........................ 0.3 0.0 --
Pro forma net income (loss)................................. 0.3 0.0 --
</TABLE>
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.
15
<PAGE> 18
Income taxes on pre-tax income before extraordinary charge were $0.3
million in 1998 compared to $(0.2) million in 1997. The effective income tax
rate for 1998 was (13.0)% and was increased from the statutory rate due to
non-deductible goodwill amortization.
The net loss for 1998 was $(4.7) million, or (0.7)%, of net sales compared
to a net loss of $(14,000), or 0.0%, of net sales in 1997, as a result of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales were $311.8 million for 1997, an increase of $121.3 million, or
63.7%, from $190.5 million in 1996. The increase was primarily due to the
acquisition of Winston on May 7, 1997. Winston sales included in reported 1997
results totaled $101.1 million, or 83.3% of the total sales increase for the
year. Wholesale distribution sales for Heafner in 1997 totaled $210.8 million,
an increase of $20.3 million, or 10.7%, from 1996 sales. This increase resulted
primarily from additional market share gains in the Southeast.
Gross profit was $77.9 million in 1997, an increase of $46.2 million, or
146.1%, from $31.7 million in 1996. As a percentage of net sales, gross profit
was 25.0% and 16.6%, respectively. Gross profit increased primarily due to the
acquisition of Winston. Excluding Winston's gross profits included in 1997
results, gross profit would have been $35.1 million, or 16.7% of net sales.
Retail sales generally result in higher gross profit margins than sales from
wholesale distribution.
Selling, general and administrative expenses were $74.4 million in 1997, an
increase of $44.8 million, or 151.0%, from $29.7 million in 1996. As a
percentage of net sales, these expenses were 23.9% and 15.6%, respectively.
Excluding the results of Winston subsequent to May 7, 1997, selling, general and
administrative expenses in Heafner's wholesale distribution business were $32.7
million, or 15.5%, of wholesale sales. Although as a percentage of sales these
costs were slightly lower in 1997 on an absolute basis, the increase of $3.0
million reflects Heafner's investment in both field and corporate personnel,
programs and customer service capabilities as it prepared for higher levels of
activity in 1998 and beyond.
Interest and other expense increased from $0.9 million in 1996 to $3.7
million in 1997 due to additional debt incurred in connection with the
acquisition of Winston.
Income taxes were $(0.2) million in 1997 as a result of the change in the
status of Heafner as of May 7, 1997 from a Subchapter S corporation to a
Subchapter C corporation.
A net loss of $(14,000), or 0.0% of net sales, in 1997 represented a
decrease of $1.1 million from net income in 1996 of $1.1 million, or 0.6% of net
sales, in 1996 as a result of the factors discussed above.
The effective income tax rate for 1997, on a pro forma basis, was 0.0%,
compared to an effective tax rate for 1996, on a pro forma basis, of 41.8%, due
to taxable income being $0.0 million for the four-month period in which Heafner
was an S corporation.
Pro forma net loss of $(14,000), or 0.0% of net sales, in 1997 represented
a decrease of $0.6 million from net income in 1996 of $0.6 million, or 0.3% of
net sales, in 1996 as a result of the factors discussed above.
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.
16
<PAGE> 19
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 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" under Item 1, above.
The Transactions and related financings had a significant impact on
Heafner's capitalization. At December 31, 1998 the combined net indebtedness
(net of cash) of Heafner was $178.7 million compared to $62.2 million (net of
cash) for Heafner on a stand-alone basis at December 31, 1997. Financing
currently committed by the lenders under the credit facility is $100.0 million
under a revolving line of credit. As of December 31, 1998, $21.9 million was
outstanding and $64.7 million was available for additional borrowings under the
credit facility.
Heafner's principal sources of cash during 1998, 1997, and 1996 came from
operations, borrowings under revolving credit facilities, issuance of long-term
subordinated debt and preferred stock in connection with the acquisition of
Winston, and issuance of long-term debt in connection with the Transactions.
Cash generated from (used in) operating activities totaled $(9.7) million, $6.7
million and $4.0 million, respectively, during
17
<PAGE> 20
each of those periods. Cash used in operating activities in 1998 was primarily
due to increases in trade accounts receivable and inventories totaling $13.9
million and $12.2 million, respectively. These increases were caused by an
increase in total sales during the year. Cash generated in 1997 was primarily
due to improved vendor payment programs which resulted in an increase in
accounts payable and accrued expenses of $9.6 million. Cash generated in 1996
was primarily due to reductions in inventory levels of $5.0 million due to
increased concentration on inventory management.
Capital expenditures during the years ended 1998, 1997 and 1996 amounted to
$8.7 million, $4.9 million, and $7.9 million, respectively. Capital expenditures
during 1998 included $5.7 million at Winston for store equipment, upgrades to
existing stores, new store locations and information technology. Other capital
expenditures during 1997 and 1996 were primarily for the construction and
purchase of warehouse distribution locations, including Heafner's primary
"mixing" warehouse in Lincolnton, North Carolina. Historically, the majority of
capital spending by Heafner has been for the construction or purchase of
additional distribution facilities, or for maintenance of existing fixed assets.
Heafner estimates that future annual capital expenditures (excluding those of
acquisitions of retail and distribution operations) will be $6.0 million to $8.0
million annually, and will principally be used for the renovation of retail
facilities and general corporate purposes. Heafner anticipates making further
acquisitions of retail and wholesale operations that may become available and
that meet Heafner's overall strategic guidelines. Such acquisition spending may
be incremental to the capital expenditures forecast above.
The credit facility is scheduled to mature on May 20, 2003. Loans under the
credit facility bear interest at a floating rate based upon federal funds or
Eurodollar rates plus an applicable margin. Loans under the credit facility are
guaranteed by all material subsidiaries of Heafner and secured by inventory and
accounts receivable of Heafner and its subsidiaries.
Heafner has entered into interest rate swap agreements from time to time to
manage exposure to fluctuations in interest rates. As of December 31, 1998,
interest rate swap agreements were in place covering notional amounts of
approximately $20.0 million of indebtedness expiring at various dates through
October 2002, at an average interest rate of 7.82%. Heafner does not anticipate
entering into additional swap agreements or hedging arrangements at this time.
Heafner anticipates that its principal use of cash going forward will be to
meet working capital and debt service requirements and to make capital
expenditures. In addition, Heafner expects to pay $5.0 million relating to
consolidation of warehouse and office facilities, severance obligations and
other exit costs over the next 18 months. Based upon current and anticipated
levels of operations, Heafner believes that its cash flow from operations,
together with amounts available under the credit facility, will be adequate to
meet its anticipated requirements. There can be no assurance, however, that
Heafner's business will continue to generate sufficient cash flow from
operations in the future to be applied to meet these requirements or to service
its debt, and Heafner may be required to refinance all or a portion of its
existing debt, or to obtain additional financing. These increased borrowings may
result in higher interest payments. In addition, there can be no assurance that
any such refinancing would be possible or that any additional financing could be
obtained. The inability to obtain additional financing could have a material
adverse effect on Heafner.
18
<PAGE> 21
Certain minority stockholders of Heafner have been granted redemption
rights commencing in 2004, subject to certain conditions, which if exercised
would obligate Heafner to redeem the shares of capital stock held by such
stockholders at agreed valuations (based upon a multiple of EBITDA formula). See
"The Transactions" and "Certain Relationships and Related Party Transactions --
Warrants" and "-- Preferred Stock." There can be no assurance that sufficient
funds will be available to redeem the shares of capital stock held by such
stockholders if Heafner is required to do so or whether the terms of its
outstanding indebtedness at such time, including the Series B and Series D
indentures, will permit such redemption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Heafner does not consider its exposure to market risk to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE J.H. HEAFNER COMPANY, INC. -- CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................... 20
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 21
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997
and 1996.................................................. 22
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998,
1997 and 1996............................................. 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997
and 1996.................................................. 24
Notes to Consolidated Financial Statements.................. 25
</TABLE>
19
<PAGE> 22
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.
20
<PAGE> 23
THE J. H. HEAFNER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
21
<PAGE> 24
THE J. H. HEAFNER COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
22
<PAGE> 25
THE J. H. HEAFNER COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------ NOTES
CLASS A CLASS B ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID IN FROM STOCK RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL SALES EARNINGS TOTAL
--------- -------- --------- ------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========= ======== ========= ======= =========== ========= =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
<PAGE> 26
THE J. H. HEAFNER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (4,724,000) $ (14,000) $ 1,051,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities, net of the ITCO merger,
CPW acquisition and the Winston acquisition --
Depreciation and amortization......................... 12,316,000 5,399,000 1,331,000
Extraordinary charge.................................. 3,694,000 0 0
Special charges....................................... 1,409,000 0 0
Deferred taxes........................................ (4,162,000) (528,000) 0
Loss (gain) on sale of property and equipment......... 264,000 (114,000) (390,000)
Reduction in stated value of Series A preferred
stock............................................... (147,000) 0 0
Change in assets and liabilities:
Accounts receivable, net................................ (13,923,000) (5,758,000) (1,672,000)
Inventories, net........................................ (12,242,000) (2,377,000) 4,956,000
Prepaid expenses and other current assets............... 1,967,000 200,000 (136,000)
Accounts payable and accrued expenses................... 7,090,000 9,581,000 (1,145,000)
Other................................................... (1,226,000) 314,000 13,000
------------ ------------ ------------
Net cash used in operating activities............... (9,684,000) (6,703,000) (4,008,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CPW, net of cash acquired.................. (36,074,000) 0 0
Merger of ITCO, net of cash acquired...................... (17,125,000) 0 0
Acquisition of Winston, net of cash acquired.............. 0 (42,195,000) 0
Purchase of property and equipment........................ (8,697,000) (4,908,000) (7,865,000)
Proceeds from sale of property and equipment.............. 3,826,000 363,000 1,090,000
Purchases of real estate held for sale.................... 0 0 (542,000)
Other..................................................... 0 281,000 (309,000)
------------ ------------ ------------
Net cash used in investing activities................. (58,070,000) (46,459,000) (7,626,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 150,000,000 28,000,000 6,447,000
Net proceeds from revolving credit facility and other
notes................................................... (38,071,000) 18,405,000 1,429,000
Proceeds from issuance of preferred stock................. 0 11,500,000 0
Principal payments on long-term debt...................... (32,714,000) (10,558,000) (2,506,000)
Cash paid for stock repurchase............................ (11,000) (2,708,000) 0
Cash paid for financing costs............................. (8,030,000) (2,378,000) 0
Cash dividends paid....................................... 0 (1,193,000) (1,196,000)
Collection (issuance) of notes receivable, net............ 726,000 184,000 (463,000)
------------ ------------ ------------
Net cash provided by financing activities............. 71,900,000 41,252,000 3,711,000
------------ ------------ ------------
NET INCREASE IN CASH........................................ 4,146,000 1,496,000 93,000
CASH, BEGINNING OF YEAR..................................... 2,502,000 1,006,000 913,000
------------ ------------ ------------
CASH, END OF YEAR........................................... $ 6,648,000 $ 2,502,000 $ 1,006,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash payments for interest................................ $ 10,495,000 $ 3,585,000 $ 1,428,000
============ ============ ============
Cash payments for taxes................................... $ 1,963,000 $ 0 $ 0
============ ============ ============
</TABLE>
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.
24
<PAGE> 27
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.
25
<PAGE> 28
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:
<TABLE>
<S> <C>
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
</TABLE>
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.
26
<PAGE> 29
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.
27
<PAGE> 30
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):
<TABLE>
<S> <C>
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
=======
</TABLE>
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.
28
<PAGE> 31
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):
<TABLE>
<S> <C>
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
=========
</TABLE>
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.
29
<PAGE> 32
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):
<TABLE>
<S> <C>
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
=======
</TABLE>
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):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................... $924,000 $831,000
Loss from continuing operations before extraordinary
charge.................................................... (5,075) (5,111)
Net loss.................................................... (7,291) (5,111)
======== ========
</TABLE>
30
<PAGE> 33
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
PRO FORMA
1998 1997 1996
------- ----- ---------
<S> <C> <C> <C>
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
======= ===== ====
</TABLE>
As discussed in Note 8, the Company incurred an extraordinary charge in May
1998 related to the early extinguishment of debt resulting in an income tax
benefit of $1.5 million.
Actual 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
PRO FORMA
1998 1997 1996
------- ----- ---------
<S> <C> <C> <C>
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
======= ===== ====
</TABLE>
31
<PAGE> 34
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The above amounts have been classified in the consolidated balance sheet as
follows (000's):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
4. REVOLVING CREDIT FACILITY:
On May 20, 1998, the Company replaced its existing loan and security
agreement with a new credit facility that provides for a senior secured
revolving credit facility (the Revolver). The Revolver provides for borrowings
in the aggregate principal amount of up to the lesser of $100.0 million or the
Borrowing Base, as defined in the agreement, based on 85% of eligible accounts
receivable and 65% of eligible tire inventory and 50% of all other eligible
inventory (of which up to $10.0 million may be utilized in the form of letters
of credit). 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
32
<PAGE> 35
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
Aggregate maturities required on long-term debt at December 31, 1998, are
as follows (000's):
<TABLE>
<S> <C>
1999........................................................ $ 3,011
2000........................................................ 3,795
2001........................................................ 3,036
2002........................................................ 379
2003........................................................ 269
Thereafter.................................................. 152,921
--------
$163,411
========
</TABLE>
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.
33
<PAGE> 36
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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
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
34
<PAGE> 37
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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).
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):
<TABLE>
<CAPTION>
EASTERN WESTERN WESTERN
WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS
--------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
35
<PAGE> 38
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
EASTERN WESTERN WESTERN
WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS
--------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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):
<TABLE>
<CAPTION>
AS OF AND FOR
THE YEAR
ENDED
DECEMBER 31,
1998
--------------
<S> <C>
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)
</TABLE>
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.
36
<PAGE> 39
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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.
The following presents the status of the Plan as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
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
======= =====
</TABLE>
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.
37
<PAGE> 40
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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):
<TABLE>
<CAPTION>
1998 1997
------- ----
<S> <C> <C>
Net loss............................................. $(4,724) $(14)
Pro forma............................................ (4,873) (42)
</TABLE>
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.
The following is summary information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
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
---------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 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
========== ======= ==== ===== ====== =====
</TABLE>
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):
<TABLE>
<S> <C>
1999........................................................ $20,913
2000........................................................ 18,338
2001........................................................ 15,031
2002........................................................ 12,323
2003........................................................ 10,002
Thereafter.................................................. 18,579
-------
$95,186
=======
</TABLE>
38
<PAGE> 41
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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 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.
39
<PAGE> 42
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
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.
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.
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table contains information regarding the directors and
executive officers of Heafner. Directors hold their positions until the annual
meeting of the stockholders at which their term expires or until their
respective successors are elected and qualified. Executive officers hold their
positions until the annual meeting of the Board of Directors or until their
respective successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ann H. Gaither............................ 67 Chairperson
William H. Gaither........................ 43 President, Chief Executive Officer and
Director
Donald C. Roof............................ 47 Senior Vice President, Chief Financial
Officer and Treasurer
J. Michael Gaither........................ 46 Senior Vice President/Strategic Planning,
General Counsel and Secretary
Daniel K. Brown........................... 45 Senior Vice President/Sales and Marketing
Richard P. Johnson........................ 51 President, Heafner-ITCO Division
P. Douglas Roberts........................ 51 President, Winston Tires
Arthur C. Soares.......................... 49 President and Chief Operating Officer, CPW
Joseph P. Donlan.......................... 52 Director
V. Edward Easterling, Jr.................. 39 Director
Victoria B. Jackson....................... 44 Director
William M. Wilcox, Jr..................... 72 Director
</TABLE>
Ann H. Gaither -- Chairperson. Ms. Gaither joined Heafner in 1972 and
succeeded her father as Chief Executive Officer in 1984. She served as President
of Heafner from 1986 until 1989 and has served as Chairperson since 1988. Ms.
Gaither currently serves on the board of directors of C200, a national women's
business owners organization, and is a Commissioner with the North Carolina
Department of Transportation Board. Ms. Gaither is the mother of William H.
Gaither, the President, Chief Executive Officer and a Director of Heafner.
William H. Gaither -- President, Chief Executive Officer and Director. Mr.
Gaither joined Heafner in 1978 as a management trainee, subsequently serving as
an Assistant Manager in various locations. In 1986, Mr. Gaither was named
Executive Vice President, a position he held until 1989. He has served as
President of Heafner since 1989. Mr. Gaither also has served as the Chief
Executive Officer of Heafner since 1996 and has been a Director of Heafner since
1986. He holds a B.A. from Davidson College. Mr. Gaither is the son of Ann H.
Gaither, the Chairperson of Heafner.
Donald C. Roof -- Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Roof has served as Heafner's Senior Vice President, Chief
Financial Officer and Treasurer since April 1997. Prior to that time, from 1987
to November 1996, he served in a variety of positions with Yale
International/Spreckels Industries, a global industrial manufacturing and food
processing company. From 1990 to 1994, Mr. Roof was Treasurer and Chief
Financial Officer of Yale International/Spreckels Industries, and from 1994 to
1996, Senior Vice President and Chief Financial Officer. He received his B.B.A.
from Eastern Michigan University.
J. Michael Gaither -- Senior Vice President/Strategic Planning, General
Counsel and Secretary. Mr. Gaither has served in his present capacity since
joining Heafner in 1991. Prior to that time, he was a lawyer in private practice
for several years. He holds a B.A. from Duke University and received his J.D.
from
41
<PAGE> 44
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 Distribution from 1991 to 1994, and as
its President and Chief Operating Officer from 1994 to 1996. Prior to that time,
Mr. Johnson held a variety of management positions with Leprino Foods, Sargento
Cheese and Kraft Foods. He holds an A.A. from Palm Beach College.
P. Douglas Roberts -- President, Winston Tires. Mr. Roberts joined Winston
as President -- Winston Tires in November 1998. He served with Frazee Industries
as Vice President -- Sales, Development, Marketing & Store Operations from 1992
until the time he joined Winston. Prior to that time, Mr. Roberts headed a
variety of management positions with Libbey-Owens-Ford, Tenneco Automotive, and
Taco Bell. Mr. Roberts holds a B.A. from Western Carolina University.
Arthur C. Soares -- President, CPW Division. Mr. Soares was the founder
and principal owner of CPW, and currently serves as the President and Chief
Operating Officer of Heafner's CPW division. Mr. Soares started CPW in 1971 with
a single retail outlet, which grew over the years to its current level of
operations. He holds a B.A. from Santa Clara University.
Joseph P. Donlan -- Director. Mr. Donlan has been a Director since May
1997. He is currently a Senior Manager of Brown Brothers Harriman & Co., where
he has served in a variety of capacities beginning in 1970 when he joined Brown
Brothers' commodities lending group. He was promoted to run this group in 1976,
and in 1981 was named Senior Credit Officer and a member of Brown Brothers'
Credit Committee, on which he continues to serve. In 1996 he co-founded the 1818
Mezzanine Fund. He is a 1968 graduate of Georgetown University and received an
M.B.A. from Rutgers University in 1970. Mr. Donlan also serves on the board of
directors of National Auto Finance, Incorporated, One Call Medical, Inc. and
System One Services, Inc.
V. Edward Easterling, Jr. -- Director. Mr. Easterling has been a Director
since June 1998. He is currently a principal of Wingate Partners, a private
equity investment firm based in Dallas, Texas. Prior to joining Wingate in 1994,
he was part of the investment and executive management group that acquired 12
troubled thrifts in Texas and created American Federal Bank in 1988. Previously,
Mr. Easterling was Vice President and Treasurer of Swift Independent Packing
Company and Treasurer of Valley View Capital Corporation. He received a B.B.A.,
a B.A. in Psychology, and an M.B.A. from Southern Methodist University. Mr.
Easterling also serves as Chairman of the board of directors for NSG
Corporation.
Victoria B. Jackson -- Director. Ms. Jackson has been a Director since
June 1997. She has been with DSS/Pro Diesel, a diesel parts manufacturer,
remanufacturer and distribution company based in Nashville, Tennessee since 1977
and served as its President and Chief Executive Officer from 1997 until February
1999. She received an M.B.A. from the Owen Graduate School of Management at
Vanderbilt University and a B.A. in Business Administration and A.A. from
Belmont University. Ms. Jackson also serves on the boards of directors of
AmSouth Bancorporation, Hussman Econometrics Advisors, Inc. and Whitman
Corporation.
William M. Wilcox, Jr. -- Director. Mr. Wilcox has been a Director since
March 1998. Mr. Wilcox served for over 41 years with both B.F. Goodrich and
Uniroyal Goodrich. At B.F. Goodrich, he served in various capacities, including
Executive Vice President/Sales. He retired from Uniroyal Goodrich after serving
as President, Company Brands and President, Sales Worldwide.
42
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table contains information concerning the compensation for
services in all capacities to Heafner for the years ended December 31, 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
$100,000 in salary and bonus in 1998 and (c) one person for whom disclosure
would have been provided as among the most highly compensated executive officers
but for the fact that he was not serving as an executive officer at December 31,
1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(A) (#)(B) ($)
- --------------------------- -------- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- --
</TABLE>
- ---------------
(a) This column includes nothing for perquisites and other personal benefits
because in no case did the aggregate amount of perquisites and other
personal benefits exceed the reporting threshold (the lesser of $50,000 or
10% of total annual salary and bonus), but includes amounts for the annual
contribution for deferred compensation for such Named Executive Officer for
the year.
(b) This column includes stock options granted in 1997 and 1998 under Heafner's
stock option plan, which is discussed below under "-- Stock Option Plan."
Thirty percent of the options granted in 1997 have, or will, vest and become
exercisable within 60 days. The remaining options vest as described in "--
Stock Option Plan," below.
(c) Consists of certain board-designated discretionary compensation paid in
1998.
(d) Consists of directors' fees paid during 1996 of $10,000.
(e) Consists of taxable amounts reported in connection with vendor-sponsored
trips.
(f) Mr. Roof joined Heafner in April 1997. Salary represents payments to Mr.
Roof during the period of his employment in 1997. On an annualized basis,
Mr. Roof's salary for 1997 would have been $215,000.
(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
43
<PAGE> 46
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 $259,600.
OPTION/SAR GRANTS IN 1998
No stock appreciation rights were granted during 1998. The following table
contains information concerning the grant of stock options to each of the Named
Executive Officers during 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF STOCK
SECURITIES TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(B)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED(A) YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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................ -- -- -- -- -- --
</TABLE>
- ---------------
(a) The securities underlying the options, which were granted under the stock
option plan, are shares of Class A common stock. Under the stock option
plan, none of the options granted to each of the Named Executive Officers
will vest or are exercisable within 60 days. The options will vest as
described in "-- Stock Option Plan," below.
(b) The potential realizable value columns illustrate the value that might be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compound rates of appreciation of the
Class A common stock over the term of the options. These amounts represent
certain assumed rates of appreciation only, assuming a fair market value on
the date of grant of $7.48 per share. Because the Class A common stock is
privately held, a per-share fair market value on the date of grant of the
options equal to $7.48 was assumed based on a stock appraisal as of May
1998. Actual gains on the exercise of the options are dependent on the
future performance of the Class A common stock. The potential values
reflected in this table may not be the actual values ultimately realized.
All amounts have been rounded to the nearest whole dollar.
-----------------------------------------
No options to purchase common stock were exercised by the Named Executive
Officers during the 12 months ended December 31, 1998.
STOCK OPTION PLAN
In 1997, Heafner adopted The J.H. Heafner Company 1997 Stock Option Plan
(the "stock option plan"). The stock option plan is designed to motivate
designated employees, officers, directors and independent contractors of Heafner
and its subsidiaries by encouraging them to acquire a proprietary interest in
Heafner. Heafner's board of directors, acting through a "plan committee" of at
least two members of the board, administers the stock option plan, selects
eligible participants, determines the number of shares subject to each option
granted under the stock option plan and sets other terms and conditions
applicable to participants in the stock option plan. After giving effect to the
reclassification of Heafner's Class A common
44
<PAGE> 47
stock, and a 1998 amendment increasing the number of shares available for option
grants under the plan, an aggregate of 527,500 shares of Class A common stock
are reserved for issuance under the stock option plan.
The stock option plan provides for the grant to designated employees,
officers, directors and independent contractors of Heafner and its subsidiaries
of options to purchase shares of Class A common stock. The plan committee has
sole authority to select those individuals to whom options may be granted and to
determine the number of shares of Class A common stock that will be issuable
upon exercise of the options granted. The purchase price for shares of Class A
common stock issuable upon exercise of the options granted is fixed by the plan
committee, but cannot be less than the fair market value of the Class A common
stock, as determined in good faith by Heafner's board of directors, if the
corresponding option is intended to qualify as an incentive stock option under
the Internal Revenue Code. As of December 31, 1998, options to purchase an
aggregate of 493,650 shares of Class A common stock, some of which are shares of
common stock that were reclassified as Class A common stock, at prices ranging
from $1.10 to $7.48 per share, were outstanding under the stock option plan.
All options granted under the stock option plan are subject to the terms
and conditions of a stock option agreement entered into by each option
recipient. The stock option agreement generally requires each recipient to be
bound by the terms of a stockholder agreement between certain management
stockholders and Heafner in the event the recipient elects to exercise options.
Options granted under the stock option plan generally vest on the first four
anniversaries of the date of grant, in installments of either (a) 10%, 20%, 30%
and 40% or (b) 20%, 20%, 20%, and 40%, of the total number of underlying shares.
Options granted under the stock option plan are not transferable by the
recipient other than by a will or by the laws of descent and distribution and,
during the recipient's lifetime, may only be exercised by the recipient. Under
the terms of the stock option plan, options terminate no later than the tenth
anniversary of the date of grant. Options are also subject to adjustment to
avoid dilution in the event of a change in the capital structure of Heafner.
If an option recipient dies or if his or her employment is terminated
because of a permanent disability or for any other reason, other than for cause
as defined in the stock option agreement, the recipient or his or her personal
representative may exercise the option within 180 days after the termination
date, but only to the extent the option has vested on the termination date or
would have vested in the 12 months following the termination date. Any option
that would still be unvested after that time will lapse. If an option
recipient's employment is terminated for cause, the recipient may exercise the
option within 30 days after the date of termination, but only to the extent the
option has vested on the date of termination. Any option that is unvested on the
date of termination will lapse.
Under the stock option plan, each of the following events would constitute
a "change of control":
- any person or entity not controlled by Heafner's stockholders acquires
more than 50% of the shares of Heafner's common stock,
- all or substantially all of the assets of Heafner are sold,
- the majority of Heafner's board of directors no longer comprises persons
currently serving on the board or persons designated by the current
board majority,
- Ann H. Gaither, William H. Gaither, Susan G. Jones and Thomas R. Jones
collectively own less than 50% of the combined voting power of the then
outstanding shares of common stock of Heafner, or
- Heafner issues common stock in a public offering.
All options outstanding under the stock option plan will become fully
vested and immediately exercisable immediately prior to any change of control.
If any option is not then exercised, it will expire upon the happening of the
change in control.
RESTRICTED STOCK PLAN
In 1997, Heafner adopted The J.H. Heafner Company 1997 Restricted Stock
Plan (the "restricted stock plan"), which is designed to motivate designated
employees, officers, directors and independent contractors of Heafner and its
subsidiaries by encouraging them to acquire a proprietary interest in Heafner.
Heafner's board of directors, acting through the plan committee, administers the
restricted stock plan, selects eligible participants, determines the number of
shares to be awarded to each participant and sets other terms and
45
<PAGE> 48
conditions applicable to participants in the restricted stock plan. As of
December 31, 1998, an aggregate of 215,000 shares of Class A common stock, some
of which are shares of common stock that were reclassified as Class A common
stock, had been issued to participants in the restricted stock plan for a
purchase price of $1.10 per share. The shares issued under the restricted stock
plan were issued in exchange for promissory notes given by the participants. The
principal of the notes is forgiven over time by Heafner depending upon the
attainment of certain earnings targets.
The restricted stock plan enables designated employees, officers, directors
and independent contractors of Heafner to purchase shares of Class A common
stock. The plan committee has sole authority to select the individuals to whom
the opportunity to participate in the restricted stock plan may be offered and
to determine the number of shares of Class A common stock to be issued. The
purchase price for shares of Class A common stock issued under the restricted
stock plan is fixed by the plan committee, which has the authority to impose
additional terms and conditions in connection with issuances to participants.
All shares that have been issued under the restricted stock plan are subject to
the terms and conditions of a securities purchase and stockholders' agreement
(the "restricted stock agreement") entered into by each option recipient.
The restricted stock agreement prohibits the transfer of stock issued under
the restricted stock plan except for transfers:
- to Heafner upon the termination of employment of a participating
stockholder,
- to other management employees who have executed and delivered agreements
substantially similar to the restricted stock agreement,
- by will or by the laws of descent or distribution, or
- if and to the extent repurchase rights in favor of Heafner on
termination of employment have not been exercised, to third parties,
subject to rights of first refusal in favor of Heafner and the other
holders of restricted stock.
Heafner has the right to repurchase all of a participating stockholder's
shares upon the termination of that stockholder's employment due to cause (as
defined in the restricted stock agreement) or the death of the participating
stockholder. A participating stockholder may require Heafner to repurchase all
of such stockholder's shares if that stockholder terminates his or her
employment for good reason (as defined in the restricted stock agreement). In
all cases, the repurchase price for shares of stock subject to the restricted
stock agreement is the higher of their original purchase price and a price
derived from Heafner's "Net Equity Value," as defined in the restricted stock
agreement, at the time of repurchase.
COMPENSATION OF DIRECTORS
During the year ended December 31, 1998, directors who were not members of
the Gaither family or nominees of The 1818 Mezzanine Fund, L.P. or Wingate
Partners II, L.P. were paid a fee of $2,500 for each board meeting attended.
Heafner intends to continue this compensation policy for directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, William H. Gaither, Donald C. Roof, and J. Michael Gaither
served on an executive committee of Heafner which reviewed and recommended
executive compensation for the Named Executive Officers and other executives of
Heafner. All compensation recommendations of the executive committee were
reviewed by and subject to the approval of the full board of directors of
Heafner.
BOARD REPORT ON EXECUTIVE COMPENSATION
The executive committee, at the direction of the board of directors of
Heafner, recommends the compensation of the Named Executive Officers and other
executives of Heafner. In addition, the executive committee administers
Heafner's compensation and stock option plans.
46
<PAGE> 49
The key components of the compensation packages of Heafner's executive
officers are annual salary, bonuses dependent upon Heafner's performance, and
long term, stock-based incentives. In addition, Heafner's executive officers
receive health, accident, and life insurance, retirement, and other personal
benefits typically offered to executives by other corporations equivalent in
size.
Historically, Heafner has entered into employment agreements with its
senior executive officers which fix their minimum annual salaries and bonuses.
The compensation philosophy of Heafner's board of directors is that the
compensation of Heafner's executives and key managers should be designed to
promote achievement of Heafner's business and financial objectives; to provide
pay that is externally competitive and internally equitable, which will allow
Heafner to attract, retain, and motivate the executives and key managers
necessary to accomplish its business objectives; and to reward exceptional
performance. The executive committee reviews the salaries provided for in the
employment agreements with its senior executive officers, as well as the
salaries of Heafner's other officers, once a year, and recommends changes to the
board of directors.
Mr. William H. Gaither's compensation for the last completed fiscal year
was in recognition of the many major initiatives undertaken and accomplished by
him since the beginning of 1998. The most notable of these initiatives were his
restructuring efforts, including the ITCO merger and the CPW acquisition.
Bonuses are payable based upon performance measures recommended by the
executive committee for each participant. The executive committee recommends a
threshold, target, and maximum performance objective for each performance
measure. Each of the executive committee's recommendations must be approved by
the board of directors. No payment with respect to a performance measure is made
if performance is below the threshold performance objective established for that
performance measure. If the target performance objective is reached, the
participant is entitled to receive 100% of the bonus attributable to that
performance measure. If the maximum performance objective is reached, the
participant receives 200% of the bonus attributable to that performance measure.
As a result, if the maximum performance objectives for all performance measures
are reached, a participant will receive a bonus equal to 200% of his or her
targeted bonus.
No participant may receive more than 200% of his or her targeted bonus.
Bonuses are subject to reduction or cancellation on the basis of a participant's
individual performance or in the event of conduct by a participant detrimental
to Heafner. Bonuses are payable in cash.
THE BOARD OF DIRECTORS
Ann H. Gaither
William H. Gaither
Joseph P. Donlan
V. Edward Easterling, Jr.
Victoria B. Jackson
William M. Wilcox, Jr.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Heafner's articles of incorporation provide for the release of any person
serving as a director of Heafner from liability to Heafner or its stockholders
for damages for breach of fiduciary duty and for the indemnification by Heafner
of any person serving as a director, officer, employee or agent or other
authorized person to the fullest extent permissible under the North Carolina
Business Corporation Act. In addition, Heafner has purchased a directors' and
officers' insurance policy covering officers and directors of Heafner and its
subsidiaries for liabilities that they may incur as a result of any action, or
failure to act, by such officers and directors in their capacity as officers and
directors.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Heafner has entered into employment agreements with each of Messrs. William
H. and J. Michael Gaither, Roof, Brown and Roberts, providing for annual base
salaries of approximately $354,444, $224,000, $243,000, $191,000 and $230,000,
respectively, for the current year.
47
<PAGE> 50
The employment agreements with Messrs. William H. and J. Michael Gaither,
Roof, Brown and Roberts provide for payment of annual bonuses and for additional
bonuses pursuant to Heafner's executive bonus plan. Fixed bonus payments made to
William H. Gaither are reduced by the amount received by him under Heafner's
board-designated discretionary compensation plan.
The employment agreements may be terminated at any time by Heafner. If the
employee's employment with Heafner is terminated on account of death or
disability, for cause, or without good reason (as defined in each employment
agreement), the employee is entitled to receive his base salary and target bonus
payable through the date of termination. If Heafner terminates the employee's
employment without cause, or if the employee terminates his employment with good
reason, then the employee is entitled to receive an additional payment equal to
his base salary and target bonus for one year. In the event of a termination by
Heafner as a result of or in anticipation of a change in control (as defined in
the employment agreements) or a constructive termination due to a change in
control, the employment agreements of each of Messrs. William H. Gaither and
Roberts provide that the employee is entitled to receive his base salary and
target bonus for a period of 24 months from the date of termination or
constructive termination. The employment agreements of Messrs. J. Michael
Gaither, Roof and Brown provide that, if the employee is terminated as a result
of or in anticipation of a change of control, or if his employment is terminated
by Heafner for any reason or by the employee for good reason within one year
after the change of control, or if he terminates his employment for any reason
within 30 days after the first anniversary of the change of control, then he is
entitled to receive an amount equal to his base salary and target bonus for the
period from his termination until the third anniversary of the change of
control. All of the employment agreements contain non-compete, non-solicitation
and confidentiality provisions.
In conjunction with the CPW acquisition, Heafner entered into employment
agreements with each of Arthur C. Soares, the current President of CPW, and Ray
C. Barney, the current Executive Vice President and Chief Operating Officer of
CPW.
Mr. Soares' employment agreement provides for a two year term and an annual
base salary of $250,000, a stay-put bonus of $2,000,000, payable in installments
of $1,250,000 at the end of the first year and $750,000 at the end of the second
year after the closing of the Transactions. It also provides for a "synergy"
bonus payable at the end of the first year based on the attainment of specified
performance targets for CPW and an annual incentive and performance bonus to be
determined in good faith by Heafner's board of directors. Mr. Barney's
employment agreement provides for a three-year term and an annual base salary of
$140,000, a stay-put bonus of $600,000, payable in installments of $200,000 at
the end of each of the first three years after the closing of the Transactions.
Mr. Barney's employment agreement (with Speed Merchant) also provides for a
"synergy" bonus payable at the end of the first year based on the attainment of
specified performance targets for CPW and an annual incentive and performance
bonus to be determined in good faith by Heafner's board of directors. Both
employment agreements contain non-compete, non-solicitation and confidentiality
provisions.
The employment agreements with Messrs. Soares and Barney are terminable at
any time by Heafner. Upon termination of employment for any reason, including
death or permanent disability, the employee or his heirs is entitled to receive
the employee's base salary and incentive bonus earned through the date of
termination and the synergy bonus for the first year of the employment term. If
Heafner terminates the employee's employment without cause, or the employee
terminates his employment with good reason (each as defined in the employment
agreements), the employee is entitled to receive an additional payment equal to
his base salary through the end of his employment term as well as the incentive
bonus payable for the first year. Payment of the stay-put bonus is contingent
upon the employee's continued employment with Heafner except in the case of the
employee's death or permanent disability, termination by the employer without
cause or termination by the employee for good reason.
In conjunction with the consummation of the Transactions, Heafner entered
into an employment agreement with Richard P. Johnson, who serves as President,
Heafner-ITCO Division. Mr. Johnson is paid an annual base salary of $250,000, a
fixed bonus and an annual incentive bonus to be determined in the discretion of
Heafner's board of directors. Upon termination of Mr. Johnson's employment by
Heafner without cause, or by Mr. Johnson for good reason, or upon a change of
control (each as defined in the employment agreement),
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<PAGE> 51
Mr. Johnson is entitled to a severance payment, depending on the date of
termination, ranging from 12 to 24 months' salary and bonus from and after the
date of termination. The employment agreement contains non-compete,
non-solicitation and confidentiality provisions.
EXECUTIVE BONUS PLAN
Heafner awards annual cash bonuses to up to 20 of its top executives.
Bonuses are payable only if Heafner attains specified annual performance
targets. Bonuses can range from up to 5% of salary for executives in the lowest
bonus bracket to up to 60% of salary for those in the highest. The executive
bonus plan may be altered in the discretion of Heafner's board of directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of Heafner's common stock as of December 31, 1998, giving effect to
the reclassification of Heafner's stock and to the other Transactions, of:
- each person known by Heafner to own beneficially more than 5% of the
Class A common stock,
- each person known by Heafner to own beneficially more than 5% of the
Class B common stock,
- each director,
- the Named Executive Officers, and
- all directors and executive officers of Heafner as a group.
<TABLE>
<CAPTION>
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)
- --------------------------------------- ---------------- -------------- --------------
<S> <C> <C> <C>
Ann H. Gaither........................... 1,992,293(c) 53.9%
William H. Gaither....................... 1,079,038(c,d) 28.7
Susan Jones.............................. 475,919 12.9
The 1818 Mezzanine Fund, L.P............. 1,034,000(e) 21.9
Wingate Partners II, L.P................. 1,301,264(f) 92.9%
Donald C. Roof........................... 32,500(g) 1.8
J. Michael Gaither....................... 32,500(h) 1.8
Daniel K. Brown.......................... 32,500(i) 1.8
Joseph P. Donlan......................... 1,034,000(e) 21.9
V. Edward Easterling, Jr................. 1,301,264(k) 92.9
Victoria B. Jackson...................... 5,000(l) *
Richard P. Johnson....................... 32,110(f,j) * 1.9
Arthur C. Soares......................... --
P. Douglas Roberts....................... 5,000(l) *
William M. Wilcox, Jr.................... 5,000(l) *
All directors and executive officers of
Heafner as a group (11 persons)........ 4,258,941(m) 98.7 1.9
</TABLE>
- ---------------
* 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
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<PAGE> 52
table, any securities which that person or group of persons has the right
to acquire within 60 days of March 31, 1999 are deemed to be outstanding
for purposes of computing the percentage ownership of such person or
persons, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Shares of Class A common
stock possess 20 votes per share and shares of Class B common stock possess
one vote per share. As of December 31, 1998, 3,697,000 shares of Class A
common stock and 1,400,667 shares of Class B common stock were issued and
outstanding.
(c) Excludes 475,919 shares of Class A common stock that Ann H. Gaither and
William H. Gaither have the power to vote under a voting trust agreement
among certain members of the Gaither family.
(d) Includes 18,750 shares of Class A common stock issuable upon the exercise of
options which are exercisable within 60 days.
(e) Represents shares issuable upon the exercise of Warrants, as discussed
below. Mr. Donlan is the co-manager of The 1818 Mezzanine Fund, L.P. and in
that capacity will have authority to vote and exercise investment power over
the shares. See "Certain Relationships and Related Transactions --
Warrants."
(f) Represents shares of Class B common stock issued in exchange for shares of
ITCO Logistics Corporation as part of the consideration for the ITCO merger.
Share numbers for Wingate Partners II, L.P. include shares of Class B common
stock held by its affiliate, Wingate Affiliates II, L.P. See "The
Transactions," included in Item 1 above.
(g) Includes 7,500 shares of Class A common stock issuable upon the exercise of
options which are exercisable within 60 days.
(h) Includes 7,500 shares of Class A common stock issuable upon the exercise of
options which are exercisable within 60 days.
(i) Includes 7,500 shares of Class A common stock issuable upon the exercise of
options which are exercisable within 60 days.
(j) Includes 5,000 shares of Class A common stock issuable upon the exercise of
options which are exercisable within 60 days.
(k) Represents shares of Class B common stock owned by Wingate Partners II, L.P.
and its affiliate, Wingate Affiliates II, L.P. Mr. Easterling is a general
partner of Wingate Affiliates II, L.P., and an indirect general partner of
Wingate Partners II, L.P., and, accordingly, may be deemed to be the
beneficial owner of such shares.
(l) Consists of 5,000 shares of Class A common stock issuable upon the exercise
of options which are exercisable within 60 days.
(m) Includes (1) 27,110 shares of Class B common stock and (2) 4,231,831 shares
of Class A common stock, of which 1,034,000 are shares issuable upon the
exercise of Warrants to The 1818 Mezzanine Fund, L.P., of which Mr. Donlan
is co-manager and will, in that capacity, have voting and investment power
over the shares.
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<PAGE> 53
ITEM 13. 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. (the "1818 Fund") warrants (the "Warrants") to purchase
shares of Heafner's common stock. Joseph P. Donlan, a member of Heafner's board
of directors, is a Senior Manager of Brown Brothers Harriman & Co., the 1818
Fund's general partner. Mr. Donlan and Robert R. Gould, a Partner of Brown
Brothers Harriman & Co., are co-managers of the 1818 Fund, and in that capacity
they exercise voting and investment power over the 1818 Fund's shares. The
Warrants are exercisable for 1,034,000 shares of Class A common stock. The
Warrants may be exercised, in whole or in part, at any time prior to the
earliest of:
- May 7, 2007,
- the date of an initial public offering of Class A common stock yielding
gross proceeds of at least $25.0 million or representing at least 20% of
the Class A common stock on a fully-diluted basis, or
- Heafner's merger or consolidation with or into another entity or the
sale of all or substantially all of Heafner's assets.
The number of shares issuable upon the exercise of the Warrants is subject
to adjustment from time to time to reflect stock dividends, splits, combinations
and reclassifications. In addition, the Warrants provide for upward adjustment
of the number of issuable shares if Heafner issues Class A common stock at a
price per share that is less than its current fair market value. Fair market
value is determined by reference to closing prices of the Class A common stock
on a national exchange or, if the Class A common stock is not publicly traded,
in good faith by Heafner's board of directors or a nationally recognized
investment banking firm, if requested by the holders of 33% of the Class A
common stock on a fully-diluted basis.
The Warrants provide that the holders of a majority in interest of the
Warrants issued on May 7, 1997 have the right, exercisable upon a change of
control as defined in the Warrants or at any time after May 7, 2004, to require
Heafner to redeem the Warrants. However, that redemption right may not be
exercised after the consummation of an initial public offering of the Class A
common stock yielding gross proceeds of at least $25.0 million or representing
at least 20% of the Class A common stock on a fully-diluted basis. If the
requested redemption right is exercised, Heafner must redeem all of the
outstanding Warrants at an agreed redemption price calculated based on an EBITDA
multiple of Heafner at the time of redemption, unless otherwise prevented by
law. Heafner has no right to call for the redemption of the Warrants.
Heafner and the 1818 Fund are also parties to a note and warrant purchase
agreement and a registration rights agreement, each dated as of May 7, 1997,
which contain provisions restricting the transferability of the Warrants,
including a right of first offer in favor of Heafner, and grant registration
rights with respect to shares of Class A common stock issuable upon exercise of
the Warrants.
PREFERRED STOCK
In connection with entering into the Kelly-Springfield Supply Agreement,
Kelly-Springfield purchased from Heafner 7,000 newly issued shares of Heafner's
Series A Cumulative Redeemable Preferred Stock, par value $.01 (the "Series A
preferred stock"), and 4,500 newly issued shares of Heafner's Series B
Cumulative Redeemable Preferred Stock, par value $.01 (the "Series B preferred
stock"), for an aggregate purchase price of $11.5 million. Kelly-Springfield is
the sole holder of each series of preferred stock. Each series of the preferred
stock has a stated value and liquidation preference equal to $1,000 per share,
except the liquidation preference of the Series B preferred stock is reduced
from time to time based upon purchases by Heafner of certain types of tires from
Kelly-Springfield.
Kelly-Springfield is entitled to receive monthly dividends on the
liquidation preference of the Series A preferred stock at a rate of 4% per year,
which may be increased if Heafner's annual tire purchases from Kelly-Springfield
fall below certain levels. Heafner is not required to pay dividends on the
Series B preferred stock unless its annual tire purchases from Kelly-Springfield
fall below certain levels.
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<PAGE> 54
Subject to the limitations summarized below, beginning in December 2002 and
ending in June 2007 Heafner is required to redeem 700 shares of Series A
preferred stock each year on a semi-annual basis at 100% of the liquidation
preference of such shares plus all accrued and unpaid dividends. Subject to the
same limitations, Heafner is required to redeem all of the outstanding shares of
Series B preferred stock in June 2007 at the same redemption price. Unless
restricted by the limitations summarized below, Heafner is also required to
redeem all the preferred stock if the Kelly-Springfield Supply Agreement is
terminated or, at the request of Kelly-Springfield, if a change of control of
Heafner occurs and Kelly-Springfield requests a termination of the Supply
Agreement. Each series of preferred stock also is redeemable at any time at
Heafner's option.
So long as any amounts are outstanding under Heafner's existing credit
facility or subordinated notes, or any amending or replacing agreement for that
debt, or any commitments to lend exist under such debt, Heafner is prohibited
from:
- making any payment in respect of any mandatory or optional redemption of
either series of preferred stock, or
- declaring, making or paying any dividend or distribution in respect of
either series of preferred stock, if any default or event of default
under any such debt, or any event which upon notice or lapse of time, or
both, would constitute an event of default, has occurred or is
continuing or would result from that event and has not been cured or
waived in accordance with such debt.
SHARE REPURCHASES
In February 1997, Heafner offered to repurchase shares of common stock from
members of the Gaither family not actively involved in the operation of Heafner
at a price equal to $.8058 per share, or $2,644 per share without giving effect
to a 3,281-for-1 stock split that occurred on May 7, 1997. Pursuant to the
offer, Heafner repurchased, and subsequently canceled and retired, 3,359,744
shares, 1,024 shares without giving effect to the stock split, of common stock
from the Gaither family members for an aggregate purchase price of $2.7 million.
In 1986, Heafner repurchased from Carolyn H. Williams, and subsequently canceled
and retired, all of her shares of Heafner's common stock in exchange for a
promissory note in the original principal amount of $1.4 million. Carolyn H.
Williams is the sister of Ann H. Gaither, the Chairperson of Heafner. The note
is payable through January 2006 in annual installments of $124,600, including
interest at a rate per year of 7.5%. The outstanding principal amount of the
note at December 31, 1998 was approximately $730,000.
RELATED PARTY LEASES; LOANS AND LOAN GUARANTEE
Heafner leases corporate office space in Lincolnton, North Carolina from
Ann H. Gaither, the Chairperson of Heafner, and her sister, Carolyn H. Williams,
for an annual rent equal to approximately $87,000. Heafner leases its
Winston-Salem, North Carolina distribution center from Ann H. Gaither for an
annual rent equal to approximately $55,200. In connection with this property in
Winston-Salem, Ann H. Gaither has a note owing to Heafner with a principal
balance of $158,591.93 payable in monthly installments of principal and interest
of $3,500 accruing interest at 9% per year with the final due date of October 1,
2003. Heafner leases the data processing and human resources buildings adjacent
to its corporate headquarters in Lincolnton, North Carolina from Evangeline
Heafner, Ann H. Gaither's mother, for an annual rent equal to approximately
$37,000. The expiration dates of these leases are September 30, 2002, August 1,
2003 and December 30, 2002, respectively. Heafner believes that these leases are
on terms no less favorable to it than could have been obtained from an
independent third party.
Pursuant to a guaranty dated March 31, 1997, Heafner has agreed to
guarantee all obligations of William H. Gaither, President and Chief Executive
Officer of Heafner, under a mortgage loan in an aggregate principal amount not
to exceed $890,000.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. The following items, including consolidated financial statements of
the Company, are set forth at Item 8 of this report:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1998 and 1997
- Consolidated Statement of Operations for the years ended December
31, 1998, 1997, and 1996
- Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
- Consolidated Statement of Cash Flows for the years ended December
31, 1998, 1997, and 1996
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Report of Independent Public Accountants (set forth on following page)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED CHARGED
BALANCE TO COSTS TO OTHER BALANCE
JANUARY 1, AND EXPENSES ACCOUNTS DEDUCTIONS DECEMBER 31,
---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts...... 400 1,627 1,701(1) (1,508)(3) 2,220
Restructuring reserve................ -- 1,409 -- (222)(4) 1,187
1997
Allowance for doubtful accounts...... 200 479 175(2) (454)(3) 400
Restructuring reserve................ -- -- -- -- --
1996
Allowance for doubtful accounts...... 200 193 -- (193)(3) 200
Restructuring reserve................ -- -- -- -- --
</TABLE>
- ---------------
(1) Includes amounts for ITCO Logistics Corporation and Subsidiaries and The
Speed Merchant, Inc. as of the May 20, 1998 acquisition date.
(2) Includes amounts for Oliver and Winston, Inc. as of the May 7, 1997
acquisition date.
(3) Accounts written off during the year, net of recoveries.
Schedules not included herein are omitted because they are not
applicable or the required information appears in the financial statements
or notes thereto.
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<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of The J.H. Heafner Company, Inc.
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of The J.H. Heafner Company, Inc. included in
this Form 10-K, and have issued our report thereon dated March 22, 1999. Our
audits were made for the purpose of forming an opinion on those financial
statements taken as whole. The schedules listed on Item 14 of this Form 10-K are
the responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Charlotte, North Carolina
March 22, 1999
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<PAGE> 57
3. Exhibits:
<TABLE>
<CAPTION>
<C> <S>
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++
9.1 Voting Trust Agreement, dated as of October 15, 1996, by and
among Ann Heafner Gaither, William H. Gaither, Albert C.
Gaither, Susan Gaither Jones, Lawson H. Gaither, Albert
Comer Gaither and Thomas R. Jones, as Stockholders, and Ann
Heafner Gaither and William H. Gaither, as Trustees*
10.1 Amended and Restated Loan and Security Agreement, dated as
of May 20, 1998, among the Company, Oliver & Winston, Inc.,
ITCO Holding Company, Inc. and The Speed Merchant, Inc., as
Borrowers, BankBoston, N.A., as Agent (the "Agent"), Fleet
Capital Corporation and First Union National Bank as
Co-Agents (the "Co-Agents") and the various financial
institutions from time to time party thereto, as Lenders*
10.2 Letter, dated May 20, 1998, from the Company, Oliver &
Winston, Inc., ITCO Holding Company, Inc., The Speed
Merchant, Inc., ITCO Tire Company, ITCO Tire Company of
Georgia and Phoenix Racing, Inc. to the Agent and the
Co-Agents*
10.3 Guaranties, dated as of May 20, 1998, by each of ITCO Tire
Company, ITCO Tire Company of Georgia, ITCO Logistics
Corporation and Phoenix Racing, Inc. in favor of the Agent*
10.4 Subsidiary Security Agreements, dated as of May 20, 1998,
between the Agent and each of ITCO Tire Company, ITCO Tire
Company of Georgia, ITCO Logistics Corporation and Phoenix
Racing, Inc.*
</TABLE>
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<PAGE> 58
<TABLE>
<C> <S>
10.5 Senior Subordinated Note and Warrant Purchase Agreement, dated as of May 7, 1997,
by and among The J. H. Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P.*
10.6 Registration Rights Agreement, dated as of May 7, 1997, by and among The J. H.
Heafner Company, Inc. and The 1818 Mezzanine Fund, L.P.*
10.7 Warrant No. 2 exercisable for 1,034,000 shares of Class A Common Stock in the
name of The 1818 Mezzanine Fund, L.P.*
10.8 Securities Purchase Agreement, dated as of May 7, 1997, between The J. H. Heafner
Company, Inc. and The Kelly-Springfield Tire and Rubber Company*
10.9 Agreement and Plan of Merger, dated March 10, 1998, among the Company, ITCO
Merger Corporation, ITCO Logistics Corporation and Wingate Partners II, L.P.,
Armistead Burwell, Jr., William E. Berry, Richard P. Johnson, Leon R. Ellin,
Wingate Affiliates II, L.P. and Callier Investment Company (the "ITCO
Stockholders")*
10.10 Class B Stockholder Agreement, dated as of May 20, 1998, among the Company and
the ITCO Stockholders*
10.11 Class B Registration Rights Agreement, dated as of May 20, 1998, among the
Company and the ITCO Stockholders*
10.12 Escrow Agreement, dated as of May 20, 1998, among the Company, the ITCO
Stockholders and the Chase Manhattan Bank, as escrow agent*
10.13 Stock Purchase Agreement, dated as of March 11, 1998, among the Company, Arthur
C. Soares and Ray C. Barney*
10.14 Escrow Agreement, dated as of May 20, 1998, among the Company, Arthur C. Barney,
Ray C. Barney and First Union National Bank, as escrow agent (the "CPW Escrow
Agreement")*
10.15 Letter of Credit, dated as of May 20, 1998, issued to First Union National Bank,
as CPW Escrow Agent*
10.16 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the
shareholders of Oliver & Winston, Inc.*
10.17 Guaranty, dated March 31, 1997, of the Company**
10.18 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998,
by and between Michelin North America, Inc. and the Company**
10.19 Letter Agreements, dated as of November 24 and 25, 1998, respectively, by and
between Michelin North America and the Company++
10.20 The J.H. Heafner Company 1997 Stock Option Plan (the "1997 Stock Option Plan")*
10.21 The J.H. Heafner Company 1998 Stock Option Plan Amendment (amending 1997 Stock
Option Plan)++
10.22 Form of Stock Option Agreement (incentive stock options)*
10.23 Form of Stockholder Agreement (pursuant to the 1997 Stock Option Plan)*
10.24 Stockholders' Agreement, dated as of October 15, 1996, by and among Ann Heafner
Gaither, William H. Gaither, Albert C. Gaither, Susan Gaither Jones, Lawson H.
Gaither, Albert Comer Gaither and Thomas R. Jones.*
10.25 The J.H. Heafner Company 1997 Restricted Stock Plan*
10.26 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among
the Company and various management stockholders*
10.27 Employment and Severance Agreements between the Company and William H. Gaither
and Thomas J. Bonburg**
10.28 Employment Agreement, dated as of May 20, 1998, between the Company and Richard
P. Johnson*
10.29 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C.
Soares*
10.30 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc.
and Ray C. Barney*
10.31 Lease Agreement, dated October 1, 1992, by and between Carolyn Heafner, Ann H.
Gaither, Albert C. Gaither and the Company, as amended*
</TABLE>
56
<PAGE> 59
<TABLE>
<C> <S>
10.32 Amended and Restated Employment Agreements, dated as of January 1, 1998, between
the Company and Daniel K. Brown, J. Michael Gaither and Donald C. Roof+
10.33 Lease, dated August 1, 1988, by and between Ann Heafner Gaither and the Company,
as amended**
10.34 Lease Agreement, dated January 1, 1993, by and between Evangeline H. Heafner and
the Company**
11.1 Statement re: Computation of Per Share Earnings
12.1 Statement re: Computation of Ratios
21.1 Chart of Subsidiaries of the Company++
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedules (for SEC use only)
</TABLE>
- ---------------
* 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.
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended December 31, 1998:
<TABLE>
<CAPTION>
ITEM REPORTED FINANCIAL STATEMENTS FILED DATED OF REPORT
------------- -------------------------- ------------------
<S> <C> <C>
Offering of $50 million in aggregate principal None December 8, 1996
amount of 10% Series C Senior Notes Due 2008
issued and sold in accordance with SEC Rule
144A
</TABLE>
57
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
31, 1999.
THE J. H. HEAFNER COMPANY, INC.
By: /s/ WILLIAM H. GAITHER
------------------------------------
Name: WILLIAM H. GAITHER
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on March 31, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM H. GAITHER Director, President and Chief March 31, 1999
- --------------------------------------------- Executive Officer
William H. Gaither
/s/ DONALD C. ROOF Senior Vice President, Chief Financial March 31, 1999
- --------------------------------------------- Officer and Treasurer
Donald C. Roof
/s/ J. LEWIS MCKNIGHT, JR. Chief Accounting Officer March 31, 1999
- ---------------------------------------------
J. Lewis McKnight, Jr.
/s/ ANN H. GAITHER Chairperson of the Board March 31, 1999
- ---------------------------------------------
Ann H. Gaither
/s/ VICTORIA B. JACKSON Director March 31, 1999
- ---------------------------------------------
Victoria B. Jackson
/s/ JOSEPH P. DONLAN Director March 31, 1999
- ---------------------------------------------
Joseph P. Donlan
/s/ WILLIAM M. WILCOX, JR. Director March 31, 1999
- ---------------------------------------------
William M. Wilcox, Jr.
/s/ V. EDWARD EASTERLING, JR. Director March 31, 1999
- ---------------------------------------------
V. Edward Easterling, Jr.
</TABLE>
58
<PAGE> 1
EXHIBIT 11.1
The J.H. Heafner Company, Inc.
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Average shares outstanding during the period 6,062,322 4,736,501 6,826,976
Incremental shares under stock options and warrants computed
under the treasury stock method using the average market
price of issuer's stock during the period 1,187,929 663,144 -
----------------- ----------------- ---------------
Total shares for diluted EPS 7,250,251 5,399,645 6,826,976
================= ================= ===============
Income applicable to common shareholders:
Loss from operations before extraordinary charge $ (2,508,000) - -
=================
Net income (loss)
-
$ (4,724,000) $ (14,000) $ 612,000
================= ================= ===============
(Loss) income per basic common share:
Loss from operations before extraordinary charge (0.41) - -
Net income (loss) $ (0.78) $ (0.00) $ 0.09
================= ================= ===============
Income (loss) per diluted share:
Loss from operations before extraordinary charge (0.35) - -
Net income (loss) $ (0.65) $ (0.00) $ 0.09
================= ================= ===============
</TABLE>
<PAGE> 1
Page 1 EXHIBIT 12.1
THE J.H. HEAFNER COMPANY, INC.
Statement Regarding: Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
(Amounts in thousands, except ratio amounts)
<TABLE>
<CAPTION>
Twelve months Twelve months Twelve months Twelve months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1998 1997 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Consolidated pretax income (loss) from
continuing operations (2,219) (253) 1,051 690
Interest 13,460 4,842 1,465 1,308
Interest portion of rent expense 6,474 2,985 795 661
Amortization of Deferred Debt Issuance
Costs and Deferred Financing Costs 733 291 -- --
Preferred stock dividend requirements of
majority-owned subsidiaries -- -- -- --
------- ------ ----- -----
EARNINGS 18,448 7,865 3,311 2,659
======= ====== ===== =====
Interest 13,460 4,842 1,465 1,308
Interest portion of rent expense 6,474 2,985 795 661
Amortization of Deferred Debt Issuance
Costs and Deferred Financing Costs 733 291 -- --
Preferred stock dividend requirements of
majority-owned subsidiaries -- -- -- --
------- ------ ----- -----
FIXED CHARGES 20,667 8,118 2,260 1,969
======= ====== ===== =====
RATIO OF EARNINGS TO FIXED CHARGES -- -- 1.47 1.35
======= ====== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 23.1
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
Form-K.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
March 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE J.H.
HEAFNER COMPANY, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 6,648 2,502 0
<SECURITIES> 0 0 0
<RECEIVABLES> 111,691 32,209 0
<ALLOWANCES> 2,220 400 0
<INVENTORY> 133,221 41,530 0
<CURRENT-ASSETS> 262,659 79,028 0
<PP&E> 55,652 35,121 0
<DEPRECIATION> 12,850 9,130 0
<TOTAL-ASSETS> 430,821 146,508 0
<CURRENT-LIABILITIES> 206,097 58,446 0
<BONDS> 160,400 30,130 0
11,353 11,500 0
0 0 0
<COMMON> 51 37 0
<OTHER-SE> 18,073 7,622 0
<TOTAL-LIABILITY-AND-EQUITY> 430,821 146,508 0
<SALES> 713,672 311,839 190,535
<TOTAL-REVENUES> 713,672 311,839 190,535
<CGS> 533,243 221,060 158,880
<TOTAL-COSTS> 702,597 308,382 188,540
<OTHER-EXPENSES> (166) (1,131) (521)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 13,460 4,842 1,465
<INCOME-PRETAX> (2,219) (254) 1,051
<INCOME-TAX> 289 (240) 439
<INCOME-CONTINUING> (2,508) (14) 612
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (2,216) 0 0
<CHANGES> 0 0 0
<NET-INCOME> (4,724) (14) 612
<EPS-PRIMARY> (0.78) 0.00 0.09
<EPS-DILUTED> (0.65) 0.00 0.09
</TABLE>
