<PAGE>
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): July 10, 1996
TBC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-11579 31-0600670
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
4770 Hickory Hill Road
Memphis, Tennessee 38141
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (901)363-8030
Not Applicable
(Former name or former address, if changed since last report)
-1-<PAGE>
TBC Corporation ("TBC") filed with the Commission a Current
Report on Form 8-K, dated July 10, 1996. At Item 7 of such Report, TBC
indicated that it would file the required historical financial statements
of the business acquired and pro forma financial information on or before
September 23, 1996. Set forth below is Item 7 of such Report restated in
its entirety to include the required financial statements and pro forma
financial information, all of which are being filed with this Amendment.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
See Financial Statement Index.
(b) Pro forma financial information.
See Financial Statement Index.
(c) Exhibits.
See Exhibit Index.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
TBC CORPORATION
(Registrant)
September 20, 1996 By: /s/ Ronald E. McCollough
(Date) Ronald E. McCollough
Senior Vice President Operations
and Treasurer
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FINANCIAL STATEMENT INDEX
Page
Consolidated Balance Sheets of Big O Tires, Inc.
at December 31, 1995 and 1994........................... 4
Consolidated Statements of Income of Big O Tires, Inc.
for the years ended December 31, 1995 and 1994.......... 6
Consolidated Statements of Shareholders' Equity
of Big O Tires, Inc. for the years ended
December 31, 1995 and 1994.............................. 7
Consolidated Statements of Cash Flows of Big O Tires,
Inc. for the years ended December 31, 1995 and 1994..... 8
Notes to Consolidated Financial Statements of
Big O Tires, Inc. at and for the years ended
December 31, 1995 and 1994.............................. 10
Report of Deloitte & Touche LLP on Consolidated
Financial Statements of Big O Tires, Inc. at and
for the years ended December 31, 1995 and 1994.......... 25
Unaudited Consolidated Balance Sheet of Big O Tires,
Inc. at March 31, 1996.................................. 26
Unaudited Consolidated Statements of Income of
Big O Tires, Inc. for the three months ended
March 31, 1996 and 1995................................. 28
Unaudited Consolidated Statements of Cash Flows of
Big O Tires, Inc. for the three months ended
March 31, 1996 and 1995................................. 29
Notes to Unaudited Consolidated Financial Statements
of Big O Tires, Inc. at March 31, 1996 and for the
three months ended March 31, 1996 and 1995.............. 31
Unaudited Pro Forma Combined Condensed Balance Sheet
of TBC Corporation and Big O Tires, Inc. as of
March 31, 1996.......................................... 37
Notes to Unaudited Pro Forma Combined Condensed
Balance Sheet of TBC Corporation and Big O Tires, Inc... 39
Unaudited Pro Forma Combined Statement of Income
of TBC Corporation and Big O Tires, Inc. for the
year ended December 31, 1995............................ 40
Unaudited Pro Forma Combined Statement of Income
of TBC Corporation and Big O Tires, Inc. for the
three months ended March 31, 1996....................... 41
Notes to Unaudited Pro Forma Combined Statements of
Income of TBC Corporation and Big O Tires, Inc.......... 42
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BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(In thousands)
ASSETS
1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 1,094 $4,882
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,421 in 1995 and $835 in 1994 9,255 8,165
Other receivables 242 2,905
Current portion of notes receivable 515 733
Inventories 13,249 14,219
Retail stores under development 4,861 2,169
Deferred income taxes 2,654 2,126
Other current assets 769 688
Total current assets 32,639 35,887
NOTES RECEIVABLE,
net of current portion 2,656 3,193
PROPERTY, PLANT AND EQUIPMENT:
Furniture and equipment 7,427 6,021
Buildings and leasehold improvements 11,194 7,413
Land and land improvements 2,971 1,574
21,592 15,008
Less accumulated depreciation and amortization (5,266) (5,146)
16,326 9,862
INTANGIBLE AND OTHER ASSETS:
Distribution rights, net of accumulated
amortization of $2,094 in 1995 and
$1,816 in 1994 8,799 9,077
Equity in joint ventures and unconsolidated
subsidiaries 877 1,129
Other 2,097 2,820
11,773 13,026
TOTAL ASSETS $63,394 $61,968
- See notes to consolidated financial statements -
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BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
CURRENT LIABILITIES:
Accounts payable $1,882 $650
Accrued payroll and benefits 1,408 1,130
Other accrued expenses 1,283 1,355
Warranty reserve 4,350 3,850
Current portion of long-term debt 1,639 2,033
Current portion of capital lease obligations 36 33
Total current liabilities 10,598 9,051
LONG-TERM DEBT,
net of current portion 13,729 15,739
CAPITAL LEASE OBLIGATIONS,
net of current portion 131 167
OTHER LONG-TERM LIABILITIES 1,337 1,433
EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATIONS 192 449
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock: $ .10 par value
100,000,000 shares authorized,
shares issued: 3,349,100 in 1995
and 3,339,300 in 1994 335 334
Capital contributed in excess of par 15,544 15,418
Retained earnings 21,962 20,419
37,841 36,171
Less: Employee stock ownership plan obligations (192) (449)
Deferred stock grant compensation (121) (472)
Treasury stock, at cost, 31,300 shares (121) (121)
37,407 35,129
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,394 $61,968
- See notes to consolidated financial statements -
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BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands except for share and per share amounts)
1995 1994
SALES:
Product and franchising $136,633 $ 127,678
Real estate 5,489 --
142,122 127,678
COST OF SALES:
Product and franchising 105,985 97,547
Real estate 5,471 --
111,456 97,547
GROSS PROFIT 30,666 30,131
EXPENSES:
Selling and administrative 19,868 19,132
Product delivery expense 3,954 3,113
Interest expense 1,441 1,465
Loss on sale or closure of retail stores 547 1,106
Shareholder proposal expense 1,812 674
Warehouse consolidation costs 320 --
27,942 25,490
INCOME BEFORE INCOME TAXES 2,724 4,641
PROVISION FOR INCOME TAXES:
Current 1,709 2,311
Deferred (528) (361)
1,181 1,950
NET INCOME $ 1,543 $ 2,691
EARNINGS PER SHARE $ .46 $ .80
WEIGHTED AVERAGE
SHARES OUTSTANDING 3,377,429 3,347,892
- See notes to consolidated financial statements -
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BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
($ only in thousands)
<TABLE>
<CAPTION>
Employee
Capital Stock
COMMON STOCK Contributed Ownership Deferred TREASURY STOCK
Number of In Excess Retained Plan Stock Grant Number of
Shares Amount of Par Earnings Obligations Compensation Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1993 3,274,900 $ 327 $ 14,529 $ 17,728 $ (975) $ - 31,300 $ (121)
Net Income for 1994 2,691
Stock Issued as Compensation 33,700 4 516 (472)
Stock Options Exercised 30,700 3 229
Deferred Compensation under
Discounted Stock Option Plan 144
Employee Stock Ownership
Plan Obligation 526
BALANCE DECEMBER 31, 1994 3,339,300 334 15,418 20,419 (449) (472) 31,300 (121)
Net Income for 1995 1,543
Stock Options Exercised 15,000 2 138
Restricted Stock Grants Canceled (5,200) (1) (80) 81
Deferred Compensation Recognized 270
Deferred Compensation under
Discounted Stock Option Plan 68
Employee Stock Ownership
Plan Obligation 257
BALANCE DECEMBER 31, 1995 3,349,100 $ 335 $ 15,544 $ 21,962 $ (192) $ (121) 31,300 $(121)
</TABLE>
-See notes to consolidated financial statements-
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BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands)
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,543 $2,691
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,240 1,215
Amortization of intangibles 395 453
Provision for losses on accounts and
notes receivable 1,272 356
(Gain)/loss on sales and retirements
of property and equipment (481) 37
Loss on sale or closure of retail stores 315 1,106
Equity in losses of affiliates 40 250
Deferred compensation under stock option plan
and restricted stock grants 338 224
Deferred gain recognized (22) (47)
Deferred income taxes (528) (361)
Changes in assets and liabilities:
Increase in receivables (167) (4,446)
(Increase) decrease in inventories 993 (2,253)
Increase in retail stores under development (2,392) (456)
(Increase) decrease in other current assets (81) 161
(Increase) decrease in other assets (3) 9
Increase (decrease) in accounts payable 1,232 (2,987)
Increase in accrued expenses 100 25
Increase in warranty reserve 500 596
Decrease in other liabilities (283) (258)
Total adjustments 2,468 (6,376)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 4,011 (3,685)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (139) (650)
Payments received on notes receivable 647 1,170
Proceeds from sales of notes receivable 1,014 2,962
Equity investment in affiliates (87) (187)
Net cash provided by sales of retail stores -- 204
Purchase of retail stores (141) (410)
Purchases of property and equipment (10,114) (1,440)
Proceeds from sales of property and equipment 3,649 1,183
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,171) 2,832
- See notes to consolidated financial statements -
-8-<PAGE>
BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(In thousands)
1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $2,650 $10,735
Principal payments on long-term debt (5,385) (6,106)
Principal payments on capital
lease obligations (33) (239)
Proceeds from sale of common stock and
stock options and warrants exercised, net 140 232
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (2,628) 4,622
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,788) 3,769
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,882 1,113
CASH AND CASH EQUIVALENTS
AT END OF YEAR $1,094 $ 4,882
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $1,740 $ 1,446
Income taxes 1,186 2,373
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accounts receivable transferred to long-
term notes receivable and other assets $ 767 $ 478
Employee stock ownership plan obligations 257 526
Inventories received in satisfaction of long-term
notes receivable -- 454
Common stock issued as unearned compensation -- 520
Property and equipment purchased by issuance of
long-term debt 300 2,767
Sale of assets through assumption of related debt -- 4,078
- See notes to consolidated financial statements -
-9-<PAGE>
BIG O TIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Operations
The primary business of the Company is to franchise Big O tire retail
stores ("Franchisees") and supply those Franchisees with tires, wheels and
related replacement automotive parts. As a Franchisor, the Company is
active in promoting certain programs and sales techniques to its
Franchisees. On a limited basis, the Company also engages in site
selection and real estate development for franchised retail stores, and
also owns and operates a limited number of retail stores. Franchisees are
located primarily in the Midwest and Western United States.
Under a Franchise Agreement, the Company grants the right to operate a
retail tire store using the Big O trademarks, service marks and associated
logos and symbols in exclusive marketing territories. Depending on
certain qualifications, the initial franchise fee ranges from $7,000 to a
maximum of $21,000. Assignment or transfer of a Franchise Agreement
provides a transfer fee of up to $21,000. Initial franchise fees are
deferred and recognized when all material services or conditions relating
to the sale or transfer of the franchise have been substantially
completed. Franchisees also pay the Company a continuing royalty fee of
2% of the Franchisees' monthly gross sales as that term is defined in the
Franchise Agreement. Continuing royalty fees are recognized when the fees
are earned and become receivable from the Franchisee. The initial
franchise and royalty fees included in sales were $7,068,000 and
$6,772,000 for 1995 and 1994, respectively. The Franchise Agreement also
allows for the Company to collect a 1% fee to be used for national
advertising; however, this fee is currently limited to $.10 for each Big O
brand tire purchased from the Company.
One member of the Company's Board of Directors had ownership of or
interests in twenty-eight (28) Big O Retail Stores in 1995 and thirty-one
(31) Big O Retail Stores during 1994. One officer had ownership interests
in two (2) Big O Retail Stores in 1995 and 1994 and two officers each had
an ownership interest in a Big O Retail Store in 1995 and 1994. Sales to
these stores were approximately $6,948,000 and $9,372,000 during 1995 and
1994, respectively. These sales were made under the same terms and
conditions as those with unrelated parties. As of December 31, 1995 and
1994, outstanding accounts and notes receivable from these stores totalled
$959,000 and $803,000, respectively. The Company has also provided
equipment lease guarantees to certain of these stores totalling $327,000
at December 31, 1995.
Significant Accounting Policies:
Consolidation and Reclassifications -
All significant majority-owned subsidiaries are consolidated and all
significant intercompany transactions are eliminated. Certain
reclassifications have been made to 1994 financial information to make the
presentation consistent with that of the current year. These
reclassifications had no impact on net income.
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Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates used by management in the preparation of
these financial statements include, but are not limited to, the valuation
of accounts receivable, the carrying value of inventories, the useful
lives and recoverability of property, plant and equipment, the valuation
of distribution rights and future warranty costs.
Cash -
Cash and cash equivalents include time deposits, certificates of deposit
and marketable securities with original maturities of three months or
less.
At December 31, 1994 cash in the amount of $4,228,000 was restricted for
use by the Company for the acquisition of the Las Vegas distribution
center which was under construction. The distribution center was completed
in February 1995.
Inventories -
Inventories consist of finished goods only. New and recapped tire
inventories of Big O Tire of Idaho, Inc. ("Idaho"), a subsidiary of the
Company, and the inventories purchased pursuant to the November 1988
Louisville, Kentucky merger, are valued at the lower of last-in, first-out
("LIFO") cost or market. All other inventories are valued at the lower of
first-in, first-out ("FIFO") cost or market. Inventories of $4,472,000
and $4,657,000 at December 31, 1995 and 1994, respectively, are valued at
LIFO. Under the FIFO method of inventory valuation, these inventories
would have been approximately $9,000 and $44,000 higher at December 31,
1995 and 1994, respectively.
Retail Stores Under Development -
Costs associated with developing real estate into retail stores are
capitalized and carried at the lower of each project's capitalized cost or
its net realizable value.
Property, Plant and Equipment -
Property, plant and equipment are carried at cost. Depreciation is
computed using the straight-line and double declining balance methods over
estimated useful lives of the assets ranging from three to 40 years.
Ordinary maintenance and repairs are charged to operations, while
expenditures which extend the physical or economic life of property and
equipment are capitalized. Gains and losses on disposition of property
and equipment are recognized in operations in the year of disposition and
the related asset and accumulated depreciation accounts are adjusted
accordingly.
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Intangible Assets -
Distribution rights, which represent the excess purchase cost over the
fair market value of net assets acquired in certain mergers and
acquisitions are capitalized and are being amortized by charges to
operations on a straight line basis over 40 years. On a quarterly basis,
management reviews the carrying value of the Company's intangible assets
for impairment and adjusts the carrying value and/or amortization periods
of such assets whenever events or circumstances warrant.
Warranty Reserve -
The Company maintains a reserve for future warranty claims on Big O brand
tires based on historical experience.
Earnings Per Share -
Earnings per share is computed using the weighted-average number of
outstanding shares during each period presented. Inclusion of common
stock equivalents would not have a material effect on the computation.
2. JOINT VENTURES:
In August 1992 the Company sold its interest in a joint venture involving
a wholly owned subsidiary, Big O Distributors, Inc. ("Distributors") and
received a five-year promissory note for $231,000 in exchange for its
interest. The Company incurred a loss of approximately $73,000 on the
sale. Although the buyer, Aspen Enterprises, Inc., is now primarily
responsible for obligations under the building lease, Distributors remains
contingently liable through 1996 for up to $131,000 in future rentals if
the joint venture defaults. These future rents are not included in the
future minimum rental payments disclosed in Note 7.
Prior to 1992 the Company and one of its subsidiaries, Big O Development,
Inc. ("Development"), entered into three separate joint venture agreements
with independent parties for the purpose of developing real estate sites
for Big O Retail Stores. The Company accounts for its 50% investment in
these joint ventures using the equity method. During 1993, the Company
acquired the remaining 50% interest in one of the joint ventures at a cost
of $266,000. The joint venture was then liquidated and the net assets
were transferred to Development. At December 31, 1995 and 1994, $499,000
and $573,000, respectively, were recorded as investments in these joint
ventures including $45,000 in pretax loss for 1995 and $ 9,000 in net
pretax income for 1994.
In 1993 and 1992, the Company and one of its subsidiaries, Big O Retail
Enterprises, Inc., entered into separate joint venture agreements with
five of its franchisees to operate retail stores in Arizona, California,
Colorado, and Wyoming. Generally, the Company contributed inventories in
the amount of $55,000 and guaranteed certain financing arrangements in
exchange for a 50% interest in each joint venture.
-12-<PAGE>
3. SALES AND CLOSURES OF RETAIL STORES:
The Company accrued $547,000 and $1,106,000 in 1995 and 1994,
respectively, to cover estimated closing and future lease costs associated
with the sale or closure of company-owned retail stores and the closure of
Franchisee retail stores. Three franchisee retail stores were closed in
1995 and four in 1994, respectively, in which the Company had guaranteed
the franchisees' lease agreements. Five company-owned retail stores were
either closed or sold in 1994. No company-owned retail stores were sold
or closed in 1995.
4. NOTES RECEIVABLE:
Notes receivable at December 31, 1995 and 1994, consisted of the
following:
1995 1994
(in thousands)
6.0% to 12.0% notes receivable from
franchisees from the sale of Company-
owned retail stores, substantially
all of which are collateralized by
inventories, equipment, receivables
and franchise rights, due in monthly
installments plus interest (see Note 3). $ 579 $1,432
8.0% to 11.25% notes receivable from
franchisees, for inventories and equipment,
substantially all of which are also
collateral, due in monthly installments
plus interest. 2,075 1,599
6% note receivable due from a vendor for
returned inventories, which are also
collateral, due in monthly installments
plus interest. -- 187
9.25% to 10% notes receivable from sale
of real properties, collateralized by
said properties, due in monthly
installments plus interest. 293 494
Other - primarily 8% to 11% notes
receivable from various entities, majority
are without collateral, maturing at
various dates. 224 214
3,171 3,926
Less current portion 515 733
Long-term portion $2,656 $3,193
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5. LONG-TERM DEBT:
Long-term debt at December 31, 1995 and 1994, consisted of the following:
1995 1994
(in thousands)
Prime rate (8.5% at December 31, 1995)
revolving credit agreement,
collaterized by receivables and
inventories, with a maximum borrowing
of up to $20,000,000 (limited to a
portion of eligible collateral and
further reduced by the amount of any
outstanding letters of credit issued
by the lender on behalf of the
Company). (a) $2,650 $ --
Prime rate plus 1/2% revolving
credit loan, with an annual facility
fee of $19,000, replaced by a new
credit facility on January 23, 1995. -- 2,985
8.71% senior loan, collateralized
by certain real estate, interest
only due in quarterly installments
through July 1998, then principal
due in quarterly installments of
$333,000 plus interest through
May 2004. 8,000 8,000
Prime rate credit loan, without
collateral, due in monthly
principal installments of $125,000
plus interest through September
1996, and $135,000 plus interest
through October 1997, balance due
November 1997. (b) 2,945 4,355
Prime rate mortgage loan,
collateralized by deed of trust,
due in monthly installments of
$8,000 including interest through
September 2001. 1,367 1,475
Prime plus 2.25% mortgage loan,
collateralized by a deed of trust,
due in monthly installments of
$4,000 through July 2004. 406 412
8.0% mortgage loan, paid in January 1995. -- 312
8.0% mortgage loan, paid in April 1995. -- 200
Other -- 33
15,368 17,772
Less current portion 1,639 2,033
Long-term portion $ 13,729 $ 15,739
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(a) The amount of borrowing availability for the revolving credit
agreement is determined by application of a predefined formula to the
collateral base on a monthly basis. The range of permitted borrowings for
1995 was $12,119,000 to $19,500,000.
(b) Interest rate reductions of up to 2.5% may be earned by meeting
certain purchase requirements defined in the lending agreement.
Management's discretion with respect to certain business matters is
limited by financial and other covenants contained in the revolving credit
agreement and other loan agreements described above. These covenants,
among other things, limit or prohibit the Company from (i) paying
dividends on its capital stock, (ii) incurring additional indebtedness,
(iii) creating liens or selling certain assets, (iv) making certain loans,
investments, or guarantees, (v) violating certain financial ratios, (vi)
repurchasing shares of its common stock, or (vii) making certain capital
expenditures. At December 31, 1995, the Company was in compliance with
all of the covenants.
The annual maturities of long-term debt for succeeding years are as
follows (in thousands):
1996 $ 1,639
1997 1,524
1998 2,760
1999 778
2000 1,446
Due thereafter 7,221
$ 15,368
6. CAPITAL LEASES:
The Company leases certain equipment and a building under capital lease
arrangements. Leased assets under these arrangements at December 31, 1995
and 1994 were as follows (in thousands):
Accumulated
Cost Amortization Net
1995:
Building and leasehold
improvements $ 125 $ 76 $ 49
Equipment 144 116 28
$ 269 $ 192 $ 77
1994:
Building and leasehold
improvements $ 125 $ 70 $ 55
Equipment 144 89 55
$ 269 $ 159 $ 110
-15-<PAGE>
At December 31, 1995, future minimum lease commitments under these leases
for succeeding years were as follows (in thousands):
1996 $ 70
1997 58
1998 34
1999 34
2000 34
Due thereafter 92
Total minimum lease payments 322
Less amount representing interest 155
Present value of net minimum
lease payments 167
Less current portion 36
Long-term portion 131
7. OPERATING LEASES:
The Company's operating leases are primarily for real property. Rental
expense for the years ended December 31, 1995 and 1994 were $968,000 and
$1,218,000, respectively, after deducting sublease income of $1,740,000
for 1995 and $1,571,000 for 1994.
Future minimum rental payments required under these leases for succeeding
years are as follows (in thousands):
1996 $ 3,613
1997 3,295
1998 2,893
1999 2,337
2000 1,999
Due thereafter 5,920
20,057
Less sublease income 10,100
$ 9,957
The Company is contingently liable for future rentals on a building lease
currently occupied by a former joint venture partner (See Note 2). In the
event of a default, the Company remains liable for up to $131,000 in
future rentals. These future rents are not included in the future minimum
rental payments above.
Certain lease agreements provide the Company with the option to purchase
the leased property at its fair market value at the end of the lease term.
Additionally, certain lease agreements contain renewal options ranging
from five to fifteen years with terms similar to the original lease
agreements.
In November 1988 the Company received a distribution of its interest in
the Ontario, California distribution center from the limited partnership
and subsequently sold its interest to an unrelated third party. As part
of this transaction, the distribution center's ten year lease was also
transferred, resulting in a sale-leaseback. The Company's share of the
gain on the sale of the property is being deferred and amortized over the
remaining lease term.
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8. INCOME TAXES:
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109) as of January 1, 1993. SFAS
No. 109 is an asset and liability approach that, among other provisions,
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future
tax consequences, SFAS No. 109 generally considers all expected future
events other than enactments or changes in the law or rules.
The tax effects of temporary differences which give rise to the deferred
tax assets and liabilities as of December 31, 1995 and 1994 are as follows
(in thousands):
1995 1994
Deferred Tax Assets:
Allowance for doubtful
accounts not currently
deductible $ 548 $ 325
Inventory reserves not
currently deductible -- 198
Inventory basis
differences 76 44
Accruals not currently
deductible 334 208
Warranty reserves not
currently deductible 1,678 1,499
Other reserves not
currently deductible 347 474
Compensation under stock
option plan not currently
deductible 266 207
Differences between book and
tax recognition of gain on
sales of property 48 93
Property and equipment basis
differences 7 --
Investment basis
differences 45 106
$ 3,349 $ 3,154
-17-<PAGE>
1995 1994
Deferred Tax Liabilities:
Prepaid expenses deductible
for tax purposes $ 196 $ 216
Accelerated tax depreciation
and amortization 314 604
Property and equipment basis
differences 156 43
Intangible assets not
currently deductible -- 165
Inventory basis differences 29 --
$ 695 $ 1,028
Net deferred tax asset $ 2,654 $ 2,126
Non-current deferred tax
liability -- --
Current deferred tax asset $ 2,654 $2,126
The following is a summary of the income tax provision for the years ended
December 31, 1995 and 1994 (in thousands):
1995 1994
Currently payable $ 1,677 $ 2,197
Deferred expense (528) (361)
Tax benefit of exercise of
stock options 32 114
Total income tax provision $ 1,181 $ 1,950
A reconciliation of the provision for income taxes to the statutory
Federal tax rate of 34% on income before income taxes is as follows (in
thousands):
1995 1994
Tax at statutory rate $ 926 $1,578
State taxes, net of Federal
tax benefit 141 248
Depreciation and amortization
not deductible for tax
purposes 91 91
Other 23 33
$1,181 $1,950
-18-<PAGE>
9. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an employee stock ownership plan ("ESOP") in which all
non-retail employees, 18 years of age or older and having 1,000 hours of
service in a fiscal year, are eligible to participate. The ESOP generally
provides for 20% vesting after three years of service with an additional
20% each year of service thereafter, until a participant is 100% vested.
Annual contributions are at the discretion of the Board of Directors,
subject to the ESOP provision that the Company is required to make
contributions equal to principal and interest payments on debt issued by
the ESOP to acquire securities. Contributions recorded in 1995 and 1994
were $255,000 and $357,000, respectively.
In 1991, the ESOP purchased 461,008 shares of the Company's $.10 par value
common stock from four of the Company's shareholders at market value in
exchange for cash and notes. In 1993, the ESOP refinanced the remaining
three notes with a new note payable in five annual installments of
principal and interest fixed at 9.0%. The Company's financial statements
at December 31, 1995 and 1994 reflect the ESOP's obligations as a
liability and a corresponding reduction of shareholders' equity.
10. SHAREHOLDERS' EQUITY:
Shareholder Rights Plan -
In August 1994, the Board of Directors adopted a shareholder rights plan
and declared a dividend of one right for each outstanding share of the
Company's common stock. Each right entitles the shareholder to purchase
from the Company one share of the Company's common stock at a discounted
price (which varies depending upon the circumstances, determined according
to the plan). The rights are not and will not become exercisable unless
certain change of control events occur. None of the rights are
exercisable as of December 31, 1995.
Stock Option Plans -
In August 1988 the Company adopted the Big O Tires, Inc. Director and
Employee Stock Option Plan (the "Option Plan") which allows the Company's
directors and employees to forego a portion of their compensation in order
to acquire options for the purchase of the Company's common stock in
accordance with the provisions of the Option Plan. Options are granted to
the participants on January 1 of each year, in an amount equal to the
foregone compensation divided by 90% of the fair market value of the
Company's $0.10 par value common stock. The remaining 10% of the fair
market value then becomes the exercise price of the options. The options
are exercisable one year after the grant date and expire ten years after
grant. The Option Plan was terminated by the Board of Directors at a
meeting held in December 1995. Options previously granted pursuant to the
Option Plan remain exercisable until exercised or forfeited. No new
options will be granted pursuant to the Option Plan after 1995.
-19-<PAGE>
In June 1991 the Company adopted the Big O Tires, Inc. Long Term Incentive
Plan (the "Incentive Plan") which allows the Company to make long-term
awards of stock options and restricted stock grants to selected officers
and employees of the Company and to make long-term awards of stock options
to selected directors of the Company. The stock options are generally not
exercisable for at least three years following their award date and awards
of restricted common stock are subject to vesting requirements. The fair
market value of the shares of stock at the grant date ($472,000) was
recorded as deferred compensation and is included as a deduction from
shareholders' equity. This amount is amortized as compensation expense as
the shares vest to the recipients.
Stock option transactions for the years ended December 31, 1995 and 1994
are as follows:
1995 1994
Exercise Exercise
Price Options Price Options
Options outstanding
at beginning of
year $ .32 - 15.44 226,347 $ .32 - 12.25 203,974
Granted 1.63 4,943 1.48 - 15.44 53,213
Exercised .32 - 12.25 (14,982) .32 - 12.25 (30,735)
Expired -- 1.06 (105)
Options outstanding
at end of year .32 - 15.44 216,308 .32 - 15.44 226,347
Options exercised
at end of year .32 - 5.16 116,894 .32 - 12.25 77,025
11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:
Effective January 1, 1994, the Company adopted a supplemental executive
retirement plan ("SERP") which is maintained for the purpose of providing
deferred compensation for a select group of highly compensated employees.
The 1994 contribution to the SERP was $11,000 and was determined by
multiplying the Board approved ESOP contribution rate by the ESOP
qualified compensation exceeding $150,000. This plan is unfunded and the
contribution was made only for 1994. No contribution was made for 1995.
12. COMMITMENTS AND CONTINGENCIES:
During 1992, the Company entered into an agreement with a lender to
provide equipment, inventory and real estate financing to various joint
ventures in which the Company was a 50% joint venture partner. The
agreement required the Company and the other joint venture partners to
guarantee repayment of the loans. This agreement was terminated in August
1995.
-20-<PAGE>
The Company previously entered into two separate equipment leasing
programs for its franchisees with two equipment leasing companies. The
Company entered into agreements with these leasing companies which require
the Company to pay up to $1,000,000 and $500,000, respectively, under
certain franchisee contract defaults. These commitments are
collateralized by the leased equipment. In addition, the Company entered
into a similar leasing program with another equipment leasing company
which does not require a financial guarantee, but does require the Company
to assist in the re-marketing of the leased equipment, if necessary.
In December 1989 the Company also entered into an agreement with an
independent franchise finance company to provide financing to its
Franchisees for inventories and equipment. This agreement requires the
Company to guarantee payment of up to $750,000 under certain franchisee
contract defaults. This commitment is collateralized by the inventories
and equipment which have been financed and franchise rights.
In 1995 and 1994, the Company sold certain notes receivable which had
remaining principal balances of $1,014,000 and $2,962,000, respectively,
plus accrued interest, to an investor. In connection with the sale of
these notes, the Company executed an Ultimate Net Loss Agreement which
limits the Company's guarantee for payment of these notes to fifty percent
of the aggregate unpaid balance of the purchased notes at the end of each
prior year. No gain or loss was recorded in connection with the sale of
these notes.
At December 31, 1995 and 1994, the Company had no post-retirement or post
employment benefits which would require recognition or disclosure under
the provisions of SFAS No. 106 and No. 112, respectively.
13. FINANCIAL GUARANTEES AND CREDIT RISK:
The Company has provided financial guarantees associated with franchisee
financing and real estate leases for its Franchisees. The guarantees were
issued in the normal course of business to meet the financing needs of the
Company and its Franchisees. However, these financial guarantees
represent additional credit risk in excess of the amounts which are
already reflected in the balance sheet as of December 31, 1995.
The Company's maximum exposure to credit loss in the event of
nonperformance by the beneficiaries of the financial guarantees at
December 31, 1995 is represented by the contractual amount of the
guarantees as indicated below (in thousands):
Mortgage loan guarantees $ 2,730
Franchisee financing guarantees 8,097
Franchisee real estate lease
guarantees 4,874
Total $15,701
The financing and lease guarantees are conditional commitments issued by
the Company to guarantee the repayment of amounts which are owed to third
parties by certain of its Franchisees and joint ventures. Most of the
financing and lease guarantees extend for more than five years and expire
in decreasing amounts through 2002.
-21-<PAGE>
The credit risk associated with these guarantees is essentially the same
as that involved in extending loans to the Company's Franchisees or
partners. The Company evaluates each Franchisee's creditworthiness on an
individual basis, and it is the Company's policy to require that
sufficient collateral (primarily inventories and equipment) and security
interests be obtained by the third parties in connection with the
financing and lease obligations (except for real estate obligations) for
which the guarantees are issued. There are no cash requirements
associated with these guarantees except in the event that an actual
financial loss is subsequently incurred by the Company in connection with
these guarantees.
14. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
Although the Company has franchised and Company-owned retail stores
located in 18 states, approximately 38% of these stores are located in the
State of California, and nearly 28% of the Company's sales were made to
the California retail stores. In addition, all of the Company's
operations and identifiable assets are attributable to the wholesale and
retail marketing of tires and other automotive aftermarket products
primarily to franchised, Company-owned and Canadian licensed retail
stores. Accordingly, the Company's receivables and its guarantees of
obligations are concentrated within a single industry segment and a
significant portion of its credit risk is also concentrated within a
single state.
At December 31, 1995, the Company had receivables and financial guarantees
associated with six of its Franchisees totalling $7,320,000. Of that
total, approximately $3,960,000 was associated with one of its
Franchisees.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of the Company's
financial instruments is made in accordance with the requirements of SFAS
107, "Disclosures about Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data in
order to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Carrying Estimated
Amount Fair Value
(in thousands)
Assets:
Cash and cash
equivalents $ 1,094 $ 1,094
Receivables 12,668 12,668
Liabilities:
Long-term debt $15,368 $15,564
Other long-term
liabilities 1,337 1,292
-22-<PAGE>
The estimation methodologies utilized by the Company in determining fair
value are summarized below:
Cash and cash equivalents: The carrying amount is a reasonable estimate
of fair value.
Receivables: The carrying amount is a reasonable estimate of fair value.
Long-term debt: The fair value of the Company's long-term debt is
estimated by discounting the estimated future cash payments using the
Company's incremental borrowing rate at December 31, 1995.
Other long-term debt: The fair value of the Company's other long-term
liabilities is estimated by discounting the estimated future cash payments
using the Company's incremental borrowing rate at December 31, 1995.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
16. LITIGATION:
As a franchisor and wholesale distributor, the Company licenses the use of
its trade names, service marks and trademarks to the Company's Franchisees
and other licensees and distributes tire products manufactured by the
Company's suppliers ("Suppliers") under the Company's trade names and
trademarks. As a result, the Company has been named as a defendant in a
number of lawsuits alleging negligent acts and/or omissions by the
Company's Franchisees or alleged defective workmanship and/or materials of
the products produced by the Suppliers. As of December 31, 1995, there
were forty-two such lawsuits pending in which the Company was named as a
defendant. Of those forty-two lawsuits, only five directly involve the
Company. The other thirty seven involve Franchisees of the Company or
alleged tire failures of the Company's Suppliers. In most of the forty-
two lawsuits in which the Company is named as a defendant, the claims for
damages are not specific. The Company believes that it is reasonably
possible that a judgment may be rendered against the Company in one or
more of these lawsuits but the Company is unable to estimate the amount of
any such possible judgments. Over the past five years, the judgments that
have been rendered against the Company and settlements made by the Company
in lawsuits similar to the forty-two lawsuits have not resulted in
material losses to the Company. Therefore, based upon such history, the
Company does not believe that it will suffer any material loss as a result
of the forty-two lawsuits pending against the Company as of December 31,
1995.
-23-<PAGE>
The Company requires that both its Franchisees and Suppliers indemnify and
protect the Company against claims resulting from the alleged negligent
acts and/or omissions of the Franchisees and the alleged defects in
workmanship and/or material of its Suppliers. In addition, the Company
carries its own insurance. The forty-two lawsuits referred to above are
being defended by attorneys who have been retained by the applicable
insurance companies and the Company is not actively involved in the
defense thereof. Historically, the Company has been able to rely upon its
Franchisees and Suppliers and their insurance carriers to defend, protect
and indemnify the Company against such types of lawsuits. Accordingly,
even if a judgment is rendered against the Company in any of these
lawsuits, because of the insurance and indemnities described above,
management does not believe that the Company will incur any loss as a
result of any such judgment.
The Company is also a defendant in three additional lawsuits which are
incidental to the Company's business and for which the Company does not
believe it is liable, but which are not covered by insurance. Thus the
Company is directly and actively involved in its own defense and has
sufficient information to form a judgment on the likely outcome and
exposure of such cases. Based on this analysis, the Company believes that
the ultimate outcome of these cases will not have a material effect on the
Company's financial statements.
The Company previously reported the pendency of two class action lawsuits
naming the Company and its nine directors as defendants (Knopf vs. Big O
Tires, Inc., et al. and Zucker, et al. vs. Big O Tires, Inc., et al.,
Second Judicial District Court of the State of Nevada, County of Washow).
By motion filed by plaintiffs' counsel , both actions were dismissed
without prejudice by the Court on March 31, 1995.
17. SUBSEQUENT EVENT:
On March 14, 1996, the Company signed a letter of intent with TBC
Corporation ("TBC"), a Tennessee based marketer and distributor of tires
and other aftermarket automotive parts, under which TBC will acquire all
of the outstanding shares of the Company's common stock for $16.50 per
share, subject to possible reductions based on a final tabulation of
transaction costs and other expenses. The consummation of the transaction
is subject to certain conditions including the execution of a Definitive
Merger Agreement by April 15, 1996, unless extended; the Company and TBC
complying with any required regulatory filings; the execution of
employment agreements between TBC and certain officers of the Company; TBC
obtaining financing for the transaction; extensions of certain franchise
agreements expiring prior to 2001; and the approval of the merger by the
Company's shareholders.
-24-<PAGE>
Independent Auditors' Report
To the Shareholders and Board of Directors of
Big O Tires, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Big O
Tires, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years
then ended. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December
31, 1995 and 1994 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
March 14, 1996
-25-<PAGE>
BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
March 31,
1996
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 546
Trade accounts receivable, net of
allowance for doubtful accounts 10,196
Other receivables 981
Current portion of notes receivable 585
Inventories 17,535
Retail stores under development 2,343
Deferred income taxes 2,731
Other current assets 420
Total current assets 35,337
NOTES RECEIVABLE, net of current portion 3,172
PROPERTY, PLANT AND EQUIPMENT 21,702
Less accumulated depreciation and
amortization (5,552)
16,150
INTANGIBLE AND OTHER ASSETS:
Distribution rights 8,730
Equity in joint ventures and
unconsolidated subsidiaries 765
Other 2,108
11,603
TOTAL ASSETS $ 66,262
-26-<PAGE>
BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
1996
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 4,898
Accrued expenses 3,000
Warranty reserve 4,475
Current portion of long-term debt
and capital lease obligations 1,705
Total current liabilities 14,078
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
net of current portion 12,594
OTHER LONG-TERM LIABILITIES 1,321
EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATIONS --
SHAREHOLDERS' EQUITY:
Common stock 335
Capital contributed in excess of par 15,544
Retained earnings 22,602
38,481
Less: Employee stock ownership
plan obligations --
Deferred stock grant compensation (91)
Treasury stock (121)
38,269
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $66,262
-27-<PAGE>
BIG O TIRES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except for share and per share amounts)
For the Three Months
ended March 31,
1996 1995
NET SALES:
Product and franchising $29,889 $29,153
Real estate 3,282 --
33,171 29,153
COST OF SALES:
Product and franchising 22,656 22,413
Real estate 3,291 --
25,947 22,413
GROSS PROFIT:
Product and franchising 7,233 6,740
Real estate (9) --
7,224 6,740
EXPENSES, net:
Selling and administrative 4,678 4,579
Product delivery expense 896 851
Interest expense 274 396
Shareholder proposal expense 186 321
Loss on sale or closure of retail stores 85 95
6,119 6,242
INCOME BEFORE INCOME TAXES 1,105 498
PROVISION FOR INCOME TAXES:
Current 542 248
Deferred (77) (39)
465 209
NET INCOME $ 640 $ 289
EARNINGS PER SHARE $ .19 $ .09
WEIGHTED AVERAGE SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 3,368,111 3,381,330
-28-<PAGE>
BIG O TIRES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the three months
ended March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 640 $ 289
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 305 299
Amortization of intangibles 103 99
Other 477 52
Cash flows from changes in working capital (847) (3,116)
Total adjustments 38 (2,666)
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 678 (2,377)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (116) --
Payments received on notes receivable 144 128
Proceeds from sales of property and equipment 5 26
Proceeds from sales of equity investments
in affiliates 143 --
Equity investments in affiliates (28) (2)
Purchase of property and equipment (138) (8,420)
Purchase of retail stores -- (122)
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 10 (8,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt -- 6,850
Principal payments on long-term debt
and capital lease obligations (1,236) (700)
Other -- 78
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (1,236) 6,228
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (548) (4,539)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,094 4,882
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 546 $ 343
-29-<PAGE>
BIG O TIRES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
For the three months
ended March 31,
1996 1995
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 306 $ 378
Income taxes 392 --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accounts receivable transferred
to long-term notes receivable 614 311
Decrease in employee stock
ownership plan obligations 192 269
-30-<PAGE>
BIG O TIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
March 31, 1996 AND 1995
(UNAUDITED)
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
REFERENCE TO ANNUAL REPORT:
These financial statements should be read in conjunction with the Annual
Report on Form 10-K and 10-K/A for the year ended December 31, 1995, since
certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the United States Securities and Exchange Commission
("SEC"). These interim financial statements reflect all adjustments which
are, in the opinion of Management, necessary for a fair presentation of
the financial position, results of operations and cash flows of the
Company for the interim periods. Such adjustments are of a normal
recurring nature. Operating results for the three months ended March 31,
1996, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.
SHAREHOLDER PROPOSAL EXPENSE:
At the Annual Meeting of Shareholders held in June 1994, the shareholders
adopted a resolution calling for the Company to engage an investment
banker to evaluate all alternatives for enhancing the value of the
Company. The cost associated with the implementation of the shareholder
proposal was $186,000 and $321,000 for the three months ended March 31,
1996 and 1995, respectively.
MERGER AGREEMENT:
Effective April 30, 1996, the Company entered into a definitive merger
agreement with TBC Corporation ("TBC"), a Tennessee based marketer and
distributor of tires and other automotive aftermarket parts, under which
TBC will acquire all of the outstanding shares of the Company's common
stock for $16.50 per share, subject to possible reductions based on a
final tabulation of transaction costs and other expenses which the Company
does not believe will result in material adjustments, if any. The
transaction, which has been approved by the Board of Directors of each
company, remains subject to certain regulatory approvals and the approval
of the stockholders of the Company. Closing of the merger is expected to
occur within 60 days from the signing of the definitive merger agreement.
-31-<PAGE>
Effective April 30, 1996, the Company entered into agreements with John E.
Siipola, the Chairman of the Company, and with Horst K. Mehlfeldt, the
Vice Chairman of the Company, that provide that if the above described
merger is consummated, Messrs. Siipola and Mehlfeldt will resign their
positions with the Company and will receive lump sum payments of $208,613
and $186,654, respectively, rather than severance pay in accordance with
the Company's Executive Management Severance Pay Policy and that the
Company would continue to provide medical and dental insurance benefits to
Messrs. Siipola and Mehlfeldt and their eligible dependents for fifteen
(15) months after the effective date of the merger or until they obtain
other employment, whichever is earlier. In addition, the Company will
repurchase 66,648 units under the Stock Appreciation Rights Agreements of
Messrs. Siipola and Mehlfeldt for a total amount of $174,951 each. The
agreements also provide that the stock options held by Messrs. Siipola and
Mehlfeldt will be repurchased in accordance with the Merger Agreement.
By its terms, the Merger Agreement puts certain constraints on the
Company's conduct of business pending the merger. These constraints
provide that neither the Company nor any of its subsidiaries shall take
any action except in the ordinary course of business and consistent with
past practices, without prior written approval by TBC. The Merger
Agreement also provides that approval be obtained from TBC prior to
expenditures, contingent liabilities or the acquisition or disposition of
assets which exceed $25,000.
STOCK APPRECIATION RIGHTS:
In February 1995, the Company's Board of Directors granted Stock
Appreciation Rights ("SAR") to each of the three members of the Office of
the Chief Executive ("OCE"). Each member of the OCE received a grant of
100,000 share equivalent units, each of which represents an equal
undivided interest in the future appreciation in the value of a share of
the Company's Common Stock. The SAR agreements provide, subject to
certain vesting requirements, that each unit shall entitle each member to
receive, in cash only, the difference between the base value (as defined
in the agreement) and the market value of a share of common stock on the
exercise date. As of March 31, 1996, $216,000 has been accrued pursuant
to these agreements, however this amount is subject to adjustment pursuant
to the Merger Agreement and agreements with Messrs. Mehlfeldt and Siipola
as noted above.
UNEARNED STOCK COMPENSATION:
In connection with the restricted stock grants in 1994, unearned stock
compensation of $520,000 was recorded which represents the non-vested
portion of the restricted stock grants based upon the market price of the
stock at the grant date. Compensation expense is being recognized over a
vesting period of three to five years in accordance with the provisions of
the Big O Tires, Inc. Long Term Incentive Plan ("LTI Plan").
-32-<PAGE>
STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS") No. 123, "Accounting for Stock-
Based Compensation," which was effective for the Company beginning January
1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on
the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock-based compensation
awards to employees and will disclose the required pro forma effect on net
income and earnings per share.
FRANCHISE AND ROYALTY FEES:
The Company receives initial franchise fees and continuing royalty fees
from its franchised Big O dealers which totalled $1,642,000 for the three
months ended March 31, 1996, and $1,557,000 for the three months ended
March 31, 1995.
EARNINGS PER SHARE:
Earnings per share is computed using the weighted-average number of
outstanding shares during each period presented. Common stock equivalents
are included but did not have a material effect on the computation.
LITIGATION:
As a franchisor and wholesale distributor, the Company licenses the use of
its trade names, service marks and trademarks to the Company's franchisees
and other licensees and distributes tire products manufactured by the
Company's suppliers ("Suppliers") under the Company's trade names and
trademarks. As a result, the Company has been named as a defendant in a
number of lawsuits alleging negligent acts and/or omissions by the
Company's franchisees of alleged defective workmanship and/or materials of
the products produced by the Suppliers. As of March 31, 1996, there were
45 such lawsuits pending in which the Company was named as a defendant.
Of those 45 lawsuits, only three directly involve the Company. The other
42 involve franchisees of the Company or alleged tire failures of its
Suppliers. In most of the 45 lawsuits in which the Company is named as a
defendant, the claims for damages are not specific. It is possible that a
judgment may be rendered against the Company in one or more of these
lawsuits but the Company is unable to estimate the amount of any such
possible judgments. Over the past five years, the judgments that have
been rendered against the Company and settlements made by the Company in
lawsuits similar to the 45 lawsuits have not resulted in material losses
to the Company. Therefore, based upon such history, the Company does not
believe that the Company will suffer any material loss as a result of the
45 lawsuits pending against the Company on March 31, 1996.
-33-<PAGE>
The Company requires that both the Company's franchisees and Suppliers
indemnify and protect the Company against claims resulting from the
alleged negligent acts and/or omissions of the franchisees and the alleged
defects in workmanship and/or materials of its Suppliers. In addition,
the Company carries its own insurance. The 42 lawsuits referred to above
are being defended by attorneys who have been retained by the applicable
insurance companies and the Company is not actively involved in the
defense thereof. Historically, the Company has been able to rely upon its
franchisees and Suppliers and their insurance carriers to defend, protect
and indemnify the Company against such types of lawsuits. Accordingly,
even if a judgment is rendered against the Company in any of these
lawsuits, because of the insurance and indemnities described above,
management does not believe that the Company would incur any loss as a
result of any such judgment.
The Company is also a defendant in seven additional lawsuits which are
incidental to the Company's business and for which the Company does not
believe it is liable, but which are not covered by insurance. Thus, the
Company is directly and actively involved in its own defense and has
sufficient information to form a judgment on the likely outcome and
exposure of such cases. Based on this analysis, the Company believes that
the ultimate outcome of these cases will not have a material adverse
effect on the Company's financial statements.
-34-<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATMENTS
The following Unaudited Pro Forma Combined Statements of Income of TBC
Corporation ("TBC" or the "Company") for the year ended December 31, 1995
and the three months ended March 31, 1996 and the Unaudited Pro Forma
Combined Condensed Balance Sheet of TBC as of March 31, 1996 have been
prepared to illustrate the estimated effect of the acquisition by TBC of Big
O Tires, Inc. ("Big O"), a Nevada corporation (herinafter referred to as
the "Acquisition"). The Unaudited Pro Forma Financial Statements do not
purport to be indicative of the results of operations or financial position
of the Company that would have actually been obtained had the Acquisition
been completed as of the assumed dates and for the periods presented, or
which may be obtained in the future.
The Unaudited Pro Forma Financial Statements have been prepared by management
based upon the separate historical consolidated financial statements of TBC
and Big O and should be read in conjunction with such historical financial
statements and the notes thereto.
The Unaudited Pro Forma Statments of Income give pro forma effect to the
Acquisition and related transactions and include the following as if they
were realized during the applicable period:
(a) Reductions in cost of goods sold resulting from purchasing economies
to be extended to the Company by its existing suppliers based on
agreements the Company currently has in place;
(b) Fluctuations in selling and administrative expenses due to changes
in the administration of certain functions; and
(c) Net increase in interest expense to reflect the notes which were
issued in order to finance the Acquisition.
The Company believes that it can complete the steps required to fully realize
the benefits reflected in the pro forma adjustments to the Unaudited Pro
Forma Statements of Income; however, unanticipated factors may delay the
realization of such benefits, and there can be no assurances that such
benefits will be realized.
-35-<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Unaudited Pro Forma Balance Sheet gives pro forma effect to the
Acquisition and related transactions. The Acquisition will be accounted
for by the purchase method of accounting, pursuant to which the purchase
price is allocated among the acquired tangible and intangible assets and
assumed liabilities in accordance with estimates of their fair values on
the date of acquisition. The Unaudited Pro Forma Balance Sheet reflects
preliminary estimates of the allocation of the purchase price and is
subject to final determination. The pro forma adjustments represent
management's preliminary determination of purchase accounting adjustments
and are based upon available information and certain assumptions that
the Company believes to be reasonable under the circumstances.
Consequently, the amounts reflected in the Unaudited Pro Forma Balance Sheet
are subject to change, and the final values may differ from these amounts.
Management does not expect that differences between the preliminary and
final purchase price allocation will have a material impact on the Company's
financial position and/or results of operations.
-36-<PAGE>
TBC CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
(In thousands)
ASSETS
<TABLE>
<CAPTION>
Pro Forma
TBC Big O Tires, Purchase
Corporation Inc. Price Other
(Historical) (Historical) Allocation Adjustments Combined
CURRENT ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ - $ 546 $ - $ (546) (A) $ -
Accounts and notes receivable, less
allowance for doubtful accounts:
Related parties 19,733 - - - 19,733
Other 77,204 11,762 - - 88,966
Total accounts and notes receivable 96,937 11,762 - - 108,699
Inventories 55,265 17,535 - - 72,800
Retail stores under development - 2,343 - - 2,343
Deferred income taxes 2,455 2,731 (477) (C) - 4,709
Other current assets 2,780 420 - - 3,200
Total Current Assets 157,437 35,337 (477) (546) 191,751
PROPERTY, PLANT AND EQUIPMENT - NET 18,712 16,150 1,362 (B) - 36,224
INTANGIBLE ASSETS 1,037 8,730 16,442 (D) - 26,209
OTHER ASSETS 7,535 6,045 - - 13,580
TOTAL ASSETS $ 184,721 $ 66,262 $ 17,327 $ (546) $ 267,764
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
-37-<PAGE>
TBC CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTIONS>
Pro Forma
TBC Big O Tires, Purchase
Corporation Inc. Price Other
(Historical) (Historical) Allocation Adjustments Combined
CURRENT LIABILITIES
<S> <C> <C> <C> <C> <C>
Outstanding checks, net $ 8,264 $ - $ - $ (546) (A) $ 7,718
Notes payable to banks 48,927 - (4,404) (E) - 44,523
Current portion of long-term debt
and capital lease obligations 62 1,705 - - 1,767
Accounts payable, trade 12,071 4,898 - - 16,969
Federal and state income taxes payable 1,512 330 - - 1,842
Other current liabilities 4,131 7,145 - - 11,276
Total Current Liabilities 74,967 14,078 (4,404) (546) 84,095
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, LESS CURRENT PORTION 515 12,594 60,000 (E) - 73,109
NONCURRENT LIABILITIES 1,027 1,321 - - 2,348
STOCKHOLDERS' EQUITY
Common Stock 2,378 335 (335) (F) - 2,378
Additional paid-in capital 9,543 15,544 (15,544) (F) - 9,543
Retained earnings 96,291 22,602 (22,602) (F) - 96,291
Treasury stock and deferred stock
grant compensation - (212) 212 (F) - -
Total Stockholders' Equity 108,212 38,269 (38,269) - 108,212
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,721 $66,262 $ 17,327 $ (546) $ 267,764
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
-38-<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The Unaudited Pro Forma Balance Sheet gives pro forma effect to the
Acquisition and related transactions, including the addition of
certain Long-Term Debt, as if such transactions had occurred on March
31, 1996. For purposes of the Unaudited Pro Forma Balance Sheet,
certain items on the historical balance sheets of TBC and Big O have
been condensed.
(A) Represents reclassification of Big O's net cash from an asset to a
liability to reflect the impact of TBC's cash management system and
the excess of TBC's Outstanding Checks, Net over the Cash and Cash
Equivalents of Big O.
(B) Represents the estimated net increase in the basis of fixed assets
acquired due to the revaluation of assets to fair value.
(C) Represents the deferred income tax effect of the increase in the
basis of fixed assets for financial reporting purposes (Note B),
which will result in differences between the financial reporting
basis and tax basis of Big O's assets.
(D) Represents the additional intangible assets attributable to the
Acquisition. The estimated intangible assets acquired totaled
$25,172,000, equal to the excess of the aggregate purchase price over
the estimated fair value of the tangible net assets acquired.
Intangible assets of $8,730,000 were previously recorded on the books
of Big O.
(E) The additional Long-Term Debt represents the issuance of Notes to The
Prudential Insurance Company of America ("Prudential"). Pursuant to
the Note Agreement, TBC issued to Prudential a Series A Senior Note
in the Principal amount of $32,500,000 at the rate of 7.55% per annum,
a Series B Senior Note in the principal amount of $11,000,000 at the
rate of 7.87% per annum, and a Series C Senior Note in the principal
amount of $16,500,000 at the rate of 8.06% per annum.
The Company used the above funds to purchase 3,317,916 shares of Big
O common stock at $16.47 per share, a total purchase price of
$54,646,000. Total costs incurred by TBC to complete the debt
financing were $150,000 and estimated costs for legal, accounting and
other professional services were $800,000. The excess of the $60
million in debt incurred to finance the transaction over the purchase
price and closing costs was used to reduce the Company's existing
short-term borrowings.
(F) Reflects the elimination of Big O's net assets.
-39-<PAGE>
TBC CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
TBC Big O Tires, Pro Forma
Corporation Inc.
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
NET SALES $547,785 (A) $136,633 (C) $ - $684,418
COSTS, EXPENSES AND OTHER:
Cost of sales 488,717 105,985 (C) (5,444) (E) 589,258
Distribution 19,461 (A) 9,449 (D) 79 (F) 28,989
Selling and administrative 14,073 14,373 (D) 771 (G) 29,217
Interest expense 3,110 1,441 4,322 (H) 8,873
Other (income) expense - net (2,348) (B) 2,661 (C) (1,812) (I) (1,499)
Total Costs, Expenses and Other 523,013 133,909 (2,084) 654,838
INCOME BEFORE INCOME TAXES 24,772 2,724 2,084 29,580
Provision for income taxes 9,523 1,181 1,226 (J) 11,930
NET INCOME $ 15,249 $ 1,543 $ 858 $ 17,650
EARNINGS PER SHARE $ .62 $ .72
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENTS OUTSTANDING 24,683 24,683
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income.
-40-<PAGE>
TBC CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
TBC Big O Tires, Pro Forma
Corporation Inc.
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
NET SALES $124,005 (A) $ 29,889 (C) $ - $153,894
COSTS, EXPENSES AND OTHER:
Cost of sales 110,065 22,656 (C) (1,300) (E) 131,421
Distribution 4,677 (A) 1,974 (D) 20 (F) 6,671
Selling and administrative 3,800 3,600 (D) 221 (G) 7,621
Interest expense 574 274 1,080 (H) 1,928
Other (income) expense - net (577) (B) 280 (C) (186) (I) (483)
Total Costs, Expenses and Other 118,539 28,784 (165) 147,158
INCOME BEFORE INCOME TAXES 5,466 1,105 165 6,736
Provision for income taxes 2,077 465 169 (J) 2,711
NET INCOME $ 3,389 $ 640 $ (4) $ 4,025
EARNINGS PER SHARE $ .14 $ .17
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENTS OUTSTANDING 23,837 23,837
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of Income.
-41-<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
The Unaudited Pro Forma Statements of Income assume that the
Acquisition and related transactions, including the issuance of the
Notes, occurred on January 1, 1995. For purposes of the Unaudited Pro
Forma Statements of Income, certain reclassifications have been made in
the historical statements of income for both TBC and Big O, with no
effect on previously reported net income. The Unaudited Pro Forma
Statements of Income have been prepared assuming retention of all of
the Company's and Big O's sales following the Acquisition.
(A) Net Sales and Distribution expenses for TBC reflect the
reclassification of TBC's product delivery expenses to Distribution
expenses. Previously, such expenses were reported as a reduction to
Net Sales. Net Sales also include fees charged to the Company's
distributors, which were previously included in Other Income.
(B) Other Income/Expense - Net for TBC reflects the reclassification of
interest expense to a separate line item.
(C) Net Sales, Cost of Sales and Other Income/Expense - Net for Big O
reflect the reclassification of Big O's real estate sales and cost of
sales to Other Income/Expense - Net.
(D) Distribution expenses for Big O include product delivery expenses, as
well as warehousing expenses which were previously included in Selling
and Administrative expenses by Big O.
(E) Pro forma adjustments to Cost of Sales include benefits from the
combined purchasing strength of TBC and Big O. The savings reflected
represent amounts resulting from incremental purchasing economies
arising from the Acquisition and are based on agreements that the
Company currently has with suppliers. Management believes that the
total annual purchasing savings will be realized in the first year
following the Acquisition. The Company is currently involved in
numerous discussions with its suppliers and may achieve additional
savings which are not reflected in the pro forma adjustments.
(F) Pro forma adjustments to Distribution Expenses include additional
depreciation related to the revaluation of Big O's fixed assets to
fair value.
-42-<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(G) Pro forma adjustments to Selling and Administrative expenses for the
year ended December 31, 1995 include additional amortization of
intangibles of $856,000, additional depreciation of $11,000 and net
expense reductions of $96,000 associated with changes in the
administration of the companies.
For the three months ended March 31, 1996, pro forma adjustments to
Selling and Administrative expenses include additional amortization
of intangibles of $210,000, additional depreciation of $3,000 and
additional net expenses of $8,000 associated with changes in the
administration of the companies.
The additional amortization is related to the increase in intangible
assets associated with the Acquisition, amortized over an estimated
average life of 20 years. The final valuation of the intangible
assets has not yet been completed and the actual amortization period
may differ from the estimated life used for pro forma purposes.
However, management does not believe the differences between the
preliminary estimates and the final amortization will have a material
impact on the results of operations. The additional pro forma
charges for depreciation are associated with the revaluation of Big
O's fixed assets to fair value.
Fluctuations in administrative expenses include the elimination of
expenses incurred by Big O for its separate Board of Directors and
investor reporting requirements, as well as reductions in executive
staffing. Additional expenses are included for TBC in connection
with the purchasing and strategic planning functions.
(H) Pro forma adjustments to Interest Expense for the year ended December
31, 1995 include interest of $4,309,000 on the borrowings required to
finance the Acquisition, at an average rate of 7.75%. In addition,
$13,000 is included for the amortization of deferred financing costs.
For the three months ended March 31, 1996, pro forma adjustments to
Interest Expense include interest of $1,077,000 on the borrowings
required to finance the Acquisition, at an average rate of 7.75%,
as well as $3,000 for the amortization of deferred financing costs.
(I) The pro forma adjustments to Other Income/Expense - Net represents
the elimination of non-recurring Big O shareholder proposal expense.
(J) The Provisions for Income Taxes were made after considering the non-
deductible nature of the additional amortization of intangible assets
and depreciation of fixed assets. In addition, as a result of the
Acquisition, the statutory Federal income tax rate applied to Big O's
taxable earnings will increase from 34% to 35%.
-43-<PAGE>
EXHIBIT INDEX
Page
Exhibit No. and Description:
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
2.1 Agreement and Plan of Merger, dated as
of April 30, 1996, by and among TBC
Corporation, TBCO Acquisition, Inc.,
and Big O Tires, Inc......................... *
(4) Instruments defining the rights of security
holders, including indentures.
4.1 Note Purchase and Private Shelf Agreement,
dated July 10, 1996, between TBC
Corporation and The Prudential Insurance
Company of America.......................... *
4.2 Series A, Series B, and Series C Senior
Notes, dated July 10, 1996, issued by
TBC Corporation pursuant to the Note
Purchase Agreement filed as Exhibit 4.1..... *
(23) Consents of experts and counsel.
23.1 Consent of Deloitte & Touche LLP to the
incorporation into certain S-8 registration
statements of TBC Corporation, of Deloitte
& Touche LLP's report on the consolidated
financial statements of Big O Tires, Inc.
at and for the years ended December 31,
1995 and 1994............................... 45
* Indicates Exhibit was previously filed with the Commission.
-44-<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-43166 and Post-Effective Amendment No. 1 to Registration Statement No.
2-97888 of TBC Corporation on Forms S-8 of our report dated March 14, 1996
on the consolidated financial statements of Big O Tires, Inc. for the years
ended December 31, 1995 and 1994, appearing in the Form 8-K/A of TBC
Corporation to be filed on or about September 23, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
September 20, 1996
-45-<PAGE>
