-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DV4Bow1CKhK0cRn6qB+QIbAliheUJdLU1IHMc60d6CPmgA0tDws75SmYDIYFXJD+ arY5/azWJth8C0uGz300DA== 0000912057-96-005667.txt : 19960402 0000912057-96-005667.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005667 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIG O TIRES INC CENTRAL INDEX KEY: 0000718082 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 870392481 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12964 FILM NUMBER: 96542236 BUSINESS ADDRESS: STREET 1: 11755 E PEAKVIEW AVE CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037902800 MAIL ADDRESS: STREET 1: 11755 E PEAKVIEW AVENUE CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: TIRES INC DATE OF NAME CHANGE: 19870101 FORMER COMPANY: FORMER CONFORMED NAME: VENTURE CONSOLIDATED INC DATE OF NAME CHANGE: 19841021 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ______________. Commission File Number: 1-8833 BIG O TIRES, INC. (Exact name of registrant as specified in its charter) Nevada 87-0392481 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 11755 East Peakview Avenue, Suite A ENGLEWOOD, COLORADO 80111 (Address of Principal Executive Offices and Zip Code) Registrant's Telephone Number, Including Area Code: (303) 790-2800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: $0.10 PAR VALUE COMMON STOCK (Title of Class) Indicate by 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 registrant's voting stock held as of March 26, 1996, by nonaffiliates of the registrant was $40,214,816. As of March 26, 1996, the registrant had 3,317,840 shares of its $0.10 par value common stock outstanding. The information required by Part III hereof will be filed either as an amendment to this Annual Report on Form 10-K or it will be filed with the definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. Total Pages 213. Exhibit Index Page 56. 1 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS (a) (1) GENERAL. The primary business of Big O Tires, Inc. (the "Company") is to franchise Big O retail stores ("Retail Stores") and supply Retail Stores with tires and related automotive products. On a limited basis, the Company engages in site selection and real estate development for new Retail Stores and owns and operates Retail Stores. As used herein, the term Retail Stores also includes the Company-owned Retail Stores unless a distinction is warranted for clarification. Each independently owned corporation, partnership and sole proprietorship that has entered into a Franchise Agreement with the Company is hereinafter referred to as a "Franchisee" or collectively as the "Franchisees." As shown below, at January 31, 1996, the Company had 387 Retail Stores, 382 of which were franchised and 5 of which were Company-owned. The Company also distributes its products at wholesale prices to 37 unaffiliated retail tire stores in British Columbia, Canada (the "Canadian Licensees"), with which the Company has a user agreement. The Company sells to its Franchisees and Canadian Licensees an exclusive line of premium private label Big O brand passenger, light truck, recreational and high performance tires that are primarily manufactured by The Kelly-Springfield Tire Company (a division of The Goodyear Tire & Rubber Company ("Goodyear")) ("Kelly-Springfield") and by Continental General Tire, Inc. (a subsidiary of Continental AG) ("General"). The Company currently distributes tires, its exclusive ProComp high performance wheels and other automotive products through its Regional Sales and Service Centers ("RSC") located in the states of Idaho, Indiana and Nevada. During the first half of 1995, the Company consolidated two (2) of its RSCs into a single facility located near Las Vegas, Nevada (the "Las Vegas RSC"). The following table sets forth the number of Retail Stores, by marketing region, as of January 31, 1996:
REGION # OF FRANCHISEE # OF JOINT VENTURE # OF COMPANY OWNED TOTAL ------ OWNED STORES STORES * STORES ----- --------------- ----------------- ------------------ SOUTHWEST REGION (includes Arizona, southern California, 102 1 1 104 southern Nevada; and southern Utah) WESTERN REGION (northern California and western Nevada) 95 1 0 96 NORTHWEST REGION (Idaho, Montana, northern Nevada, Oregon, 77 1 2 80 Utah, Washington and Wyoming) CENTRAL REGION (includes Colorado, Nebraska, New Mexico, 70 0 0 70 Oklahoma, South Dakota, Texas and Wyoming) SOUTHEAST REGION (includes Indiana, Kentucky and North 35 0 2 37 Carolina) TOTAL 379 3 5 387
* THE COMPANY, THROUGH ITS WHOLLY-OWNED SUBSIDIARY, BIG O RETAIL ENTERPRISES, INC., A COLORADO CORPORATION, HAS ENTERED INTO RETAIL JOINT VENTURES WITH EXISTING FRANCHISEES SO THAT ADDITIONAL RETAIL STORES COULD BE OPENED AND, IN CERTAIN SELECTED CASES, MAY BUY AN INTEREST IN EXISTING RETAIL STORE(S) THROUGH AN EXISTING JOINT VENTURE. THE COMPANY LOOKS TO ITS JOINT VENTURE PARTNER TO MANAGE THE RETAIL STORE AND TO PURCHASE THE RETAIL STORE FROM THE JOINT VENTURE AFTER THREE (3) YEARS OF OPERATION USING A FORMULA ALLOWING FOR A DETERMINATION OF THE PURCHASE PRICE TO BE PAID TO THE COMPANY. In 1995, twenty-one (21) Franchisee owned Retail Stores were opened and twelve (12) were closed. The Company acquired one (1) previously franchised Retail Store in the state of Washington, which continues to be operated as a Company owned Retail Store. The Company continues to look to convert existing retail tire stores and retail tire store chains to the Big O system as part of its growth strategy, but has met with limited success using this growth strategy. The Company has not emphasized the use of Company-owned Retail Stores as part of its business, but in certain circumstances the Company may acquire tire stores and/or retail tire store chains as a means to grow its business. 2 SHAREHOLDER PROPOSAL. At the Annual Meeting of Shareholders held in June 1994, the shareholders adopted a resolution requesting the Company to engage an investment banker to explore all alternatives to enhance the value of the Company. In implementing this resolution, the Company's Board of Directors established the Investment Committee of the Board which retained PaineWebber Incorporated ("PaineWebber") to assist in fulfilling this shareholder proposal. In September 1994, the proponent of the June 1994 shareholder proposal, upon invitation by the Board, began assisting the Investment Committee in this process. In December 1994, the Company announced that the Investment Committee had agreed to enter into a period of exclusive negotiations with, and agreed to pay certain expenses of, a group of Company officers, managers and Franchisees ("Dealer-Management Group") that made an offer to acquire the outstanding shares of the Company for $18.50 per share, subject to certain conditions including the Dealer-Management Group's ability to obtain the necessary financing. The proposed transaction would have taken the Company private and was led by the Company's President, other officers and managers and Franchisees acting on behalf of certain of the Company's Franchisees. In February 1995, the Company was notified that the Dealer-Management Group elected not to continue negotiations to acquire the Company due to the difficulties in obtaining commitments for the elements of financing necessary to consummate the acquisition and the inability of the representatives of the Franchisees and management to reach mutual understandings on certain fundamental issues relating to the acquisition. At the time the Dealer-Management Group withdrew the offer to acquire the Company, the Company was also informed by representatives of management that they continued to be interested in completing a purchase of the Company on mutually agreeable terms to shareholders, management, certain Franchisees and the Board. The Company advised the management representatives that it would consider carefully credible proposals but the Board of Directors would continue to review alternatives to enhance the value of the Company. In April 1995, the Company received a proposal from the Dealer Management Group to acquire the Company for a cash price of $16 per share and on substantially the same other terms as the December 1994 proposal. The Investment Committee determined not to accept the $16 per share and advised the Dealer Management Group that it would be open to further negotiations at a more favorable price. In June 1995, the Company's Board of Directors approved in principle a proposal to recommend to the Company's shareholders that the shareholders sell at a price of $16.50 per share to a group consisting of a group of the Company's franchised dealers and senior managers (the "Acquisition Group"). In July 1995, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with BOTI Holdings, Inc. and BOTI Acquisition Corp., (collectively "Purchaser"), companies formed by the Acquisition Group to accomplish the merger. The Merger Agreement was subject to approval of the Company's stockholders. Among other conditions, the consummation of the merger was also subject to the receipt of fairness opinions, the Acquisition Group obtaining acceptable financing, participation in the acquisition by not less than 80% of the shares held by the Company's ESOP and participation in the acquisition by not less than 85% of the franchised Big O Tire stores as of the date of the Merger Agreement, which later was reduced to 82%. In March 1996, the Acquisition Group provided the Company a review as to the status of all of these conditions and requested an additional 180 day exclusive period in order to complete the transaction contemplated by the Merger Agreement. On March 13, 1996, the Company terminated the Merger Agreement. In September 1995, TBC Corporation ("TBC") and certain members of the Acquisition Group discussed TBC's potential interest in acquiring an interest in the Company. In December 1995, TBC expressed its desire to perform due diligence regarding the Company. Effective December 20, 1995, the Company, the Purchaser and TBC entered into an agreement whereby the Company, at the request of the Purchaser, agreed to facilitate TBC's investigation of the Company. The Company also agreed to indemnify TBC against any claims, expenses and costs that TBC may incur by reason of its investigation of the Company and agreed, without making TBC whole for TBC's costs and expenses of investigation, not to solicit or participate in any discussions with or provide any information to any person or group (other than the Dealer Management Group) regarding the acquisition of the Company until the earlier of TBC's announcement that TBC did not wish to acquire the Company or March 20, 1996. TBC and the Company also agreed to hold in confidence nonpublic information received by each from the other. Thereafter, the Company provided information to TBC and its advisors. The Company entered into a Letter of Intent with TBC dated March 13, 1996 relating to TBC's proposed acquisition of all the outstanding shares of the Company in a transaction in which the Company would be merged into a subsidiary of TBC. 3 Under the terms of the Letter of Intent, Company shareholders would receive a cash price of $16.50 a 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 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. (a) (2) INFORMATION REQUIRED FROM REGISTRANTS ON FORM S-1 Not applicable. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS During the three years ended December 31, 1995, over ninety percent (90%) of the Company's revenues, operating profit and identifiable assets have been attributable to one industry segment, i.e., ownership, operation and franchising of Retail Stores and the related wholesale and retail marketing of tires and other automotive aftermarket products to or through such Retail Stores. During this same three year period, less than ten percent (10%) of the Company's revenues, operating profit and identifiable assets have been attributable to the Company's development of real estate sites for Retail Stores through its wholly-owned subsidiary, Big O Development, Inc. ("Development"), and one partnership. (c) NARRATIVE DESCRIPTION OF BUSINESS The Company's principal business is franchising of Retail Stores and supplying these stores with tires and related automotive aftermarket products through the Company's RSCs. The Retail Stores are located primarily in the western United States as indicated on the chart on page 2. The Company also distributes its products to the 37 Canadian Licensees (see "Canadian Operations" on page 6). The Company has been a member of Summit Tire and Battery, Inc. ("Summit"), an independently owned buying group based in Brandon, Florida, since March 1994. In certain parts of the country, Summit provides the Company exclusive access to the Heritage line of passenger and light truck tires. The Heritage brand is manufactured by Kelly-Springfield. Subject to certain Company established limitations for development activities, the Company has a real estate development program involving Retail Store site selection and development by one of the Company's subsidiaries, and the subsequent sale of these developed store sites to Franchisees that qualify for Small Business Administration ("SBA") guaranteed loans. In certain instances, the Company may provide subordinated loans (as to collateral) not to exceed $50,000 for the prospective Franchisee to qualify for this SBA guaranteed funding. The Company anticipates that this financing will be repaid to the Company by the Franchisee, amortized over a period not to exceed five (5) years. During 1995, permanent financing had been approved for ten development projects through AT&T Capital Corporation ("AT&T"). The agreement with AT&T was terminated in August 1995. While the Company plans on continuing this real estate development program, the extent of this development has been reduced significantly. The Company anticipates funding future projects through its revolving line of credit, joint ventures or directly with or through developers. The Company has also assisted in obtaining financing for new Retail Store development with an unrelated third party financing company by providing debt guarantees for joint ventures. The Company also has provided lease guarantees to developers on behalf of Franchisees and straight financing for Retail Stores developed internally. In February 1995, the Company acquired the Las Vegas RSC at a total cost of approximately $7.7 million. Expenditures for new equipment, including computer hardware and software to operate this facility totaled approximately $1.3 million in 1995. The Company is financing this equipment through its existing line of credit. 4 (i) PRODUCTS, SERVICES AND MARKETING. FRANCHISE OPERATIONS: With respect to the Company's franchise operations, the primary products provided and services related thereto are described in the franchise agreement with each Franchisee (the "Franchise Agreement"). The Franchise Agreement essentially grants to the Franchisee a ten (10) year license to sell Big O brand tires and to use Company trademarks and trade secrets in the operation of a Retail Store at a specific location within a trade area defined in the Franchise Agreement. Franchisees are generally required to capitalize their business with $157,500 to $366,600 which covers the initial franchise fee, inventories, equipment, working capital, certain deposits and initial advertising costs. Initial franchise fees range between $7,000 to $21,000 depending on the Company's classification of the prospective Franchisee, as defined in the Franchise Agreement. In addition to the initial franchise fee, all Franchisees are required to pay monthly royalty fees of 2% of each Retail Store's prior month's gross sales, as defined in the Franchise Agreement. The Company offers a unique franchise program characterized by high standards, quality products and ongoing support designed to establish and grow successful Retail Stores. Most Franchisees are owner/operators, instead of passive investors. Management believes that a Franchisee's active involvement in the day-to-day operation of a Retail Store enhances its performance. The Company provides (i) training to the Franchisee and its supervisory personnel, (ii) assistance in store design and site and equipment selection, (iii) assistance in store construction and development, (iv) insurance programs, standardized manuals and computerized accounting systems, (v) Big O brand and other approved tires and related automotive aftermarket products, and (vi) continuing support with respect to operations, marketing, merchandising and new product introductions. The Company also promotes regional accounting centers, which may be nonprofit corporations, cooperatives, mutual benefit corporations, or trusts designed to provide assistance to the Franchisees. In an effort to build efficiencies in the Company's franchise program on a national basis, a nationally based advertising fund called Impact Advertising, Inc. ("Impact") is promoted by the Company to collect advertising fees from participating Franchisees and disburse these funds for advertising expenditures, which includes the development of advertising campaigns. The Company also provides certain materials, e.g., broadcast and print advertising materials, point of sale materials, equipment, uniforms and other wearables and services to each Franchisee at varying costs and assistance in obtaining financing through unaffiliated financing companies and SBA qualified lenders. The Company has established and requires Franchisees to meet certain uniform guidelines for physical characteristics, inventories, efficiency, speed and courteous service. Each new Franchisee or manager is required to attend formal training covering sales, service, financial management, personnel, business ethics, legal compliance, merchandising and other management skills. In addition, Franchisees are to perform in accordance with written standards outlined in manuals provided pursuant to the Franchise Agreement. After the initial training requirements are met, the Company offers regional training classes to maintain and improve this expertise. The Company's growth depends to a large measure on its ability to attract, retain and maintain good relationships with Franchisees. Changes in that relationship could cause existing Franchisees to purchase less merchandise from the Company and more from its competitors or to decline to renew their franchises upon expiration. Factors beyond the Company's control may adversely affect the Company's relationship with its Franchisees. In addition, there is no assurance that the Company will be able to continue to attract and retain suitable Franchisees. The Company also loses franchises from time to time due to financial and other problems of Franchisees. Accordingly, while a significant part of the Company's strategy is to increase the number of its franchised Retail Stores, there is no assurance that it will be able to do so. In 1995, six (6) Franchise Agreements expired and two (2) of these franchisees reapplied for a new franchise agreement and were renewed and four (4) were transferred between Franchisees resulting in new Franchise Agreements being executed. During 1996, one (1) Franchise Agreement is due to expire, and in 1997, four 5 (4) Franchise Agreements are due to expire, with the remaining Franchise Agreements expiring in the eight years thereafter, including 101 Franchise Agreements which will expire in 1999. The Company is developing a master franchise program whereby the Company intends to sell master franchises for specific areas where the master franchisee will be authorized to offer franchises for Retail Stores, be required to provide certain services in the specific area, and have the opportunity to function as a distributor of the Company's products. The Company anticipates that the master franchise program will be used primarily to expand Retail Stores in areas of the eastern United States where the Company does not yet have established franchised stores and distribution, and possibly to expand internationally. As of March 22, 1996, the Company had not sold any master franchises. CANADIAN OPERATIONS: Since 1962, certain Canadian retail tire stores within the Province of British Columbia, Canada, have been using the Company's trade name and previous versions of the Company's trademarks, logos and colors. As of March 22, 1996, 37 Canadian Licensees have signed user agreements for the Company's new trademark, logo and colors, and efforts continue to sign additional Canadian tire stores. While the Company has invited the Canadian Licensees to become Franchisees under the Company's franchise system, the Canadian Licensees have chosen to look to the Company only as a wholesale supplier. During 1995, the Company sold $85,000 in goods to 37 Canadian Licensees. In November 1995, the Company began distributing to the Canadian Licensees through its Boise, Idaho, RSC. Canadian sales were previously being distributed by a subsidiary of the Goodyear Tire and Rubber Company. DISTRIBUTION: The Company distributes Big O branded passenger and light truck tires, other approved brands of tires and automotive aftermarket products and certain material and equipment used in the operation of Retail Stores. Retail Stores may stock and sell other tires and automotive aftermarket products which have been previously approved by the Company even though such products are not distributed by the Company. The Company does not manufacture any of the products it sells. During 1995, approximately 97% of the Big O branded tires were manufactured by Kelly-Springfield, with the remainder produced primarily by General. The termination of the May 1993 Marketing Agreement provided that General was to continue to discharge its obligation to the Company and its Franchisees under a special warranty program until July 26, 1995. Thereafter, all subsequent adjustments will be subject to General's then current warranty adjustment policy. In 1995, General continued to provide and sell private brand tires, but not Big O brand tires to Tire Marketers Association ("TMA"), a former division of the Company that supplied tires to distributors predominantly based in the eastern United States. Effective March 31, 1995, the Company closed on a cash sale of the assets, trademarks and copyrights of TMA to an unrelated third party. TMA had been an operating division of the Company that marketed non-Big O branded products to retailers outside the Big O system, and was acquired by the Company in June 1993. During 1995, the Company continued its membership with Summit, an independently owned buying group. This agreement provides that Summit will provide the Company exclusive access to the Heritage line of passenger and light truck tires, manufactured by Kelly-Springfield. In August 1991, the Company entered into a supply agreement with Kelly- Springfield for the manufacture and sale to the Company of Big O branded tires (the "Kelly Supply Agreement"). The term of the Kelly Supply Agreement is a calendar year, which is automatically renewed for the next calendar year unless either party elects to terminate upon three (3) months prior written notice. The Kelly Supply Agreement was automatically renewed for 1993, 1994, 1995 and 1996. Under the Kelly Supply Agreement, the Company is required to provide Kelly-Springfield with monthly non-binding estimates of the Company's tire requirements, by line and type, for the succeeding three months, and on August 1 of each year, an itemized non- binding forecast of the quantities of tires the Company will require during the next calendar year. 6 The Company believes that it has adequate supply arrangements to meet anticipated demand, subject to industry wide shortages or disaster. However, the Kelly Supply Agreement only commits Kelly-Springfield to fill those portions of the Company's monthly orders that Kelly-Springfield agrees to fill. The obligation of Kelly-Springfield is also subject to circumstances causing delay that are outside of its reasonable control. BIG O BRAND MARKETING PROGRAM: During 1995, the Company continued its Cost-U-LessTM marketing program, a reduction in the cost of Big O brand tires to the Company's Franchisees (with a small reduction in cost from the Company's suppliers). This allowed the Franchisees to offer Big O brand products to retail customers at lower retail pricing which generally allowed the Franchisees to be more competitive in their markets. In order to differentiate the Company's products in a commodity market, Big O brand tires are sold with a "Premium Tire Service Policy" and a "Limited Warranty for Free Replacement" (certain exceptions apply to non- recreational vehicle light truck tires). The Premium Tire Service Policy provides certain services and products free of charge, which are generally provided at an additional charge from other tire stores. These include free mounting and balancing of the new tires, free wheel weights and new rubber valve stems, free flat repair, free rotations and any necessary rebalancing throughout the Big O brand tire's life. The Limited Warranty for Free Replacement provides "no charge" service for mounting, balancing, new valve stems, lifetime rebalancing service, lifetime flat repair service, free rotations and free replacement during the (i) first three years of ownership on certain quality Big O brand tires; (ii) first four years of ownership of certain premium Big O brand tires, and (iii) and the entire life of the tire on certain ultra premium Big O brand tires that fail during the life of the tire tread due to workmanship, material defects or road hazards. The Company's suppliers have financial responsibility for workmanship and material defect claims during the first 2/32 of an inch of tread in the case of Kelly-Springfield supplied tires, and the first 10% of the tread life in the case of General supplied tires, with prorations to the Company thereafter. The Kelly Supply Agreement provides maximum limits on workmanship and material defects for which the Company will have any financial responsibility on each line and size of Big O branded products. The Company or the Retail Stores have financial responsibility for substantially all of the other costs associated with the Premium Tire Service Policy and Limited Warranty for Free Replacement programs beyond these prorations. The Company's sales by product in 1995 were as follows (in thousands): % OF TOTAL UNITS REVENUES PRODUCT SALES ----- -------- ------------- Big O brand tires 1,570 $90,795 70% Other brand tires 588 $22,059 17% Wheels, shocks and other accessories 1,208 $16,088 13% The Company believes that a Franchisee's decision to purchase Big O brand products is based on several factors, including product profitability, knowledge of Big O products, services and programs, the level of product support provided by the Company, and the availability of products that meet the quality demands of the Retail Store's customers. The Company plans to meet these requirements and thereby increase sales of Big O brand products to Retail Stores by continuing to provide (i) a broad line of quality products that command higher margins for Retail Stores and that meet changing consumer demands, (ii) extensive training for store personnel, (iii) support of Retail Store operations, marketing, merchandising, and new 7 product introductions, and (iv) upgraded product quality, particularly as measured by the industry's Uniform Tire Quality Grading Standards. Unit sales of Big O brand tires increased by 11.4% in 1995 as compared to 1994, following 1994's Big O brand unit sales increase of 6.5% as compared to 1993. (ii) STATUS OF PRODUCT OR SEGMENT. The Company has made no announcement of, nor has the Company otherwise made public any information about any new product or industry segment requiring investment of a material amount of the Company's total assets or which is otherwise material to the Company's operations, other than its ongoing investment in new product lines to meet Retail Store needs and its consolidation of some of its warehouse facilities. (iii) RAW MATERIALS. The Company does not manufacture any products. The Company orders Big O brand tires anywhere from 18 - 180 days before the beginning of the month in which they are produced. Manufacturers normally produce these tires and ship them directly to the appropriate RSCs thereby eliminating manufacturers' inventories of Big O brand product. Because of the lack of "safety stock," any unforecasted change in sales trends or interruptions in production schedules may result in inventory shortages or outages. If the Company should lose Kelly-Springfield as a supplier at a time when there is sufficient production capacity within the tire manufacturing industry, management believes the Company could accomplish a rapid and orderly transition to a new supplier(s). If, however, production capacity were limited, such as was experienced in 1988 and 1989, a change in suppliers could be extremely difficult and could cause the Company to again experience significant product shortages. While the Company cannot completely assess the impact on its financial performance if an industry-wide shortage, labor strike or natural disaster should occur, such circumstances might result in higher costs, higher sales prices and possibly lower demand. In 1995, the Company received an approximate 3% price increase from its suppliers on tires and other products. The Company has received notice of a possible price increase from its suppliers of tires and other products to be implemented in 1996. However, this increase has yet to be implemented due to the current competitive pressures within the industry. Since price increases are initiated by manufacturers and are then subject to competitive pressures, the original announced increases are sometimes reduced or rolled back. An increase in cost, over a sustained period, may be significant to the overall cost of sales and working capital requirements of the Company, particularly if sales decrease. However, the tire industry in general, and the Company specifically raises prices in response to such increases. As the cost of raw materials increases for all manufacturers, the resulting costs are passed through, in the form of higher prices, to the manufacturers' customers, i.e., distributors and retailers, such as the Company. Such distributors and retailers, in turn, increase their prices, and therefore the price increases are ultimately borne by the consumer. Should price increases occur, management believes that these increases will be borne proportionately throughout the industry, as the pricing formula used usually results in percentage margins which actually increase gross profit (dollars) for distributors and retailers. (iv) PATENTS, TRADEMARKS, LICENSES, AND FRANCHISES. At January 31, 1996, the Company had 382 franchised Retail Stores operating pursuant to Franchise Agreements. Please refer to "Products, Services and Marketing" above, for a further explanation of the Company's franchises and "Canadian Operations" above, for a further explanation of the Canadian Licensees. The existence of the Franchise Agreements is of extreme importance to the Company since almost all of the Company's revenue is generated from sales to these Franchisees and from monthly royalty fees. 8 The Company is the owner of various United States, Canadian and state trademark and service mark registrations and applications for marks used in connection with the Company's tires and tire retailing concepts. These trademarks and service marks include "Big O", and numerous secondary marks for individual products and advertising slogans. The Company is aware that two retail tire companies operating "Big 10" outlets in the states of Alabama, Florida, Georgia, Louisiana and Mississippi have raised issues regarding the Company's use of "Big O" in such areas. After Big 10's national trademark registration expired, Big 10 attempted to obtain reinstatement and the Company has opposed this request. The Company does not currently have any Retail Stores operating in territories served by the other companies and the matter does not affect the Company's ability to use the name "Big O" where currently used. Should the Company begin franchising operations that overlap or are proximate to those served by the Big 10 companies, it is possible that such companies may contest usage of the Company's trade name and trademarks in such areas. The Company does not own any United States or foreign issued patents or pending patent applications. (v) SEASONALITY. The Retail Stores experience some seasonal variation in product sales because tire sales are generally greater during the summer than in the winter months. The Company generally experiences some seasonality, although not to the same extent that the Retail Stores do, as the Company maintains sales to certain Retail Stores, e.g., snow tires, that offset the trend on a national basis. (vi) WORKING CAPITAL ITEMS. The Company's trade accounts receivable increased by $1,090,000 in 1995. Approximately half of this increase resulted from the increased sales associated with the Cost-U-LessTM marketing program. The remaining increase in receivables balance is associated with slower payments from the Company's customers. As a whole, the tire industry generally sells product on varying extended payment terms, up to 180 days. The standard credit terms extended by the Company to the Retail Stores are 3%/15, 2%/30, COD/31. Through arrangements with manufacturers regarding struts, the Company has arranged terms to encourage Retail Stores to stock sufficient quantities and varieties to meet market demands. For certain items, primarily snow tires, the Company provides extended payment terms similar to those offered by wholesalers. Of the Company's $3,171,000 in notes receivable at December 31, 1995, $579,000 relate to the sale of Company-owned Retail Stores to Franchisees. $2,075,000 of these notes receivable relates to trade receivables that have been placed on notes as a financial strategy to maintain sales to financially limited, franchised Retail Stores. By placing these Retail Stores on level monthly payments, and with the development of a business plan for each such Retail Store, management is attempting to assist the Franchisees in reaching financial success while improving repayment options. In 1995, the Company sold approximately $1,014,000 of long term notes receivable. The Company targets a 45-day inventory of Big O brand tires, and lesser inventory levels for other tires, wheels, and related automotive aftermarket products. Big O brand inventory levels are greater than those normally carried by tire distributors because of the limited availability due to production scheduling and lack of supplier floor stocks. The Company has and will increase its Big O brand inventory due to anticipated shortages, potential strikes and minimum production runs required by suppliers. In lieu of obtaining extended payment terms generally provided by manufacturers, the Company has negotiated lower net pricing from suppliers. The Company periodically obtains extended payment terms on purchases while maintaining this lower net pricing. 9 As part of the Company's warranty and marketing programs, Retail Stores have the right to return certain merchandise to the RSCs for credit. The Company believes that its warranty program provides certain significant marketing advantages, but it also results in higher warranty expense to the Company than is normal in the industry. Some of this expense has been and will be offset by payments from manufacturers. The increase in warranty expense in 1995 appears to have primarily been the result of a higher ratio of road hazard type failures in the current product lines as a percent of production, than was experienced with previous product lines. This higher percent of failure, coupled with increased Big O brand product sales, resulted in a greater number of tires replaced under warranty than was anticipated. The Company does not receive compensation from the manufacturers for road hazard tire failures. Subject to Company established limitations, the Company has a real estate development program involving Big O retail store site selection and development by one of the Company's subsidiaries, and the subsequent sale of these developed store sites to Franchisees that qualify for Small Business Administration ("SBA") guaranteed loans. In certain instances, the Company may provide subordinated loans (as to collateral and payment) not to exceed $50,000 for the prospective Franchisee to qualify for this SBA guaranteed funding. The Company anticipates that this financing will be repaid to the Company by the Franchisee, amortized monthly over five (5) years. During 1995, permanent financing had been approved for ten development projects through AT&T Capital Corporation ("AT&T"). The agreement with AT&T was terminated in August 1995. While the Company plans on continuing this real estate development program, the extent of this development has been reduced significantly. The Company anticipates funding future projects through its revolving line of credit, joint ventures or directly with developers. At December 31, 1995, Development had $4,861,000 invested in acquisition and construction in progress for fourteen (14) sites, which was primarily financed from the earlier sale of notes receivable and the Company's revolving credit agreement. As additional Retail Stores are added, additional working capital for accounts receivable, inventories, and certain real estate financing will be needed. Accounts receivable financing is anticipated to be supplied through the Company's existing credit facilities; inventory growth will be financed partially by the Company's suppliers and partially through the Company's existing credit facilities; and real estate financing will be provided by a combination of the Company's revolving line of credit and limited permanent (term) financing. (vii) CUSTOMER DEPENDENCE. Since the Company primarily sells its products to 382 Franchisees and 37 Canadian Licensees, its customer group is very limited. Of this customer group, the Company does not depend upon a single customer, or a limited number of customers, for its revenues, the loss of any one or more of which would have a material adverse effect on the Company. However, certain Franchisees (and Franchisee groups) continue their individual growth and are becoming more significant customers. Approximately 28% of the Company's sales were made to Retail Stores located in the State of California, which includes sales made to the Company's largest Franchisee who is affiliated with 28 Retail Stores. Total California Retail Stores constitute about 38% of the total Retail Stores. As a result, a high portion of the Company's receivables and credit risks are concentrated in California with the result that adverse conditions or adverse publicity affecting retail operations in California could more significantly affect the operating results of the Company than if the stores were more geographically diversified. In addition, at December 31, 1995, receivables and financial guarantees totaling approximately $7,320,000 were associated with six (6) Franchisees who own and operate multiple Big O Retail Stores. Of these six Franchisees, receivables and financial guarantees totaling approximately $3,960,000 were associated with one multiple store owner. Adverse financial results with these Franchisees could adversely affect the Company more significantly than if the credit risks were less concentrated. 10 (viii) BACKLOG OF ORDERS. At March 22, 1996 and March 24, 1995, there were no material backlogs of orders. Any sustained backlog the Company experiences with its suppliers creates a backlog in fulfilling orders from the Retail Stores and Canadian Licensees. (ix) GOVERNMENT CONTRACTS. The Company is not involved with any contracts or subcontracts with the government which may allow for the renegotiation of profits or the termination of such contracts at the election of the government. (x) COMPETITION. Since the Company is primarily a distributor to its Retail Stores and the Canadian Licensees, its success depends on the retail success of its Franchisees and Canadian Licensees. Both the tire aftermarket and under- car service businesses are highly competitive. Through the Retail Stores and Canadian Licensees, the Company competes with major tire manufacturers who have retail tire stores, national and regional tire chains, traditional department stores, independent merchants, and general, full range, discount and warehouse club stores. Many of the Company's competitors are larger in terms of sales volume, have access to greater capital and management resources, and have been operating longer in particular geographic areas. Management believes that price competition in the geographical markets served by the Company continues to intensify. Retail competition comes in the form of price, service, warranty, product performance, product innovation, location or differing variations of each of these issues. Although competition varies by geographic area, the Company believes that it generally has a favorable competitive position in terms of price, product line, value, merchandising, warranty and customer service. With the implementation of the Company's Cost-U-LessTM program and the continuation of the Premium Tire Service Policy and the Limited Warranty for Free Replacement, the Company believes that its marketing programs are equal to or exceed any such programs offered by its competitors. Franchise sales are also highly competitive as the Company competes with other franchisors, some of which are larger, have better name recognition and access to larger capital resources and have been operating longer than the Company. Management believes that the competition for the sale of franchises has increased and will intensify due, in part, to the entry of new franchisors and the growth of existing franchisors. The competitive conditions for real estate development differ substantially from those the Company faces in the retail tire and franchise markets. The success of the Company's real estate development lies in obtaining sites that can be developed into store facilities that meet Franchisees' requirements at reasonable rental rates or sales prices. Since the prime customers for the Company's real estate development are its Franchisees, development of real estate can affect the growth of Retail Stores. Competition for real estate development comes from many sources, including other retail tire companies, other franchisors, e.g., fast food restaurants and gas stations, other retailers, and other businesses. (xi) RESEARCH AND DEVELOPMENT. The Company does not engage in any significant research and development activities, and no material amount was spent by the Company on research and development activities. (xii) ENVIRONMENTAL REGULATIONS. The Company is subject to the ever expanding purview of federal, state and local environmental laws relating to spillage, noise, air quality and disposal of waste products. The Company believes it is in general compliance with all applicable environmental laws and has adopted a policy of requiring Phase I 11 environmental studies associated with any new real estate projects or the acquisition of any existing locations before such transactions are consummated. The Company is not aware of any requirements to develop environmental control facilities and has not made any material capital expenditures for such facilities and does not anticipate doing so at this time. The Company has periodically been involved with minor clean-ups associated with certain Retail Stores in which the Company has been a tenant or subtenant. Generally, the costs of these clean-ups have not been material. Many states have enacted specific tire disposal laws that, among other requirements, assess fees for each tire disposed and designate specific locations for tire disposal. This impacts the Company, its Franchisees and the retail customers as such costs are usually passed on to the customers. (xiii) EMPLOYEES. At March 22, 1996, the Company employed 210 persons on a full-time basis and 32 persons on a part-time basis. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Sales to Canadian Licensees totaled $85,000, $72,000 and $994,000, which resulted in gross profits of $17,000, $8,000 and $97,000 in 1995, 1994 and 1993, respectively. In November 1995, the Company began distributing its Big O branded product through its Boise, Idaho RSC, such product was previously being distributed by a subsidiary of The Goodyear Tire & Rubber Company. While distributing Big O branded product through a subsidiary of The Goodyear Tire & Rubber Company, the Company did not recognize sales to its Canadian Licensees. The Company has not maintained any identifiable assets in Canada. ITEM 2. PROPERTIES
MORTGAGE AMOUNT # OF STORES SQUARE OWNED/ (IF ANY) AT SERVED DESCRIPTION/LOCATION FOOTAGE LEASED 3/22/96 AT 3/22/96 -------------------- ------- ------ ----------- ---------- Boise, Idaho RSC(1)(4) 100,000 Owned $ - 0 - 117(2) New Albany, Indiana RSC(3) 80,000 Owned $1,350,000 37 Las Vegas, Nevada RSC(4)(5) 300,000 Owned $ - 0 - 270
(1) The Company owns, in fee simple, approximately seven acres of land immediately adjacent to this RSC. Of those seven acres, 6.24 acres are under contract to be sold in 1996, leaving approximately .76 acres for expansion. (2) Includes distribution to 37 Canadian Licensees. (3) The New Albany, Indiana, RSC is servicing the Retail Stores located in Indiana, Kentucky and North Carolina. The cost of land acquisition and construction of this facility was $1,985,000. (4) The Boise, Idaho and Las Vegas, Nevada, properties serve as collateral for $8 million of senior, secured notes sold by the Company in April 1994. The proceeds from these notes were used to pay the previous mortgage on the Boise, Idaho RSC, to pay a term loan with the Company's previous lender, and the balance (approximately $4.2 million) to provide financing for the acquisition of the Las Vegas RSC. (5) The Las Vegas RSC contains approximately 294,000 square feet of warehouse space and 6,000 square feet of office space. It services the Retail Stores which had been serviced by the Denver, Colorado, and Ontario and Vacaville, California RSCs. The Company continues to own in fee simple, approximately five acres of land immediately adjacent to the Vacaville warehouse facility. In March 1995, the Company closed its RSC in Denver, Colorado, and consolidated its operations into the newly opened Las Vegas RSC. Ontario RSC operations were fully converted to the Las Vegas RSC in May 1995. While the Company is obligated under the lease for the Ontario warehouse through May 1998, it sublet this property in June 1995 to an unrelated third party for the remainder of the lease term. 12 The Company also has a lease for a 35,000 square foot warehouse and general office space in Santa Ana, California, which was assigned to a joint venture in which a subsidiary of the Company was a 50% joint venture partner. The initial term of this lease expires in October 1996. In 1993, the subsidiary of the Company agreed to sell its 50% interest in the joint venture to the other joint venturer which assumed all obligations under this lease through 1996. Thus the Company will remain contingently liable for this lease obligation through October 1996. As of March 15, 1996, the Company is also responsible for leases on approximately sixty-one (61) Retail Store locations, of which thirty-four (34) locations are subleased to Franchisees or third parties, six (6) locations are operated as Company owned or joint venture Retail Stores and the leases for fifteen (15) Retail Stores are guaranteed by the Company. The Company, in accordance with lease guaranty provisions, is also responsible for the lease obligations on six (6) closed Retail Store locations. ITEM 3. LEGAL PROCEEDINGS As a franchisor and wholesale distributer, 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 the Company will suffer any material loss as a result of the forty-two lawsuits pending against the Company as of December 31, 1995. 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 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 material 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 adverse effect on the Company's financial statements. As described in the Company's Annual Report on Form 10-K, for the year ended December 31, 1994, in December 1994, the Company and its nine directors were named in two proposed stockholder class action lawsuits (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 Washoe). By motion filed by plaintiff's counsel, both actions were dismissed without prejudice by the Court on March 31, 1995. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, the Company did not submit any matters to a vote of the Company's security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock is reported on the NASDAQ National Market System. The principal market for the stock is the over-the-counter market. The quotations in the table below were obtained from NASDAQ and reflect high and low bid prices of the Company's Common Stock. The prices reflect inter-dealer prices without retail mark-up, mark-down or commission. The prices have been rounded to the nearest eighth and may not necessarily represent actual transactions.
PERIOD HIGH LOW ------ ---- --- 01/01/94--03/31/94 16 3/4 12 3/4 04/01/94--06/30/94 16 3/4 13 1/8 07/01/94--09/30/94 16 3/4 14 1/2 10/01/94--12/31/94 17 7/8 15 1/4 01/01/95--03/31/95 16 1/4 12 7/8 04/01/95--06/30/95 15 1/4 12 1/2 07/01/95--09/30/95 15 1/4 12 3/4 10/01/95--12/31/95 15 1/8 12
________________ (b) HOLDERS As of March 22, 1996, the Company had 702 shareholders of record as indicated on the Company's transfer records. (c) DIVIDENDS The Company has not declared cash dividends on its Common Stock during the last two fiscal years and there is no present intent to pay a cash dividend. Certain covenants contained in the credit agreements with the Company's primary lender preclude the general declaration or payment of cash dividends and preclude the general purchase, redemption, retirement or other acquisition of the Company's capital stock, or the return of capital or distribution of assets to its shareholders, without the prior written consent of the lender. 14 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data concerning the Company, which should be read in conjunction with the financial statements appearing elsewhere herein. Amounts are in thousands (000's) except per share data.
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Sales $142,122 $127,678 $122,960 $119,799 $113,836 Net income 1,543 2,691 1,595 2,783 1,751 Earnings per share(1) .46 .80 .47 .80 .50 Cash dividends per share .00 .00 .00 .00 .00 FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Working capital(2) $22,041 $26,836 $11,885 $17,333 $20,661 Total assets(3) 63,394 61,968 56,607 57,679 57,111 Non-current portion of long-term debt, obligations under capital leases and guarantee of ESOP obligation 14,052 16,355 12,012 10,636 16,305
(1) Adjusted to reflect the 1 for 5 reverse split of the Company's $0.10 par value common stock that was effective June 15, 1992. (2) Working capital for 1994 has been restated to reflect the reclassification of retail stores under development. (3) Total assets for years prior to 1992 have been restated to reflect the reclassification of vendor receivables to accounts payable. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1995 COMPARED TO 1994 SALES. Sales in 1995 were $142.1 million which represented an increase of $14.4 million (or 11.3%) over 1994. This increase in sales was primarily due to higher sales of Big O brand tires which resulted from the Company's "Cost-U-LessTM" marketing program that was implemented on July 1, 1994, and $5.5 million of real estate sales. Cost-U-LessTM provided a significant reduction in the cost of Big O brand tires to the Company's Franchisees (with a small reduction in cost from the Company's primary supplier). This allowed the Franchisees to offer Big O brand products to their customers at lower retail pricing which generally enabled the Franchisees to be more price competitive in their markets. Wholesale sales of Big O brand tires increased by approximately 160,000 units (11.4%) in 1995. This unit increase, combined with an increase in the average selling price of $.75 per unit (1.3%), increased revenues by $10.4 million in 1995. The sale of other new tires decreased by approximately 58,000 units or 9.0% as compared to 1994, resulting in decreased sales of $2.2 million. The sale of wheels, shocks, and other accessories decreased by approximately 131,000 units or 9.8% which was offset by an increase in the average selling price of accessories of $1.62 per unit, thereby increasing revenues by $.4 million in 1995. 15 During 1995, the Company continued its efforts to improve the operations of its existing Retail Stores and add new stores to its distribution system. During the year, 21 new Retail Stores were reopened or added, but 12 existing Retail Stores were closed. Accordingly, sales to newly opened franchised Retail Stores increased by $5.9 million, sales to previously existing franchised retail stores increased by $3.4 million, and the higher retail sales generated a $.3 million increase in royalty fees. Offsetting these sales increases were reductions in sales of $.3 million at Company-owned Retail Stores, $1.1 million from the closure of nine (9) franchised Retail Stores, and $.3 million from a decrease in other wholesale sales. The Company also receives royalties from the Extra Care service program at Retail Stores which consists of alignment, brake work, front-end repair, shock absorber and strut replacement, lubrication and oil changes. Extra Care service program royalty fees in 1995 were $2.07 million, up $.07 million or 4.6% from 1994. While these fees continued to increase, they are growing at a slower rate than the Company's overall revenues. The Company's revenues are dependent on sales to its network of Retail Stores. The continuation of these franchises during the ten year term of each Franchise Agreement is extremely important to the Company as is the renewal of these franchises upon their expiration period. In 1995, six (6) Franchise Agreements expired; two (2) of these were renewed and four (4) were transferred between franchisees resulting in new franchise agreements being executed. During 1996, one (1) Franchise Agreement is due to expire. In 1997, four (4) Franchise Agreements are due to expire. The Company's Franchisees are independent business operators who are entitled to establish their own policies within certain guidelines established by the Company and who are directly responsible for supervision of their employees. Of the 382 franchised Retail Stores at December 31, 1995, three (3) are owned by partnerships in which a subsidiary of the Company owns a 50% interest but has no managerial control over day-to-day operations. The Company prescribes certain operating procedures in business and ethical standards; however, Franchisees are responsible for complying with these procedures and standards as well as all applicable laws and regulations. GROSS PROFIT. Cost of goods sold consists primarily of the cost of products and equipment sold and the cost of real estate projects sold. Gross profit in 1995 was $30.7 million, an increase of $.5 million or 1.8% over 1994. Gross profit derived from the sale of real estate projects generated an increase of $18,000. Product and franchising gross profit increased by $.5 million or 1.7% over that of 1994. Increased sales volumes generated an increase in gross profit of $2 million, which was offset by a decrease in gross profit of $1.5 million due to the decrease in gross margin. The product and franchising gross margin was 22.4% in 1995 as compared to 23.6% in 1994. This decrease in gross margin was primarily due to the increased warranty expenses in 1995 over 1994 and a decrease in margin related to the Company's "Cost-U-LessTM" marketing program. The increase in warranty expense in 1995 appears to have primarily been the result of a higher ratio of road hazard type failures in the current product lines as a percent of production, than was experienced with previous product lines. This higher percent of failure, coupled with increased Big O brand product sales, resulted in a greater number of tires replaced under warranty than was anticipated, resulting in increased warranty expenses in 1995 over 1994. EXPENSES. Expenses increased by $2.5 million, or 9.6%, to $27.9 million in 1995. An increase in expenses of $1.1 million was associated with the implementation of the shareholder proposal, and increased expenses of $.3 million resulted from costs incurred to consolidate the Company's Colorado and California warehouse operations into a single facility near Las Vegas, Nevada. Expenses decreased $.6 million due to a smaller loss associated with the sale or closure of Retail Stores. Expenses also increased by $.8 million in product delivery expense which primarily resulted from the additional freight costs associated with the Company's consolidation of its warehouse operations, $.9 million which resulted from an increase in the provision for uncollectible receivables, and $.8 million increased from payroll costs. These increases were partially offset by decreases in financing costs, legal fees and travel and entertainment expenses. 16 Expenses excluding offering costs, warehouse consolidation costs, shareholder proposal expense, and loss on sale or closure of retail stores ("Operating Expense") in 1995 were 17.8% of net sales, down from 18.6% in 1994. The Company anticipates that Operating Expense in 1996 will decrease due to the consolidation of the Colorado and California warehouse operations into a new distribution facility near Las Vegas, Nevada, which began operations in March 1995. However, increased ownership of Retail Stores may add significantly to the growth of Operating Expense as each store can add as much as $.6 million of Operating Expense annually. While the Company's current strategic plan does not contemplate the operation of additional Company-owned Retail Stores, beyond the five (5) Retail Stores presently in operation, the Company recognizes that it will generally operate some Company-owned Retail Stores until such stores can be sold to Franchisees. In 1994, five (5) Company-owned Retail Stores were sold to Franchisees which resulted in a pretax loss of $.1 million; none were sold in 1995. The Company's primary growth strategy is to significantly increase the number of franchised Retail Stores. This will cause expenditures for advertising and locating and developing new franchised locations. However, the Company believes that development of these new stores, especially based on its fixed overhead structure, could increase profitability and margins as these fixed costs are spread over more units sold due to increased outlets. To the extent that new store openings do not materialize, these additional expenses may reduce overall profitability and reduce the Company's return on assets. Interest expense decreased slightly (1.6%) in 1995 to $1.4 million. This decrease resulted primarily from the elimination of the Denver Regional Sales and Service Center (RSC) mortgage loan, which was assumed by the buyer in December 1994. This decrease was offset somewhat by increased borrowings under the Company's line of credit during 1995 and higher interest rates in 1995 compared to 1994. 1994 COMPARED TO 1993 SALES. Sales in 1994 were $127.7 million which represented an increase of $4.7 million (or 3.8%) over 1993. This increase in sales was primarily due to higher sales of Big O brand tires which resulted from the Company's "Cost-U-Less-TM-" marketing program that was implemented on July 1, 1994. Sales to new franchised Retail Stores increased by $5.3 million, sales to existing franchised retail stores increased by $4.1 million, and higher retail sales generated a $.7 million increase in royalty fees. Offsetting these sales increases were reductions in sales of $2.1 million at Company-owned Retail Stores, $1.2 million from the closure of nine (9) franchised Retail Stores, $.9 million from decreased sales to the Canadian licensees, and $1.1 million from a decrease in other wholesale sales. Royalties from the Extra Care service program in 1994 were $2 million, up $.2 million or 10.6% from 1993. GROSS PROFIT. Gross profit in 1994 was $30.1 million, an increase of $2.5 million or 9.0% over 1993. Gross profit increased $1.1 million due to increased sales volumes, and increased $1.4 million due to the 1.1% increase in gross margin. Also contributing to this 1.1% increase in gross margin was an increase in continuing royalties, additional cash discounts earned, and increased profits associated with price changes. Partially offsetting these increases were additional purchasing incentives provided to Franchisees and a decrease in promotional funds provided by the Company's suppliers. The gross margin was 23.6% in 1994 as compared to 22.5% in 1993. An increase of .8% in the gross margin was attributable to the increase in sales of Big O brand tires which carry higher gross margins than other tire products. Warranty adjustment expense decreased by 3.2% in 1994 to $4.7 million. The product quality produced by the Company's present supplier has continued to reduce the Company's financial exposure for workmanship and material warranty claims. In addition, products that have shown excessive adjustments have been discontinued and on-hand inventories have been returned to suppliers for liquidation outside existing market areas or distribution channels. EXPENSES. Expenses increased by $1.1 million or 4.7% to $25.5 million in 1994. An increase in expenses of $.7 million was associated with the implementation of the shareholder proposal, and increased expenses of $.7 million resulted from an increased loss on the sale or closure of Retail Stores. 17 Expenses also increased by $.6 million in product delivery expense which primarily resulted from the additional freight costs associated with the Company's consolidation of its warehouse operations in California, $.8 million which resulted from increased promotional expense in connection with the Company's new marketing program, and $.8 million which resulted from the operation of Company-owned Retail Stores. However, these increases were partially offset by a decrease of $1.9 million in expenses related to Company- owned Retail Stores which were sold, and a reduction of $.1 million in the provision for uncollectible receivables. In 1994, five (5) Company-owned Retail Stores were sold to Franchisees which resulted in a pretax loss of $.1 million. Interest expense increased by 20.2% in 1994 to $1.5 million. Although interest expense decreased due to reduced borrowings resulting from lower working capital requirements, this reduction was offset by an increase in interest expense attributable to an increase in the "prime" rate and, therefore, in the Company's borrowing rate, and the sale of 8.71% Senior Secured Notes in the aggregate principal amount of $8 million in April 1994. LIQUIDITY AND CAPITAL RESOURCES SHAREHOLDER PROPOSAL. In June 1994, the Company's shareholders adopted a proposal requesting that the Board of Directors engage an investment banker to evaluate alternatives to enhance the value of the Company. The Board of Directors established the Investment Committee and retained PaineWebber, Incorporated (PaineWebber) to fulfill this shareholder request. The Company has received three offers to acquire the Company, none of which have been completed as of March 22, 1996. The Company is currently negotiating with TBC Corporation (TBC) pursuant to a letter of intent dated March 13, 1996. In the event that TBC acquires the Company, then the Company's liquidity and need for capital resources may change dramatically, although the exact extent and nature of such changes cannot be predicted at this time. In the event that a transaction is not consummated with TBC, then it is presently expected that the Company will continue its current operations, but accelerate operations to achieve more rapid growth in order to enhance the value of the Company. The Board of Directors is aware of the limited capital resources available while developing strategies and growth plans pursuant to this alternative. WORKING CAPITAL. The Company's working capital (defined as current assets less current liabilities) decreased by approximately $4.8 million in 1995, finishing the year at $22.0 million. Sources of working capital included earnings, payments received on and sale of notes receivable, and sales of property. Uses of working capital included purchases of property and equipment (most notably the Las Vegas RSC) and principal payments on long-term debt. Significant changes in the components of working capital consisted of the following: i. Trade accounts receivable, net of allowances, increased by $1.09 million. This increase was primarily attributable to the addition of franchise retail stores, increased sales, and slower collections from the Company's customers. ii. Other receivables decreased by $2.66 million in 1995, primarily as a result of the change in payment structure and rebates for annual volume bonuses (AVB's) from the Company's primary supplier. This resulted in lower net pricing to the Company, with a corresponding decrease in the AVB. iii. Inventories decreased by $.97 million during 1995. A portion of this was attributable to reduced wheel inventories, primarily resulting from the cooperative marketing arrangements with one of the Company's wheel suppliers. In addition, the Company continues its development of ordering systems providing for reduced inventories, but relying more heavily on production commitments from the Company's suppliers. iv. Retail Stores under development increased by $2.69 million in 1995, primarily as a result of the real estate development program described below. v. Accounts payable increased by approximately $1.23 million. This increase was primarily attributable to the above mentioned change in the AVB rebate from the Company's primary supplier. 18 vi. The Company's warranty reserve increased by $.5 million. This resulted from the recognition of future warranty obligations on additional sales volumes. The Company anticipates that it will meet its 1996 working capital needs through internal generation of funds from operations and from financing available from its primary lender (see EXISTING CREDIT FACILITIES). Financing for the Company's real estate development programs is planned to come from the Company's existing credit facilities and proceeds from sales of real estate generally financed by Small Business Administration (SBA) guaranteed loans (see REAL ESTATE DEVELOPMENT). The Company transferred $.77 million of accounts receivable to long-term notes receivable in 1995. Such refinancings have been generally successful in assisting financially distressed Franchisees. Nevertheless, this program limits the Company's access to cash that would have been generated from earlier collection of these receivables. The Company sold approximately $1.01 million of notes receivable in 1995. No plans presently exist for the sale of additional notes. REAL ESTATE DEVELOPMENT. In 1995, the Company moved forward with its Real Estate Development Program. This program was developed to provide store growth while minimizing the need for Company-provided guarantees, particularly as they relate to real estate leases. Required performance under prior real estate guarantees, or leases, resulted in the recognition of $.55 million expense in 1995, which is reported as a component of loss on sale or closure of retail stores. Under the Company's Real Estate Development Program, the Company secures approved sites, develops such sites with a retail store, and generally, during the development process, secures a Franchisee for ownership of the real estate and business. Generally, such sales are financed through SBA guaranteed loans. In certain instances, the Company has provided, and may continue to provide, subordinated notes in an amount not to exceed $50,000 to the Franchisee to qualify for this SBA guaranteed funding. In addition, certain providers of the SBA funding may require the Company to guarantee the first 12-18 monthly payments pursuant to such loans. The Company executed 6 of these guarantees in 1995, obligating the Company to $.7 million of additional financial guarantees. At December 31, 1995, the Company's real estate subsidiary had $4.86 million invested in retail stores under development for fourteen (14) sites. These sites were primarily financed from the sale of notes receivable in 1994 and 1995 and the Company's revolving line of credit (Revolver). This program carries considerable developmental risk as the Company will be required to hold these assets, and related liabilities, if the properties cannot be sold. The Board of Directors has established certain financial limitations for these developmental activities. Accordingly, future development is limited to the extent that funding can be obtained, developed retail store sites sold, and generally, the criteria established by the Board of Directors met. In 1995, 25 projects were terminated as a result of the Agreement and Plan of Merger dated July 24, 1995 (Merger Agreement). The Company incurred charges totaling $.27 million in 1995 as a result of the termination of these projects. In addition, the Company's commitment for financing from AT&T Capital Corporation (AT&T) was terminated in August 1995. As a result, projects that are retained by the Company are now financed through the Revolver. The Company sold ten (10) retail store and development sites during 1995. Two (2) existing retail stores sites were sold for $.8 million, resulting in a net income of $.09 million. Two (2) land sites were sold for $.5 million, resulting in a net loss of $.21 million. The remaining six (6) sites were developed and sold to franchisees. Gross sales on these sites were $4.2 million, resulting in a net income of $.14 million. 19 EXISTING CREDIT FACILITIES. The Company's operations are primarily financed through the Revolver with the First National Bank of Chicago (First Chicago). First Chicago provides a $20 million Revolver, which was initiated in January 1995. This loan matures in January 1998. In 1995, the Revolver had a sublimit of $6 million which could be used for construction and permanent financing pursuant to the Real Estate Development Program described above. In 1996, this sublimit was increased to $8 million, and will increase to $10 million for 1997. As noted above, the real estate and retail store joint venture financing program previously provided by AT&T was terminated in August 1995. Certain prepayments are associated with existing loans maintained under this program, unless an SBA guaranteed loan is placed with AT&T's Small Business Lending Unit. At December 31, 1995, $4.9 million was outstanding under this AT&T facility. $.4 million was included as a liability on the Company's books, with the remaining $4.5 million being a contingent liability of the Company. Advances from First Chicago are limited to a portion of eligible collateral as defined in the Revolving Credit Agreement and are further reduced by the amount of any outstanding letters of credit issued on behalf of the Company. The Company anticipates that short-term cash needs can be met through this credit facility as well as limited real estate development costs. However, financing through this facility is subject to a formula borrowing base and certain covenant limitations. Financing beyond these needs, principally for capital expenditures, will need to be obtained through other credit facilities. The Company sold $8 million of senior, secured notes in April 1994, which provide for quarterly interest only payments through July 1998 and then equal principal payments of $333,000, plus interest, per quarter with the unpaid balance due May 2004. The Company is financing the Indiana RSC with a permanent loan obtained in 1994. This loan amortizes in monthly installments over seven years. In 1993, the Company borrowed $6 million from Kelly-Springfield to finance the acquisition and retirement of certain common stock and warrants of the Company previously held by General. Payments under this note extend through November 1997 and are based on scheduled principal reductions. Management's discretion with respect to certain business matters is limited by financial and other covenants contained in the Revolver, loan agreements with AT&T, the senior note holders, and Kelly-Springfield. 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 on 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 these covenants. PROPOSED FINANCING. Due to the uncertain circumstances resulting from the shareholder proposal, other than SBA guaranteed financing, the Company is currently not pursuing any financing proposals to provide additional financing for the Company's Franchisees. FINANCIAL COMMITMENTS. The Company has provided financial guarantees on behalf of certain franchised retail stores, which, at December 31, 1995, approximated $8.1 million. The Company has also guaranteed approximately 50% of the balance of notes sold since 1994. At December 31, 1995, this amounted to an additional $2.2 million. Lease guarantees provided to landlords approximated $4.9 million at December 31, 1995. The Company guaranteed a promissory note on behalf of the Big O Tires, Inc. Employee Stock Ownership Plan (ESOP) in November 1993. The last annual payment under this note is due April 1996, in the amount of $180,000 plus accrued interest. The Company is required to make contributions to the ESOP in an amount equal to such principal and interest payments. The current year contribution is sufficient to meet this debt service requirement. 20 In 1994, the Company sold its Denver RSC for a down payment, certain rent concessions, and the assignment of the Company's promissory note and mortgage on the facility. The continuing financial obligations under this mortgage were not released, resulting in the Company's continued obligation of $2.7 million. The Company will use a portion of this space for its corporate offices, pursuant to the aforementioned rent concessions, through June 1998. LAS VEGAS RSC CONVERSION. During the second quarter 1995, the Company completed its announced plan to consolidate three of its RSCs (Vacaville, California, Ontario, California, and Denver, Colorado) into a 300,000 square foot facility located near Las Vegas, Nevada. In May 1994, the Company closed the Vacaville RSC and consolidated operations into the Ontario RSC. The Vacaville warehouse was leased to an unrelated third party. In July 1995, the land, warehouse, and lease were sold to the tenant. Proceeds from the sale were used to reduce the outstanding loan balance with First Chicago. The Denver RSC operations were converted to the Las Vegas RSC in the first quarter 1995. As noted above, the Denver land and warehouse were sold in December 1994. The operations of the Ontario RSC were converted to the Las Vegas RSC in the second quarter 1995. While the Company is obligated under this warehouse lease until May 1998, the space was sublet to an unrelated third party. This lease commenced June 1995. CAPITAL EXPENDITURES. In February 1995, the Company acquired the Las Vegas RSC at a total cost of approximately $7.7 million. Additional equipment, computer hardware, and software to operate this facility on a more efficient basis resulted in $1.3 million of capital expenditures in 1995. Additional capital expenditures are anticipated in connection with real estate development activities as described above. Presently, the proposed expansion of the Boise RSC has been deferred. Management anticipates that significant investments in new computer hardware, software, and other technologies will be required. The Company's 1996 capital budget for this expenditure amounts to $.8 million although it is expected that significant additions in capital expenditures will be required for these and other projects in future years. ADDITIONAL ISSUES THAT COULD IMPACT LIQUIDITY. Expenses associated with the warranty program offered by the Company have had a significant impact on profitability. Negotiated programs with suppliers have assisted the Company in reducing the financial impact of this warranty program, however many of these agreements with the Company's previous supplier have expired or are limited as to future application. The Company now has 97% of its private brand product produced by Kelly-Springfield and it is anticipated that this percentage will remain over 95% through 1996. A significant portion of the Company's customers are located in California. The Company continues to add Franchisees in this significant market, but it is also looking to expand retail store development into other states. In 1993, the Company and its Franchisees experienced adverse publicity in the state of California, which may have had an impact on retail sales during 1994 and 1995. Retail sales, and the ability to franchise new locations within California, may be impacted in the future, although the exact extent, if any, cannot be forecast at this time. Given the continued competitive pressures and the economic environment, most notably in California, the Company has noticed a weakness in collections from its customers. Continued competitive pressures and weak sales environments could cause continued deterioration of collections from its customers, although the exact extent of such problems cannot be predicted. The Company experienced one environmental issue in 1995, which was settled at a cost of approximately $50,000. The Company has periodically been involved with minor clean-ups associated with certain retail stores in which the Company has been a tenant, subtenant, or guarantor. Generally, the cost of these clean-ups has been less than $10,000, although two situations, including the 1995 clean- up, have each been approximately $50,000. There is no assurance that such environmental remediations can be limited to this amount in the future, if any occur. As a result of environmental concerns, the Company's real estate development strategy requires that all new sites have Phase One environmental studies conducted before the project is approved and the location acquired. 21 Market risks associated with changes in interest rates could have an impact on the Company's profitability due to the significant amounts of financing tied to variable interest rates. Increases in consumer interest rates could have an adverse effect on the sale of the Company's product to its Retail Stores, since such Retail Stores sell a portion of their products and services to the consumer on credit. The previous credit card system offered through American General Finance, Inc. has been terminated. The Company is recommending to its Franchisees that they work with Norwest Financial as an alternative for such credit sales. There is no assurance that this finance company, or any finance company, will continue to offer an acceptable financing program to the Franchisees. Lease guarantees and obligations can have a significant financial impact on the Company's operations and cash flows. Over the past two years, the Company has accrued for lease guarantees that have been expensed; however, the cash flow requirements from these leases will continue until each lease has expired. Further, the failure of any Retail Store for which the Company is currently a tenant, subtenant, or guarantor, will result in reduced financial performance and the resulting impact on future cash flows. SEASONALITY The Retail Stores experienced some seasonal variation of product sales because tire sales are generally greater during the summer than in the winter months. The Company generally experiences some degree of seasonality, although not to the same extent that Retail Stores do, as the Company maintains sales to certain Retail Stores that offset this trend on a national basis through the sale of such products as snow tires and chains. The Company has historically generated operating losses or lower profits during the first quarter of each fiscal year because of lower sales volumes and higher expenses as a percentage of sales. INFLATION AND PRICE CHANGES As a matter of past industry practice, most tire distributors adjust the selling price of inventories when prices increase (decrease) which results in gross profit increases (decreases) associated with the sale of existing inventories at these higher (lower) prices. Management notes that certain "discount" distributors may defer this price increase on their existing inventory in an effort to increase market share. Management has also noted increased price competition among distributors, wherein price increases are not passed onto customers, nor accepted from suppliers. Price increases contributed approximately $450,000, $360,000 and $90,000 to the Company's gross profits for 1995, 1994 and 1993, respectively. The Company received an approximate 3% price increase from its suppliers on tires and other products in 1995. The Company has received notice of a possible 1996 price increase from its suppliers of tires and other products. Management is unsure as to whether this price increase, if implemented, will be supported by the industry. Since price increases are initiated by manufacturers and are then subject to competitive pressures, management cannot predict any future increases. ACCOUNTING STANDARDS ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standard (FAS) No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, effective January 1, 1995. The adoption of this FAS did not have a material effect on the Company's financial position or results of operations for the year ended December 31, 1995. The Financial Accounting Standards Board (FASB) has issued FAS No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, which is required to be implemented for the Company's fiscal year ending December 31, 1996. At December 31, 1995, the Company did not hold any derivative financial instruments for trading or other purposes, and the Company did not purchase any such instruments during the year then ended. Accordingly, the earlier adoption of this FAS would not have materially affected the Company's financial position or results of operations for the year ended December 31, 1995. 22 The FASB has also issued Statement of Financial Accounting Standard No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is required to be implemented for the Company's fiscal year ending December 31, 1996. The earlier adoption of this FAS would not have materially affected the Company's financial position or results of operations for the year ended December 31, 1995. The FASB has also issued FAS No. 123 ACCOUNTING FOR STOCK BASED COMPENSATION, which is required to be implemented for the Company's fiscal year ending December 31, 1996. The Company is continuing to evaluate the provisions of FAS No. 123 and, as such, has not yet determined the effect the earlier adoption of this FAS would have on the Company's financial position or results of operations for the year ended December 31, 1995. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA All Financial Statements and Financial Statement Schedules required to be filed hereunder are listed under Item 14 and are attached hereto following the signature page. (a) Selected Quarterly Financial Data (unaudited) (in thousands except per share data): 1995 QUARTER ENDED ----------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- Net Sales $ 29,153 $ 37,777 $ 40,742 $ 34,450 Gross Profit 6,740 8,243 7,952 7,731 Income Tax 209 466 372 134 Net Income 289 645 511 98 Net Income Per Common Share .09 .19 .15 .03
1994 QUARTER ENDED ----------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- Net Sales $ 26,393 $31,087 $ 36,652 $ 33,546 Gross Profit 6,285 8,083 7,561 8,202 Income Tax 152 479 421 898 Net Income 205 650 599 1,237 Net Income Per Common Share .06 .19 .18 .37
_________________ (b) Information about Oil and Gas Producing Activities Not applicable. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 23 PART III Items 10 through 13 of this Form 10-K are omitted by the Company and will either be filed as an amendment to this Annual Report on Form 10-K or will be incorporated by reference to the Company's definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders which will be filed with the United States Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) LIST OF FINANCIAL STATEMENTS The following is a list of financial statements which, along with the auditors' report, accompany this Form 10-K: - Independent Auditors' Report - Deloitte & Touche LLP - Consolidated Balance Sheets December 31, 1995 and 1994 - Consolidated Statements of Income Years Ended December 31, 1995, 1994, and 1993 - Consolidated Statements of Shareholders' Equity Years ended December 31, 1995, 1994, and 1993 - Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994, and 1993 - Notes to Consolidated Financial Statements (a) (2) LIST OF SCHEDULES REQUIRED BY ITEM 8 AND ITEM 14 (D) None. (a) (3) LIST OF EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K EXHIBIT NUMBER (3.1) Certificate of Amendment to Restated Articles of Incorporation of Big O Tires, Inc. dated June 10, 1992 and Restated Articles of Incorporation of Big O Tires, Inc. dated August 17, 1987 (incorporated by reference to Exhibit 3 to Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (3.2) Third Amendment and Restated Bylaws of Big O Tires, Inc. dated December 5, 1995. (4.1) Rights Agreement dated as of August 26, 1994, between Big O Tires, Inc. and Interwest Co., Inc., as Rights Agent (incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated August 26, 1994). (4.2) Amendment to Rights Agreement dated as of July 24, 1995, is between Big O Tires, Inc., a Nevada corporation, and Interwest Co., Inc., a Utah corporation (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated July 25, 1995). (10.1) 1994 Restatement of Employee Stock Ownership Plan and Trust Agreement of Big O Tires, Inc. (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). (10.2) Big O Tires, Inc. Director and Employee Stock Option Plan (incorporated by reference to Exhibit 10.11 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 24 (10.3) First Amendment to the Big O Tires, Inc. Director and Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989). (10.4) Amendment No. 2 to the Big O Tires, Inc. Director and Employee Stock Option Plan (incorporated by reference to Exhibit 10.16 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.5) Ultimate Net Loss Agreement between Big O Tires, Inc. and FBS Business Finance Corporation dated January 13, 1989 (incorporated by reference to Exhibit 10.34 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.6) Purchase Agreement effective June 30, 1987, and related documents including Promissory Notes, Modification Agreements, Security Agreements, Guaranty Agreement, and Subleases in connection with a purchase by C.S.B. Partnership and three individuals including Ronald D. Asher, of three Big O Franchise Retail Stores in California from Security/Cal, Inc., a wholly-owned subsidiary of the Company, and H.R.I., Inc., a wholly-owned subsidiary of Security/Cal, Inc. (incorporated by reference to Exhibit 10.63 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1987). (10.7) Purchase Agreement effective November 1, 1987, and related documents including Promissory Notes, Security Agreements, Guaranty Agreements, Subleases, and Franchise Agreements in connection with a purchase by C.S.B. Partnership and its three general partners, including Ronald D. Asher, of two Big O Franchise Retail Stores in California from Security/Cal, Inc. and H.R.I., Inc. (Seller) (incorporated by reference to Exhibit 10.45 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.8) Purchase Agreements effective July 5, 1988, October 1, 1988, and November 14, 1988, and related documents including Promissory Notes, Security Agreements, Guaranty Agreements, and Subleases in connection with a purchase by C.S.B. Partnership and three individuals including Ronald D. Asher of three Big O Franchise Retail Stores in California from Big O Tires, Inc., Security/Cal, Inc., a wholly-owned subsidiary of the Company, and H.R.I., Inc., a wholly-owned subsidiary of Security/Cal, Inc. (incorporated by reference to Exhibit 10.46 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.9) Agreement and Release dated October 31, 1989, and related documents including Promissory Note, related Subleases, Assignment of Lease Rights, and Performance Guarantee in connection with the purchase by C.S.B. Partnership and its general partners, including Ronald D. Asher, of two (2) Big O franchise Retail Stores in California, owned by GEM Tire, Inc. from the Company (incorporated by reference to Exhibit 10.57 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989). (10.10) Ultimate Net Loss Agreement, dated as of December 1, 1990, by and between Big O Tires, Inc. and Northcross Financial Services, Inc., ICON Capital Corp., in its individual capacity and on behalf of ICON Cash Flow Partners, L.P., Series A, ICON Cash Flow Partners, L.P., Series B and any future partnerships on which it may be the general partner and/or manager (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990). (10.11) Agreement of Joint Venture of Big O/C.S.B. Joint Venture dated as of June 1, 1992, by and between Big O Retail Enterprises, Inc., a wholly-owned subsidiary of Big O Tires, Inc., and C.S.B. Partnership, a California general partnership (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991). (10.12) 1995 Incentive Bonus Plans (incorporated by reference to Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 25 (10.13) Purchase Agreement for Private Brand Name Tires between Big O Tires, Inc. and The Kelly-Springfield Tire Co., dated August 16, 1992 (incorporated by reference to Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991). (10.14) Big O Tires, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 55 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.15) Amendment No. 1 to Big O Tires, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 56 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.16) Amendment No. 2 to Big O Tires, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 57 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.17) Agreement of Joint Venture of Big O/S.A.N.D.S. Joint Venture (incorporated by reference to Exhibit 58 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.18) Commitment Letters dated July 22, 1992, from AT&T Capital Corporation (incorporated by reference to Exhibit 64 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.19) Agreement dated as of November 15, 1992, among Peerless Trading Company, Limited, Delaware Liquidators, Inc. dba Trade Center Imports, and Big O Tires, Inc.; Purchase Money Non-Negotiable Promissory Note dated as of November 15, 1992, from Peerless Trading Company, Limited to Big O Tires, Inc.; and amendment dated January 19, 1993 to the Agreement dated November 15, 1992 (incorporated by reference to Exhibit 66 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.20) Marketing Agreement for Private Brand Tires between Big O Tires, Inc. and General Tire, Inc., dated May 14, 1993 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 30, 1993). (10.21) Inventory Financing Agreement between The Kelly-Springfield Tire Company and Big O Tires, Inc. and/or Big O Tire of Idaho, Inc. and/or Big O Retail Enterprises, Inc., dated May 14, 1993 (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 30, 1993). (10.22) Demand Note in the original principal amount of $6,000,338.67 with The Kelly-Springfield Tire Col. as Holder and Big O Tires, Inc., Big O Retail Enterprises, Inc. and Big O Tire of Idaho, Inc. as Maker (incorporated by reference to Exhibit 10.50 to Big O Tires, Inc.'s Annual Report on Form 10-K dated April 30, 1993). (10.23) Consolidation and Modification Agreement among Big O Tires, Inc. (successor in interest to H.R.I., Inc. and Security/Cal, Inc.) and Big O Retail Enterprises, Inc. and C.S.B. Partnership (incorporated by reference to Exhibit 10.51 to Big O Tires, Inc.'s Registration Statement No. 33-65852). (10.24) Modification of Consolidation and Modification Agreement by and between C.S.B. Partnership and Big O Tires, Inc. (incorporated by reference to Big O Tires, Inc.'s Form 10-K for the year ended December 31, 1993). (10.25) Registration Rights Agreement dated June 28, 1993, between the Selling Shareholder and Big O Tires, Inc. (incorporated by reference to Exhibit 10.52 to Big O Tires, Inc.'s Registration Statement No. 33-65852). 26 (10.26) Loan Agreement and Promissory Note in the original principal amount of $155,000.00 with C.S.B. Partnership as Maker (incorporated by reference to Exhibit 10.44 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.27) Loan Agreement and Promissory Note in the original principal amount of $70,000.00 with Big O/C.S.B Joint Venture as Maker (incorporated by reference to Exhibit 10.45 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.28) Loan Agreement and Promissory Note in the original principal amount of $75,000.00 with Big O/S.A.N.D.S. Joint Venture as Maker (incorporated by reference to Exhibit 10.46 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.29) Commercial Note and Loan Agreement, Commercial Mortgage and Environmental Certificate between Big O Development, Inc. and National City Bank, Kentucky, and Guaranty Agreement of Big O Tires, Inc. guaranteeing the obligations of Big O Development, Inc. to National City Bank, Kentucky in connection with the borrowing of $1,500,000 for construction of the Company's Regional Sales and Service Center in New Albany, Indiana (incorporated by reference to Exhibit 10.47 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.30) Construction Agreement between Big O Development, Inc. and Koetter Construction, Inc. to construct the Regional Sales and Service Center in Floyd, County, Indiana (incorporated by reference to Exhibit 10.48 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.31) Letter dated January 26, 1994 from General Tire, Inc. to the Company terminating the Marketing Agreement for Private Brand Name Tires between Big O Tires, Inc. and General Tire, Inc. dated May 14, 1993 (incorporated by reference to Exhibit 10.52 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.32) Purchase Agreement by and between Caps Tire Limited Liability Company and Intermountain Big O Realty for the Big O Tires Retail Store located at 8151 East Arapahoe Road, Englewood, Colorado incorporated by reference to Exhibit 10.53 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.33) Third and Fourth Amendments to Loan and Security Agreement by and between Big O Tires, Inc. and its primary lender (incorporated by reference to Exhibit 10.54 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.34) Limited Partnership Agreement by and between Donald J. Horton, General Partner, Thomas L. Staker, General Partner, and Big O Tires, Inc., Limited Partner, dated as of December 31, 1993 (incorporated by reference to Exhibit 10.56 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.35) Loan Agreement and Guaranty, Promissory Note and Security Agreement with Big O Tires, Inc. Employee Stock Ownership Plan ("ESOP") as Borrower, Big O Tires, Inc., as Guarantor, and Key Bank of Wyoming, as Lender, in connection with the refinancing of the ESOP debt in the amount of $960,000 (incorporated by reference to Exhibit 10.57 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.36) Amendment to Partnership Agreement dated August 25, 1994, by and between Big O Development, Inc., a Colorado corporation, a wholly-owned subsidiary of Big O Tires, Inc. and Mill Creek Associates, Ltd., a Colorado limited partnership (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). (10.37) Agreement dated July 1, 1994, by and between General Tire, Inc., an Ohio corporation and Big O Tires, Inc. (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). 27 (10.38) Consulting Agreement by and between Big O Tires, Inc., and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.5 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.39) Letter Agreement dated January 10, 1995, amending the Consulting Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.40) Letter Agreement dated July 12, 1994, by and between Big O Tires, Inc. and PaineWebber Incorporated (incorporated by reference to Exhibit 10.6 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.41) Letter Agreement dated March 23, 1994, by and between Big O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.7 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.42) Ultimate Net Loss Agreement dated October 21, 1994, by and between Big O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.8 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.43) Fifth Amendment to Loan and Security Agreement by and between Big O Tires, Inc. and its former lender dated April 29, 1994 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.44) Agreement by the Investment Committee of the Board of Directors and the Management/Dealer participants dated December 22, 1994 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 6, 1994). (10.45) Letter dated December 13, 1994, to the Investment Committee of Big O Tires, Inc. and the Management participants and Dealer representatives (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 6, 1994). (10.46) Letter dated February 7, 1995, from the Dealer/Management Group to the Company's Board Chairman (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.47) Agreement between the Company and the Management/Dealer participants dated January 20, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K (10.48) Multi-Tenant Lease NNN dated December 1, 1994 between Botac VI Leasing L.L.C., a Utah Limited Liability Company and Big O Development, Inc. (incorporated by reference to Exhibit 10.62 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.49) Assignment and Assumption Agreement dated December 2, 1994 by Big O Development, Inc., Big O Tires, Inc. and Botac VI Leasing, L.L.C. and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.63 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.50) Guarantee Agreement dated December 2, 1994 by Big O Tires, Inc., Big O Development, Inc. and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.64 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.51) Closing Agreement dated December 2, 1994 by Big O Development, Inc., Big O Tires, Inc., Botac VI Leasing, L.L.C., and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.65 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). 28 (10.52) Commercial Contract to Buy and Sell Real Estate dated March 17, 1994 between Bailey's Moving and Storage and Big O Tires, Inc. (incorporated by reference to Exhibit 10.66 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.53) Confidentiality Agreement dated September, 1994 between Big O Tires, Inc. and Kenneth W. Pavia, Sr. (incorporated by reference to Exhibit 10.67 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.54) Amendment No. 1 to the Big O Tires, Inc. Employee Stock Ownership Plan and Trust Agreement dated September 12, 1994 (incorporated by reference to Exhibit 10.68 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.55) Development Management Agreement dated September, 1994 between Ross Development Management Group, Inc. and Big O Development, Inc. and Big O Tires, Inc. (incorporated by reference to Exhibit 10.69 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.56) Letter Agreement dated February 20, 1995 terminating the Consulting Agreement between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.57) Commitment Letter dated February 16, 1994 between Big O Tires, Inc. and AT&T Commercial Finance Corporation for real estate financing (incorporated by reference to Exhibit 10.72 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.58) Commitment Letter dated February 16, 1994 between Big O Tires, Inc. and AT&T Commercial Finance Corporation for equipment financing (incorporated by reference to Exhibit 10.73 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.59) Extension letter dated December 9, 1994 between Big O Tires, Inc. and AT&T Commercial Finance Corporation to extend existing lines of credit through December 31, 1995 (incorporated by reference to Exhibit 10.74 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.60) Resignation letter dated February 27, 1995 from Robert L. Puckett (incorporated by reference to Exhibit 10.75 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.61) Resignation letter dated February 24, 1995 from David W. Dwyer (incorporated by reference to Exhibit 10.76 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.62) Revolving Credit Agreement dated January 23, 1995 between Big O Tires, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit 10.77 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.63) Consent, Acknowledgement and Access Agreement dated January 23, 1995 between The Bank of Cherry Creek, N.A., Kenneth B. Buckius and The First National Bank of Chicago (incorporated by reference to Exhibit 10.78 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.64) Note Purchase Agreement dated April 27, 1994 between Big O Tires, Inc. and USG Annuity & Life Company and Republic Western Insurance Company (incorporated by reference to Exhibit 10.79 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.65) Franchise Agreement dated October 7, 1994 between Big O Tires, Inc. and OK Tires, Inc. for the Retail Store located at 2830 West 3500 South, West Valley City, Utah 84119 (incorporated by reference to Exhibit 10.80 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). 29 (10.66) Franchise Agreement dated November 26, 1993 between Big O Tires, Inc and CAPS Tire Limited Liability Company for the Retail Store located at 8151 East Arapahoe Road, Englewood, Colorado 80112 (incorporated by reference to Exhibit 10.81 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.67) Form of Confidentiality Agreement signed by dealers dated October 19, 1994 (incorporated by reference to Exhibit 10.82 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.68) Ultimate Net Loss Agreement dated November 30, 1994, by and between Big O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.83 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.69) Inventory Financing Agreement together with a Demand Note dated September 30, 1994, by and between The Kelly-Springfield Tire Company and Big O Tires, Inc., Big O Retail Enterprises, Inc. and Big O Tire of Idaho, Inc. (incorporated by reference to Exhibit 10.84 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.70) Supplemental Executive Retirement Plan dated December 7, 1994, by Big O Tires, Inc., effective January 1, 1994 (incorporated by reference to Exhibit 10.85 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.71) Forms of Stock Appreciation Rights Agreement dated February 15, 1995, between Big O Tires, Inc. and the Members of the Chief Executive Office (incorporated by reference to Exhibit 10.86 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.72) Letter Agreement dated March 24, 1995, regarding severance package, between Big O Tires, Inc. and John E. Siipola (incorporated by reference to Exhibit 10.87 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.73) Letter Agreement dated March 24, 1995, regarding severance package, between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.88 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.74) Letter dated February 7, 1995, from the Dealer-Management Group to the Company's Board Chairman (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.75) Agreement between the Company and the Management Dealer Participants dated January 20, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.76) Letter Agreement dated January 10, 1995, amending the Consulting Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.77) Purchase Agreement dated March 22, 1995 effective March 31, 1995 by and between Tire Marketers Association, a division of Big O Tires, Inc. and Carr's Tire Service, Inc., a Virginia corporation (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated March 31, 1995). (10.78) Acquisition Proposal to the Investment Committee of the Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated April 6, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 6, 1995). 30 (10.79) Acquisition Proposal to the Investment Committee of the Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated June 2, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated June 5, 1995). (10.80) Acquisition Proposal to the Investment Committee of the Board of Directors from certain members of management and a representative of Big O Tire Dealers of America dated June 2, 1995, and signed by the Company on June 7, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated June 9, 1995). (10.81) Letter Agreement and Indemnification Agreement dated January 20, 1995, between Big O Tires, Inc. and PaineWebber Incorporated. Acquisition Proposal to the Investment Committee of the Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated April 6, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.82) Three memos from PaineWebber Incorporated to the Company amending certain fees dated June 9, 1995, June 16, 1995 and June 30, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.83) Letter Agreement between Big O Tires, Inc. and John E. Siipola dated July 21, 1995, pertaining to new severance package terms and terminating the March 24, 1995 Letter Agreement regarding severance (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.84) Letter Agreement between Big O Tires, Inc. and Horst K. Mehlfeldt dated July 21, 1995, pertaining to new severance package terms and terminating the March 24, 1995 Letter Agreement regarding severance (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.85) Letter Agreement between Big O Tires, Inc. and Steven P. Cloward dated July 21, 1995, regarding a modification to Mr. Cloward's severance package (incorporated by reference to Exhibit 10.5 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.86) Agreement and Plan of Merger dated July 24, 1995, between BOTI Holdings, Inc., a Nevada corporation, BOTI Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of BOTI Holdings, Inc., and Big O Tires, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated July 25, 1995). (10.87) Letter Agreement dated August 31, 1995, by and among Big O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated September 5, 1995). (10.88) Agreement for Purchase and Sale of Joint Venture Interest; Dissolution of Joint Venture; and Continuation of Business by Acquiring Joint Ventures dated effective October 1, 1994, by and between Big O Retail Enterprises, Inc., a Colorado corporation ("Seller") and C.S.B. Partnership, a California general partnership ("Purchaser") (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1995). (10.89) Letter Agreement dated October 2, 1995, by and among Big O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated October 4, 1995). (10.90) Letter dated October 15, 1995, from BOTI Acquisition Corp. and BOTI Holdings, Inc., to Big O Tires, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated October 18, 1995). 31 (10.91) Second Amendment to Employee Stock Ownership Plan and Trust Agreement of Big O Tires, Inc., dated ___ November, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (10.92) Amendment to Agreement and Plan of Merger dated as of November 14, 1995, between BOTI Holdings, Inc., a Nevada corporation (the "Parent"), BOTI Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of the Parent (the"Purchaser"), and Big O Tires, Inc., a Nevada corporation (the "Company"), and amends the Agreement and Plan of Merger dated as of July 24, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (10.93) Second Amendment to Employee Stock Ownership Plan and Trust Agreement of Big O Tires, Inc., dated November 14, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 15, 1995). (10.94) 1996 Incentive Bonus Plans. (10.95) Form of Franchise Agreement currently in use. (10.96) Promissory Note in the original principal amount of $250,000.00 with C.S.B Partnership as Maker and related security documents. (20.1) Opinion Letter from PaineWebber Incorporated to the Board of Directors of Big O Tires, Inc. dated November 14, 1995 (incorporated by reference to Exhibit 20.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (21.1) Big O Tires, Inc. Subsidiaries (23.1) Consent of Deloitte & Touche (25.1) Powers of Attorney executed by the Directors of Big O Tires, Inc. (27.1) Big O Tires, Inc.'s Financial Data Schedule. __________ * All executive compensation plans and arrangements required to be filed as exhibits to the Form 10-K pursuant to Item 601. 32 (b) Reports on Form 8-K 1. On October 4, 1995, the Company filed a Current Report on Form 8-K dated October 4, 1995 announcing under Item 5 that the Company had agreed to a requested extension of the Merger Agreement. The Company also filed under Item 7 the Letter Agreement dated October 2, 1995 by and among the Company, BOTI Acquisition Corp., and BOTI Holding, Inc. 2. On October 18, 1995, the Company filed a Current Report on Form 8-K dated October 18, 1995, announcing under Item 5 that the Company received notice from the Purchaser that the Purchaser elected to waive the Dealer Participation Contingency. The Company also filed under Item 7 the letter dated October 15, 1995 from BOTI Acquisition Corp. and BOTI Holding, Inc. 3. On November 17, 1995, the Company filed a Current Report on Form 8-K dated November 17, 1995, announcing under Item 5 that the Company received a written opinion from PaineWebber Incorporated stating that as of the date of the opinion, the merger consideration of $16.50 per share was fair from a financial point of view to holders of the Company's common stock. The Company also announced that the Board approval of various amendments to the Company's Stock Ownership Plan and Trust Agreement. The Company also filed under Item 7 the Second Amendment to Employee Stock Plan and Trust Agreement, the Amendment to Agreement and Plan of Merger dated as of November 14, 1995, between BOTI Holdings, Inc. and BOTI Acquisition Corp., and the Company, and the Opinion Letter from PaineWebber Incorporated dated November 15, 1995. 4. On December 15, 1995, the Company filed a Current Report on Form 8-K/A dated December 15, 1995, amending the Company's Current Report on Form 8-K dated November 17, 1995 for the purpose of filing a corrected version of the Second Amendment to Employee Stock Ownership Plan and Trust Agreement. (c) EXHIBITS Exhibits required by Item 601 of Regulation S-K are listed above under (a) (3) of this Item 14. (D) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules are listed above under (a) (2) of this Item 14. 33 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 1996 BIG O TIRES, INC., a Nevada corporation By: /s/ JOHN E. SIIPOLA ---------------------------------- John E. Siipola Member of the Office of the Chief Executive and Chairman By: /s/ HORST K. MEHLFELDT ---------------------------------- Horst K. Mehlfeldt Member of the Office of the Chief Executive and Vice-Chairman By: /s/ STEVEN P. CLOWARD ---------------------------------- Steven P. Cloward Member of the Office of the Chief Executive and President By: /s/ JOHN B. ADAMS ---------------------------------- John B. Adams Principal Accounting Officer 34 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
DATE NAME AND TITLE SIGNATURE - ------------------------------------------------------------------------------------- March 29, 1996 John E. Siipola JOHN E. SIIPOLA Director, Member of the Office of the Chief Executive and Chairman of the Board Horst K. Mehlfeldt HORST K. MEHLFELDT Director, Member of the Office of the Chief Executive and Vice-Chairman of the Board Steven P. Cloward STEVEN P. CLOWARD Director, Member of the Office of the Chief Executive and President John B. Adams JOHN B. ADAMS Director and Principal Financial Officer Ronald D. Asher RONALD D. ASHER Director Frank L. Carney FRANK L. CARNEY Director Everett H. Johnston EVERETT H. JOHNSTON Director Robert K. Lallatin ROBERT K. LALLATIN Director Ralph J. Weiger RALPH J. WEIGER Director C. Thomas Wernholm C. THOMAS WERNHOLM Director March 29, 1996 By: /s/ JOHN B. ADAMS ------------------------- John B. Adams Attorney-in-Fact
35 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 each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP /s/Deloitte & Touche Denver, Colorado March 14, 1996 BIG O TIRES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (000S EXCEPT FOR SHARE AMOUNTS)
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 amortiza- tion 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 BIG O TIRES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (000S EXCEPT FOR SHARE AMOUNTS)
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 BIG O TIRES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (000S EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
1995 1994 1993 -------- -------- -------- SALES: Product and franchising $136,633 $127,678 $122,960 Real estate 5,489 -- -- --------- --------- --------- 142,122 127,678 122,960 COST OF SALES: Product and franchising 105,985 97,547 95,329 Real estate 5,471 -- -- --------- --------- --------- 111,456 97,547 95,329 GROSS PROFIT 30,666 30,131 27,631 --------- --------- --------- EXPENSES: Selling and administrative 19,868 19,132 19,316 Product delivery expense 3,954 3,113 2,499 Interest expense 1,441 1,465 1,219 Loss on sale or closure of retail stores 547 1,106 429 Shareholder proposal expense 1,812 674 -- Offering costs -- -- 281 Warehouse consolidation costs 320 -- 607 --------- --------- --------- 27,942 25,490 24,351 --------- --------- --------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,724 4,641 3,280 --------- --------- --------- PROVISION FOR INCOME TAXES: Current 1,709 2,311 1,979 Deferred (528) (361) (579) --------- --------- --------- 1,181 1,950 1,400 --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,543 2,691 1,880 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (285) --------- --------- --------- NET INCOME $1,543 $ 2,691 $1,595 --------- --------- --------- --------- --------- --------- EARNINGS PER SHARE: Income before cumulative effect of change in accounting principle $ .46 $ .80 $ .55 Cumulative effect of change in accounting principle -- -- (.08) --------- --------- --------- Net income $ .46 $ .80 $ .47 --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING 3,377,429 3,347,892 3,409,962 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements BIG O TIRES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ($ ONLY IN 000S)
EMPLOYEE COMMON STOCK CAPITAL STOCK TREASURY STOCK ------------- CONTRIBUTED OWNERSHIP DEFERRED ---------------- NUMBER OF IN EXCESS RETAINED PLAN STOCK GRANT NUMBER OF SHARES AMOUNT OF PAR EARNINGS OBLIGATIONS COMPENSATION SHARES AMOUNT --------- ------- ------- -------- ----------- ------------ ------ ------ BALANCE DECEMBER 31, 1992 3,542,700 $354 $19,099 $16,133 $(1,277) $ - 31,000 $ (119) Net Income for 1993 1,595 Sale of Common Stock 93,300 9 1,097 Stock Issued as Compensation 1,500 19 Stock Options and Warrants Exercised 37,400 4 284 Deferred Compensation under Discounted Stock Option Plan 90 Purchase and Retirement of Treasury Stock and Warrants (400,000) (40) (6,060) Treasury Stock Purchased 300 (2) Employee Stock Ownership Plan Obligation 302 --------- ------ ------- ------- ------- ------ ------ ------ 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 Cancelled (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) --------- ------ ------- ------- ------- ------ ------ ------ --------- ------ ------- ------- ------- ------ ------ ------
See notes to consolidated financial statements BIG O TIRES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (000s)
1995 1994 1993 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,543 $2,691 $1,595 ------ ------ ------ Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,240 1,215 1,168 Amortization of intangibles 395 453 390 Provision for losses on accounts and notes receivable 1,272 356 556 (Gain)/loss on sales and retirements of property and equipment (481) 37 40 Loss on sale or closure of retail stores 315 1,106 150 Equity in losses of affiliates 40 250 350 Deferred compensation under stock option plan and restricted stock grants 338 224 90 Deferred gain recognized (22) (47) (35) Deferred income taxes (528) (361) (579) Cumulative effect of change in accounting principle -- -- 285 Other -- -- 104 Changes in assets and liabilities: Increase in receivables (167) (4,446) (1,206) (Increase) decrease in inventories 993 (2,253) 3,356 Increase in retail stores under development (2,392) (456) -- (Increase) decrease in other current assets (81) 161 (329) (Increase) decrease in other assets (3) 9 (40) Increase (decrease) in accounts payable 1,232 (2,987) 4,528 Increase in accrued expenses 100 25 278 Increase in warranty reserve 500 596 600 Decrease in other liabilities (283) (258) -- ------ ------ ------ Total adjustments 2,468 (6,376) 9,706 ------ ------ ------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 4,011 (3,685) 11,301 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable (139) (650) (400) Payments received on notes receivable 647 1,170 1,184 Proceeds from sales of notes receivable 1,014 2,962 -- Equity investment in affiliates (87) (187) (673) Acquisition of interest in joint ventures -- -- (266) Acquisition of other assets -- -- (1,005) Contingent payments related to business combination -- -- (788) Net cash provided by sales of retail stores -- 204 77 Purchase of retail stores (141) (410) (435) Purchases of property and equipment (10,114) (1,440) (1,039) Proceeds from sales of property and equipment 3,649 1,183 42 ------ ------ ------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,171) 2,832 (3,303) ------ ------ ------
BIG O TIRES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (000s)
1995 1994 1993 ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt $2,650 $10,735 $ 560 Principal payments on long-term debt (5,385) (6,106) (4,055) Principal payments on capital lease obligations (33) (239) (274) Proceeds from sale of common stock and stock options and warrants exercised, net 140 232 1,394 Purchase and retirement of treasury stock and warrants -- -- (6,100) ------ ------ ------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,628) 4,622 (8,475) ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,788) 3,769 (477) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,882 1,113 1,590 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $1,094 $4,882 $1,113 ------ ------ ------ ------ ------ ------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $1,740 $1,446 $1,240 Income taxes 1,186 2,373 2,116 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accounts receivable transferred to long- term notes receivable and other assets $ 767 $ 478 $1,912 Employee stock ownership plan obligations 257 526 302 Non-cash equity investments in affiliates -- -- 108 Accounts payable transferred to long-term debt -- -- 6,000 Non-cash acquisition of company-owned retail stores -- -- 187 Inventories received in satisfaction of long-term notes receivables -- 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 BIG O TIRES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 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, $6,772,000 and $6,116,000 for 1995, 1994 and 1993, 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 and 1993. 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, 1994 and 1993. Sales to these stores were approximately $6,948,000, $9,372,000, and $8,122,000 during 1995, 1994 and 1993, 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. During 1993, an officer of the Company purchased real property from a joint venture in which the Company holds a 50% interest. The sale resulted in a pretax gain of $38,000 for the joint venture. 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 and 1993 financial information to make the presentation consistent with that of the current year. These reclassifications had no impact on net income. 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. 43 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 (see Note 2), 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. Intangible Assets - Distribution rights, which represent the excess purchase cost over the fair market value of net assets acquired in certain mergers and acquisitions (see Note 2) 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. ACQUISITIONS AND MERGERS: In November 1988 the Company acquired Big O Tire of Louisville, Inc. ("Louisville") at a cost of $3,031,000. Louisville had the distribution rights to the Kentucky and Indiana market of 24 Big O Retail Stores. The Company issued 204,200 shares of its common stock and paid $1,443,000 in cash for this acquisition. The stock was valued 44 at $7.70 per share which approximated management's estimate of the market value of such unregistered shares as of the date of the transaction. In accordance with the purchase method of accounting, the purchase price was allocated to the net assets acquired based on fair values at the date of acquisition with $1,114,000 being assigned to distribution rights and $600,000 to a non-compete agreement. In connection with this acquisition, the Company also had an obligation to provide additional securities, or obtain the return of a portion of those securities, based upon the trading price of the Company's common stock at specified dates through November 1994. In August 1990 the Company modified the agreement with the former shareholders of Louisville whereby the Company guaranteed that the former shareholders would receive, under certain circumstances, a value of $25.00 per share (subject to adjustment depending on when payment is received) from the sale of the Big O common stock issued to them in connection with the acquisition of Louisville, and the former shareholders provided the Company with an option of paying cash in lieu of issuing additional securities pursuant to this obligation. In 1993 and 1992, cash payments of $788,000 and $501,000, respectively, were made to the former shareholders of Louisville under the terms of this obligation which were capitalized as additional costs of distribution rights. In June 1993, the Company completed an equity offering which included the sale of 81,667 shares of Big O common stock held by the former shareholders of Louisville. With the sale of this stock and the cash payment of $788,000, the Company's obligation to the former shareholders was fully satisfied. 3. 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 8. 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 and $10,000 in net pretax income for 1994, and 1993, respectively. 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. 4. SALES AND CLOSURES OF RETAIL STORES: The Company accrued $547,000, $1,106,000 and $429,000 in 1995, 1994 and 1993, 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, four and one franchisee retail stores were closed in 1995, 1994 and 1993, respectively, in which the Company had guaranteed the franchisees' lease agreements. Five company-owned retail stores were either closed or sold in each of 1994 and 1993. No company-owned retail stores were sold or closed in 1995. 45 5. 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 4). $ 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 ------ ------ ------ ------
46 6. 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 ------- ------- ------- -------
(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. 47 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 these 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 ------- -------
7. 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 -------- -------- ------ -------- -------- ------
48 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 ----- -----
8. OPERATING LEASES: The Company's operating leases are primarily for real property. Rental expense for the years ended December 31, 1995, 1994 and 1993 was $968,000, $1,218,000 and $1,253,000, respectively, after deducting sublease income of $1,740,000 for 1995, $1,571,000 for 1994 and $1,448,000 for 1993. 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 3). 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. 49 9. 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 total cumulative effect of adopting SFAS No. 109 was an increase in deferred tax liabilities of $285,000 at January 1, 1993 and has been reported as a charge against income in the 1993 consolidated statement of income. 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 ------- -------- ------- -------- 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 ------- -------- ------- --------
50 The following is a summary of the income tax provision for the years ended December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993 ------- ------- ------- Currently payable $ 1,677 $ 2,197 $ 1,921 Deferred expense (528) (361) (579) Tax benefit of exercise of stock options 32 114 58 ------- ------- ------- Total income tax provision $ 1,181 $ 1,950 $ 1,400 ------- ------- ------- ------- ------- -------
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 1993 ------- ------- ------- Tax at statutory rate $ 926 $ 1,578 $ 1,115 State taxes, net of Federal tax benefit 141 248 177 Depreciation and amortization not deductible for tax purposes 91 91 87 Other 23 33 21 ------- ------- ------- $ 1,181 $ 1,950 $ 1,400 ------- ------- ------- ------- ------- -------
10. 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, 1994 and 1993 were $255,000, $357,000 and $697,000, 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. 11. 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 51 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. 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, 1994 and 1993 are as follows:
1995 1994 1993 ------------------------ ------------------------ ------------------------ Exercise Price Options Exercise Price Options Exercise Price Options -------------- ------- -------------- ------- -------------- ------- Options outstanding at $.32 - 15.44 226,347 $.32 -12.25 203,974 $.32 - 5.16 150,223 beginning of year Granted 1.63 4,943 1.48 -15.44 53,213 1.35 - 12.25 71,336 Exercised .32 - 12.25 (14,982) .32 -12.25 (30,735) .32 - 5.16 (17,348) Expired -- 1.06 (105) .84 - 1.06 (237) ------- ------- ------- Options outstanding at end of year .32 - 15.44 216,308 .32 -15.44 226,347 .32 - 12.25 203,974 ------- ------- ------- ------- Options exercisable at end of year .32 - 5.16 116,894 .32 -12.25 77,025 .32 - 1.06 65,848
12. 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. 13. 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. 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. 52 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. 14. 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. 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. 15. 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. 53 16. AGREEMENTS WITH CONTINENTAL GENERAL TIRE, INC.: In September 1989, the Company entered into a Master Loan Agreement and a Stock and Warrants Purchase Agreement with Continental General Tire, Inc. ("General"), a related party through May 1993. Under the Master Loan Agreement, General provided the Company with a revolving line of credit of up to $7,500,000 which was collateralized by receivables, inventories and equipment. Under the Stock and Warrants Purchase Agreement, General acquired 400,000 shares of the Company's common stock (approximately 11.4% of the then outstanding shares), and acquired warrants to purchase an additional 1,000,000 shares. In May 1993, the Company and General entered into an agreement which terminated the 1989 agreements, and which resulted in the Company's repurchase of the 400,000 shares of its common stock which had been owned by General, the repurchase and cancellation of the warrants held by General for the purchase of an additional 1,000,000 shares, and the repayment of the outstanding balance of the revolving line of credit in the amount of $1,764,000. 17. 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
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. 18. 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 54 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. 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 adverse 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 Washoe). By motion filed by plaintiffs' counsel, both actions were dismissed without prejudice by the Court on March 31, 1995. 19. SUBSEQUENT EVENT: The Company entered into a letter of intent dated March 13, 1996 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, which the Company does not believe will result in material adjustments, if any. 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. 55 EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE NO. - ------- ----------- -------- (3.1) Certificate of Amendment to Restated Articles of N/A Incorporation of Big O Tires, Inc. dated June 10, 1992 and Restated Articles of Incorporation of Big O Tires, Inc. dated August 17, 1987 (incorporated by reference to Exhibit 3 to Quarterly Report on Form 10-Q for quarter ended June 30, 1992). (3.2) Third Amendment and Restated Bylaws of Big O Tires, Inc. 67 dated December 5, 1995. (4.1) Rights Agreement dated as of August 26, 1994, between Big N/A O Tires, Inc. and Interwest Co., Inc., as Rights Agent (incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated August 26, 1994). (4.2) Amendment to Rights Agreement dated as of July 24, 1995, N/A is between Big O Tires, Inc., a Nevada corporation, and Interwest Co., Inc., a Utah corporation (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated July 25, 1995). (10.1) 1994 Restatement of Employee Stock Ownership Plan and N/A Trust Agreement of Big O Tires, Inc. (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). (10.2) Big O Tires, Inc. Director and Employee Stock Option Plan N/A (incorporated by reference to Exhibit 10.11 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.3) First Amendment to the Big O Tires, Inc. Director and Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989). N/A (10.4) Amendment No. 2 to the Big O Tires, Inc. Director and N/A Employee Stock Option Plan (incorporated by reference to Exhibit 10.16 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.5) Ultimate Net Loss Agreement between Big O Tires, Inc. and N/A FBS Business Finance Corporation dated January 13, 1989 (incorporated by reference to Exhibit 10.34 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.6) Purchase Agreement effective June 30, 1987, and related N/A documents including Promissory Notes, Modification Agreements, Security Agreements, Guaranty Agreement, and Subleases in connection with a purchase by C.S.B. Partnership and three individuals including Ronald D. Asher, of three Big O Franchise Retail Stores in California from Security/Cal, Inc., a wholly-owned subsidiary of the Company, and H.R.I., Inc., a wholly-owned subsidiary of Security/Cal, Inc. (incorporated by reference to Exhibit 10.63 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1987). (10.7) Purchase Agreement effective November 1, 1987, and N/A related documents including Promissory Notes, Security Agreements, Guaranty Agreements, Subleases, and Franchise Agreements in connection with a purchase by C.S.B. Partnership and its three general partners, including Ronald D. Asher, of two Big O Franchise Retail Stores in California from Security/Cal, Inc. and H.R.I., Inc. (Seller) (incorporated by reference to Exhibit 10.45 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.8) Purchase Agreements effective July 5, 1988, October 1, N/A 1988, and November 14, 1988, and related documents including Promissory Notes, Security Agreements, Guaranty Agreements, and Subleases in connection with a purchase by C.S.B. Partnership and three individuals including Ronald D. Asher of three Big O Franchise Retail Stores in California from Big O Tires, Inc., Security/Cal, Inc., a wholly-owned subsidiary of the Company, and H.R.I., Inc., a wholly-owned subsidiary of Security/Cal, Inc. (incorporated by reference to Exhibit 10.46 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988). (10.9) Agreement and Release dated October 31, 1989, and related N/A documents including Promissory Note, related Subleases, Assignment of Lease Rights, and Performance Guarantee in connection with the purchase by C.S.B. Partnership and its general partners, including Ronald D. Asher, of two (2) Big O franchise Retail Stores in California, owned by GEM Tire, Inc. from the Company (incorporated by reference to Exhibit 10.57 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1989). (10.10) Ultimate Net Loss Agreement, dated as of December 1, N/A 1990, by and between Big O Tires, Inc. and Northcross Financial Services, Inc., ICON Capital Corp., in its individual capacity and on behalf of ICON Cash Flow Partners, L.P., Series A, ICON Cash Flow Partners, L.P., Series B and any future partnerships on which it may be the general partner and/or manager (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990). (10.11) Agreement of Joint Venture of Big O/C.S.B. Joint Venture N/A dated as of June 1, 1992, by and between Big O Retail Enterprises, Inc., a wholly-owned subsidiary of Big O Tires, Inc., and C.S.B. Partnership, a California general partnership (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991). (10.12) 1995 Incentive Bonus Plans (incorporated by reference to N/A Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (10.13) Purchase Agreement for Private Brand Name Tires between N/A Big O Tires, Inc. and The Kelly-Springfield Tire Co., dated August 16, 1992 (incorporated by reference to Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991). (10.14) Big O Tires, Inc. Long Term Incentive Plan (incorporated N/A by reference to Exhibit 55 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.15) Amendment No. 1 to Big O Tires, Inc. Long Term Incentive N/A Plan (incorporated by reference to Exhibit 56 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.16) Amendment No. 2 to Big O Tires, Inc. Long Term Incentive N/A Plan (incorporated by reference to Exhibit 57 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.17) Agreement of Joint Venture of Big O/S.A.N.D.S. Joint N/A Venture (incorporated by reference to Exhibit 58 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.18) Commitment Letters dated July 22, 1992, from AT&T Capital N/A Corporation (incorporated by reference to Exhibit 64 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.19) Agreement dated as of November 15, 1992, among Peerless N/A Trading Company, Limited, Delaware Liquidators, Inc. dba Trade Center Imports, and Big O Tires, Inc.; Purchase Money Non-Negotiable Promissory Note dated as of November 15, 1992, from Peerless Trading Company, Limited to Big O Tires, Inc.; and amendment dated January 19, 1993 to the Agreement dated November 15, 1992 (incorporated by reference to Exhibit 66 to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (10.20) Marketing Agreement for Private Brand Tires between Big O N/A Tires, Inc. and General Tire, Inc., dated May 14, 1993 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 30, 1993). (10.21) Inventory Financing Agreement between The N/A Kelly-Springfield Tire Company and Big O Tires, Inc. and/or Big O Tire of Idaho, Inc. and/or Big O Retail Enterprises, Inc., dated May 14, 1993 (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 30, 1993). (10.22) Demand Note in the original principal amount of N/A $6,000,338.67 with The Kelly-Springfield Tire Col. as Holder and Big O Tires, Inc., Big O Retail Enterprises, Inc. and Big O Tire of Idaho, Inc. as Maker (incorporated by reference to Exhibit 10.50 to Big O Tires, Inc.'s Annual Report on Form 10-K dated April 30, 1993). (10.23) Consolidation and Modification Agreement among Big O N/A Tires, Inc. (successor in interest to H.R.I., Inc. and Security/Cal, Inc.) and Big O Retail Enterprises, Inc. and C.S.B. Partnership (incorporated by reference to Exhibit 10.51 to Big O Tires, Inc.'s Registration Statement No. 33-65852). (10.24) Modification of Consolidation and Modification Agreement N/A by and between C.S.B. Partnership and Big O Tires, Inc. (incorporated by reference to Big O Tires, Inc.'s Form 10-K for the year ended December 31, 1993). (10.25) Registration Rights Agreement dated June 28, 1993, N/A between the Selling Shareholder and Big O Tires, Inc. (incorporated by reference to Exhibit 10.52 to Big O Tires, Inc.'s Registration Statement No. 33-65852). (10.26) Loan Agreement and Promissory Note in the original N/A principal amount of $155,000.00 with C.S.B. Partnership as Maker (incorporated by reference to Exhibit 10.44 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.27) Loan Agreement and Promissory Note in the original N/A principal amount of $70,000.00 with Big O/C.S.B Joint Venture as Maker (incorporated by reference to Exhibit 10.45 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.28) Loan Agreement and Promissory Note in the original N/A principal amount of $75,000.00 with Big O/S.A.N.D.S. Joint Venture as Maker (incorporated by reference to Exhibit 10.46 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.29) Commercial Note and Loan Agreement, Commercial Mortgage N/A and Environmental Certificate between Big O Development, Inc. and National City Bank, Kentucky, and Guaranty Agreement of Big O Tires, Inc. guaranteeing the obligations of Big O Development, Inc. to National City Bank, Kentucky in connection with the borrowing of $1,500,000 for construction of the Company's Regional Sales and Service Center in New Albany, Indiana (incorporated by reference to Exhibit 10.47 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.30) Construction Agreement between Big O Development, Inc. N/A and Koetter Construction, Inc. to construct the Regional Sales and Service Center in Floyd, County, Indiana (incorporated by reference to Exhibit 10.48 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.31) Letter dated January 26, 1994 from General Tire, Inc. to N/A the Company terminating the Marketing Agreement for Private Brand Name Tires between Big O Tires, Inc. and General Tire, Inc. dated May 14, 1993 (incorporated by reference to Exhibit 10.52 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.32) Purchase Agreement by and between Caps Tire Limited N/A Liability Company and Intermountain Big O Realty for the Big O Tires Retail Store located at 8151 East Arapahoe Road, Englewood, Colorado incorporated by reference to Exhibit 10.53 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.33) Third and Fourth Amendments to Loan and Security N/A Agreement by and between Big O Tires, Inc. and its primary lender (incorporated by reference to Exhibit 10.54 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.34) Limited Partnership Agreement by and between Donald J. N/A Horton, General Partner, Thomas L. Staker, General Partner, and Big O Tires, Inc., Limited Partner, dated as of December 31, 1993 (incorporated by reference to Exhibit 10.56 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.35) Loan Agreement and Guaranty, Promissory Note and Security N/A Agreement with Big O Tires, Inc. Employee Stock Ownership Plan ("ESOP") as Borrower, Big O Tires, Inc., as Guarantor, and Key Bank of Wyoming, as Lender, in connection with the refinancing of the ESOP debt in the amount of $960,000 (incorporated by reference to Exhibit 10.57 to Big O Tires, Inc.'s Form 10-K for the fiscal year ended December 31, 1993). (10.36) Amendment to Partnership Agreement dated August 25, 1994, N/A by and between Big O Development, Inc., a Colorado corporation, a wholly-owned subsidiary of Big O Tires, Inc. and Mill Creek Associates, Ltd., a Colorado limited partnership (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). (10.37) Agreement dated July 1, 1994, by and between General N/A Tire, Inc., an Ohio corporation and Big O Tires, Inc. (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.38) Consulting Agreement by and between Big O Tires, Inc., N/A and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.5 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.39) Letter Agreement dated January 10, 1995, amending the N/A Consulting Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.40) Letter Agreement dated July 12, 1994, by and between Big N/A O Tires, Inc. and PaineWebber Incorporated (incorporated by reference to Exhibit 10.6 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.41) Letter Agreement dated March 23, 1994, by and between Big N/A O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.7 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.42) Ultimate Net Loss Agreement dated October 21, 1994, by N/A and between Big O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.8 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.43) Fifth Amendment to Loan and Security Agreement by and N/A between Big O Tires, Inc. and its former lender dated April 29, 1994 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1994). (10.44) Agreement by the Investment Committee of the Board of N/A Directors and the Management/Dealer participants dated December 22, 1994 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 6, 1994). (10.45) Letter dated December 13, 1994, to the Investment N/A Committee of Big O Tires, Inc. and the Management participants and Dealer representatives (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 6, 1994). (10.46) Letter dated February 7, 1995, from the Dealer/Management N/A Group to the Company's Board Chairman (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.47) Agreement between the Company and the Management/Dealer N/A participants dated January 20, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K (10.48) Multi-Tenant Lease NNN dated December 1, 1994 between N/A Botac VI Leasing L.L.C., a Utah Limited Liability Company and Big O Development, Inc. (incorporated by reference to Exhibit 10.62 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.49) Assignment and Assumption Agreement dated December 2, N/A 1994 by Big O Development, Inc., Big O Tires, Inc. and Botac VI Leasing, L.L.C. and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.63 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.50) Guarantee Agreement dated December 2, 1994 by Big O N/A Tires, Inc., Big O Development, Inc. and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.64 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.51) Closing Agreement dated December 2, 1994 by Big O N/A Development, Inc., Big O Tires, Inc., Botac VI Leasing, L.L.C., and Allstate Life Insurance Company (incorporated by reference to Exhibit 10.65 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.52) Commercial Contract to Buy and Sell Real Estate dated N/A March 17, 1994 between Bailey's Moving and Storage and Big O Tires, Inc. (incorporated by reference to Exhibit 10.66 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.53) Confidentiality Agreement dated September, 1994 between N/A Big O Tires, Inc. and Kenneth W. Pavia, Sr. (incorporated by reference to Exhibit 10.67 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.54) Amendment No. 1 to the Big O Tires, Inc. Employee Stock N/A Ownership Plan and Trust Agreement dated September 12, 1994 (incorporated by reference to Exhibit 10.68 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.55) Development Management Agreement dated September, 1994 N/A between Ross Development Management Group, Inc. and Big O Development, Inc. and Big O Tires, Inc. (incorporated by reference to Exhibit 10.69 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.56) Letter Agreement dated February 20, 1995 terminating the N/A Consulting Agreement between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.57) Commitment Letter dated February 16, 1994 between Big O N/A Tires, Inc. and AT&T Commercial Finance Corporation for real estate financing (incorporated by reference to Exhibit 10.72 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.58) Commitment Letter dated February 16, 1994 between Big O N/A Tires, Inc. and AT&T Commercial Finance Corporation for equipment financing (incorporated by reference to Exhibit 10.73 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.59) Extension letter dated December 9, 1994 between Big O N/A Tires, Inc. and AT&T Commercial Finance Corporation to extend existing lines of credit through December 31, 1995 (incorporated by reference to Exhibit 10.74 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.60) Resignation letter dated February 27, 1995 from Robert L. N/A Puckett (incorporated by reference to Exhibit 10.75 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.61) Resignation letter dated February 24, 1995 from David W. N/A Dwyer (incorporated by reference to Exhibit 10.76 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.62) Revolving Credit Agreement dated January 23, 1995 between N/A Big O Tires, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit 10.77 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.63) Consent, Acknowledgement and Access Agreement dated N/A January 23, 1995 between The Bank of Cherry Creek, N.A., Kenneth B. Buckius and The First National Bank of Chicago (incorporated by reference to Exhibit 10.78 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.64) Note Purchase Agreement dated April 27, 1994 between Big N/A O Tires, Inc. and USG Annuity & Life Company and Republic Western Insurance Company (incorporated by reference to Exhibit 10.79 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.65) Franchise Agreement dated October 7, 1994 between Big O N/A Tires, Inc. and OK Tires, Inc. for the Retail Store located at 2830 West 3500 South, West Valley City, Utah 84119 (incorporated by reference to Exhibit 10.80 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.66) Franchise Agreement dated November 26, 1993 between Big O N/A Tires, Inc and CAPS Tire Limited Liability Company for the Retail Store located at 8151 East Arapahoe Road, Englewood, Colorado 80112 (incorporated by reference to Exhibit 10.81 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.67) Form of Confidentiality Agreement signed by dealers dated N/A October 19, 1994 (incorporated by reference to Exhibit 10.82 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.68) Ultimate Net Loss Agreement dated November 30, 1994, by N/A and between Big O Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New York corporation (incorporated by reference to Exhibit 10.83 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.69) Inventory Financing Agreement together with a Demand Note N/A dated September 30, 1994, by and between The Kelly-Springfield Tire Company and Big O Tires, Inc., Big O Retail Enterprises, Inc. and Big O Tire of Idaho, Inc. (incorporated by reference to Exhibit 10.84 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.70) Supplemental Executive Retirement Plan dated December 7, N/A 1994, by Big O Tires, Inc., effective January 1, 1994 (incorporated by reference to Exhibit 10.85 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.71) Forms of Stock Appreciation Rights Agreement dated N/A February 15, 1995, between Big O Tires, Inc. and the Members of the Chief Executive Office (incorporated by reference to Exhibit 10.86 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.72) Letter Agreement dated March 24, 1995, regarding N/A severance package, between Big O Tires, Inc. and John E. Siipola (incorporated by reference to Exhibit 10.87 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.73) Letter Agreement dated March 24, 1995, regarding N/A severance package, between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.88 to Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended December 31, 1994). (10.74) Letter dated February 7, 1995, from the Dealer-Management N/A Group to the Company's Board Chairman (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.75) Agreement between the Company and the Management Dealer N/A Participants dated January 20, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.76) Letter Agreement dated January 10, 1995, amending the N/A Consulting Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Current Report on Form 8-K dated January 10, 1995). (10.77) Purchase Agreement dated March 22, 1995 effective March N/A 31, 1995 by and between Tire Marketers Association, a division of Big O Tires, Inc. and Carr's Tire Service, Inc., a Virginia corporation (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated March 31, 1995). (10.78) Acquisition Proposal to the Investment Committee of the N/A Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated April 6, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated April 6, 1995). (10.79) Acquisition Proposal to the Investment Committee of the N/A Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated June 2, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated June 5, 1995). (10.80) Acquisition Proposal to the Investment Committee of the N/A Board of Directors from certain members of management and a representative of Big O Tire Dealers of America dated June 2, 1995, and signed by the Company on June 7, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated June 9, 1995). (10.81) Letter Agreement and Indemnification Agreement dated N/A January 20, 1995, between Big O Tires, Inc. and PaineWebber Incorporated. Acquisition Proposal to the Investment Committee of the Board of Directors from certain member of management and a representative of certain Big O Tires, Inc.'s franchisees dated April 6, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.82) Three memos from PaineWebber Incorporated to the Company N/A amending certain fees dated June 9, 1995, June 16, 1995 and June 30, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.83) Letter Agreement between Big O Tires, Inc. and John E. N/A Siipola dated July 21, 1995, pertaining to new severance package terms and terminating the March 24, 1995 Letter Agreement regarding severance (incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.84) Letter Agreement between Big O Tires, Inc. and Horst K. N/A Mehlfeldt dated July 21, 1995, pertaining to new severance package terms and terminating the March 24, 1995 Letter Agreement regarding severance (incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.85) Letter Agreement between Big O Tires, Inc. and Steven P. N/A Cloward dated July 21, 1995, regarding a modification to Mr. Cloward's severance package (incorporated by reference to Exhibit 10.5 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995). (10.86) Agreement and Plan of Merger dated July 24, 1995, between N/A BOTI Holdings, Inc., a Nevada corporation, BOTI Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of BOTI Holdings, Inc., and Big O Tires, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated July 25, 1995). (10.87) Letter Agreement dated August 31, 1995, by and among Big N/A O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated September 5, 1995). (10.88) Agreement for Purchase and Sale of Joint Venture N/A Interest; Dissolution of Joint Venture; and Continuation of Business by Acquiring Joint Ventures dated effective October 1, 1994, by and between Big O Retail Enterprises, Inc., a Colorado corporation ("Seller") and C.S.B. Partnership, a California general partnership ("Purchaser") (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30, 1995). (10.89) Letter Agreement dated October 2, 1995, by and among Big N/A O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated October 4, 1995). (10.90) Letter dated October 15, 1995, from BOTI Acquisition N/A Corp. and BOTI Holdings, Inc., to Big O Tires, Inc. (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated October 18, 1995). (10.91) Second Amendment to Employee Stock Ownership Plan and N/A Trust Agreement of Big O Tires, Inc., dated ___ November, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (10.92) Amendment to Agreement and Plan of Merger dated as of N/A November 14, 1995, between BOTI Holdings, Inc., a Nevada corporation (the "Parent"), BOTI Acquisition Corp., a Nevada corporation and a wholly owned subsidiary of the Parent (the"Purchaser"), and Big O Tires, Inc., a Nevada corporation (the "Company"), and amends the Agreement and Plan of Merger dated as of July 24, 1995 (incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (10.93) Second Amendment to Employee Stock Ownership Plan and N/A Trust Agreement of Big O Tires, Inc., dated November 14, 1995 (incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated December 15, 1995). (10.94) 1996 Incentive Bonus Plans. 91 (10.95) Form of Franchise Agreement currently in use. 111 (10.96) Promissory Note in the original principal amount of 168 $250,000.00 with C.S.B Partnership as Maker and related security documents. (20.1) Opinion Letter from PaineWebber Incorporated to the Board N/A of Directors of Big O Tires, Inc. dated November 14, 1995 (incorporated by reference to Exhibit 20.1 to Big O Tires, Inc.'s Current Report on Form 8-K dated November 17, 1995). (21.1) Big O Tires, Inc. Subsidiaries 201 (23.1) Consent of Deloitte & Touche 202 (25.1) Powers of Attorney executed by the Directors of Big O 203 Tires, Inc. (27.1) Big O Tires, Inc.'s Financial Data Schedule. 213 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 THIRD AMENDED AND RESTATED BYLAWS OF BIG O TIRES, INC. A NEVADA CORPORATION DATE: DECEMBER 5, 1995 TABLE OF CONTENTS OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01. Location of Offices . . . . . . . . . . . . . . . . . 1 Section 1.02. Principal office and Resident Agent . . . . . . . . . 1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.01. Annual Meeting. . . . . . . . . . . . . . . . . . . . 1 Section 2.02. Special Meetings. . . . . . . . . . . . . . . . . . . 1 Section 2.03. Place of Meetings . . . . . . . . . . . . . . . . . . 1 Section 2.04. Notice of Meetings. . . . . . . . . . . . . . . . . . 2 Section 2.05. Waiver of Notice. . . . . . . . . . . . . . . . . . . 2 Section 2.06. Fixing Record Date. . . . . . . . . . . . . . . . . . 2 Section 2.07. Quorum. . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.08. Voting. . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.09. Proxies . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.10. Stockholder Action. . . . . . . . . . . . . . . . . . 4 Section 2.11. Conduct of Meetings . . . . . . . . . . . . . . . . . 4 Section 2.12. Presentation of Business at Stockholders Meetings . . 5 Section 2.13. Nominations of Persons for Election to the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.14. Advisory Stockholder Votes. . . . . . . . . . . . . . 7 BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.01. General Powers. . . . . . . . . . . . . . . . . . . . 7 Section 3.02. Number, Class and Term. . . . . . . . . . . . . . . . 7 Section 3.03. Vacancies and Newly Created Directorships . . . . . . 8 Section 3.04. Removal . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.05. Regular Meetings. . . . . . . . . . . . . . . . . . . 8 Section 3.06. Special Meetings. . . . . . . . . . . . . . . . . . . 8 Section 3.07. Meetings by Telephone Conference Call . . . . . . . . 9 Section 3.08. Quorum and Majority of Acting . . . . . . . . . . . . 9 Section 3.09. Executive Committee . . . . . . . . . . . . . . . . .10 Section 3.10. Other Committees. . . . . . . . . . . . . . . . . . .10 Section 3.11. Compensation. . . . . . . . . . . . . . . . . . . . .10 Section 3.12. Notice. . . . . . . . . . . . . . . . . . . . . . . .11 Section 3.13. Waiver of Notice, Ratification and Approval . . . . .11 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Section 4.01. Number. . . . . . . . . . . . . . . . . . . . . . . .12 i Section 4.02 Election Term of Office and Qualifications. . . . . .12 Section 4.03. Subordinate Officers. . . . . . . . . . . . . . . . .12 Section 4.04. Salaries. . . . . . . . . . . . . . . . . . . . . . .12 Section 4.05. Removal . . . . . . . . . . . . . . . . . . . . . . .12 Section 4.06. Resignations. . . . . . . . . . . . . . . . . . . . .13 Section 4.07. Vacancies and Newly Created Offices . . . . . . . . .13 Section 4.08. The Chairman of the Board . . . . . . . . . . . . . .13 Section 4.09. The Vice Chairman of the Board. . . . . . . . . . . .13 Section 4.10. The President . . . . . . . . . . . . . . . . . . . .13 Section 4.11. The Vice-Presidents . . . . . . . . . . . . . . . . .14 Section 4.12. The Secretary . . . . . . . . . . . . . . . . . . . .14 Section 4.13. The Treasurer . . . . . . . . . . . . . . . . . . . .15 CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Section 5.01. Stock Certificates. . . . . . . . . . . . . . . . . .16 Section 5.02. Maintenance of Stock Book . . . . . . . . . . . . . .17 Section 5.03. Lost or Destroyed Certificates. . . . . . . . . . . .17 Section 5.04. Transfer of Stock . . . . . . . . . . . . . . . . . .17 Section 5.05. Registered Stockholders . . . . . . . . . . . . . . .17 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 6.01. Indemnification for Third Party Actions . . . . . . .18 Section 6.02. Indemnification for Actions by or in the Right of the Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 6.03. Determination . . . . . . . . . . . . . . . . . . . .19 Section 6.04. Advances. . . . . . . . . . . . . . . . . . . . . . .19 Section 6.05 General Indemnification . . . . . . . . . . . . . . .19 CONTRACTS, LOANS, CHECKS AND DEPOSITS. . . . . . . . . . . . . . . . . . . . .20 Section 7.01. Contracts . . . . . . . . . . . . . . . . . . . . . .20 Section 7.02. Loans . . . . . . . . . . . . . . . . . . . . . . . .20 Section 7.03. Deposits. . . . . . . . . . . . . . . . . . . . . . .20 Section 7.04. Checks Drafts, Etc. . . . . . . . . . . . . . . . . .20 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Section 8.01. Dividends . . . . . . . . . . . . . . . . . . . . . .21 Section 8.02. Fiscal Year . . . . . . . . . . . . . . . . . . . . .21 Section 8.03. Corporate Seal. . . . . . . . . . . . . . . . . . . .21 Section 8.04. Amendments. . . . . . . . . . . . . . . . . . . . . .21 ii SECOND AMENDED AND RESTATED BYLAWS OF BIG O TIRES. INC. ARTICLE I OFFICES SECTION 1.01. LOCATION OF OFFICES. The Corporation may maintain such offices, within or without the State of Nevada, as the Board of Directors may from time to time designate. SECTION 1.02. PRINCIPAL OFFICE AND RESIDENT AGENT. The address of the principal office of the Corporation, and the resident agent located at such address, shall be The Corporation Trust Company of Nevada, One First East Street, Reno, Nevada 89501, and said address may be changed by the Board of Directors at any time pursuant to the laws of the State of Nevada. ARTICLE II STOCKHOLDERS SECTION 2.01. ANNUAL MEETING. The annual meeting of the stockholders shall be held in each fiscal year of the Corporation on such date and at such time as are established by a resolution adopted by the Board of Directors. The annual meeting shall be held for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. SECTION 2.02. SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time by the Chairman of the Board, the Vice Chairman of the Board, the President, or by a majority of the Board of Directors, or in their absence or disability, by the Executive Vice President. SECTION 2.03. PLACE OF MEETINGS. The Board of Directors may designate any place, either within or without the State of Nevada, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all stockholders entitled to vote at a meeting 1 may designate any place, either within or without the State of Nevada, as the place for the holding of such meeting. SECTION 2.04. NOTICE OF MEETINGS. Notices of both annual and special meetings shall be in writing and signed by the Chairman of the Board, Vice Chairman of the Board, the President or Executive Vice-President, or the Secretary, or an assistant Secretary, or by such other person or persons as the directors shall designate. Such notice shall state the purpose or purposes for which the meeting is called and the time when, and the place where, it is to be held. A copy of such notice shall be either delivered personally to or shall be mailed, postage prepaid, to each stockholder of record entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before such meeting. If mailed, it shall be directed to a stockholder at his address as it appears upon the records of the Corporation, and upon such mailing of any such notice, the service thereof shall be complete, and the time of the notice shall begin to run from the date upon which such notice is deposited in the mail for transmission to such stockholder. Personal delivery of any such notice to any officer of a corporation or association, or to any member of a partnership, shall constitute delivery of such notice to such corporation, association or partnership. In the event a stockholder transfers his stock after delivery or mailing of the notice by the Corporation and prior to the holding of the meeting, it shall not be necessary to deliver or mail notice of the meeting upon the transferee . SECTION 2.05. WAIVER OF NOTICE. Any stockholder may waive notice of any meeting of stockholders by signing a written waiver of notice either before or after the meeting. Consent by all the persons entitled to vote at a stockholder's meeting, either by: (a) a writing on the records of the meeting or filed with the Secretary; or (b) presence at such meeting and oral consent entered on the minutes; or (c) taking part in the deliberations at such meeting without objection, shall constitute waiver of all defects of call or notice. SECTION 2.06. FIXING RECORD DATE. For the purpose of determining stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed but not for a period exceeding sixty (60) days prior to such meeting or payment. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than sixty (60) days prior to the date on which the particular action requiring such determination of stockholders is to be taken. 2 If the stock transfer books are not closed and no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 2.07. QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 2.08. VOTING. Every stockholder of record of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of stock standing in his name on the books of the Corporation. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. For example, directors shall be elected by a plurality of the votes cast. SECTION 2.09. PROXIES. At any meeting of the stockholders, any stockholder may be represented and vote by a proxy or proxies appointed by an instrument in writing. In the event that any such instrument in writing shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present then that one, shall have and may exercise all of the powers conferred by such written instrument upon all of the persons so designated unless the instrument shall otherwise provide. No such proxy shall be valid after the expiration of six months from the date of its execution, unless coupled with an interest, or unless the person executing it 3 specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven years from the date of its execution. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the Corporation. SECTION 2.10. STOCKHOLDER ACTION. Any action required or permitted to be taken by the stockholders of the Corporation must be taken at a duly called annual or special meeting of the stockholders of the Corporation and may not be taken by consent in writing or otherwise. SECTION 2.11. CONDUCT OF MEETINGS. (a) GENERAL. The chairman of the annual or any special meeting of the stockholders shall be the Chairman of the Board, if there is one, or, of there is not one or in his absence, the Vice Chairman of the Board, if there is one, or, if there is not one or in his absence, the President, or, if there is not one or in his absence, any person designated by a majority of the directors present, unless and until a different person is elected by a majority of the shares entitled to vote at such meeting. (b) INSPECTORS OF ELECTION. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternative inspectors to replace any inspector who fails to act. If no inspector or alternative is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, and (iv) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless a court of competent jurisdiction upon application by a shareholder shall determine otherwise. 4 In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with applicable law, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast, or more votes than the shareholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. (c) RULES OF CONDUCT. Meetings of shareholders shall be conducted in accordance with the following rules: (i) The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. If the chairman, in his absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of shareholders or part thereof, the chairman shall so sate and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. (ii) The chairman shall have the power and duty to determine whether a nomination of a director candidate or any other business proposed to be brought before the meeting was made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective nomination or proposal shall be disregarded. (iii) If disorder should arise that prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting and upon his so doing the meeting is immediately adjourned. (iv) The chairman may ask or require that anyone who is not a bona fide shareholder or proxy leave the meeting. SECTION 2.12. PRESENTATION OF BUSINESS AT STOCKHOLDERS MEETINGS. (a) ANNUAL MEETINGS. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. 5 To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.12, provided, however, that nothing in this Section 2.12 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with such procedure. (b) SPECIAL MEETINGS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting or as otherwise required by law. SECTION 2.13. NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event 6 that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including the proposed nominee's written consent to be named in the proxy statement and to serve if elected); and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. SECTION 2.14. ADVISORY STOCKHOLDER VOTES. In order for the stockholders to adopt or approve any proposals submitted to them for the purpose of requesting the Board of Directors to take specified action, a majority of the outstanding stock of the Corporation entitled to vote thereon must be voted in favor of the proposal. ARTICLE III BOARD OF DIRECTORS SECTION 3.01. GENERAL POWERS. The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Without limiting the generality of the foregoing, the directors of the Corporation are hereby authorized to own, manage and engage in businesses similar to that of the Corporation. SECTION 3.02. NUMBER, CLASS AND TERM. The number of directors which shall constitute the Board of Directors of the Company may vary from five to 7 fifteen as prescribed by a resolution adopted by the Board of Directors of the Company. The Board of Directors shall be divided into four classes, Class I, Class II, Class III and Class IV. (a) CLASS I, II AND III DIRECTORS. As to the Class I, II and III directors, each class shall be as nearly equal in number as possible and each class shall have such number of directors so that at least one-fourth of the total number of directors is elected at each annual meeting of shareholders. The term of Class I Directors first chosen shall expire at the first annual meeting of shareholders after their election, the term of Class II Directors first chosen shall expire at the second annual meeting of shareholders after their election, and the term of Class III Directors first chosen shall expire at the third annual meeting of shareholders after their election. At each annual meeting of shareholders after such classification, the class of directors whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of shareholders. (b) CLASS IV DIRECTORS. The Class IV directors shall be elected at each annual meeting of shareholders, to serve until the next succeeding annual meeting of shareholders. Each director shall hold office until his or her successor shall be elected and shall qualify. SECTION 3.03. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. All vacancies, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors though less than a quorum. When one or more directors shall give notice of his or their resignation to the Board of Directors, effective at a future date, a majority of the Board of Directors shall have power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective, each director so appointed to hold office during the remainder of the term of office of the resigning director or directors. SECTION 3.04. REMOVAL. Any director may be removed from office by the vote or written consent of stockholders representing not less than two-thirds of the issued and outstanding capital stock entitled to voting power. SECTION 3.05. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than these Bylaws immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide by resolution the time and place for the holding of additional regular meetings without other notice than such resolution. 8 SECTION 3.06. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the Vice Chairman of the Board, the President or any two directors. SECTION 3.07. MEETINGS BY TELEPHONE CONFERENCE CALL. Members of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of such board or committee by means of a conference telephone network or a similar communications method by which all persons participating in the meeting can hear each other. Participation in a meeting in such a manner constitutes presence in person at such meeting. Each person participating in the meeting shall sign the minutes thereof. The minutes may be signed in counterparts. SECTION 3.08. QUORUM AND MAJORITY OF ACTING. Except as contemplated and provided in the second and third paragraphs of this Section 3.08, a majority of the Board of Directors, at a meeting duly assembled, shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Articles of Incorporation. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all of the directors entitled to vote with respect to the subject matter thereof. "No contract or other transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any corporation, firm or association in which one or more of its directors or officers are directors or officers or are financially interested, is void or voidable solely for this reason or solely because any such director or officer is present at the meeting of the Board of Directors or a committee thereof which authorizes or approves the contract or transaction, or because the vote or votes of common or interested directors are counted for that purpose, if the circumstances specified in any of the following paragraphs exist: "(a) The fact of the common directorship, office or financial interest is disclosed or known to the Board of Directors or committee and noted in the minutes, and the Board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient for the purpose without counting the vote or votes of the common or interested director or directors. 9 "(b) The fact of the common directorship, office or financial interest is disclosed or known to the stockholders, and they approve or ratify the contract or transaction in good faith by a majority vote of stockholders holding a majority of the voting power. The votes of the common or interested directors or officers must be counted in any such vote of stockholders. "(c) The fact of the common directorship, office or financial interest is not disclosed or known to the director or officer at the time the transaction is brought before the Board of Directors of the Corporation for action. "(d) The contract or transaction is fair as to the Corporation at the time it is authorized or approved. "Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies a contract or transaction, and if the votes of the common or interested directors are not counted at the meeting, then a majority of the disinterested directors may authorize, approve or ratify a contract or transaction." SECTION 3.09. EXECUTIVE COMMITTEE. The Board of Directors may by resolution of a majority of its members designate two or more directors to constitute an Executive Committee, which Committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the management of the Corporation. The designation of an Executive Committee and the delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon him or it by law. The Executive committee shall act only upon unanimous vote. SECTION 3.10. OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the Board of Directors, designate one or more other committees, each committee to consist of one or more of the directors of the Corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers on which the Corporation desires to place a seal. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. 10 SECTION 3.11. COMPENSATION. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 3.12. NOTICE. Notice of any special meeting shall be given at least two (2) days prior thereto by written notice delivered personally, or mailed postage prepaid to the directors at their business addresses, or by facsimile or telegram. Notice by mail shall be deemed to be given when deposited in the United States mail so addressed, with postage thereon prepaid. SECTION 3.13. WAIVER OF NOTICE, RATIFICATION AND APPROVAL. Any director may waive notice of any meeting in writing, whether before or after the time stated therein. Whenever all directors entitled to vote at any meeting consent, either by a writing on the records of the meeting or filed with the Secretary, or by presence at such meeting and oral consent entered on the minutes, or by taking part in the deliberations at such meeting without objection, the doings of such meeting shall be as valid as if had at a meeting regularly called and noticed, and at such meeting any business may be transacted which is not excepted from the written consent or to the consideration of which no objection for want of notice is made at the time. If any meeting be irregular for want of notice or of such consent, provided a quorum was present at such meeting, the proceedings of said meeting may be ratified and approved and rendered likewise valid and the irregularity or defect therein waived by a writing signed by all parties having the right to vote at such meetings. 11 ARTICLE IV OFFICERS SECTION 4.01. NUMBER. The officers of the Corporation shall be the Chairman of the Board, the Vice Chairman of the Board, the President, one or more Vice Presidents, Secretary, Treasurer and such other officers as may be appointed by the Board of Directors. Any person may hold two or more offices. SECTION 4.02 ELECTION TERM OF OFFICE AND QUALIFICATIONS. The officers shall be chosen by the Board of Directors at its first meeting after each annual meeting of stockholders. In the event of failure to choose officers at such annual meeting of the Board of Directors, officers may be chosen at any regular or special meeting of the Board of Directors. Each such officer shall hold his office until the next ensuing annual meeting of the Board of Directors and until his successors shall have been chosen and qualified, or until his death or until his resignation or removal in the manner provided in these Bylaws. The Chairman of the Board and/or Vice Chairman of the Board, if any, shall be and remain as director(s) of the Corporation during the term of his or their office. No other officer need be a director. SECTION 4.03. SUBORDINATE OFFICERS. The Board of Directors may appoint assistant secretaries, assistant treasurers, and such other officers and agents as it shall deem necessary, each of whom shall have such title, hold office for such period, have such authority and perform such duties as shall be determined from time to time by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint any such subordinate officers or agents and to prescribe their respective titles, terms of office, authorities and duties. Subordinate officers need not be stockholders or directors. SECTION 4.04. SALARIES. The salaries or other compensation of the officers and agents of the Corporation shall be fixed by the Board of Directors except that the Board may delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with Section 4.03 hereof. SECTION 4.05. REMOVAL. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any officer or agent appointed in accordance with the 12 provisions of Section 4.03 hereof may also be removed by any officer upon whom such power of removal shall have been conferred by the Board. SECTION 4.06. RESIGNATIONS. Any officer may resign at any time by delivering a written resignation to the Board of Directors, the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. SECTION 4.07. VACANCIES AND NEWLY CREATED OFFICES. If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification or any other cause, or if a new office shall be created, then such vacancies or newly-created offices may be filled by the Board of Directors at any regular or special meeting. SECTION 4.08. THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be such an officer, shall have the following powers and duties: (a) He shall preside at all stockholders meetings. (b) He shall preside at all meetings of the Board of Directors. (c) He shall be a member of the Executive Committee, if any. (d) He shall be an executive officer of the Corporation, and, subject to the directions of the Board of Directors, shall have general charge of the business, affairs and property of the Corporation and general supervision over its officers, employees and agents. SECTION 4.09. THE VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board, if there be such an officer, shall have the following powers and duties if no Chairman of the Board has been chosen or if such officer is absent or disabled: (a) He shall preside at all shareholders meetings. (b) He shall preside at all meetings of the Board of Directors. (c) He shall be a member of the Executive Committee, if any. (d) He shall be an executive officer of the Corporation, and, subject to the directions of the Board of Directors, shall have general charge of the business, officers and property of the Corporation and general supervision over its officers, employees and agents. 13 SECTION 4.10. THE PRESIDENT. The President shall have the following powers and duties: (a) He shall be an executive officer of the Corporation, and, subject to the directions of the Board of Directors, shall have general charge of the business, affairs and property of the Corporation and general supervision over its officers, employees and agents. (b) If no Chairman of the Board and/or Vice Chairman of the Board has been chosen, or if such officer(s) is(are) absent or disabled, he shall preside at meetings of the stockholders and Board of Directors. (c) He shall be a member of the Executive Committee, if any. (d) He shall be empowered to sign certificates representing stock of the Corporation, the issuance of which shall have been authorized by the Board of Directors . (e) He shall have all powers and perform all duties normally incident to the office of a president of a corporation and shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4.11. THE VICE-PRESIDENTS. The Board of Directors shall, from time to time, designate and elect one or more Vice Presidents, one or more of whom may be designated to serve as Executive Vice-President or Senior Vice-President. Each Vice-President shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors or the President. At the request or in the absence or disability of the President, the Executive Vice-President or, in the absence or disability of the Executive Vice-President, the Vice-President designated by the Board of Directors or (in the absence of such designation by the Board of Directors) by the President, as Senior Vice-President, may perform all the duties of the President, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. SECTION 4.12. THE SECRETARY. The Secretary shall have the following powers and duties: (a) He shall keep or cause to be kept a record of all of the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose. 14 (b) He shall cause all notices to be duly given in accordance with the provisions of these Bylaws and as required by statute. (c) He shall be the custodian of the records and of the seal of the Corporation, and shall cause such seal (or a facsimile thereof) to be affixed to all certificates representing stock of the Corporation prior to the issuance thereof and to all instruments, the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these Bylaws, and when so affixed he may attest the same. (d) He shall see that the books, reports, statements, certificates and other documents and records required by statute are properly kept and filed. (e) He shall have charge of the stock books of the Corporation and cause the stock and transfer books to be kept in such manner as to show at any time the amount of the stock of the Corporation of each class issued and outstanding, the manner in which and the time when such stock was paid for, the names alphabetically arranged and the addresses of the holders of record thereof, the number of shares held by each holder and time when each became such holder of record; and he shall exhibit at all reasonable times to any director, upon application, the original or duplicate stock register. He shall cause the stock book referred to in Section 5.02 hereof to be kept and exhibited at the principal business office of the Corporation in the manner and for the purpose provided in Section 5.02. (f) He shall be empowered to sign certificates representing stock of the Corporation, the issuance of which shall have been authorized by the Board of Directors. (g) He shall perform in general all duties incident to the office of Secretary and such other duties as are given to him by these Bylaws or as from time to time may be assigned to him by the Board of Directors or the President. SECTION 4.13. THE TREASURER. The Treasurer shall have the following powers and duties: (a) He shall have charge and supervision over and be responsible for the monies, securities, receipts and disbursements of the Corporation. 15 (b) He shall cause the monies and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such banks or other depositories as shall be selected in accordance with Section 7.03 hereof. (c) He shall cause the monies of the Corporation to be disbursed by checks or drafts (signed as provided in Section 7. 04 hereof) drawn upon the authorized depositories of the corporation, and cause to be taken and preserved proper vouchers for all monies disbursed. (d) He shall render to the Board of Directors or the Office of Chief Executive, whenever requested, a statement of the financial condition of the Corporation and of all of his transactions as Treasurer, and render a full financial report at the annual meeting of the stockholders, if called upon to do so. (e) He shall cause to be kept correct books of account of all the business and transactions of the Corporation and exhibit such books to any directors upon request during business hours. (f) He shall be empowered from time to time to require from all officers or agents of the Corporation reports or statements giving such information as he may desire with respect to any and all financial transactions of the corporation. (g) He shall perform in general all duties incident to the office of Treasurer and such other duties as are given to him by these Bylaws or as from time to time may be assigned to him by the Board of Directors or the President. ARTICLE V CAPITAL STOCK SECTION 5.01. STOCK CERTIFICATES. Every stockholder shall be entitled to have a certificate, signed by the President or a Vice-President, if one shall be appointed, and the Secretary or an assistant Secretary, if one shall be appointed, certifying the number of shares owned by him in the Corporation. When the Corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face of back of the certificate, or the certificate shall have a statement that the Corporation will furnish to any stockholders upon request and without charge, a full or summary statement of the 16 designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, and, if the Corporation shall be authorized to issue only special stock, such certificate shall set forth in full or summarize the rights of the holders of such stock. Whenever any certificate is countersigned or otherwise authenticated by a transfer agent or transfer clerk, and by a registrar, then a facsimile of the signatures of the officers or agents of the Corporation may be printed or lithographed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be the officer or officers of the Corporation. SECTION 5.02. MAINTENANCE OF STOCK BOOK. A statement shall be kept at the principal place of business of the Corporation setting out the name of the custodian of the stock ledger or duplicate stock ledger and the present and complete post office address, including street and number, if any, where such stock ledger or duplicate stock ledger is kept. SECTION 5.03. LOST OR DESTROYED CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 5.04. TRANSFER OF STOCK. Upon surrender to the Corporation or transfer agent designated by resolution of the Board of Directors of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 17 SECTION 5.05. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by statute. ARTICLE VI INDEMNIFICATION SECTION 6.01. INDEMNIFICATION FOR THIRD PARTY ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the Corporation, by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorney s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to be in the best interests of the Corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. SECTION 6.02. INDEMNIFICATION FOR ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed 18 to be in or not opposed to the best interests of the Corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Corporation or for amounts paid in settlement to the Corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines that upon application that in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. SECTION 6.03. DETERMINATION. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.01 and 6.02 hereof, or in defense of any claim, issue or matter therein, he must be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the defense. Any indemnification under Sections 6.01 or 6.02 hereof, unless ordered by a court or advanced pursuant to Section 6.04 hereof, must be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made either (1) by the stockholders, or (2) by the Board of Directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding, or (3) if a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion, or (4) if a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. SECTION 6.04. ADVANCES. Expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the Corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the Corporation. The provisions of this Section 6.04 do not affect any rights to advancement of expenses to which the Corporation's personnel other than directors or officers may be entitled under any contract or otherwise by law. SECTION 6.05 GENERAL INDEMNIFICATION. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to Article VI: (1) does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the certificate or articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court 19 pursuant to Section 6.02 or for the advancement of expenses made pursuant to Section 6.04, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action and (2) continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 7.01. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents to execute and deliver any contract or other instrument in the name and on behalf of the Corporation; any such authorization may be general or confined to specific instances. SECTION 7.02. LOANS. No loans shall be contracted on behalf of the Corporation, no evidence of indebtedness shall be issued in its name, and no property of the Corporation shall be mortgaged, pledged, transferred or conveyed as security for the payment of any indebtedness or liability of the Corporation, unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. SECTION 7.03. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to its credit in such banks, trust companies or other depositories as the directors may select. SECTION 7.04. CHECKS DRAFTS, ETC. All checks, drafts or other orders for the payment of money, and notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officer, agent or agents of the Corporation and in such manner as the Board of Directors may from time to time designate. 20 ARTICLE VIII GENERAL PROVISIONS SECTION 8.01. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions, if any, of any statute or of the Articles of Incorporation, may be declared by the Board of Directors at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. SECTION 8.02. FISCAL YEAR. The fiscal year of the Corporation shall end on the 31st day of December in each year. SECTION 8.03. CORPORATE SEAL. The Corporation shall have the power to adopt and use a common seal, or stamp, and alter the same at its pleasure. SECTION 8.04. AMENDMENTS. These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors; provided however, that any alteration, amendment or repeal of Article VI of these Bylaws shall only be effective on the actual date such alteration, amendment or repeal is actually adopted and shall only have prospective effect and shall not apply to or effect persons, actions and matters occurring or in place prior to such effective date. I, THE UNDERSIGNED, being the Secretary of Big O Tires, Inc. DO HEREBY CERTIFY the foregoing to be the Amended and Restated Bylaws of said Corporation, as adopted at Regular Meetings of the Board of Directors of said Corporation held on the 5th day of December 1995, to be effective on the specific dates of each amendment. ____________________________________ Secretary 21 EX-10.94 3 EXHIBIT 10.94 Exhibit 10.94 1996 MBO-John Adams 1996 INCENTIVE BONUS PLAN FOR JOHN ADAMS - EXECUTIVE V.P. & CFO - CORPORATE - ------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996. WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $30,100 $60,200 $90,300 ANNUAL TOTALS:100% $30,100 $60,200 $90,300 SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO-John Adams Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /s/Horst K. Mehlfeldt 2/7/96 - ------------------------ ------- Horst Mehlfeldt Date Vice Chairman - Corporate BIG O TIRES, INC. AGREED TO: /s/John B. Adams 2/7/96 - ------------------------ ------- John Adams Date Executive V.P. & CFO - Corporate BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Dennis Fryer 1996 INCENTIVE BONUS PLAN FOR DENNIS FRYER - REGIONAL V.P. - CENTRAL REGION - -------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996.
WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $12,501 $25,002 $37,503 ANNUAL TOTALS:100% $12,501 $25,002 $37,503
SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO - Dennis Fryer Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /s/Tom Staker 2/6/96 - -------------------- ------- Tom Staker Date Senior V.P. Operations - Corporate BIG O TIRES, INC. AGREED TO: /s/Dennis Fryer 2/7/96 - ---------------- ------ Dennis Fryer Date Regional V.P. - Central Region BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Donald Flanders 1996 INCENTIVE BONUS PLAN FOR DONALD FLANDERS - REGIONAL V.P. SOUTHWEST REGION - -------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996. WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $13,334 $26,669 $40,003 ANNUAL TOTALS:100% $13,334 $26,669 $40,003 SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO-Donald Flanders Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /S/Tom Staker 2/6/96 - -------------------- -------- Tom Staker Date Senior V.P. Operations - Corporate BIG O TIRES, INC. AGREED TO: /S/Donald Flanders 2/15/96 - ------------------------- --------- Donald Flanders Date Regional V.P. - Southwest Region BIG O TIRES, INC. Revised March 26, 1996 1996 MBO-Allen Jones 1996 INCENTIVE BONUS PLAN FOR ALLEN JONES - REGIONAL V.P. - SOUTHEAST REGION - -------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996. WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $12,417 $24,835 $37,252 ANNUAL TOTALS:100% $12,417 $24,835 $37,252 SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO-Allen Jones Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /S/Tom Staker 2/6/96 - -------------------- ------- Tom Staker Date Senior V.P. Operations - Corporate BIG O TIRES, INC. AGREED TO: /S/Allen Jones 2/16/96 - -------------------- ------- Allen Jones Date Regional V.P. - Southeast Region BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Greg Roquet 1996 INCENTIVE BONUS PLAN FOR GREG ROQUET - REGIONAL V.P. - WEST REGION This agreement outlines the criteria, goals and rewards for your 1996 incentive plan as well as the terms and conditions as they apply to your plan. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996. WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $13,834 $27,669 $41,503 ANNUAL TOTALS:100% $13,834 $27,669 $41,503 SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO - Greg Roquet Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /s/Tom Staker 2/6/96 - ----------------------------------- ------ Tom Staker Date Senior V.P. Operations - Corporate BIG O TIRES, INC. AGREED TO: /s/Greg Roquet 2/8/96 - ---------------------------------- ------ Greg Roquet Date Regional V.P. - West Region BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Phil Teigen 1996 INCENTIVE BONUS PLAN FOR PHIL TEIGEN - CORPORATE COUNSEL - CORPORATE THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996.
WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ -------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $7,108 $14,216 $21,324 ANNUAL TOTALS:100% $7,108 $14,216 $21,324
SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO - Phil Teigen Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE:
THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500
Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /S/John B. Adams 2/6/96 - ------------------------------ ---------- John B. Adams Date Executive V.P. & CFO - Corporate BIG O TIRES, INC. AGREED TO: /S/Phil Teigen 2/6/96 - ----------------------------- ---------- Phil Teigen Date Corporate Counsel - Corporate BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Bruce Ware 1996 INCENTIVE BONUS PLAN FOR BRUCE WARE - CORPORATE PURCHASING MGR. - CORPORATE THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996.
WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $12,751 $25,502 $38,253 ANNUAL TOTALS:100% $12,751 $25,502 $38,253
SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO - Bruce Ware Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE:
THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500
Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /S/Horst K. Mehlfeldt 2/19/96 - ------------------------- ----------- Horst K. Mehlfeldt Date Vice Chairman - Corporate BIG O TIRES, INC. AGREED TO: /S/Bruce Ware 2/19/96 - ------------------------- ------------ Bruce Ware Date Corporate Purchasing Manager - Corporate BIG O TIRES, INC. Revised January 24, 1996 1996 MBO-Tom Staker 1996 INCENTIVE BONUS PLAN FOR TOM STAKER - SENIOR V.P. OPERATIONS - CORPORATE - -------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996.
WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $21,585 $ 43,170 $64,755 ANNUAL TOTALS:100% $21,585 $43,170 $64,755
SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by 1996 MBO-Tom Staker Page 2 the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /s/John E. Siipola 2/16/96 - ------------------------- ---------- John E. Siipola Date Chairman - Corporate BIG O TIRES, INC. AGREED TO: /s/Horst K. Mehlfedlt 2/16/96 - ------------------------- ---------- Horst K. Mehlfeldt Date Vice Chairman - Corporate BIG O TIRES, INC. AGREED TO: /s/Steven P. Cloward 2/16/96 - ------------------------- ---------- Steven P. Cloward Date President - Corporate BIG O TIRES, INC. AGREED TO: /s/Tom Staker 2/16/96 - ------------------------- ---------- Tom Staker Date Senior V.P. Operations - Corporate BIG O TIRES, INC. Revised March 26, 1996 1996 MBO-Kelley O'Reilly 1996 INCENTIVE BONUS PLAN FOR KELLEY O'REILLY - V.P. MARKETING - CORPORATE - -------------------------------------------------------------------------------- THIS AGREEMENT OUTLINES THE CRITERIA, GOALS AND REWARDS FOR YOUR 1996 INCENTIVE PLAN AS WELL AS THE TERMS AND CONDITIONS AS THEY APPLY TO YOUR PLAN. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. SECTION 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996.
WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- -------- --------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $10,983 $ 21,966 $32,949 ANNUAL TOTALS:100% $10,983 $21,966 $32,949
SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 1996 MBO-Kelley O'Reilly Page 2 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars.
EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $ 0 $1,000 $1,500
Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000) / (16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000) / (18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus. AGREED TO: /s/Horst K. Mehlfeldt 2/7/96 - ------------------------- ------ Horst K. Mehlfeldt Date Vice Chairman - Corporate BIG O TIRES, INC. AGREED TO: /s/Kelley O'Reilly 2/7/96 - ----------------------- ------ Kelley O'Reilly Date V.P. Marketing - Corporate BIG O TIRES, INC. Revised January 24, 1996 1996 INCENTIVE BONUS PLAN FOR RON LAUTZENHEISER - V.P. BUSINESS DEVELOPMENT - CORPORATE ________________________________________________________________________ This agreement outlines the criteria, goals and rewards for your 1996 incentive plan as well as the terms and conditions as they apply to your plan. DEFINITIONS: THRESHOLD - The expected achievement goal for the criteria, at which 40% of the bonus will be paid. TARGET - The stretch goal at which 80% of the bonus will be paid out. MAXIMUM - The extraordinary goal at which 120% of the bonus will be paid. No additional bonus will be paid for achieving beyond this point. Section 1. EBITDA This criterion is defined as 1996 earnings before interest, taxes, depreciation, and amortization as reported in the audited financial statements for 1996. WEIGHT THRESHOLD TARGET MAXIMUM ------ --------- ------ ------- 100% $11,113,100 $11,698,000 $12,282,900 ANNUAL BONUS: $ 15,180 $ 30,360 $ 45,540 ANNUAL TOTALS: 100% $ 15,180 $ 30,360 $ 45,540 SECTION 2. TERMS AND CONDITIONS 1. The criteria outlined in the above sections are considered singular and bonusable as specified. 2. This plan year shall commence January 1, 1996 and shall conclude December 31, 1996. 3. If your employment with the Company should terminate for any reason in 1996, no annual bonus or any part thereof shall be deemed to be earned and payable. You must be employed for the entire plan year. 4. Any annual bonus payable under this plan shall be paid by March 15, 1997. 1996 MB0 - RON LAUTZENHEISER PAGE 2 5. The method of annual calculation is on a percentage basis using the difference between the threshold and target goals or target and maximum goals as follows: 1) For achievement between threshold and target - achievement divided by the sum of target goal minus threshold goal, times the target dollars, or; 2) For achievement above target - achievement divided by the sum of maximum goal minus target goals divided by 2 plus 1 times the target goal dollars. EXAMPLE: THRESHOLD TARGET MAXIMUM --------- ------ ------- $12,000 $16,000 $18,000 ANNUAL BONUS: $0 $1,000 $1,500 Calculation of bonus between Target and Threshold with goal achievement of $13,535: (13,535 - 12,000)/(16,000 - 12,000) = .38375 x 1,000 = $383.75 bonus. Calculation of bonus between Target and Maximum with goal achievement of $16,393: (16,393 - 16,000)/(18,000 - 16,000) = .1965 / 2 = .09825 + 1 = 1.09825 x 1,000 = $1,098.25 bonus AGREED TO: - ------------------------------------ --------------- Horst K. Mehlfeldt Date Vice Chairman - Corporate BIG O TIRES, INC. AGREED TO: - ------------------------------------- --------------- Ron Lautzenheiser Date V.P. Business Development - Corporate BIG O TIRES, INC. Revised March 27, 1996 EX-10.95 4 FRANCHISE AGREEMENT/SCHEDULE PAGES BIG O TIRES, INC. FRANCHISE AGREEMENT BIG O TIRES, INC. FRANCHISE AGREEMENT TABLE OF CONTENTS SUMMARY PAGES ................................................................i GLOSSARY....................................................................iii 1. PARTIES AND RECITALS......................................................1 2. GRANT OF FRANCHISE........................................................1 2.01 Grant of Franchise...............................................1 2.02 Trade Area.......................................................1 3. FIRST OPTION RIGHTS ......................................................1 3.01 First Option Rights .............................................1 3.02 Notification by Big O ...........................................2 3.03 Multiple First Option Rights.....................................2 3.04 Notification of Qualification ...................................2 3.05 Exercise of Option by Franchisee ................................2 3.06 Transfer of First Option Rights .................................2 3.07 Limitation on First Option Rights ...............................2 3.08 Expiration of First Option Rights ..............................2 4. TERM......................................................................3 4.01 Term.............................................................3 5. RENEWAL: EXTENSION OF FRANCHISE RIGHTS....................................3 5.01 Grant of Successor Franchise Rights .............................3 5.02 Conditions to Grant of Successor Franchise.......................3 5.03 Notification of Non-Renewal .....................................3 6. FRANCHISEE'S DEVELOPMENT OBLIGATIONS......................................3 6.01 Financing Approval...............................................3 6.02 Site Selection ..................................................4 6.03 Equipment and Signage ...........................................4 6.04 Conditions to Opening ...........................................4 6.05 Commencement of Business.........................................4 7. PRE-OPENING AND ONGOING ASSISTANCE .......................................4 7.01 Pre-Opening Assistance ..........................................4 7.02 On-Going Assistance .............................................5 8. FEES......................................................................6 8.01 Initial Franchise Fee ...........................................6 8.02 Royalty Fee .....................................................6 8.03 Late Fees .......................................................6 8.04 Taxes ...........................................................6 8.05 Allocation of Payments...........................................6 9. LICENSED MARKS............................................................6 9.01 Licensed Marks...................................................6 9.02 Limitation on Use ...............................................7 9.03 Infringement.....................................................7 9.04 Franchisee's Business Name.......................................7 9.05 Change of Licensed Marks.........................................7 9.06 Franchisor's Rights .............................................7 10. STANDARDS OF OPERATION ...................................................8 10.01 Standards of Operations .........................................8 11. STORE MANAGEMENT .........................................................9 11.01 Store Management ...............................................9 11.02 Completion of Training by Operator or Manager ...................9 11.03 Operation of Store by Big O .....................................9 12. QUALITY CONTROL ..........................................................9 12.01 Inspections .....................................................9 13. MANUAL: NEW PROCESSES ................................................. 10 13.01 Manual ....................................................... 10 13.02 Confidentiality of Information ................................10 13.03 Revisions to Manual ............................................10 13.04 Improvements to System ........................................10 14. PRODUCTS AND SERVICES ...................................................10 14.01 Products and Services ..........................................10 14.02 Approval of Products and Services ..............................11 14.03 Inventory ......................................................11 14.04 Warranties and Guaranties ......................................11 14.05 Open Account Financing ........................................12 15. ADVERTISING, MARKETING AND PROMOTIONAL PLANS ............................12 15.01 Initial Advertising ............................................12 15.02 National Advertising Fund ......................................12 15.03 Local Fund ....................................................13 15.04 Approval of Advertising ........................................13 16. STATEMENTS AND RECORDS ..................................................13 16.01 Invoices ......................................................13 16.02 Audit ..........................................................14 16.03 Monthly Reports ................................................14 16.04 Financial Statements ..........................................14 16.05 Management System ..............................................14 16.06 Retail Accounting Corporation...................................14 17. COVENANTS ...............................................................14 17.01 Noncompetition During Term ....................................14 17.02 Confidentiality ................................................15 17.03 No Interference with Business ..................................15 17.04 Post Termination Covenant Not to Compete ......................15 17.05 Survivability of Covenants ....................................15 17.06 Modification of Covenants ......................................15 18. TRANSFER AND ASSIGNMENT .................................................16 18.01 Assignment by Big O ............................................16 18.02 Right of First Refusal ........................................16 18.03 Transfer Legend ................................................16 18.04 Pre-Conditions to Franchisee's Assignment ......................16 18.05 Death of Franchisee ............................................18 18.06 No Waiver ......................................................19 18.07 Excepted Transfers ............................................19 19. DEFAULT AND TERMINATION .................................................19 19.01 Termination by Big O ..........................................19 19.02 Governing State Law ............................................21 19.03 Termination by Franchisee ......................................21 19.04 Force Majeure ..................................................21 20. POST TERMINATION OBLIGATIONS.............................................21 20.01 Post-Termination Obligations ..................................21 20.02 Right to Repurchase ............................................22 20.03 Right of First Refusal ........................................23 20.04 De-Identification of Assets Upon Sale ..........................23 21. INSURANCE ...............................................................23 21.01 Insurance Coverage ............................................23 21.02 Proof of Insurance ............................................24 21.03 Survival of Indemnification ....................................24 22. TAXES, PERMITS AND INDEBTEDNESS .........................................25 22.01 Payment of Taxes ..............................................25 22.02 Compliance with Laws ......................................... 25 22.03 Payment of Debts ..............................................25 23. INDEMNIFICATION AND INDEPENDENT CONTRACTOR STATUS .......................25 23.01 Indemnification ................................................25 23.02 Independent Contractor ........................................25 24. WRITTEN APPROVALS, WAIVERS AND AMENDMENT ................................26 24.01 Written Approval ..............................................26 24.02 Waiver ........................................................26 24.03 Modification ..................................................26 25. DEALER PLANNING BOARD AND BODTA .........................................26 25.01 Dealer Planning Board ..........................................26 25.02 Special Interest Issues ........................................26 25.03 Disapproval of Management Proposal ............................26 25.04 Compliance with Modification ..................................27 25.05 BODTA ..........................................................27 26. RIGHT OF OFFSET .........................................................27 26.01 Right of Offset ................................................27 27. ENFORCEMENT .............................................................27 27.01 Declaratory and Injunctive Relief ..............................27 27.02 Costs of Enforcement ..........................................27 27.03 Mediation ......................................................27 27.04 Excluded Matters................................................28 27.05 Confidentiality.................................................28 28. NOTICES .................................................................28 28.01 Notices ........................................................28 29. GOVERNING LAW ...........................................................28 29.01 Governing Law ..................................................28 29.02 Jurisdiction ..................................................28 30. SEVERABILITY AND CONSTRUCTION ...........................................29 30.01 Severability ..................................................29 30.02 Counterparts ..................................................29 30.03 Construction ..................................................29 31. ACKNOWLEDGMENTS .........................................................29 Schedule 1 - Premises and Trade Area Schedule 2 - Ownership Verification Schedule 3 - Guaranty Schedule 4 - Lease Rider and Modification Schedule 5 - Farm Class Rider Schedule 6 - Renewal Rider Schedule 7 - Trademarks Schedule 8 - Converter Rider BIG O TIRES, INC. FRANCHISE AGREEMENT SUMMARY PAGES These pages summarize the attached Franchise Agreement, the details of which shall control in the event of any conflict. 1. FRANCHISEE: ------------------------------------------ 2. INITIAL FRANCHISE FEE: Amount Due: -with Application: ------------------------ -upon signing Agreement: ------------------ Total: ------------------------------------ 3. ROYALTY FEE Two percent (2%) of Gross Sales 4. LOCAL ADVERTISING Minimum of four percent (4%) of Gross Sales CONTRIBUTION: 5. NATIONAL ADVERTISING See sections 15 and 25 CONTRIBUTION: 6. INITIAL ADVERTISING REQUIREMENT: ----------------------------------- 7. STORE LOCATION: ------------------------------------ Street and Number ------------------------------------ City, State and Zip Code ------------------------------------ Phone Number 8. Franchisee's Operator: --------------------------------------------- 9. Franchisee's Manager: ---------------------------------------------- 10. Franchisee's Agent For Service of Process: Name: -------------------------------------------------------------- Address: ----------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- 11. Big O's Agent for Service of Process: Name: CT CORPORATION -------------------------------------------------------------- Address: 1675 BROADWAY, SUITE 1200 ----------------------------------------------------------- DENVER, COLORADO 80290 ------------------------------------------------------------------- 12. Effective Date: ---------------------------------------------------- -i- 13. Commencement Date: ------------------------------------------------- 14. Expiration Date: --------------------------------------------------- 15. Franchisee's Advisor: ---------------------------------------------- 16. Send Notices to Big O to: Name: PHILIP J. TEIGEN (LEGAL DEPARTMENT) -------------------------------------------------------------- Address: BIG O TIRES, INC. ----------------------------------------------------------- 11755 E. PEAKVIEW AVENUE ------------------------------------------------------------------- ENGLEWOOD, COLORADO 80111 ------------------------------------------------------------------- 17. Send Notices to Franchisee to: Name: -------------------------------------------------------------- Address: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- 18. Business not subject to Section 17 (a) Name: -------------------------------------------------------------- Address: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- 19. Farm Class Franchise: Yes ------------------- No X ------------------- 20. First Option Holder: Name: N/A -------------------- Address: -------------------- -------------------- -------------------- -ii- GLOSSARY (in alphabetical order) ADVERTISING - The advertising, promotional programs, public relations programs and marketing programs approved or administered by Big O utilizing the resources of the National Advertising Fund or local franchisee cooperatives or franchisee associations. AGREEMENT - This contract, the Summary Pages and all Riders and Schedules hereto, as interpreted through the Manual. BIG O - Big O Tires, Inc. BIG O STORE OR STORE - A retail tire store operated pursuant to the Big O System. BIG O SYSTEM OR SYSTEM - The plan and system developed by Big O relating to the complete operation of Stores which are authorized to sell Products and Services and offer other authorized tire and automotive services at retail, which include some or all of the following: site selection as required, site approval, Store layout and design, product selection and display, purchasing and inventory control methods, accounting methods, merchandising, advertising, sales and promotional ideas, franchisee training, personnel training, and other matters relating to the efficient operation and supervision of Stores and the maintenance of uniform standards of retail merchandising. BLUE II - See the definition of "Manual". BOTDA - Big O Tire Dealers of America, a California non-profit mutual benefit corporation organized by certain Franchisees to promote the common business interests of independently-owned retail dealers duly franchised by Big O. BOTDA is not an affiliate of Big O. The functions and efforts of BOTDA are recognized in Section 25 of this Agreement. COMMENCEMENT DATE - The date upon which the Store opens for business or, in the event of transfer, or conversion, the date designated by Big O Tires, Inc. CONVERTER - A person who converts a retail tire store it owns to a Big O Store pursuant to this Agreement. DEALER PLANNING BOARD - The group of franchisee representatives elected from each Local Group which meets periodically with Big O's management to assist with strategic business plans and to discuss issues of concern to franchisees. The functions of the Dealer Planning Board are described in Section 25 of this Agreement. DEVELOPMENT AGREEMENT - An agreement between Big O and a person to which the person ("Developer") agrees that within a defined territory to open and commence operating an agreed number of Big O Stores pursuant to a development schedule. Developers must execute Franchise Agreements prior to commencing business at any Store developed pursuant to a Development Agreement. DUE DATE - The fifteenth day of each month: the date by which all royalty fees and advertising contributions must be postmarked and mailed to Big O. EFFECTIVE DATE - The date upon which the Franchise Agreement has been executed in full by both the Franchisee and Big O. EXPIRATION DATE - The date on which the initial term of the Agreement expires. -iii- FARM CLASS STORE - A Store with twenty-five percent (25%) or more of its average Gross Sales during any twelve (12) month period arising directly from the sale of Farm Class Tires. FARM CLASS TIRES - Farm tires, off road tires, large double bead truck tires and similar select tires, as may be more specifically defined from time to time by Big O. FIRST OPTION - Franchisee's right to acquire a franchise for a new Store planned for development within a five (5) mile radius of Franchisee's Premises. The First Option and method of exercising it are described in Section 3 of this Agreement. FRANCHISE - The rights granted by the Franchise Agreement. FRANCHISED BUSINESS - The business operated pursuant to a license granted by Big O which utilizes the Licensed Marks and the Big O System. FRANCHISEE - The individual(s), corporation or other entity to which the Franchise is granted. Depending on the context of this Agreement, the term Franchisee may include the shareholders or guarantors of a corporate Franchisee. GROSS SALES - The aggregate gross amount of all revenues from whatever source derived whether in form of cash, credit, agreements to pay or other consideration including the actual retail value of any goods or services traded, bartered, or otherwise received by Franchisee in exchange for any form of non- monetary consideration, (whether or not payment is received at the time of sale or any such amount is proved uncollectible) from or derived by Franchisee or any other person from business conducted or which originated in, on, from or through the Premises, whether such business is conducted in compliance with or in violation of the terms of the Franchise Agreement. Gross Sales includes sums paid for claims made on business interruption insurance policies, Federal Excise Taxes collected, as well as payments received from employees of Franchisee for products purchased at a discounted price. However, Gross Sales does not include: (i) sales or use taxes collected by Franchisee; (ii) the amount of any refunds or allowances made on Products and Services returned by customers; (iii) returns to shippers, vendors and manufacturers; (iv) proceeds derived from the sale of equipment or supplies used by Franchisee in the operation of the Store and not acquired for resale; (v) sales of Products and Services to other Big O Stores; (vi) tire disposal fees so long as the fees charged do not exceed the highest fee recommended by any applicable governmental agency; and (vii) sums received in settlement of claims for loss or damage to fixtures, equipment or leasehold improvements, other than sums received from business interruption insurance. INFORMATION - The contents of the Manual, computer software, materials, goods, training module and any other proprietary information and information created or used by Big O designated for confidential use within the Big O System, and the information contained therein. INITIAL ADVERTISING - Advertising conducted within sixty (60) days of the Commencement Date to promote the opening of the Store. LICENSED MARKS - Trademarks and trade names, service marks and associated logos and symbols owned or sublicensed by Big O, including those enumerated on Schedule 7 and such other marks, logos and names as Big O may designate. LOCAL FUND - The fund, which may be a trust fund, corporation or other entity, derived from contributions by Big O franchisees who are members of a Local Group which shall be maintained by the Local Group for Advertising pursuant to such guidelines as Big O may approve or prescribe. -iv- LOCAL GROUP - A cooperative or association of Big O franchisees formed and operating in their marketing area pursuant to a structure approved or prescribed by Big O for the purpose of promoting Big O Stores and their Products and Services, and providing Management Systems and related services to its members to the extent approved by Big O. Big O will assign a Franchisee to a Local Group and Franchisee must become a member of that Local Group and be bound by any decisions it makes to the extent they are approved by Big O. MANAGEMENT SYSTEMS - Computer hardware, software, cash registers, bookkeeping and accounting services or systems and other systems designed to provide information for the management of Big O Stores. MANAGER - An individual other than the Operator who is responsible for the day- to-day operation of a Store. MANAGER INCENTIVE CONTRACT - An agreement pursuant to which certain Managers may earn purchase credits based upon their performance so that they can acquire Big O franchises from their employer, whether the employer is Big O or a Big O franchisee. MANUAL - The various written, audio and video instructions, including amendments thereto relating to the operation of the Franchised Business which are provided to Franchisee by Big O and identified as such, including but not limited to BLUE II - BIG O TIRES' BLUEPRINT FOR SUCCESS ("Blue II"), and Big O's Franchise Policies and Procedures Manual, consisting of technical bulletins or other written materials. NATIONAL ADVERTISING FUND - The fund derived from contributions by Big O franchisees which shall be exclusively maintained and administered by Big O for national Advertising in cooperation with the Dealer Planning Board. NATIONAL FUND - Big O Tires, Inc. National Advertising Fund. OPERATOR - The individual approved by Big O who shall be responsible for the operation of the Franchised Business. The Operator may be the Franchisee if the Franchisee is an individual. OPTION - Big O's right to purchase the interest being offered by the Franchisee or any Shareholder by matching the bona fide monetary purchase price and payment schedule terms of the proposed Transfer, less any brokerage commission (without having to match any other non-monetary terms). PIONEER - A person who owned at least twenty-five percent (25%) equity interest in a Big O franchisee on March 1, 1987, provided such ownership interest appeared on Big O's records as of July 1, 1987. A Pioneer is entitled to acquire Big O franchises for one-third of the applicable initial franchise fee, provided the Pioneer satisfies Big O's other requirements. PREMISES - The site from which a Franchised Business will be operated at the Store Location described on the Summary Pages, or where applicable, on Schedule 1 to the Franchise Agreement. PRODUCTS AND SERVICES - All tires (including but not limited to Big O's private brand lines of tires), products and services produced, organized or distributed under a license granted by Big O, which are designated by Big O for sale or lease in Stores. RETAIL ACCOUNTING CORPORATION - A cooperative or association which provides bookkeeping, accounting, payroll, tax and related services for the purpose of providing such services at a lower cost and providing the financial reporting Big O requires. -v- SHAREHOLDER - Any person possessing a legal or beneficial interest or holding a share of stock of any kind or nature in the Franchisee, including partners in a Franchisee which is a partnership. SURVIVOR - A surviving spouse or heir of estate of any deceased person owning stock or any other interest in the Franchisee. TERMINATION DATE - The date upon which the Franchise Agreement is canceled or ended by Big O or the Franchisee. TRADE AREA - The area described on Schedule 1 to the Agreement within which, subject to certain conditions, Big O agrees to limit the number of Stores to one (1) for every fifty thousand (50,000) persons residing therein. Big O may, from time to time, redefine Franchisee's Trade Area. TRADE DRESS - Any shop or architectural designs, fixtures, improvements, signs, color schemes or other elements of the appearance of the Store which in any manner suggest affiliation of the Store or Premises with Big O, or the System. TRANSFER - To give away, sell, assign, pledge, lease, sublease, devise, or otherwise transfer, either directly or by operation of law or in any other manner, the Agreement, any of Franchisee's rights or obligations hereunder, or any interest or shares of stock or partnership interest of any kind or nature in Franchisee or the Premises. The merger or consolidation or issuance of additional securities representing an ownership interest in Franchisee shall also be deemed to be a "Transfer" for purposes of this Agreement. -vi- BIG O TIRES, INC. FRANCHISE AGREEMENT This Franchise Agreement ("Agreement") is made by and between Big O Tires, Inc. ("Big O"), a Nevada corporation, with its principal place of business at 11755 East Peakview Avenue, Englewood, Colorado 80111, and ___________________ ________________________________________________________ ("Franchisee"), a(n) __________________ corporation with a place of business at _________________ ________________________________________________________. 1. PARTIES AND RECITALS 1.01 Big O was established to provide franchisees with access to Products and Services and a System for marketing and servicing such Products and Services. Since its inception, Big O has added to the Product and Services and System to enhance the competitive posture of its franchisees. Big O has developed and owns certain Licensed Marks which are licensed to franchisees for use in the Big O Stores. Big O has developed the Big O System relating to the operation of Stores which are authorized to offer and sell Big O tires as part of the Products and Services offered to retail customers. 1.02 Franchisee desires, upon the terms and conditions set forth herein, to obtain a license to operate a Franchised Business and to offer and sell Big O Products and Services. Franchisee acknowledges that it is essential to the preservation of the integrity of the Licensed Marks, and the goodwill of Big O and the Big O System, that each franchisee in the System maintain and adhere to certain standards, procedures and policies described hereinafter and in the Manual. 1.03 Big O is willing, upon the terms and conditions set forth herein, to license Franchisee to operate a Franchised Business which will utilize the Licensed Marks and the Big O System. 2. GRANT OF FRANCHISE 2.01 GRANT OF FRANCHISE. Subject to all of the terms and conditions herein, including but not limited to, the condition that Franchisee or its Shareholders or some of them, personally guarantee the obligations of Franchisee to Big O under this Agreement as set forth in Schedule 3 to this Agreement, Big O grants to Franchisee the non-exclusive license to use the Licensed Marks and the exclusive right to operate a Franchised Business solely at the Premises set forth in Schedule 1 to this Agreement. If, at the time of execution of this Agreement, the Premises cannot be designated as a specific address because a location has not been selected by Franchisee and approved by Big O, then Franchisee shall promptly take steps to choose and acquire a location for its Big O Store within the following city, county or other geographical area: _________________________________________________________________________ __________________ ("Designated Area"). In such circumstances, Franchisee shall select and submit to Big O for approval a specific location for the Premises, which shall hereinafter be set forth in Schedule 1. 2.02 TRADE AREA. During the term of this Agreement, Big O agrees not to operate itself or grant to any other person the right to operate any more than one (1) Store for every fifty thousand (50,000) persons residing in the Trade Area described on Schedule 1. Big O may, from time to time, redefine the Trade Area. Absent Franchisee's prior approval, Big O shall not permit the establishment or operation of another Store within a two (2) mile radius of Franchisee's Store. Big O shall offer Products and Services bearing the Licensed Marks at retail only through Big O Stores. 3. FIRST OPTION RIGHTS 3.01 FIRST OPTION RIGHTS. Subject to the conditions described below, if Big O or any prospective Big O franchisee should propose to open a Store within a five (5) mile radius of Franchisee's Store, Franchisee shall be notified of its First Option to acquire a Franchise for an additional Store within the five (5) mile radius of its Store. Franchisee may only exercise the First Option if: (a) at the time Big O notifies Franchisee of the proposal for the new Store, Franchisee is in full compliance with all the terms of this Agreement and any other agreements it has with Big O; (b) Franchisee meets Big O's then current criteria for new franchisees; and (c) There are not two (2) or more Big O franchisees with Stores within a five (5) mile radius of the site of a proposed new Store, except in accordance with Section 3.03 below. 3.02 NOTIFICATION BY BIG O. When notifying Franchisee of a proposal to establish a new Store in accordance with Franchisee's First Option, Big O may notify Franchisee of the proposal to establish the new Store within the general vicinity of Franchisee's Store without identifying a specific site or sites. 3.03 MULTIPLE FIRST OPTION RIGHTS. If two (2) or more Big O franchisees have Stores within a five (5) mile radius of the site of a proposed new Store, the Franchisee and all such franchisees will be invited simultaneously by written notice from Big O to exercise their First Option rights; but if two (2) or more such franchisees apply for the same franchise, it shall be awarded to the qualified franchisee which has a Store that is closest to the site of the proposed new Store or, if two qualified franchisees have Stores that are equidistant from such site, it shall be awarded to the qualified franchisee which owns the franchised Big O Store which was first licensed as a Big O Store to the current or a previous owner. 3.04 NOTIFICATION OF QUALIFICATION. If Franchisee qualifies for the First Option pursuant to this Section 3, Big O will provide Franchisee with written notice that it has thirty (30) days within which to submit an application for the franchise in the manner prescribed by Big O in the notice. Franchisee must submit the application within the prescribed time along with the standard franchise deposit then required by Big O. Upon approval of the application by Big O, Franchisee must execute Big O's then current standard Franchise Agreement and pay the remainder of any initial fee due. 3.05 EXERCISE OF OPTION BY FRANCHISEE. If Franchisee is a corporation or partnership, the First Option may be exercised only by the corporation or partnership itself, or by the individual designated as First Option holder on the Summary Pages. 3.06 TRANSFER OF FIRST OPTION RIGHTS. The First Option is not transferable without Big O's prior written approval, WHICH MAY BE WITHHELD FOR ANY REASON, IN BIG O'S SOLE DISCRETION. 3.07 LIMITATION ON FIRST OPTION RIGHTS. The First Option rights described above are void and unenforceable with respect to a site proposed for development in an area which is at the time of the proposal subject to a Development Agreement between Big O and Developer. 3.08 EXPIRATION OF FIRST OPTION RIGHTS. If a Franchisee has failed to qualify for or otherwise submit an application for a Franchise pursuant to this Section 3 for a proposed franchise to be granted within the area in which Franchisee holds First Option rights, Franchisee's First Option rights for that proposed franchise shall lapse regardless of whether the site actually selected for development by Big O is different from the site which was initially proposed for development. 4. TERM 4.01 TERM. This Agreement shall take effect upon the earlier of the Effective Date or of the Commencement Date and, unless previously terminated pursuant to Section 19 hereof, its term shall extend until the earlier of the tenth anniversary of the Commencement Date or such other Expiration Date as is stated on the Summary Pages. 5. RENEWAL: EXTENSION OF FRANCHISE RIGHTS -2- 5.01 GRANT OF SUCCESSOR FRANCHISE RIGHTS. If Franchisee is not in default under this Agreement and has complied with all of its provisions during the initial term, and has cooperated with Big O, its Local Group and other Big O franchisees in programs and suggestions developed by Big O, upon its expiration Big O will offer a successor franchise agreement with Franchisee, provided the parties mutually agree to the terms of a successor franchise at least one hundred eighty (180) days before the Expiration Date. 5.02 CONDITIONS TO GRANT OF SUCCESSOR FRANCHISE. Big O will only offer to execute a new franchise agreement in accordance with its then current terms and conditions for granting successor franchises, which may include any or all of the following: (a) Execution of a new and modified franchise agreement which may include, among other matters, a different fee structure, increased fees, a modified Trade Area and different purchase requirements; (b) A requirement that Franchisee refurbish the Premises or relocate the Premises to conform to Big O's then current standards for similar Stores; (c) Payment of Big O's renewal administration fee of One Thousand Five Hundred Dollars ($1,500); and (d) Execution of a general release in favor of Big O and its representatives. 5.03 NOTIFICATION OF NON-RENEWAL. If Big O is willing to execute a new franchise agreement with Franchisee, at least one (1) year before the Expiration Date, Big O shall notify Franchisee of the Expiration Date and the terms and conditions upon which Big O is willing to execute a new franchise agreement with Franchisee. Franchisee must execute a successor franchise agreement within sixty (60) days of its receipt. The Franchise Agreement will expire on the Expiration Date and the franchise relationship will terminate unless Franchisee and Big O have executed a successor franchise agreement at least one hundred eighty (180) days prior to the Expiration Date, and Franchisee has satisfied all other terms and conditions agreed upon as a prerequisite to renewal. If Big O intends not to offer Franchisee a successor franchise agreement, Big O shall give Franchisee at least one hundred eighty (180) days notice of nonrenewal prior to the Expiration Date. If Big O has not given Franchisee at least one hundred eighty (180) days notice of nonrenewal prior to the Expiration Date, the term of this Agreement will automatically be extended by the amount of time necessary to give Franchisee one hundred eighty (180) days notice of nonrenewal. 6. FRANCHISEE'S DEVELOPMENT OBLIGATIONS 6.01 FINANCING APPROVAL. Unless otherwise agreed to by Big O, Franchisee shall obtain a letter of commitment for the provision of financing through a lender approved by Big O and with minimum credit terms, also approved by Big O, no later than one hundred twenty (120) days from the Effective Date of this Agreement. 6.02 SITE SELECTION. Franchisee shall obtain the written approval of Big O of the site for the Store within one hundred twenty (120) days from the Effective Date of this Agreement. Franchisee shall propose sites for approval by Big O on forms and in the manner designated from time to time by Big O. A proposed site shall only be submitted to Big O for approval after Franchisee has evaluated the site and determined that it meets Big O's then current criteria for sites which Big O has communicated to Franchisee. Franchisee shall be responsible for obtaining Big O's then current site criteria prior to submitting a site approval application. Big O shall review the site approval application and within thirty (30) days of Big O's receipt thereof, Big O shall approve or reject the proposed site. Unless otherwise agreed to in writing by Big O, final site approval will be conditioned upon Big O's receipt of evidence of Franchisee's ownership, lease or control of the property in such form as Big O, in its sole discretion shall -3- deem to be acceptable, including, without limitation, a deed to the property, an executed contract to purchase the property, a lease with a duration of not less than ten (10) years, or an option to purchase the property. Franchisee acknowledges and agrees that Big O's approval of a site or provision of criteria regarding the site do not constitute a representation or warranty of any kind, express or implied, as to the suitability of the site for a Big O Store or for any other purpose. Big O's approval of the site indicates only that Big O believes that a site falls within the acceptable criteria established by Big O as of that time. In the case of a Converter, execution of this Agreement shall be deemed approval of the Store Location by Big O, unless additional obligations to convert or upgrade the premises are described in Schedule 8 to this Agreement. 6.03 EQUIPMENT AND SIGNAGE. Franchisee agrees to purchase, lease or otherwise use in the establishment and operation of the Big O Store only those fixtures, equipment, signs and hardware and/or software that Big O has approved as meeting its specifications and standards for quality, design, appearance, function and performance. Franchisee shall purchase or lease approved brands, types or models of fixtures, equipment, and signs only from suppliers designated or approved by Big O. Franchisee agrees to place or display at the Premises only such signs, logos and display materials that Big O approves from time to time. 6.04 CONDITIONS TO OPENING. Franchisee agrees, at its sole expense, to do or cause to be done the following prior to opening the Big O Store for business: (i) secure all required financing; (ii) obtain all required permits and licenses; (iii) construct all required improvements and decorate the Store in compliance with approved plans and specifications; (iv) purchase and install all required fixtures, equipment and signs required for the Big O Store; (v) purchase an opening inventory of tires and supplies; (vi) provide Big O with copies of all required insurance policies, or such other evidence of coverage and payment as Big O requests; and (vii) provide Big O with any other documents as may be required by Big O, including but not limited to financing statements. 6.05 COMMENCEMENT OF BUSINESS. Franchisee agrees to open the Big O Store for business within fourteen (14) days after Big O notifies Franchisee that the conditions set forth in this Section 6 have been satisfied. Big O may extend the opening of the Big O Store for up to sixteen (16) months from the Effective Date of this Agreement ("Development Period"). In the event that factors beyond Franchisee's reasonable control prevent Franchisee from meeting this Development Period, Big O may extend the Development Period so long as Franchisee has made reasonable and continuing effort to comply with such development obligations and Franchisee requests, in writing, an extension of time in which to have its Big O Store open and operating before the Development Period lapses. 7. PRE-OPENING AND ONGOING ASSISTANCE 7.01 PRE-OPENING ASSISTANCE. Prior to Franchisee's Commencement Date, Big O shall provide Franchisee with such of the following and on the same basis as it will from time to time provide to similarly situated franchisees of Big O: (a) Assistance to Franchisee related to approval of a site for the Store, although Franchisee acknowledges that Big O shall have no obligation to select or acquire a site on behalf of Franchisee. Big O's assistance will consist of the provision of criteria for a satisfactory site, an on- site inspection and determination of whether a proposed site fulfills the requisite criteria, prior to formal approval of a site selected by Franchisee. At Big O's option, Big O may, without fee or expense to Franchisee, review the proposed Store lease. The final decision about whether to acquire a given approved site or whether to execute any particular lease shall be the sole decision of Franchisee. Big O disclaims all liability for the consequences of approving a given site. Big O's participation in site selection in no way is meant to constitute a warranty or guaranty that the Franchised Business will be profitable or otherwise successful. Big O's written approval of the Premises and Store must be obtained by Franchisee before the Store may be opened or relocated. -4- Big O may condition its approval of a Store lease upon Franchisee's execution of a conditional lease assignment in a form which is the same as or similar to the one found on Schedule 4. (b) A prototype floor plan, elevation and equipment layout for the Store, if requested by Franchisee. The plans must be modified by Franchisee's architect or contractor to adapt them to conditions at the Premises and to satisfy all local code requirements. Revisions or modifications to the plans must be approved by Big O. (c) Five consecutive (5) weeks of training for one person in the operation of the Franchised Business at Big O's training facility located in Mesa, Arizona, or another location designated by Big O. Unless Big O waives the training requirement, the Manager of the Franchisee's Store, provided he or she has been approved by Big O, and Franchisee's Operator must attend and successfully complete such training. Franchisee shall pay for its own transportation, lodging, and living expenses which are incurred while attending the initial training program, except that Big O will pay lodging and transportation for the first person to attend the training program. In the event that, in Big O's sole discretion, Franchisee's Operator fails to successfully complete the initial training program, Big O may, in its sole discretion, require Franchisee's Operator to attend and successfully complete another training program or terminate this Agreement and, upon receipt from Franchisee of a general release in a form approved by Big O, refund the initial franchise fee paid by Franchisee, less any amounts necessary to reimburse Big O for the costs it incurred in approving Franchisee and in training Franchisee's Operator and Manager. (d) We will loan to you our Manual known as Blue II and the Franchise Policies and Procedures Manual. (e) Assistance in selecting Franchisee's initial inventory. (f) Assistance in the lay-out, merchandising and display of the Store. 7.02 ON-GOING ASSISTANCE. Big O agrees to make available to Franchisee the following ongoing assistance for which Big O may charge the Franchisee a fee: (a) To the extent available to Big O, a source of Big O private brand tires; (b) Ongoing research and development into new tires and other lines of Products and Services and ways to enhance the competitive posture of Big O Stores; (c) Additional training for the Operator or other personnel of Franchisee, for which Big O may charge the Franchisee a fee; (d) Suggested prices for Big O brands sold at the Franchisee's Store, provided that Franchisee will not be required to sell at any particular price if such a requirement would be unlawful; (e) A warranty or replacement program for Big O private brand tires and related automotive Products and Services; (f) Regional training provided by Big O personnel and field assistance, inspections and advice pertaining to the Franchisee's Store provided by Big O area managers; (g) Point of sale advertising materials and wearables utilizing Big O marks will be purchased through Big O's subsidiary, O Advertising, Inc., or such other licensee as designated -5- by Big O; and from time to time, local advertising plans and materials, special promotions and similar advertising, for which Big O may charge the Franchisee a fee; (h) At the request of Franchisee's Local Group, Big O will supply Franchisee with newspaper mats and radio and television commercial tapes, for which Big O may charge Franchisee or the Local Group a fee. 8. FEES 8.01 INITIAL FRANCHISE FEE. In consideration of the execution of this Agreement, Franchisee agrees to pay Big O an initial franchise fee in the amount and at the times specified on the Summary Pages. Except as described in Section 7.01(c) above, the initial franchise fee is not refundable. 8.02 ROYALTY FEE. After the Commencement Date, Franchisee shall pay to Big O a monthly royalty fee equal to two percent (2%) of the prior month's Gross Sales. The royalty fee must be postmarked and mailed to Big O by no later than the Due Date. 8.03 LATE FEES. If any fee or any other amount due under this Agreement, including payments for Products and Services, is not received within ten (10) days after such payment is due, Franchisee shall pay Big O interest equal to the lesser of the daily equivalent of eighteen percent (18%) per annum of such overdue amount per year, or the highest rate then permitted by applicable law, for each day such amount is past due. 8.04 TAXES. If any federal, state, or local tax other than an income tax is imposed upon royalty fees paid by Franchisee to Big O which Big O cannot offset against taxes it is required to pay under the laws of the United States or the state of its domicile, Franchisee agrees to compensate Big O in the manner prescribed by Big O so that the net amount or net rate received by Big O is no less than that which has been established by this Agreement and which was due Big O on the Effective Date of this Agreement. 8.05 ALLOCATION OF PAYMENTS. Unless other written instructions accompany a specific payment, all payments made by Franchisee pursuant to this Agreement shall be applied in such order as Big O may designate from time to time. Big O shall comply with any written instructions for allocation specified by Franchisee to the extent, in Big O's opinion, it is reasonable to do so. 9. LICENSED MARKS 9.01 LICENSED MARKS. Franchisee expressly acknowledges that Big O is the sole and exclusive licensor of the Licensed Marks. Franchisee agrees not to represent in any manner that Franchisee has acquired any ownership rights in the Licensed Marks. Franchisee agrees not to use any of the Licensed Marks or any marks, names, or indicia which are or may be confusingly similar in its own corporate or business name except as authorized in this Agreement. Franchisee further acknowledges and agrees that any and all goodwill associated with the Big O System and identified by the Licensed Marks shall inure directly and exclusively to the benefit of Big O and that, upon the expiration or termination of this Agreement for any reason, no monetary amount shall be assigned as attributable to any goodwill associated with Franchisee's use of Licensed Marks. 9.02 LIMITATIONS ON USE. Franchisee understands and agrees that any use of the Licensed Marks other than as expressly authorized by this Agreement, without Big O's prior written consent, is an infringement of Big O's rights therein and that the right to use the Licensed Marks granted herein does not extend beyond the termination or expiration of this Agreement. Franchisee expressly covenants that, during the term of this Agreement and thereafter, Franchisee shall not, directly or indirectly, commit any -6- act of infringement or contest or aid others in contesting the validity of Big O's right to use the Licensed Marks or take any other action in derogation thereof. 9.03 INFRINGEMENT. Franchisee acknowledges Big O's right to regulate the use of the Licensed Marks and Trade Dress of the Big O System. Franchisee shall promptly notify Big O if it becomes aware of any use or any attempt by any person or legal entity to use the Licensed Marks or Trade Dress of the Big O System, any colorable variation thereof, or any other mark, name, or indicia in which Big O has or claims a proprietary interest. Franchisee shall assist Big O, upon request and at Big O's expense, in taking such action, if any, as Big O may deem appropriate to halt such activities, but shall take no action nor incur any expenses on Big O's behalf without Big O's prior written approval. 9.04 FRANCHISEE'S BUSINESS NAME. Franchisee further agrees and covenants to operate and advertise only under the name or names from time to time designated by Big O for use by similar Big O System franchisees; to refrain from using the Licensed Marks to perform any activity or to incur any obligation or indebtedness in such a manner as may, in a way, subject to Big O to liability therefor; to observe all laws with respect to the registration of trade names and assumed or fictitious names; to include in any application for the above a statement that Franchisee's use of the Licensed Marks is limited by the terms of this Agreement, and to provide Big O with a copy of any such application and other registration document(s); and to observe such requirements with respect to trademark and service mark registrations, copyright notices, and other notices as Big O may, from time to time, require. 9.05 CHANGE OF LICENSED MARKS. Subject to the requirements of Section 25 of this Agreement, Big O reserves the right, in its sole discretion, to designate one or more new, modified, or replacement Licensed Marks or trade names for use by franchisees and to require the use by Franchisee of any such new, modified, or replacement Licensed Marks or trade names in addition to or in lieu of any previously designated Licensed Marks. Any expenses or costs associated with the use by Franchisee of any such new, modified, or replacement Licensed Marks shall be the sole responsibility of Franchisee. 9.06 FRANCHISOR'S RIGHTS. Big O retains the right to, among others: (1) use, and license others to use, the Licensed Marks and the Big O System for other Big O Stores or company-owned Stores; (2) solicit, sell to and service local, regional or national accounts wherever located; (3) use the Licensed Marks and the Big O System with other services or products, or in alternative channels of distribution, without regard to location; and (4) use and license the use of other proprietary marks or methods which are not the same as or confusingly similar to the Licensed Marks, whether in alternative channels of distribution or with the operation of any type of tire sales and service business, at any location, which may be the same as, similar to or different from the business of a Big O Store. Big O may use or license these rights on any terms and conditions it deems advisable, and without granting Franchisee any rights in them. 10. STANDARDS OF OPERATION 10.01 STANDARDS OF OPERATIONS. Big O shall establish and Franchisee shall maintain high standards of quality, appearance and operation for the Franchised Business. For the purpose of enhancing the public image and reputation of the businesses operating under the System and for the purpose of increasing the demand for Products and Services provided by Franchisee and Big O, the parties agree as follows: (a) Franchisee shall not open the Store for business until Big O has provided Franchisee with written authorization to do so; (b) Franchisee shall comply in good faith with all published Big O System rules, regulations, policies, and standards, including, without limitation, those contained in the Manual. Franchisee shall operate and maintain the Franchised Business solely in the manner and pursuant -7- to the standards prescribed herein, in the Manual and in other materials provided by Big O to Franchisee, and shall make such modifications thereto as Big O may require; (c) Franchisee shall at all times operate the Store diligently and in a manner which is consistent with sound business practices so as to maximize the revenues therefrom; (d) Franchisee shall at all times maintain working capital and a net worth which is sufficient, in Big O's opinion, to enable Franchisee to fulfill properly all of Franchisee's responsibilities under this Agreement; (e) Franchisee shall at all times maintain its Store in the image of and according to the standards of Big O as prescribed in the Manual. Moreover, Franchisee agrees to cooperate with Big O at its expense, to the extent building and site limitations permit, in the implementation of new programs, including those which may require the addition of new equipment or fixtures for the Store. In its sole discretion, Big O may waive some or all of any of its franchisees' obligations to comply with such programs. (f) Prior to opening, Franchisee shall provide Big O with written certificates or documentary evidence from an insurance company or companies that Franchisee has obtained the insurance coverage prescribed by Section 21; (g) If Franchisee maintains a customer list, such lists or parts thereof shall be disclosed to no one other than Franchisee's employees or Big O without Big O's prior written consent; and (h) Franchisee shall participate in and be bound by the decisions of any Local Group established and operated pursuant to standards and within the guidelines prescribed or approved by Big O. Franchisee shall not be subject to any agreement to fix prices, or allocate customers or territories which would violate any applicable laws. Nor will Franchisee be subject to any capital investment requirements or other standards which are inconsistent with this Agreement or which have not been approved or prescribed by Big O. 11. STORE MANAGEMENT 11.01 STORE MANAGEMENT. Franchisee's Store shall only be operated by the Operator or a Manager employed by the Franchisee who has previously been approved by Big O. All initial and subsequent Operators or Managers must be approved by Big O. Big O's approval will be conditioned upon the Operator's or Manager's successful completion of any training required by Big O. Big O may waive some or all of its initial training requirements for Operators or Managers who have already received such training as a result of their affiliation with another Store or Big O franchisee. If Franchisee or Franchisee's Operator has not already successfully completed such training, he shall be required to successfully complete the training described in Section 7.01 (c) above. 11.02 COMPLETION OF TRAINING BY OPERATOR OR MANAGER. Franchisee's Operator or Manager and such of its managerial personnel or Shareholders as are designated by Big O, shall complete, to Big O's reasonable satisfaction, any and all training programs Big O may reasonably require or provide at such time as Big O may reasonably prescribe. All expenses incurred by persons receiving such training, including, without limitation, costs of travel, room and board, as well as wages of the person(s) receiving such training shall be borne by the Franchisee except that the transportation and lodging costs for the first person receiving such training shall be paid by Big O. 11.03 OPERATION OF STORE BY BIG O. Under the circumstances described below, upon Franchisee's request, Big O has the option, but not the duty, to replace or substitute for Franchisee's Operator, Manager, or both, its own employees or agents, to operate the Franchisee's Store for the benefit of -8- Franchisee with complete discretion over all matters relating to its operation. Franchisee shall pay Big O's then current Store management fee as well as the out-of-pocket expenses Big O incurs for travel, food and lodging in the course of providing such services. Big O may operate Franchisee's Store if: (a) Franchisee's Operator or Manager has failed to satisfactorily complete any training required by this Section 11; or (b) Franchisee's Operator or Manager becomes physically or mentally incapable of operating the Franchised Business; or (c) Franchisee's Operator or Manager dies and a new Operator or Manager has not completed initial training. 12. QUALITY CONTROL 12.01 INSPECTIONS. Franchisee hereby grants to Big O and its authorized agents the right to enter the Premises during regular business hours: (a) To conduct inspections and, upon Big O's request, Franchisee agrees to render such assistance as may reasonably be requested and to take such steps as may be necessary immediately to correct any deficiencies in the operation of its Franchised Business pursuant to this Agreement which are detected during such an inspection; and (b) To remove from the Premises, certain samples of any Products and Services, supplies or goods, in amounts reasonably necessary for testing or examination by Big O or an independent laboratory, to determine whether such samples meet Big O's then current standards and specifications. Big O will grant Franchisee a credit equivalent to the cost of any approved Products and Services or supplies damaged or removed by it. 13. MANUAL; NEW PROCESSES 13.01 MANUAL. To protect the reputation and goodwill of the businesses operating under the System and to maintain high standards of operation under the Licensed Marks, Franchisee shall conduct the Franchised Business strictly in accordance with the Manual, which Franchisee acknowledges belongs solely to Big O and shall be on loan from Big O during the term of this Agreement. Franchisee agrees to pay Big O up to Five Thousand Dollars ($5,000) for the failure to return the Manual known as Blue II, the Franchise Policies and Procedures Manual, any training module or any other proprietary information to Big O within five (5) days of the Expiration Date or Termination Date of this Agreement, or the date upon which controlling interest in the Franchisee, the Franchised Business or its assets is transferred. However, Big O will waive the payment if Franchisee notifies Big O that it has lost or mislaid all or part of the Manual at any time prior to six (6) months before the date upon which the Franchise is transferred, terminates, or expires. 13.02 CONFIDENTIALITY OF INFORMATION. Franchisee shall at all times use its best efforts to keep Big O's Information confidential and shall limit access to the Information to employees and independent contractors of Franchisee on a need-to-know basis. Franchisee acknowledges that the unauthorized use or disclosure of Big O's Information will cause irreparable injury to Big O and that damages are not adequate remedy. Franchisee accordingly covenants that it shall not at any time, without Big O's prior written consent, disclose, use, permit the use thereof (except as may be required by applicable law or authorized by this Agreement), copy, duplicate, record, transfer, transmit, or otherwise reproduce such Information, in any form or by any means, in whole or in part, or otherwise make the same available to any unauthorized person or source. Any and all Information, knowledge, and know-how not generally known about the System and Big O's Products and Services, standards, procedures, techniques, and such -9- other Information or material as Big O may designate as confidential shall be deemed confidential for purposes of this Agreement, except Information which Franchisee can demonstrate lawfully came to its attention prior to disclosure by Big O, or which legally is or has become a part of the public domain by publication or communication by others. 13.03 REVISIONS TO MANUAL. Franchisee understands and acknowledges that subject to the requirements of Section 25, Big O may, from time to time, revise the contents of the Manual to implement new or different requirements for the operation of the Franchised Business, and Franchisee expressly agrees to comply with all such changed requirements which are by their terms mandatory, provided, that such requirements apply in a reasonably nondiscriminatory manner to comparable Big O franchisees. The implementation of such requirements may require the expenditure of reasonable sums of money by Franchisee. Big O will not alter the basic rights and obligations of the parties arising under this Agreement through changes to the Manual. 13.04 IMPROVEMENTS TO SYSTEM. If Franchisee develops any concept, process, service, or improvement in the operation or promotion of the Store, Big O may itself use or disclose it to other Big O franchisees without any obligation to compensate Franchisee therefor. If the concept, process, service, or improvement is adopted for use by the majority of Big O Stores, such concept, process, service, or improvement shall become the property of Big O and Big O may itself use or disclose it to other Big O franchisees without any obligation to compensate Franchisee therefor. 14. PRODUCTS AND SERVICES 14.01 PRODUCTS AND SERVICES. Franchisee acknowledges that its principal interest in acquiring a Big O Franchise is to sell Big O private brand tires and related merchandise and benefit from Big O's Products and Services selection, purchasing programs including programs for the purchase of major brand tires, and marketing expertise. The consuming public expects Big O Stores to offer the full line of Big O Products and Services and advertised warranty services. Accordingly, Franchisee shall at all times have in stock on the Premises a complete representative line of Big O private brand tires, shock absorbers, related merchandise, and other Products and Services in such quantities as Big O may prescribe from time to time. 14.02 APPROVAL OF PRODUCTS AND SERVICES. Prior to commencing business at the Premises, Franchisee shall stock the Store with Products and Services and supplies of such variety and in such amounts as Big O may select. Franchisee may not sell any product or service which has not been selected, manufactured, or approved by Big O. Big O is not obliged to approve any product, service, or merchandise selected by the Franchisee. Big O will exercise its right of approval of suppliers selected by the Franchisee which are not at the time approved by Big O for use by the Franchisee in accordance with the following procedure: (a) The Franchisee must submit a written request to Big O for approval of the supplier; (b) The Franchisee must demonstrate to Big O the existence of a need for the product; (c) The supplier must demonstrate to Big O's reasonable satisfaction, that it is able to supply a commodity to the Franchisee meeting Big O's specifications for such commodity and that it is able to do so on a timely basis; (d) The supplier must demonstrate to Big O's reasonable satisfaction that the supplier is of good standing in the business community with respect to its financial soundness and reliability of its product and service; -10- (e) The supplier must agree to indemnify and hold Big O and the Franchisee harmless from and against any claim or liability by reason of the supplier's products, including without limitation, defects in materials and workmanship and supplier must provide to Big O certificates or other evidences of insurance coverage with coverage limits sufficient to cover the risks and an endorsement reflecting that Big O and Franchisee are named as additional insureds under the supplier's insurance policies; and (f) Big O must be reasonably satisfied that the commodity is priced competitively. Big O's current practice is to notify the Franchisee of its approval or disapproval in writing as soon as practicable. 14.03 INVENTORY. Franchisee shall at all times maintain an inventory of Products and Services in such amounts and of such variety as Big O may reasonably require, and shall offer all services which Big O may require. 14.04 WARRANTIES AND GUARANTIES. Franchisee agrees to issue and honor warranties and guarantees written on certain Products and Services sold to consumers in accordance with the terms and procedures prescribed in the Manual. Any such warranty or guaranty will be offered through all Big O Tire Stores on a nondiscriminatory basis. Only warranties or guarantees sponsored or approved by Big O may be offered or honored by Franchisee (other than those required by law). Franchisee and Big O shall only honor warranties and guaranties on Products and Services which have been sold to and returned by consumers in accordance with the terms and procedures prescribed in the Manual. Franchisee acknowledges that it will honor any and all warranties and guarantees sponsored or approved by Big O, regardless of where or by whom they were issued. Franchisee shall make no charge to a customer for honoring such a warranty or guaranty unless the charge is permitted by the express terms of the warranty or guaranty or the then current Manual. Big O agrees not to change or revoke any warranty or guaranty without giving Franchisee at least thirty (30) days prior written notice. Warranties or guarantees issued prior to any such revocation or modification shall be honored according to their terms as interpreted in the Manual. 14.05 OPEN ACCOUNT FINANCING. In its sole discretion, Big O may provide Franchisee with open account financing for some or all of the Products and Services it sells Franchisee. Whether or not such credit is offered, Franchisee will be required to execute a security agreement and comply with all other requirements of Big O to secure Franchisee's obligations to Big O under the Franchise Agreement and perfect its security interest therein. If such credit is offered, Franchisee will be required to execute a credit agreement and security agreement and comply with all other requirements of Big O to secure such payments and perfect its security interest therein. Franchisee's failure to comply with any credit terms set forth above shall constitute an event of default of this Agreement. 15. ADVERTISING, MARKETING AND PROMOTIONAL PLANS 15.01 INITIAL ADVERTISING. Recognizing the value of standardized Advertising programs to the furtherance of the goodwill and public image of the Big O System, the parties agree that within the first year of business, Franchisee is required to spend on Initial Advertising, in addition to the required four percent (4%), the amount specified on the Summary Pages. The exact amount to be spent on Initial Advertising shall be determined by the Franchisee's Local Group and will depend, in part, on Big O's then current presence in the market place, reputation and name recognition. The amount and manner of the Initial Advertising must be approved in advance by Big O. If no Local Group exists for the region where Franchisee's Store is located, then the amount of the Initial Advertising shall be agreed upon by Big O and Franchisee. -11- 15.02 NATIONAL ADVERTISING FUND. Big O has established a National Advertising Fund which Big O, in its sole discretion, may decide to terminate at any time. If Big O does terminate the National Advertising Fund, Big O, in its sole discretion, may re-establish it at any time. Big O shall notify Franchisee as to the manner in which it shall function and the amount of contribution required of Franchisee. (a) Not later than the Due Date, Big O or its designee must have received from Franchisee such amount as Big O shall designate, but not more than one percent (1%) of its previous month's Gross Sales, as a contribution to the National Advertising Fund which shall be maintained or approved by Big O for Big O National Advertising. Big O shall limit any increase in Franchisee's contribution to the National Advertising Fund from any amount then currently being charged to one-tenth of one percent (0.1%) in any twelve (12) consecutive month period and an additional one-tenth of one percent (0.1%) for each twelve (12) consecutive months thereafter until the one percent (1%) limitation is reached. Such incremental increases shall not be cumulative so that if Big O fails to adopt an additional incremental increase after any twelve (12) consecutive month period, the next one-tenth of one percent (0.1%) incremental increase will not accrue until actually adopted by Big O and shall constitute the maximum for the next consecutive twelve (12) months; provided, however, in the event Big O shall determine, in its sole judgment and discretion, that a special advertising circumstance or opportunity is available to Big O and/or its franchisees, Big O may propose to the Dealer Planning Board a greater increase during any consecutive twelve (12) month period (up to one percent (1%) limit), and if a majority of the members of the Dealer Planning Board agree to such increase, it shall be implemented by Big O, not withstanding Big O's limitation as to the phasing in of any increases. (b) Big O shall, following consultation with the Dealer Planning Board, direct all National Advertising which is provided through the National Advertising Fund with sole discretion over the concepts, materials, and media used therein. All National Advertising Fund contributions paid by Franchisee and other similarly situated Big O System franchisees to Big O shall be part of the National Advertising Fund. (c) Franchisee understands and acknowledges that the National Advertising Fund is intended to maximize general public recognition and acceptance of the Licensed Marks for the benefit of the System as a whole and that Big O undertakes no obligation in administering the National Advertising Fund to insure that any particular franchisee benefits directly or pro rata from the national Advertising. Franchisee agrees that the National Advertising Fund may otherwise be used to meet any and all costs incident to such Advertising; provided that no part thereof shall be used by Big O to defray its general operating expenses other than (i) those reasonably allocable to such Advertising, or (ii) other activities reasonably related to the administration or direction of the National Advertising Fund and its related programs. No refund of contributions to the National Fund shall be due Franchisee upon termination or nonrenewal of this Agreement. (d) Any part of the National Advertising Fund contributions paid to Big O, but not spent by Big O during Big O's fiscal year, which Big O may change in its sole discretion, shall remain in the National Advertising Fund. Any taxes imposed on the National Advertising Fund shall be paid from the National Advertising Fund. (e) The Dealer Planning Board shall have the right to review all expenditures of the National Advertising Fund on a regular basis. 15.03 LOCAL FUND. Franchisee shall also contribute by the Due Date a minimum of four percent (4%) of its Store's Gross Sales for the previous month either to Big O or, if a Local Fund has been established in Franchisee's marketing area, to the Local Fund formed for the purpose of local advertising and operated pursuant to such structure and guidelines as Big O may prescribe or approve. Franchisee -12- agrees to be bound by the decisions of either Big O or its Local Group, if one has been established in Franchisee's marketing area, pertaining to Local Advertising, provided such decisions have been approved by Big O and do not violate any applicable laws. From time to time, the Local Group may agree to increase the amount Franchisee is required to spend for Advertising, but subject to the terms of certain documents already effective on this Agreement's Effective Date, not by more than one percent (1%) of Franchisee's Gross Sales on an annual basis. 15.04 APPROVAL OF ADVERTISING. Franchisee or the Local Group shall submit (through the mail, return receipt requested) to Big O for its prior written approval (except with respect to prices to be charged), samples of all marketing materials and advertising to be used by Franchisee that have not been prepared or previously approved in all respects by Big O or its designated agents. Franchisee shall submit tear sheets, receipts, and other evidence of such Advertising in the manner prescribed by Big O. Franchisee will not be required to submit to Big O copies of any proposed Advertising which has been adopted for use by the Local Group and which was previously approved by Big O for use by the Local Group. 16. STATEMENTS AND RECORDS 16.01 INVOICES. Every sale of Products and Services from the Franchisee's Store shall be accurately recorded on a consecutively numbered invoice or in such other format as Big O may approve. All invoices, whether voided or used, shall be accounted for by Franchisee. 16.02 AUDIT. Throughout the term of this Agreement and for two (2) years thereafter, Franchisee shall maintain for not less than three (3) years original, full, and complete records, accounts, books, data, licenses, and contracts which shall accurately reflect all particulars relating to the Franchised Business and such other statistical and other information or records as Big O may require. Big O or its designated agent shall have the right to examine and audit such records, accounts, books, and data during regular business hours or at reasonable times. If any such examination or audit discloses that Franchisee has understated its Store's Gross Sales by more than two percent (2%), Franchisee shall be obliged to reimburse Big O for the cost and expense of such examination or audit. If Franchisee has understated any amount due Big O or any Local Group or Local Fund, it shall tender payment of the amount due not later than ten (10) days following receipt of the auditor's report, plus interest calculated at a rate which is the lower of eighteen percent (18%) per annum or the highest rate permitted by law. If Franchisee has overpaid Big O or such Local Group or Local Fund, such amount will be credited to Franchisee against monthly royalty fees or advertising contributions due to Big O, the Local Group or the Local Fund beginning with the month following receipt of the auditor's report and continuing until the credit is exhausted. 16.03 MONTHLY REPORTS. No later than the Due Date, Franchisee shall mail to Big O all payments of royalty fees and advertising contributions and monthly reports due Big O on forms prescribed by Big O, stating the fees or contributions due to Big O which were incurred during the preceding month as specified from time to time by Big O, the Gross Sales at the Premises for the prior month, copies of all sales tax receipts or returns and such other information as Big O may require, all signed and certified as true and correct by Franchisee or Franchisee's Operator. Big O reserves the right to require such reporting to be performed and submitted to Big O electronically. 16.04 FINANCIAL STATEMENTS. Franchisee shall deliver to Big O, no later than sixty (60) days from the end of each of Franchisee's fiscal quarters, an unaudited profit and loss statement covering the Franchised Business for such quarter and a balance sheet of the Franchised Business as of the end of such quarter, all of which shall be certified by Franchisee as true and correct. All such statements shall be prepared in a format which has been prescribed or approved by Big O. In addition, Franchisee, as well as any guarantor(s) of this Agreement, shall, within thirty (30) days after request from Big O, deliver to -13- Big O a financial statement, certified as correct and current, in a form which is satisfactory to Big O and which fairly represents the total assets and liabilities of Franchisee and any such guarantor(s). 16.05 MANAGEMENT SYSTEM. Big O has authorized Local Groups to recommend to Big O that certain Management Systems be obtained and used by all their member franchisees. If Franchisee's Local Group persuades Big O that the acquisition of a Management System by all its member Franchisees is necessary to the efficient functioning of a program which is consistent with the Big O System, Franchisee shall, at its sole expense acquire such Management System and place it in service within such time periods as are recommended by the Local Group and approved by Big O. Once a particular Management System or accounting software has been adopted by a Local Group pursuant to the criteria described herein, Franchisee may utilize a different Management System at Franchisee's Store only with Big O's prior written approval. 16.06 RETAIL ACCOUNTING CORPORATION. Big O recommends the Franchisee use some or all of the services provided by a Retail Accounting Corporation operating within the Franchisee's marketing area. 17. COVENANTS 17.01 NONCOMPETITION DURING TERM. Except for any businesses already operating and identified on the Summary Pages, during the term of this Agreement, Franchisee and any guarantor(s) hereof covenant, individually, not to engage in or open any business, other than as a Franchisee of the Big O System, which offers or sells tires, wheels, shock absorbers, automotive services, or other products or services which compete with Big O Products and Services. The purpose of this covenant is to encourage Franchisee and any guarantor(s) hereof to use their best efforts to promote the Big O System, its Products and Services, to protect its Information and trade secrets, and to generate a successful business at the Store. 17.02 CONFIDENTIALITY. During the term of this Agreement and thereafter, Franchisee covenants not to communicate directly or indirectly, divulge to or use for its benefit or the benefit of any other person or legal entity, any trade secrets which are proprietary to Big O or any Information, knowledge, or know-how deemed confidential under Section 13 hereof, except as permitted by Big O. The protection granted hereunder shall be in addition to and not in lieu of all other protections for such trade secrets and confidential Information as may otherwise be afforded in law or in equity. 17.03 NO INTERFERENCE WITH BUSINESS. Franchisee agrees that during the term of this Agreement that it shall not divert or attempt to divert any business of or any actual customers of the Big O System to any competitive business, by direct or indirect inducement or otherwise. 17.04 POST TERMINATION COVENANT NOT TO COMPETE. If Franchisee terminates this Agreement other than in a manner prescribed by Section 19.03 or if this Agreement is terminated for "good cause" as defined in Section 19.01, Franchisee and its guarantors covenant that they shall not directly or indirectly, for a period of two (2) years after the Termination Date of this Agreement, engage in any business, other than as a Franchisee of the Big O System, which offers or sells tires, wheels, shock absorbers, automotive services, or other products or services which compete with Big O Products and Services within a ten (10) mile radius of the Premises or within a ten (10) mile radius of any other Big O Store which was operational or under construction on the Termination Date. If a former Franchisee or guarantor commits a breach of this Section 17.04, the two year period shall start on the date that the former Franchisee or guarantor is enjoined from competing or stops competing, whichever is later. 17.05 SURVIVABILITY OF COVENANTS. The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion -14- of a covenant in this Section 17 is held unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which Big O is a party, Franchisee expressly agrees to be bound by any lesser covenant imposing the maximum duty permitted by law that is subsumed within the terms of the covenant, as if the resulting covenant were separately stated in and made a part of this Section 17. Franchisee further expressly agrees that the existence of any claim it may have against Big O, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by Big O of the covenants in this Section 17. The covenants in this Section 17 shall survive the Termination Date or Expiration Date of this Agreement. 17.06 MODIFICATION OF COVENANTS. Franchisee understands and acknowledges that Big O shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in this Section 17 or any portion hereof, without Franchisee's consent, effective immediately upon receipt by Franchisee of written notice thereof; and Franchisee agrees that it shall comply immediately with any covenant as so modified. -15- 18. TRANSFER AND ASSIGNMENT 18.01 ASSIGNMENT BY BIG O. This Agreement and all rights and duties hereunder may be freely assigned or transferred by Big O and shall be binding upon and inure to the benefit of Big O's successors and assigns. 18.02 RIGHT OF FIRST REFUSAL. Because Big O or someone known to Big O may be interested in purchasing Franchisee's Franchised Business, the Premises, or an interest in either, if Franchisee decides to make a Transfer, Franchisee agrees to offer in writing to make the Transfer to Big O, and describe the terms under which Franchisee offers to make such a Transfer. If Big O has not offered to purchase what the Franchisee has offered to Transfer to Big O within thirty (30) days after Big O receives the notice from Franchisee, Franchisee may then offer to make the Transfer to third parties on the same or not more favorable terms and conditions as were offered to Big O. If Franchisee does not consummate the Transfer within six months after Franchisee gives notice of the Transfer to Big O, Franchisee shall not make the Transfer without again first offering to make the Transfer to Big O. 18.03 TRANSFER LEGEND. Franchisee understands and acknowledges that the rights and duties set forth in this Agreement are personal to Franchisee and that Big O has granted the Franchise in reliance on Franchisee's personal background, business skills, experience, and financial capacity. It is important to Big O that Franchisee be known to Big O and always meet Big O's standards and requirements. Accordingly, neither Franchisee nor any Shareholder shall be permitted or have the power, without the prior written consent of Big O, to make a Transfer. To assure compliance by Franchisee with the transfer restrictions contained in this Section 18, all share or stock certificates of Franchisee shall at all times contain a legend sufficient under applicable law to constitute notice of the restrictions on such stock contained in this Agreement and to allow such restrictions to be enforceable. Such legend shall appear in substantially the following form: "The sale, transfer, pledge, or hypothecation of this stock is restricted pursuant to the terms of Section 18 of a Franchise Agreement dated ___________________ between Big O Tires, Inc, and the issuer of these shares." Any Transfer which does not comply with the terms of this Section 18 shall be null and void. 18.04 PRE-CONDITIONS TO FRANCHISEE'S ASSIGNMENT. If Franchisee or any Shareholder desires to make a Transfer, such person or entity must comply with the following terms, conditions, and procedures to effectuate a valid Transfer: (a) If any proposed assignment of any rights under this Agreement, or if any other Transfer which, when aggregated with all previous Transfers, would in the reasonable opinion of Big O, result in the transfer of effective control over the ownership and/or operation of the Premises or Franchisee or the Franchised Business: (i) The transferee must apply for a Big O franchise and must meet all of Big O's then current standards and requirements for becoming a Big O franchisee (which standards and requirements need not be written); and (ii) The transferee shall execute the then current form of Franchise Agreement generally issued by Big O with respect to comparable Big O franchisees. Such agreement shall generally provide for a new term equal to the term of the standard Big O franchise agreement then being offered, and may include, without limitation, different fee structures, modified Trade Areas and/or increased fees; - 16 - (b) Regardless of the degree of control which would be affected by a proposed Transfer: (i) Franchisee shall first notify Big O in writing of any bona fide proposed Transfer and set forth a complete description of all terms and fees of the proposed Transfer in the manner prescribed by Big O, including the prospective transferee's name, address, financial qualifications, and previous five (5) years business experience; (ii) Big O or its assignee may, within thirty (30) days after receipt of such notice, exercise the Option to purchase the interest being offered by Franchisee or any Shareholder; (iii) If Big O or its assignee fails to exercise the Option to purchase the interest, Big O shall, within thirty (30) days after receipt of the notice of the Option, notify Franchisee in writing of its approval or disapproval of the prospective transferee. Big O's approval will be granted only if the prospective transferee, its Shareholders, partners, and/or Operator: meets Big O's then current standards for new franchisees, which standards need not be in writing; demonstrates to Big O's satisfaction that it or its Operator meets Big O's managerial, business, and technical standards; possesses a good moral character, business reputation, and satisfactory credit rating; and has the aptitude, ability, and financial capacity to operate the Franchised Business (as may be evidenced by prior related business experience or otherwise). Big O reserves the right to disallow a transfer of the Premises (without a transfer of the Franchised Business) to a person which would operate a business from the Premises which sells or offers for sale products or services which are the same as or similar to those offered for sale through the Franchised Business; (iv) If Big O approves the proposed transferee, Franchisee or the Shareholder may transfer the interest to the proposed transferee at a price and under terms and conditions which are not more favorable than the terms offered to Big O. Big O's approval is conditioned upon the proposed transferee or its Operator having completed (to the satisfaction of Big O) the training program then currently required of Big O franchisees or Operators; (v) Prior to the consummation of any such Transfer, Franchisee shall pay all amounts due to Big O and cure all other breaches of this Agreement and any other agreement or loan document it may have with Big O; (vi) Big O will, as a condition of any Transfer involving a change in control of Franchisee, the Store or its Assets, require Franchisee or Transferee to pay a transfer fee (but no initial franchise fee) to reimburse Big O for any expenses which may be incurred in its review, analysis, and preparation of any documentation relating to the Transfer, including legal and accounting fees, and additional assistance as may be requested by the Franchisee related to the Franchisee's resale of the Store. The transfer fee will be $1,500. In additional, if the Transferee requires training, the Franchisee or Transferee will also be charged a training fee of $3,000. Big O shall be the sole arbiter of whether a change of control occurred as a result of a single Transfer or a group of Transfers; For any transfer of less than fifty percent (50%) of Franchisee's ownership, Big O will, as a condition of any Transfer involving less than fifty percent (50%) of Franchisee's ownership in the Franchise, the store or its assets, require the Franchisee or the transferee to pay a transfer fee (but no initial franchise fee) to reimburse Big O for any - 17 - expenses which may be incurred in its review, analysis and preparation of any documentation relating to the Transfer, including legal and accounting fees and additional assistance as may be requested by the Franchisee related to the resale of the Store. The transfer fee will be $500. Big O shall be the sole arbiter of whether a change of control will occur as a result of a single Transfer or a group of Transfers. (vii) Big O may require any transferor of any partnership interest, shares of stock, or any other interest of any kind or nature in Franchisee to guarantee the obligations of Transferee under this Agreement or under any new Franchise Agreement entered into between transferee and Big O; (viii) Prior to approving a Transfer of the controlling interest in Franchisee, the Franchised Business, or the Premises, Big O may inspect Franchisee's Store and as a result of such inspection, Big O may prepare a "Punch List" setting forth the necessary repairs, maintenance, or other upgrading of the Store which will become a condition of Big O's approval of the Transfer; and (ix) If the Franchisee acquired its interest in the Franchise as a Pioneer, Converter, or pursuant to a Development Agreement or Manager Incentive Contract, and the Franchisee makes a Transfer of its interest within two (2) years of the Effective Date of this Agreement, the Franchisee must pay Big O as a condition of such Transfer the difference between the initial franchise fee paid by Franchisee and twenty-one thousand dollars ($21,000.00), the standard initial franchisee fee charged by Big O for new franchises when Franchisee executed this Agreement. (x) Franchisee shall comply with all other applicable transfer requirements as designated in the Manual or otherwise in writing. 18.05 DEATH OF FRANCHISEE. Notwithstanding any other provision in this Section 18, if a Survivor desires to acquire or retain the interest of a decedent of a Franchisee or in a Franchisee and continues to operate the Franchised Business pursuant to the System, the Survivor may do so under the terms of this Agreement subject only to: (a) The Survivor's execution and delivery to Big O of a written agreement to be bound: (i) By the terms of this Agreement; and (ii) By the terms of any guaranty of this Agreement; (b) Satisfactory completion of initial training by the Survivor, Survivor's Operator, or Manager and such other managerial personnel as Big O may designate within the time periods prescribed by Big O; and (c) The Survivor's payment of all travel, lodging, food, and similar expenses incurred by it or its Operator or managerial personnel in attending the training prescribed by Section 11.02. If the Survivor does not desire to acquire or retain such interest, then the Survivor shall have a reasonable period of time, but no more than six (6) months, to make a Transfer to a transferee acceptable to Big O subject to compliance with the procedures set forth in this Section 18, provided, the Survivor throughout such period fulfills all duties of Franchisee under this Agreement. - 18 - 18.06 NO WAIVER. Big O's consent to a Transfer hereunder shall not constitute a waiver of any claims Big O may have against Franchisee or the transferring party or Big O's right to demand exact compliance with any provision of this Agreement. 18.07 EXCEPTED TRANSFERS. The provisions of Section 18.02 and 18.04(b)(ii) shall not apply to: (a) any Transfer to a spouse, parent, child, or sibling of Franchisee or any Shareholder; (b) a Transfer to Franchisee's Operator or Manager pursuant to the terms of a Manager Incentive Contract which complies in all respects with the standards approved or prescribed by Big O; or (c) a Transfer to a spouse, parent, child, or sibling of Franchisee or any Shareholder which, in the aggregate, amounts to a Transfer of less than a controlling interest in Franchisee, the Franchised Business, or the Premises. 19. DEFAULT AND TERMINATION 19.01 TERMINATION BY BIG O. Big O may terminate this Agreement for good cause, without prejudice to the enforcement of any legal or equitable right or remedy, immediately upon giving written notice of such termination and the reason or cause for the termination, and, except as hereinafter provided, without providing Franchisee an opportunity to cure the default. Without in any way limiting the generality of the meaning of the term "good cause", the following occurrences shall constitute sufficient basis for Big O to terminate the Agreement: (a) If Franchisee fails to pay any financial obligation pursuant to this Agreement including, but not limited to, payments to Big O or any other supplier for Products and Services, and fails to cure such failure to pay within five (5) days after Big O gives Franchisee a written notice of default; (b) If Franchisee fails to perform or breaches any covenant, obligation, term, condition, warranty, or certification herein and fails to cure such non-compliance within thirty (30) days after Big O gives Franchisee written notice of default; (c) If Franchisee fails to open the Store and commence business within eighteen (18) months of the Effective Date of this Agreement, or if Franchisee fails to commence business on such other Commencement Date as the parties hereto may have agreed; (d) If Franchisee makes, or has made, any materially false statement or report to Big O in connection with this Agreement or the application therefor; (e) If Franchisee operates the Franchised Business in a manner contrary to or inconsistent with the Licensed Marks or as specified by Big O in the Manual, and Franchisee fails to cure such deficiency within thirty (30) days after Big O gives a written notice of default; (f) If Franchisee, a Shareholder, guarantor, or transferee violates any transfer and assignment provision contained in Section 18 of this Agreement; (g) If Franchisee receives from Big O more than three (3) valid notices of default of this Agreement in the same twelve (12) month period, regardless of whether previous defaults have been cured; (h) If Franchisee fails to operate or keep the Franchised Business open for more than five (5) consecutive business days without Big O's express written approval, or if Franchisee ceases to operate all or any part of the Franchised Business conducted under this Agreement or defaults under any loan, lending agreement, mortgage, deed of trust or lease with any party covering the Premises, and such party treats such act or omission as a default, and Franchisee - 19 - fails to cure such default to the satisfaction of such party within any applicable cure period granted Franchisee by such party; (i) If Franchisee or any person owning an interest in Franchisee is convicted of any felony or crime of moral turpitude regardless of the nature thereof, or any other crime or offense relating to the operation of the Franchised Business, or if Franchisee engages in any conduct which reflects materially and unfavorably upon the operation of the Franchised Business; (j) If Franchisee becomes insolvent or makes a general assignment for the benefit of creditors, or if a petition in bankruptcy is filed by Franchisee, or such a petition is filed against and consented to by Franchisee, or if a bill in equity or other proceeding for the appointment of a receiver of Franchisee or other custodian for Franchisee's business or assets is filed and consented to by Franchisee, or if a receiver or other custodian (permanent or temporary) of Franchisee's assets or property, or any part thereof, other than as described in Section 18.05, is appointed; (k) If Franchisee or any guarantor(s) hereof defaults in any other agreement or loan document with Big O or if Franchisee defaults under the terms of any lease of the Premises or if Franchisee fails to comply with the requirements of any Local Group operating pursuant to standards prescribed or approved by Big O including, but not limited to, any requirement to pay dues or make advertising contributions, and such default is not cured in accordance with the terms of such other agreement, loan document, or lease, or the by-laws of the Local Group; (l) If Franchisee fails, for a period of ten (10) days after notification of non-compliance, to comply with any law or regulation applicable to the operation of the Franchised Business; (m) If Franchisee sells, offers for sale, or gives away at the Premises any products or services which have not been previously approved by Big O in writing, or which have been subsequently disapproved; (n) If Franchisee shall have understated its Gross Sales to Big O by more than two percent (2%) on two (2) or more occasions; or (o) If a court of competent jurisdiction or an arbitration tribunal in a final and unappealed judgment determines that any significant amount of the payments or compensation which Franchisee has agreed to pay Big O pursuant to the terms hereof is unlawful, or that all or a significant part of Franchisee's payment obligations hereunder are void or voidable by Franchisee. If a different notice or cure period or good cause standard is prescribed by applicable law, it shall apply to a termination of the Franchise Agreement. REMEDIES TO BIG O. If the Franchisee is in default and has failed to cure such default in a manner prescribed by the Franchise Agreement, in addition to the rights Big O has to terminate the agreement, the Franchisee agrees to pay to Big O, among the many remedies available to Big O, royalties and any lost gross profits. 19.02 GOVERNING STATE LAW. If a different notice or cure period or good cause standard is prescribed by applicable law, it shall apply to a termination of this Agreement. 19.03 TERMINATION BY FRANCHISEE. Franchisee may only terminate this Agreement if Big O has committed a material breach of any of Big O's obligations under this Agreement and has failed to cure such breach within thirty (30) days after Franchisee has given written notice to Big O of such breach. - 20 - 19.04 FORCE MAJEURE. Notwithstanding anything contained in this Agreement to the contrary, neither party shall be in default hereunder by reason of its delay in performance of, or failure to perform, any of its obligations hereunder, if such delay or failure is caused by: (a) strikes or other labor disturbance; (b) acts of God, or the public enemy, riots or other civil disturbances, fire, or flood; (c) interference by civil or military authorities; (d) compliance with governmental laws, rules, or regulations which were not in effect and could not be reasonably anticipated as of the date of this Agreement; (e) delays in transportation, failure of delivery by suppliers, or inability to secure necessary governmental priorities for materials; or (f) any other fault beyond its control or without its fault or negligence. In any such event, the time required for performance of such obligation shall be the duration of the unavoidable delay. 20. POST TERMINATION OBLIGATIONS 20.01 POST-TERMINATION OBLIGATIONS. Upon the expiration or termination of this Agreement by any means or for any reason, Franchisee shall immediately: (a) Cease to be a Franchisee of Big O and cease to operate the former Franchised Business under the Big O System. Franchisee shall not thereafter, directly or indirectly, represent to the public that the former Franchised Business is or was operated or in any way connected with the Big O System or hold itself out as a present or former Franchisee of Big O; (b) Pay all sums owing to Big O. Upon termination for any default by Franchisee, such sums shall include actual and consequential damages, costs, and expenses incurred by Big O as a result of the default; (c) Return to Big O the (i) Manual known as Blue II, Franchise Policies and Procedures Manual, any training modules or other proprietary information and supplements thereto and all trade secrets and confidential materials owned or licensed by Big O and all copies thereof other than Franchisee's copy of the Franchise Agreement, copies of any correspondence between the parties, and any other document which Franchisee reasonably needs for compliance with any applicable law; (ii) return or discontinue use of all forms, advertising matter, marks, devises, insignias, slogans, designs, signs, any computer systems and/or software; and (iii) discontinue the use of all copyrights, Licensed Marks, trade names and patents now or hereafter applied for or granted in connection with the operation of the Franchise. (d) Provide Big O, upon its request, with a complete list of any outstanding obligations Franchisee may have to any third parties including outstanding customer orders. Big O shall have the right, but not the obligation, to fill any such outstanding customer orders generated by Franchisee and in such event, Franchisee shall immediately reimburse Big O for any costs or expenses incurred by Big O in doing so. In addition, Big O shall have the right to cancel any orders placed by Franchisee for which delivery has not been made; (e) Take such action as may be required by Big O to transfer and assign to Big O or its designee all telephone numbers, white and yellow page telephone references and advertisements, - 21 - and all trade and similar name registrations and business licenses, and to cancel any interest which Franchisee may have in the same. The Franchisor is hereby appointed as the Franchisee's attorney-in-fact for such purpose and such power, being coupled with an interest, shall be irrevocable; (f) Cease to use in Advertising, or in any manner whatsoever, any methods, procedures, or techniques associated with the Big O System in which Big O has a proprietary right, title, or interest; cease to use the Licensed Marks, and any other marks and indicia of operation associated with the Big O System and remove or change all Trade Dress, Products and Services, and other indicia of operation under the Big O System from the Premises, at Franchisee's expense and in a manner satisfactory to Big O. Unless otherwise approved in writing by Big O, Franchisee shall return to Big O all copies of materials bearing the Licensed Marks; and (g) If during the term of Franchisee's Franchise Agreement, the Franchisee has made available to its customers, the ability to purchase Products and Services from Franchisee's Store by the use of the Big O credit card with American General Finance, upon termination the Franchisee shall cease accepting such card from any future customers. (h) Franchisee shall immediately make available to Big O all customer lists as such was developed while a Franchisee. (i) Strictly comply with all other provisions of this Agreement pertaining to post-termination obligations, including, without limitation, those contained in Sections 13 and 17. (j) Any tire adjustments existing as of the Termination Date shall be referred to other existing LSCs, RSCs or other Stores for processing. Franchisee shall receive no allowance for tire adjustments upon termination. 20.02 RIGHT TO REPURCHASE. Big O shall have the right, but not the obligation, to purchase: (a) Some or all of the Products and Services and supplies at the Store and the equipment, furnishings, fixtures, or signs at the Premises which bear the Licensed Marks for a mutually agreed upon price within thirty (30) days of the Termination Date or the Expiration Date. (b) If Big O elects to exercise such a right, it may offset the purchase price against any other amounts owed by Franchisee to Big O pursuant to this or any agreement or loan document. Before exercising any such rights, Big O shall have the right to enter upon the Premises during reasonable hours to take an inventory of the Franchised Business. 20.03 RIGHT OF FIRST REFUSAL. Upon receipt by Franchisee of an offer to purchase Franchisee's Products and Services, equipment, supplies, fixtures or signs at the Premises, Franchisee hereby grants Big O a right of first refusal to purchase any of such items by matching the bona fide monetary purchase price and payment schedule terms, less any brokerage commission without having to match any other non-monetary terms of the proposed purchase by Franchisee's buyer(s). Franchisee must give Big O written notice of any such bona fide offer. If within thirty (30) days after receipt of such notice, Big O has neither exercised its right of first refusal nor notified Franchisee of its rejection thereof, Franchisee may sell such items as were covered by the offer at the expiration of the thirty (30) day period. 20.04 DE-IDENTIFICATION OF ASSETS UPON SALE. If Big O determines not to exercise its option to repurchase any such items, Franchisee may continue to sell its remaining Products and Services, equipment, supplies, and fixtures, but may not identify itself as a Big O Franchisee. Franchisee shall otherwise abide by the terms of this Section 20. -22- 21. INSURANCE 21.01 INSURANCE COVERAGE. Franchisee shall, at its expense and no later than upon the Commencement Date, procure and maintain in full force and effect throughout the term of this Agreement either the approved Big O Dealers National Insurance Program ("Program") then in effect or the types of insurance enumerated in this Agreement, which shall be in such coverages, limits and amounts as may from time to time be required by Big O, and which shall designate Big O, its directors, officers, employees, agents and other Big O designees as additional named insured(s). Unless otherwise agreed to by Big O, Franchisee shall procure and maintain whichever limits and coverages are greater in a comparison of the insurance enumerated in the Manual and the insurance enumerated in the Program. If the Franchisee chooses not to procure insurance pursuant to the Program, Franchisee shall procure the following insurance coverages, limits and amounts: (a) Workers' Compensation insurance with statutory limits for Coverage A as prescribed by the statutes of the state of the Franchised Business; including Coverage B, Employers Liability, with limits not less than or equivalent to $500,000 each person, $500,000 each occurrence, and $500,000 annual aggregate; (b) Comprehensive or Commercial General Liability insurance covering all operations and premises of the Franchised Business, including but not limited to Product Liability, Completed Operations Liability, Personal Injury Protection, Advertisers Liability, Fire Legal Liability, Medical Payments, and Contractual Liability, with limits not less than the equivalent of $2,000,000 per occurrence combined single limit for bodily injury and property damage; (c) Vehicular/Automobile Liability insurance, including Uninsured Motorist and Medical Payments, covering owned, non-owned, hired, leased or other vehicles associated, directly or indirectly, with the Franchised Business, with limits of not less than the equivalent of $1,000,000 per occurrence combined single limit for bodily injury and property damage; (d) "All Risk" Property insurance covering risk of loss to real and personal property; including but not limited to, Accounts Receivable, Valuable Papers, Glass, Signs, Employees' Tools, Loss of Rents, and other building contents - including flood and earthquake coverage if appropriate for the location of the specific Franchised Business-for repair/replacement coverage and valuation of all assets. This coverage will include Business Income/Extra Expense insurance for extra expenses incurred and/or profits lost due to a covered, "All Risk" peril (Business Interruption Valuation Worksheets will be submitted by Franchisee to Big O annually for evaluation and approval). Any coinsurance provisions should apply only to values reported and should have no adverse impact on claim settlement (an Agreed Amount Endorsement should be obtained, if possible); (e) Inland Marine insurance covering all signs, tools and equipment, and cargo being transported by rail, motortruck, or other common carrier conveyances where the Franchised Business has title or responsibility for transported goods, with limits of no less than $10,000 per any one conveyance; (f) Garage Liability and Garagekeepers Legal Liability insurance covering all vehicle storage, garage premises and other operations arising out of the Franchised Business and non-owned use and/or operation of vehicles, with Garage Liability limits of not less than the equivalent of $2,000,000 per occurrence combined single limit for bodily injury and property damage and Garagekeepers Legal Liability of not less than the equivalent of $100,000 per location; (g) Boiler and Machinery insurance covering all real and personal property; including, but not limited to, pressure vessels, machinery, piping, tubing and other high and low pressurized - 23 - items at the Franchised Business for the repair/replacement valuation of all assets. This coverage shall include Business Income/Extra Expenses insurance for additional expenses incurred and/or profits lost; (h) Comprehensive Fidelity/Crime insurance covering Employee Dishonesty with limits no less than $25,000; Forgery with limits no less than $10,000; Money and Securities Inside Premises with limits no less than $10,000; and Money and Securities Outside Premises with limits no less than $10,000; and (i) Commercial Umbrella Liability insurance covering all underlying liability insurance coverages enumerated in this section, with no gaps between underlying and umbrella limits or coverage with excess and primary limits of no less than the equivalent of $3,000,000 per occurrence combined single limit for bodily injury and property damage. 21.02 PROOF OF INSURANCE. Prior to the Commencement Date, Franchisee shall make timely delivery of a signed original certificate or certificates of all required insurance coverages to Big O, which shall contain the authorized agent's business name, address and phone number, together with a statement by the insurer that the policy will not be cancelled or materially changed without at least thirty (30) days prior written notice to Big O that the alteration or cancellation is being made. All insurance coverages will be underwritten by a company acceptable to Big O, with a Best's Rating of no less than "A-" or a financial statement of the insurer approved by Big O. If Franchisee fails to purchase required insurance conforming to the standards prescribed by Big O, Big O may obtain such insurance for Franchisee, and Franchisee shall pay Big O the cost of such insurance plus a ten percent (10%) administrative surcharge. 21.03 SURVIVAL OF INDEMNIFICATION. The procurement and maintenance of the greater of the prescribed insurance coverages set forth in the Manual or those set forth in the Program shall not relieve Franchisee of any liability to Big O assumed under any indemnification requirement of this Agreement. If Big O deems it appropriate, the Franchisee shall, upon Big O's request, provide to Big O a true, complete certified copy of all, or a part of the Franchisee's insurance policies within 10 days of receiving such request. In addition, upon Big O's request, the Franchisee shall provide to Big O renewal certificates of insurance, or certified insurance binders, for all required coverages no fewer than 10 days before the indicated anniversary date(s) of such insurance coverages. 22. TAXES, PERMITS, AND INDEBTEDNESS 22.01 PAYMENT OF TAXES. Franchisee shall promptly pay when due any and all federal, state, and local taxes including without limitation, unemployment and sales taxes, levied or assessed with respect to any Products and Services distributed or sold pursuant to this Agreement and all accounts or other indebtedness of every kind incurred by Franchisee in the operation of the Franchised Business. 22.02 COMPLIANCE WITH LAWS. Franchisee shall comply with all applicable federal, state, and local laws, rules and regulations, including, without limitation, environmental laws related to tire disposal. Franchisee shall obtain any and all permits, certificates, and licenses required for the full and proper conduct of the Franchised Business. 22.03 PAYMENT OF DEBTS. Franchisee hereby expressly covenants and agrees to accept full and sole responsibility for any and all debts and obligations incurred in the operation of the Franchised Business. 23. INDEMNIFICATION AND INDEPENDENT CONTRACTOR STATUS - 24 - 23.01 INDEMNIFICATION. Franchisee agrees to protect, defend, indemnify, and hold Big O and its affiliates, their directors, officers, shareholders, employees and agents jointly and severally, harmless from and against all claims, actions, proceedings, damages, costs, expenses and other losses (including death) and liabilities, consequently, directly or indirectly incurred (including, without limitation, attorneys', accountants' and other related fees) as a result of, arising out of, or connected with the operation of the Franchised Business, including, without limitation, the failure of Franchisee to comply with any relevant environmental and tire disposal laws. Franchisee shall not, however, be liable for claims arising exclusively as a result of Big O's intentional or fraudulent acts or omissions or sole negligence. 23.02 INDEPENDENT CONTRACTOR. In all dealings with third parties, including, without limitation, customers, employees, and suppliers, Franchisee shall disclose in an appropriate manner acceptable to Big O that it is an independent entity operating under a franchise granted by Big O. Franchisee shall submit all applications and enter into all contracts in its designated corporate name or such other fictitious names which have been approved by Big O, but not in the name "Big O Tires" or in any other name which includes the name "Big O". Nothing in this Agreement is intended by the parties hereto to create a fiduciary relationship between them nor to constitute Franchisee or Franchisee's employees or contractors as an agent, legal representative, subsidiary, joint venturer, partner, employee, or servant of Big O for any purpose whatsoever. It is understood and agreed that Franchisee is an independent contractor and is in no way authorized to make any contract, warranty, or representation or to create or imply any obligation on behalf of Big O. 24. WRITTEN APPROVALS, WAIVERS, AND AMENDMENT 24.01 WRITTEN APPROVAL. Whenever this Agreement requires Big O's prior approval, Franchisee shall make a timely written request. Unless a different time period is specified in this Agreement, Big O shall respond with its approval or disapproval within fifteen (15) business days. 24.02 WAIVER. No failure of Big O to exercise any power reserved to it by this Agreement and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Big O's right to demand exact compliance with any of the terms herein. A waiver or approval by Big O of any particular default by Franchisee or any other Big O franchisee or acceptance by Big O of any payments due hereunder shall not be considered a waiver or approval by Big O of any preceding or subsequent breach by Franchisee of any term, covenant, or condition of this Agreement. Big O shall not be deemed to have waived any of its rights under this Agreement, including any right to receive payment in full for any Product or Service provided, nor shall Franchisee be deemed to have been excused from performance of any of its obligations pursuant to this Agreement, unless such waiver or excuse is written and executed by an authorized representative of Big O and Franchisee. 24.03 MODIFICATION. No amendment, change, or variance from this Agreement shall be binding upon either Big O or Franchisee except by mutual written agreement. If an amendment of this Agreement is executed at Franchisee's request, any legal fees or costs of preparation of such amendment and any amendment of a franchise registration arising in connection therewith shall be paid by Franchisee. 25. DEALER PLANNING BOARD AND BOTDA 25.01 DEALER PLANNING BOARD. Big O has established a Dealer Planning Board ("DPB"), consisting of franchisee representatives, which is designed to assist Big O's management with strategic business plans and to advise Big O's management on issues of concern to Big O franchisees. Through a representative elected from Franchisee's Local Group, Franchisee shall be represented on the DPB. - 25 - 25.02 SPECIAL INTEREST ISSUES. Big O has granted the DPB the authority to represent the Local Groups by participating with Big O's management in making policy decisions relating to issues in which the DPB is deemed to have a special interest. The issues of "Special Interest" include: (a) advertising policies and the creation of a National Advertising Fund; (b) standards of operation; and the implementation of new programs which may require the addition of new equipment and fixtures for the store; (c) selection of Products and Services offered at Big O Stores; and (d) changes in the Licensed Marks anticipated to require the majority of franchisees to expend more than five thousand dollars ($5,000.00) per Store. 25.03 DISAPPROVAL OF MANAGEMENT PROPOSAL. With respect to those issues in which the DPB has a Special Interest, the DPB may, after consulting with the members of the Local Groups, vote to disapprove a proposal of Big O's management. If, pursuant to established procedures which have been approved by Big O, the DPB shall disapprove a proposal of Big O's management, the proposal may only become effective if, following a presentation to the Big O board of directors by a representative of the DPB, Big O's board of directors votes to adopt management's proposal. 25.04 COMPLIANCE WITH MODIFICATION. Franchisee agrees to comply with any and all modifications to Big O's standards of operation, procedures, or other requirements adopted pursuant to the procedures described in this Section 25. 25.05 BOTDA. Certain Franchisees have established Big O Tire Dealers of America ("BOTDA") for the purpose of promoting the common business interests of independently-owned retail dealers duly franchised by Big O. BOTDA was formed for the specific purpose of protecting and advancing common business interests of the franchisees on a united basis and all such activities relating thereto. Each independently-owned retail dealer duly franchised by Big O may elect to become a member of BOTDA. BOTDA is not an affiliate of Big O. 26. RIGHT OF OFFSET 26.01 RIGHT OF OFFSET. Big O shall have the right at any time before or after termination of this Agreement, without notice to Franchisee, to offset any amounts or liabilities that may be owed by the Franchisee to Big O against any amounts or liabilities that may be owed by Big O to Franchisee under this Agreement or any other agreement, loan, transaction or relationship between the parties. 27. ENFORCEMENT 27.01 DECLARATORY AND INJUNCTIVE RELIEF. Big O or its designee shall be entitled to obtain without bond, declarations, temporary and permanent injunctions, and orders of specific performance: (a) To enforce the provisions of this Agreement relating to: (i) Franchisee's use of the Licensed Marks; (ii) the obligations of Franchisee upon termination or expiration of this Agreement; or (iii) the Transfer and Assignment requirements of Section 18; or (b) to prohibit any act or omission by Franchisee or its employees that: (i) constitutes a violation of any applicable law or regulation; (ii) is dishonest or misleading to prospective or current customers or clients of businesses operated under the System; (iii) constitutes a danger to other Big O franchisees, their employees, customers, clients or the public; or (iv) may impair the goodwill associated with the Licensed Marks. - 26 - 27.02 COSTS OF ENFORCEMENT. If Big O secures any declaration, injunction or order of specific performance pursuant to Section 27.01 hereof, if any provision of this Agreement is enforced at any time by Big O or if any amounts due from Franchisee to Big O are, at any time, collected by or through an attorney at law or collection agency, Franchisee shall be liable to Big O for all costs and expenses of enforcement and collection including, but not limited to, court costs and reasonable attorneys' fees, including the fair market value of any time expended by legal counsel employed by Big O. 27.03 MEDIATION. If a dispute arises between the parties hereto, any affiliated companies thereof or any of their officers, directors, partners, joint venturers, employees, agents, representatives or those in active concert with any of such parties, relating to this Agreement or the breach thereof, the relationship of the parties or any system standards and if the dispute cannot be settled through negotiation, the parties hereto agree to first try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Rules, or administered by such other mediation organization as the parties may select, before resorting to binding arbitration or litigation. Disputes subject to mediation shall be all controversies, claims, and matters in question, whether contractual or tort in nature, arising out of, or relating to, this Agreement or the breach of this Agreement, the relationship of the parties or any system standards except for those matters specifically excluded in Section 27.04 below. The party who seeks resolution of a controversy, claim, dispute or other matter in question shall notify the other party in writing of the existence and subject matter of such controversy, claim, dispute or other matter, and shall designate in such notice the names of three prospective mediators, each of whom shall be registered with the Denver, Colorado office of the American Arbitration Association or such other mediation organization. The party receiving notice shall select from such list one individual to act as mediator in the dispute set forth by the notifying party, or offer three additional names of prospective mediators for selection. The parties shall meet with the mediator in Denver, Colorado, within thirty (30) days after the recipient party has received notice of the dispute, and agree to utilize their best efforts and all expediency to resolve the matters in dispute. The mediation shall not continue longer than three (3) hearing days without the written approval of both parties. Neither party shall be bound by any recommendation of the mediator, however, any agreement reached during mediation shall be final and conclusive. The expense of mediation shall be shared equally by both parties. 27.04 EXCLUDED MATTERS. Notwithstanding Section 27.03 above, matters of enforcement stipulated in Sections 27.01 and 27.02 and controversies, disputes, and matters in question regarding the Licensed Marks, the filing of any report, the payment of any fees required to be paid by Franchisee under the terms of this Agreement, any lease of real estate and/or Big O's right to terminate the Franchise granted under and pursuant to this Agreement shall be specifically excluded from the foregoing mediation procedures. 27.05 CONFIDENTIALITY. Big O and the Franchisee each agree that the mediation process is negotiation for the purpose of compromise. All offers, promises, conduct, and statements, whether oral or written, made in the course of the mediation process by any of the parties, their agents, employees, experts, and attorneys, shall be confidential. Franchisee acknowledges that Big O may require the Franchisee to execute a confidentiality agreement pertaining to the mediation process. Notwithstanding the foregoing, evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or not discoverable as a result of its use in the mediation process. 28. NOTICES 28.01 NOTICES. Any notice required to be given hereunder shall be in writing and shall be mailed by registered or certified mail. Notices to Franchisee and Big O shall be addressed to them at their addresses as listed on the Summary Pages or to such other addresses as the parties may hereafter prescribe. A copy of each notice to Big O shall be addressed to Franchisee's designated regional - 27 - representative. Any notice complying with the provisions hereof shall be deemed to be given on the date of mailing. 29. GOVERNING LAW 29.01 GOVERNING LAW. This Agreement is accepted by Big O in the State of Colorado and shall be governed by and interpreted in accordance with Colorado law, which law shall prevail in the event of any conflict of law. Big O and Franchisee consent to personal and subject matter jurisdiction and venue in Denver, Colorado. 29.02 JURISDICTION. The parties hereto agree that it is in their best interest to resolve disputes between them in an orderly fashion and in a consistent manner. Therefore, the parties consent to the exclusive jurisdiction of either Colorado state courts or the United States Federal District Court for the District of Colorado for any litigation relating to this Agreement or the operation of the Franchised Business thereunder. Franchisor and Franchisee irrevocably constitute and appoint the persons designated on paragraphs 10 and 11 of the Summary Pages to be their true and lawful agents, to receive service of any lawful process in any civil litigation or proceeding arising under this Agreement, and service upon such agent shall have the same force and validity as if personal service had been obtained on the other party; provided that notice of service and a copy of any process served shall be sent by registered or certified mail, addressed to the other party at the address specified herein. 30. SEVERABILITY AND CONSTRUCTION 30.01 SEVERABILITY. Subject to Section 19.01(o), should any part of this Agreement, for any reason, be declared invalid by a court of competent jurisdiction, such decision or determination shall not affect the validity of any remaining portion and such remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid portion eliminated; provided, however, that in the event of a declaration of invalidity, the provision declared invalid shall not be invalidated in its entirety, but shall be observed and performed by the parties to the extent such provision is valid and enforceable. The parties hereby agree that any such provision shall be deemed to be altered and amended to the extent necessary to effect such validity and enforceability. 30.02 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts together shall constitute one and the same instrument. 30.03 CONSTRUCTION. The headings and captions contained herein are for the purpose of convenience and reference only and are not to be construed as part of this Agreement. All terms and words used herein shall be construed to include the number and gender as the context of this Agreement may require. The parties agree that each section of this Agreement shall be construed independently of any other section or provision of this Agreement. 31. ACKNOWLEDGEMENTS (a) Big O acknowledges that Franchisee's principal interest in obtaining the Franchise granted herein is to obtain Big O private brand tires and a competitive source of supply for Products and Services. Big O acknowledges its obligation to seek to attempt, with no obligation, to maintain a competitive source of supply for the benefit of its franchisees and to aid in the promotion of Big O Products and Services. (b) Franchisee understands and acknowledges that the business licensed under this Agreement involves business risks and that Franchisee's volume, profit, income and success is dependent primarily upon Franchisee's ability as an independent business operator. - 28 - (c) Big O expressly disclaims the making of, and Franchisee acknowledges that it has not received from any representative of Big O, any warranty or guaranty, express or implied, as to the obligation of Big O to provide Franchisee with any specific or sufficient amount of Products and Services or as to the potential volume, profit, income or success of the Franchised Business. (d) Franchisee acknowledges that Big O or its agent has provided Franchisee with a Franchise Offering Circular not later than the earlier of the first personal meeting held to discuss the sale of the Franchise, ten (10) business days before the execution of this Agreement, or ten (10) business days before any payment of any consideration connected to the purchase of this Franchise. Franchisee further acknowledges that Franchisee has read such Franchise Offering Circular and understands its contents. (e) Franchisee acknowledges that Big O has provided Franchisee with a copy of this Agreement and all related documents, fully completed, for at least five (5) business days prior to Franchisee's execution hereof. (f) Franchisee acknowledges that Big O has advised it to consult with its own attorneys, accountants, or other advisers, that Franchisee has had ample opportunity to do so, and that the attorneys for Big O have not advised or represented Franchisee with respect to this Agreement or the relationship hereby created. The name and address of Franchisee's adviser, if any, is set forth on the Summary Pages. (g) Franchisee acknowledges that this Agreement, the documents referred to herein, the attachments hereto, and other agreements signed concurrently with this Agreement, if any, constitute the entire, full and complete Agreement between Big O and Franchisee concerning the subject matter hereof. This Agreement terminates and supersedes any prior agreement between the parties concerning the same subject matter, and any oral or written representations which are inconsistent with the terms of this instrument and its accompanying Franchise Offering Circular. (h) Franchisee acknowledges and recognizes that different terms and conditions, including different fee structure and investment requirements may pertain to different Big O franchises offered in the past, contemporaneously herewith, or in the future, and that Big O does not represent that all franchise agreements are or will be identical. (i) Franchisee acknowledges that except as is specifically set forth in this Agreement, it is not nor is it intended to be a third party beneficiary of this Agreement or any other agreement or contractual relationship to which Big O is a party. - 29 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement to become effective on the date it is executed by the last of Franchisee or Big O. FRANCHISEE: By: ---------------------------------------------------- Date: -------------------------------------------------- Home Address: ------------------------------------------ ------------------------------------------------------- Home Phone Number: ------------------------------------- Office Address: ---------------------------------------- ------------------------------------------------------- Office Phone Number: ----------------------------------- Title: ------------------------------------------------- Attest: ------------------------------------------------ Title: ------------------------------------------------- (Affix Corporate Seal) FRANCHISEE: -------------------------------------------- By: ---------------------------------------------------- Date: -------------------------------------------------- Home Address: ------------------------------------------ ------------------------------------------------------- Home Phone Number: ------------------------------------- Office Address: ---------------------------------------- ------------------------------------------------------- Office Phone Number: ----------------------------------- Title: ------------------------------------------------- Attest: ------------------------------------------------ Title: ------------------------------------------------- (Affix Corporate Seal) - 30 - BIG O TIRES, INC. By: ---------------------------------------------------- Date: -------------------------------------------------- Title: ------------------------------------------------- Attest: ------------------------------------------------ Title: ------------------------------------------------- (Affix Corporate Seal) - 31 - SCHEDULE 1 TO FRANCHISE AGREEMENT BETWEEN BIG O TIRES, INC. AND ------------------------------------------------------------------------ 1. The Premises of referred to in Section 2.01 of the Franchise Agreement shall be: ---------------------------------------------------------------------- ----------------------------------------------------------------------. 2. Legal Description of Premises: ---------------------------------------- ---------------------------------------------------------------------. 3. Names(s) and address(es) of holder(s) of record fee title to Premises (the landlord): Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- 4. Description of Trade Area: Schedule 1 Franchise Agreement Page 1 SCHEDULE 2 OWNERSHIP VERIFICATION 1. Name(s) and address(es) of person(s) owning interest in Franchisee and percentage of said person(s) interest: Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- Name: ------------------------------------------------------------ Address: --------------------------------------------------------- ----------------------------------------------------------------- STATE OF ) ) COUNTY OF ) ___________________________, being first duly sworn, says that they are respectively, the ________________________ and ________________________ of ________________________________________, the above-named __________________, and execute this instrument for and in its behalf, by authority of its __________________ and that they have read the foregoing Agreement and all Exhibits attached thereto. ------------------------------ ------------------------------ ------------------------------ ------------------------------ Subscribed and sworn to before me this __________ day of __________________, 19__. - ---------------------------------------------------- Notary Public My Commission Expires: ------------------------------ Schedule 2 to Franchise Agreement Page 1 SCHEDULE 3 GUARANTY OF FRANCHISEE'S AGREEMENT In consideration of, and as an inducement to, the execution of the foregoing Franchise Agreement by Big O Tires, Inc. ("Big O"), each of the undersigned hereby guarantees unto Big O that ("Franchisee") will perform during the term of the Franchise Agreement each and every covenant, payment, agreement and undertaking on the part of Franchisee contained and set forth in or arising out of such Franchise Agreement. Big O, its successors and assigns, may from time to time, without notice to the undersigned (a) resort to the undersigned for payment of any of the liabilities of the Franchisee to Big O, whether or not Big O or its successors have resorted to any property securing any of the liabilities or proceeded against any of the undersigned or any party primarily or secondarily liable on any of the liabilities, (b) release or compromise any liability of the Franchisee or of any of the undersigned hereunder or any liability of any party or parties primarily or secondarily liable on any of the liabilities, and (c) extend, renew or credit any of the liabilities of the Franchisee to Big O for any period (whether or not longer than the original period); alter, amend or exchange any of the liabilities; or give any other form of indulgence, whether under the Franchise Agreement or not. The undersigned further waives presentment, demand, notice of dishonor, protest, nonpayment and all other notices whatsoever, including without limitation: notice of acceptance hereof; notice of all contracts and commitments; notice of the existence or creation of any liabilities under the foregoing Franchise Agreement and of the amount and terms thereof; and notice of all defaults, disputes or controversies between Franchisee and Big O resulting from such Franchise Agreement or otherwise, and the settlement, compromise or adjustment thereof. The undersigned agrees to pay all expenses paid or incurred by Big O in attempting to enforce the foregoing Franchise Agreement and this Guaranty against Franchisee and against the undersigned and in attempting to collect any amounts due thereunder and hereunder, including reasonable attorneys' fees if such enforcement or collection is by or through an attorney-at-law. Any waiver, extension of time or other indulgence granted from time to time by Big O or its agents, successors or assigns, with respect to the foregoing Franchise Agreement, shall in no way modify or amend this Guaranty, which shall be continuing, absolute, unconditional and irrevocable. If more than one person has executed this Guaranty, the term "the undersigned," as used herein shall refer to each such person, and the liability of each of the undersigned hereunder shall be joint and several and primary as sureties. IN WITNESS WHEREOF, each of the undersigned has executed this Guaranty under seal effective as of the date of the foregoing Franchise Agreement. ------------------------------------------------------- Signature ------------------------------------------------------- Date ------------------------------------------------------- Printed Name Schedule 3 to Franchise Agreement Page 1 --------------------------------------------------- --------------------------------------------------- Home Address --------------------------------------------------- --------------------------------------------------- Home Telephone --------------------------------------------------- --------------------------------------------------- Business Address --------------------------------------------------- Business Telephone Schedule 3 to Franchise Agreement Page 2 SCHEDULE 4 LEASE RIDER AND MODIFICATION THIS AGREEMENT is made effective ____________________________________ by and between ________________________________________________ ("Landlord"), __________________________ ("Tenant"), and Big O Tires, Inc., its affiliates, successors and assigns ("Big O"). WHEREAS, Landlord leases or will lease certain premises to Tenant at ________________________________________________________________________ ("Premises") under that certain lease agreement dated __________________ between Landlord and Tenant ("Lease"); and ____________________________. WHEREAS, Tenant will operate a Big O Tire Store at such Premises under a Franchise Agreement ("Franchise Agreement") between Tenant and Big O; and WHEREAS, the parties hereto desire to provide Big O with certain rights in the event of default under the Lease, Franchise Agreement, or other franchise agreements between Tenant and Big O, if any; NOW, THEREFORE, in consideration of the sum of One ($1.00) Dollar, in hand paid by Big O to Landlord and to Tenant, and other good and sufficient consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. No act, failure to act, event, condition, non-payment or other occurrence ("Event") shall constitute a breach or default under the Lease so as to allow to Landlord any right of acceleration of obligations thereunder, termination, cancellation or rescission: (a) if the Event is the non-payment of rent, unless such Event is not cured within ten (10) days after Notice of Default (as hereinafter defined) has been received by Big O; (b) if the Event is anything other than the non-payment of rent, unless such Event is not cured within twenty-five (25) days after Notice of Default (as hereinafter defined) has been received by Big O, provided, however, if the Event is of such nature that it cannot reasonably be cured within such twenty-five (25) day period, then, in that case such twenty-five (25) day period shall be extended to a period of such length as is reasonably necessary to cure such Event, provided, however, such period shall be extended only so long as Tenant and/or Big O diligently pursues the cure of such Event. 2. Landlord agrees to accept from Big O any payment or performance required under the Lease. Nothing herein shall be construed as requiring Big O to m[cad 229]ake any payments or perform any obligation under the Lease. 3. As used herein, Notice of Default means written notice specifying the Event claimed and specifically describing, in each instance of a claimed Event, the particular Event and the cure Landlord requires, such Notice of Default to be mailed to Big O at: Big O Tires, Inc. 11755 East Peakview Avenue Englewood, Colorado 80111 Attention: Vice President of Business Development 4. In the event Landlord claims that an Event has occurred, or in the event Big O notifies Landlord in writing that Big O is exercising a right to take over possession of the Premises, then, at Big O's option, Schedule 4 to Franchise Agreement Page 1 Landlord shall accept Big O as substitute tenant under the Lease and will cooperate with Big O in turning actual, immediate possession of the Premises over to Big O. In such case, the Lease shall remain in full force and effect, but with Big O as the tenant thereunder. Big O's option, hereinabove granted, may be exercised only if Big O agrees to assume the obligations of the Tenant to Landlord under the Lease as of the date Franchisor or its affiliate or successor is given actual possession of the Premises. 5. Landlord agrees that Big O, or its affiliate or successor may sublet or assign the Premises to a new Big O Franchisee on the same terms and conditions as are contained in the Lease. 6. Tenant agrees that if Landlord claims that an Event has occurred, or if any material breach occurs under any Franchise Agreement between Tenant and Big O (whether for the Premises or not), then, Big O shall have the right to: (a) immediate and actual possession of the Premises, and all equipment and inventory therein, which such possession Tenant agrees to give peaceably, and which may be otherwise obtained by Big O by warrant, injunction, temporary restraining order, summary process or such other immediate legal, summary or equitable proceeding or action as Big O may choose. Tenant hereby waives any right to a jury in any such proceeding or action. (b) become the Tenant under the Lease to the exclusion of the Tenant. 7. Tenant agrees that any default under the Lease shall constitute a material breach under all Franchise Agreements between Tenant and Big O, or its affiliates or successors. 8. Tenant and Landlord understand that Big O is entering into or has entered into a Franchise Agreement with Tenant for a Big O Tire Store at the Premises in reliance on the agreements of Tenant and Landlord as herein contained and that Big O, in this instance, would not have otherwise entered into such Franchise Agreement. IN WITNESS WHEREOF, the parties hereto have duly execute and delivered this agreement as of the date first above-listed. LANDLORD By: - ------------------------------- -------------------------------------- Witness Attest: - ------------------------------- -------------------------------------- (CORPORATE SEAL) Schedule 4 to Franchise Agreement Page 2 TENANT By: - ----------------------------------- --------------------------------- Unofficial Witness Attest: - ----------------------------------- --------------------------------- Notary Public (CORPORATE SEAL) BIG O TIRES, INC. By: - ----------------------------------- --------------------------------- Unofficial Witness (CORPORATE SEAL) - ----------------------------------- Notary Public Schedule 4 to Franchise Agreement Page 3 SCHEDULE 5 FARM CLASS RIDER Franchisee represents that it reasonably anticipates that at least twenty-five percent (25%) of its Store's Gross Sales on an annual basis will be derived directly from the sale of Farm Class Tires. In reliance on Franchisee's representations, and its consideration for Franchisee to become or remain a Big O franchisee, Big O has offered Franchisee the opportunity to execute this Farm Class Rider. 1. So long as at least twenty-five percent (25%) of Franchisee's Gross Sales on an annual basis are derived directly from Farm Class Tires, Big O agrees to exercise its best efforts to provide Franchisee with access to a supply of Farm Class Tires. Franchisee acknowledges that production and distribution problems occasionally cause supplies to be limited, and that so long as Big O acts in good faith and in a commercially reasonably and lawful manner to obtain access to Farm Class Tires that it shall be deemed in compliance with its obligations hereunder. 2. If Big O fails to comply with its obligations pursuant to Section 1 of this Farm Class Rider and cannot or will not provide Franchisee with access to Farm Class Tires for sixty (60) days following written notice of such failure from Franchisee, as its sole and exclusive remedy, Franchisee shall be relieved of its obligation to pay Big O monthly royalty fees on that portion of its Gross Sales derived directly from the sale of Farm Class Tires. Any services provided by Franchisee in connection with the sale of Farm Class Tires, and any other Products and Services sold by Franchisee in a transaction involving the sale of Farm Class Tires shall be included in the portion of Franchisee's Gross Sales upon which monthly royalty fees are payable. Big O may require Franchisee to provide it with documentation to support any exclusion claimed by Franchisee. 3. Big O may terminate Franchisee's rights under this Farm Class Rider without in any way affecting Franchisee's obligations under the Franchise Agreement if the Store's sales of Farm Class Tires during any twelve (12) month period have been less than twenty-five percent (25%) of its Gross Sales. IN WITNESS WHEREOF, the parties have set forth their signatures below. FRANCHISEE: ---------------------------------------- By: ------------------------------------------------ Date: ---------------------------------------------- Home Address: -------------------------------------- --------------------------------------------------- Home Phone Number: --------------------------------- Office Address: ------------------------------------ --------------------------------------------------- Office Phone Number: ------------------------------- Schedule 5 to Franchise Agreement Page 1 Title: --------------------------------------------- Attest: -------------------------------------------- Title: --------------------------------------------- (Affix Corporate Seal) FRANCHISEE: ---------------------------------------- By: ------------------------------------------------ Date: ---------------------------------------------- Home Address: -------------------------------------- --------------------------------------------------- Home Phone Number: --------------------------------- Office Address: ------------------------------------ --------------------------------------------------- Office Phone Number: ------------------------------- Title: --------------------------------------------- Attest: -------------------------------------------- Title: --------------------------------------------- (Affix Corporate Seal) Schedule 5 to Franchise Agreement Page 2 SCHEDULE 6 RIDER FOR EXISTING FRANCHISEES EXECUTING THE FRANCHISE AGREEMENT PRIOR TO THE EXPIRATION OF THEIR PRE-EXISTING FRANCHISE AGREEMENT Franchisee is the owner of a Store which is the subject of a franchise agreement which has not yet expired. Franchisee's execution of the attached Franchise Agreement is subject to the following: 1. Unless otherwise provided herein, the attached Franchise Agreement shall expire on the tenth anniversary of the Effective Date of Franchisee's attached Franchise Agreement, to wit: ____________________________________ . 2. Prior to the expiration of the Franchisee's present franchise agreement, to wit __________________, the monthly continuing services fees (or their functional equivalent) provided in the present franchise agreement shall continue to be the only such fees due to Big O. In all other respects the terms of the attached Franchise Agreement shall be applicable as of the Effective Date of this Franchise Agreement. In Witness Whereof, the parties have set forth their signature below. BIG O TIRES, INC. By: ------------------------------------------------ Date: ---------------------------------------------- Title: --------------------------------------------- Attest: -------------------------------------------- Title: --------------------------------------------- (Affix Corporate Seal) Schedule 6 to Franchise Agreement Page 1 FRANCHISEE: ----------------------------------- By: ------------------------------------------- Date: ----------------------------------------- Home Address: --------------------------------- ---------------------------------------------- Home Phone Number: ---------------------------- Office Address: ------------------------------- Office Phone Number: -------------------------- Title: ---------------------------------------- Attest: --------------------------------------- Title: ---------------------------------------- (Affix Corporate Seal) FRANCHISEE: By: ------------------------------------------- Date: ----------------------------------------- Home Address: --------------------------------- ---------------------------------------------- Home Phone Number: ---------------------------- Office Address: ------------------------------- ---------------------------------------------- Office Phone Number: -------------------------- Title: ---------------------------------------- Attest: --------------------------------------- Title: ---------------------------------------- (Affix Corporate Seal) Schedule 6 to Franchise Agreement Page 2 SCHEDULE 7 TRADEMARKS Big O is the sole and exclusive owner of the following trademarks and service marks:
TRADEMARK, SERVICE MARK, TRADE WHERE REGISTRATION NAME OR LOGOTYPE REGISTERED NUMBER REGISTRATION DATE Sun Valley Principal 871,318 06/17/69 Golden Sonic Power Principal 962,580 07/03/73 Super S Principal 981,992 04/09/74 Saxon Principal 982,828 04/30/74 Big O Principal 993,415 09/24/74 Big O Principal 994,466 10/01/74 Big Ride Principal 1,009,148 04/22/75 Big Steel Principal 1,012,897 06/10/75 Sonic Sahara Principal 1,013,509 06/17/75 Big Haul Principal 1,018,800 08/26/75 Design of Human Likeness "Sebastian Treadmore" Principal 1,044,068 07/20/76 Big Foot 70 Principal 1,102,059 09/12/78 Big Foot 60 Principal 1,102,058 09/12/78 Big Sur Principal 1,219,035 12/07/82 Extra Care and Design Principal 1,417,730 11/18/86 Legacy Principal 1,393,967 05/20/86 Aspen Principal 1,508,041 10/11/88 Exotic Principal 1,511,711 11/08/88 Big O Tires and Design Principal 1,559,725 10/10/89 Sun Valley III Principal 1,588,734 03/27/90 Big O Tires and Design Principal 1,611,160 08/28/90 Optima Principal 74/198,278 Pending Procomp & Design Principal 74/298,320 Pending Vail Principal 74/310,463 Pending Arapahoe Principal 74/271,501 Pending Schedule 7 to Franchise Agreement Page 1 TRADEMARK, SERVICE MARK, TRADE WHERE REGISTRATION NAME OR LOGOTYPE REGISTERED NUMBER REGISTRATION DATE Alpine Principal 74/310,467 Pending Aztec Principal 74/310,465 Pending Hydro-Trac Principal 74/357,214 Pending A Reputation You Can Ride On Principal 74/360,838 Pending Big Foot Principal 74/389,931 Pending
STATE REGISTRATIONS Big O Texas 40,967 11/01/82 Big O Texas 40,704 09/02/82 Legacy Colorado T29645 10/28/85 Extra Care Colorado T30670 04/22/86 Schedule 7 to Franchise Agreement Page 2 SCHEDULE 8 CONVERTER RIDER AMENDMENT TO BIG O FRANCHISE AGREEMENT (CONVERSION) Big O TIRES, INC. ("Big O") and ____________________________________ __________________ ("Franchisee") entered into a certain Big O Franchise Agreement ("Agreement") on _____________, 19_____ and desire to supplement and amend certain terms and conditions of such Agreement in consideration of Franchisee's conversion of a currently operating tire store to a Big O Store. The parties therefore agree as follows: 1. The following paragraph is hereby added to 6.03: Notwithstanding any provision herein to the contrary, Franchisee's obligation to comply with Big O's standards and specifications as are set forth in the Manual shall be phased in for a period of six months from the Commencement Date of the Agreement in accordance with SCHEDULE A, attached hereto and by this reference incorporated herein. Franchisee will be permitted to use Big O's trademarks, service marks, logos and other identifying symbols or names, in its signage, advertising and otherwise, in conjunction with any other previous signage or identifying symbols or names for sixty (60) days from the Commencement Date of this Agreement, in a manner which shall be approved by Big O, which approval shall not be unreasonably withheld. Upon expiration of such sixty day period, Franchisee must use Big O's signage exclusively and remove all other previous signage. 2. Section 6.05 is deleted in its entirety and the following is inserted in its place: 6.05 COMMENCEMENT OF BUSINESS. The Big O Store shall be considered to have commenced operation as of the Commencement Date of this Agreement. All modifications required to bring the premises into compliance with the standards and specifications of Big O must be completed within six (6) months of the Commencement Date. 3. Section 7.01(a) is hereby deleted in its entirety and the following is inserted in its place: (a) Franchisee acknowledges that Big O is under no obligation to provide site selection assistance and Big O does not guarantee the success or profitability of the Franchisee's current site in any manner whatsoever. If Franchisee leases the Premises upon which the Store is to be operated, Franchisee agrees to use its best efforts to negotiate with its landlord for execution of a conditional lease assignment in a form which is the same as or similar to the one found on Schedule 4. Schedule 8 to Franchise Agreement Page 1 4. The following language shall be added to Section 7.01(b): Big O will provide Franchisee with sample blueprints for modification of the interior and exterior of Franchisee's premises, if applicable, but makes no representations or guarantees regarding the suitability of such blueprints for required modification of Franchisee's premises. 5. Franchisee agrees to convert all other tire stores owned or controlled by it into Big O Stores, in the manner prescribed in SCHEDULE B, attached hereto and by this reference incorporated herein. 6. The terms and conditions of this Conversion Amendment are in addition to or in explanation of the existing terms and conditions of the Agreement and shall prevail over and supersede any inconsistent terms and conditions thereof. Effective this _____ day of ________________, 199___. FRANCHISEE: ----------------------------------------- (Print Name) BIG O TIRES, INC. - ------------------------------- ----------------------------------------- By: By: - ------------------------------- ----------------------------------------- Title: Title: Schedule 8 to Franchise Agreement Page 2 EX-10.96 5 PROMISSORY NOTES PAGES PROMISSORY NOTE $250,000.00 SAN JUAN CAPISTRANO, CALIFORNIA DATE: AS OF JANUARY 1, 1996 FOR VALUE RECEIVED, the undersigned ("Maker"), jointly, severally and unconditionally promises to pay to the order of BIG O TIRES, INC., a Nevada corporation, its successors or assigns ("Holder") the sum of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00), and all subsequent advances made, with interest thereon, commencing January 1, 1996, at an annual rate equal to the "Corporate Base Rate" charged by the primary commercial lender of Big O Tires, Inc. (currently First National Bank of Chicago, but which may change from time to time), plus two percent (2%), adjusted on the day of the Corporate Base Rate changes, on the entire unpaid balance until paid in full. Principal and interest shall be paid monthly based upon an amortization over 120 months with the interest provided herein, with such monthly payments commencing February 1, 1996 and continuing on the first day of each and every month thereafter, AND IF NOT SOONER PAID, ONE FINAL "BALLOON" PAYMENT OF ALL UNPAID PRINCIPAL AND ALL ACCRUED AND UNPAID INTEREST ON JANUARY 1, 2006, payable in lawful currency of the United States of America, by Automatic Clearing House debits to Maker's checking account number: 001-047116 at Liberty National Bank, ABA # 90-3914 - --------------------- ------------------------------------------------------ (CHECKING ACCOUNT #) NAME OF BANK AND ABA NUMBER) One Pacific Plaza, 7777 Center Avenue, Huntington Beach, CA 92647 - -------------------------------------------------------------------------------- (ADDRESS OF BANK) or at the election of Holder, at the offices of Big O Tires, Inc., 11755 East Peakview Avenue, Englewood, Colorado 80111, or at such other place as the Holder hereof may designate from time to time in writing. Notwithstanding the variable interest rate of this Note, the monthly principal and interest payments shall be $3,375.00 eacc, and attached hereto a SCHEDULE 1 is an amortization schedule, which is for reference purposes only, is subject to change, as provided hereunder. Such amortization schedule shall be amended, as necessary, to reflect any change in the interest rate to be charged against the unpaid principal. All payments received hereunder shall be first applied to the payment of interest due hereunder, then to the payment of any other sums payable hereunder, if any, and finally to the unpaid principal balance then remaining unpaid. The principal balance, accrued and unpaid interest and any other sums payable hereunder, may be prepaid in whole or in part at any time and from time to time upon two (2) business days notice, without premium or penalty, PROVIDED the accrued and unpaid interest on such prepaid principal amount is also paid. Time is of the essence hereof. In the event of a default in the payment of any amount when due hereunder, and Maker fails to make such payment within ten (10) business days of the date it receives notice of such nonpayment from Holder, the entire unpaid principal balance hereunder, including any subsequent advances made hereunder by Holder, together with any accrued and unpaid interest may, at the option of Holder, be declared immediately due and payable and such accelerated amounts shall bear interest at the lesser of 18% per annum or the highest rate then allowed by law, from the date of default until paid in full. Maker, endorser(s) or any other person(s) liable hereunder waive delinquency in collection, demand for payment, presentment for payment, protest, notice of protest, notice of dishonor and all duty or obligation of Holder to effect, protect, perfect, retain or enforce any security for payment of this Note or to proceed against any collateral before otherwise enforcing this Note. This Note shall be the joint and several obligation of Maker, endorser(s) or any other person(s) liable hereunder and shall be binding upon them, their personal representatives, heirs, successors and assigns. Furthermore, Maker, endorser(s) or any other person(s) liable hereunder expressly agree that this Note and any payment hereunder may be extended, by Holder, from time to time without in any way affecting the liability of the Maker, endorser(s) or any other person(s) liable hereunder. Maker, endorser(s) or any other person(s) liable hereunder, jointly, severally and unconditionally guarantee prompt payment when due, whether by acceleration or otherwise, of the entire outstanding principal 1 balance, all amounts of any subsequent advances made by Holder hereunder and all accrued and unpaid interest hereunder and further agrees to immediately pay to Holder upon demand, all losses, costs and expenses (including attorneys' fees) incurred by Holder in collection and enforcement of this Note in the event of default or otherwise. Each Maker executing this Note represents and warrants that this Note is binding upon the undersigned Maker in accordance with its terms, except to the extent that enforcement of remedies may be limited by applicable bankruptcy, insolvency, and other laws affecting the enforcement of creditors' rights generally. Such undersigned Maker represents and warrants that the indebtedness evidenced by this Note was incurred for business and commercial purposes and not for personal, family, household or agricultural purposes. If any interest rate, fee or cost provided for herein or in the other loan documents shall exceed that which is allowed pursuant to any applicable statute or law, such amount shall be deemed by the parties hereto to be modified so as to conform to and equal the maximum amount allowed by such statute or law. All sums paid hereunder in excess of those lawfully collectible as interest, fees or costs shall, without further agreement or notice between or by any party hereto, be applied toward reduction of the principal hereof with the same force and effect as though such extra sums were specifically designated to be so applied to principal and Holder had agreed to accept such extra payment as a premium-free prepayment, or if there is then no outstanding principal indebtedness owed to Holder by Makers hereunder, or if such outstanding principal indebtedness is less than the amount to be applied as a reduction, such excess shall be refunded by Holder to Makers. In the event it should become necessary for Holder to employ counsel for advice regarding any default under this Note and any of the other loan documents, or to respond, intervene or otherwise become involved in any suit or proceeding relating to this Note and/or the other loan documents, or to collect payment on or enforce the obligations of this Note and/or under any of the other loan documents, or to protect or foreclose on any of the collateral subject to the security interest and liens given in connection herewith, Maker agrees to pay upon demand reasonable attorneys' fees incurred by Holder for services of such counsel, whether or not suit is brought, plus costs incurred in connection therewith, including interest thereon at the default interest rate. Payment and performance of all obligations under this note are secured by security interests granted by Maker to Holder in the inventory, accounts receivables, machinery, equipment, furniture and intangibles of Maker's Big O Tires retail stores, and by a second deed of trust on certain leasehold property in San Diego County, California, which is a Maker's Big O Tires retail stare at 499 A College Boulevard, Oceanside, California 92056. The terms and provisions of this Note shall be construed and governed by the laws of the State of California. MAKER: DATE:____________ C.S.B. PARTNERSHIP, a California General Partnership, DATE:____________ BY: C.E.P. Developments, Inc., a California corporation as General Partner BY:/S/Christopher R. Phillips -------------------------- TITLE: PRESIDENT ----------------------- 2 DATE: 2/29/96 BY: Someday, Inc., a California corporation as General Partner BY: /S/Ronald D. Asher -------------------------- TITLE: PRESIDENT ----------------------- DATE: BY: J.M.C., Inc., a California corporation as General Partner BY: /S/John Connelly -------------------------- TITLE: PRESIDENT ----------------------- DATE: BY: FOUR KYLES, INC., a California corporation as General Partner BY: /S/Virgil Kyle Kyle III -------------------------- TITLE: PRESIDENT ----------------------- COMAKERS: Date: 1/2/96 /S/Christopher R. Phillips --------------------------------------- Christopher R. Phillips, Individually Date: /S/Emiko J. Phillips --------------------------------------- Emiko J. Phillips, Individually Date: 12/29/95 /S/Ronald D. Asher --------------------------------------- Ronald D. Asher, Individually Date: 12/29/95 /S/Andria L. Asher --------------------------------------- Andria L. Asher, Individually Date: 1/2/96 /S/Virgil Kyle Kyle, III --------------------------------------- Virgil Kyle Kyle, III, Individually Date: 1/2/96 /S/Diane Kyle --------------------------------------- Diane Kyle, Individually Date: 1/3/96 /S/John L. Connelly --------------------------------------- John L. Connelly, Individually Date: 1/3/96 /S/Monika Connelly --------------------------------------- Monika Connelly, Individually 3 AUTHORIZATION AGREEMENT FOR PREAUTHORIZED PAYMENT SERVICE AGREEMENT: I (or We if there are joint owners of the account referenced later in this agreement) authorize and request the company named below, now referred to as the Company, to obtain payment for amounts I (we) owe to the Company as these amounts become due by initiating a payment entry to my (our) account. The account number, name of financial institution, payment amount, and date on or immediately after which payment should be deducted from the account are identified below. In addition, I (we) authorize and request the financial institution, now referred to as the Bank, to accept the payment entries presented to the Bank and to deduct them from my (our) account without responsibility for the correctness of these payments. I (we) understand that this agreement can be terminated at any time as long as I (we) have given either the Company or the Bank written notification. This written notification to either the Company or Bank shall be effective for only those payments to be issued by the Company or received by the Bank after they either or both receive notification and have sufficient and reasonable opportunity to act upon it. I (we) understand that I (we) have all the rights shown below as these rights relate to all payment entries initiated by the Company and to which this agreement pertains. I (we) understand that all payment entries initiated by the Company and covered under this agreement are subject to the following: If the amount of the initial payment entry initiated by the Company differs from the amount of the previous entry initiated under this agreement, the Company will send me (us) a written notification of this change in not less than ten (10) calendar days before this payment amount will be deducted from the account. In addition, if the Company makes any change in the date of the billing cycle on which payment is to be deducted from the account, the Company will send me (us) a written verification of the new date on or after which payment entries will be deducted from the account. This provision does not apply if my (our) authorization agreement is in effect for a single payment entry to the account or if I (we) have agreed that payment entries representing my (our) indebtedness may be deducted from the account after such indebtedness has been incurred. I (we) may, by notice to the Bank, stop payment of any payment entry initiated or to be initiated by the Company to the account under this agreement. Notice of such stop payment must be received by the Bank in such a time and manner that will allow the Bank a reasonable time to act on it and if my (our) notice is oral, it will be binding on the Bank for only fourteen (14) calendar days unless I (we) confirm it in writing within this period. If a payment entry is erroneously initiated by the Company to the account, I (we) will have the right to have the amount of this entry added back to the account by the Bank if I (we) send or deliver a written notice to the Bank within fifteen (15) calendar days following the date on which the Bank sent or made available to me (us) a statement of account or notification pertaining to the erroneous payment entry. My (our) written notice will identify the payment entry, state that the payment entry was in error and request the Bank to add the amount of the payment entry to the account balance. 4 COMPANY INFORMATION Company Name: BIG O TIRES, INC. Customer Account No. _____ Payment Date: FEBRUARY 1, 1996 AND ON THE FIRST DAY OF EACH MANTH THEREAFTER UNTIL PAID IN FULL. Payment Amount: $3,375.00, NOTWITHSTANDING THE VARIABLE INTEREST RATE, AS PROVIDED IN THE PROMISSORY NOTE. YOUR BANK ACCOUNT INFORMATION Bank Name: Liberty National Bank -------------------------------------------- Bank Address: One Pacific Plaza, 7777 Center Avenue ----------------------------------------- Huntington Beach, CA 92647 Please attach a voided check and we will complete this information for you. Transit Routing Number: 1222239144 Checking Account Number: 001-047116 ---------- ---------- Your Name(s) Christopher R. Phillips --------------------------- --------------------------- (Please Print) (Please Print) Signature(s) /S/Christopher R. Phillips --------------------------- --------------------------- Date Signed 1/3/96 --------------------------- 5 Insert: Attached to this promissory note as Schedule 1 is an amortization schedule based on an original principal amount of $250,000.00, amortized over 120 months at an annual rate of 10.5% (even though the Note provides for an interest rate of the "Corporate Base Rate" charged by the primary commercial lender of Big O Tires, Inc. plus 2%). As the Note reflects, the Schedule 1 is for reference purposes only. SECURITY AGREEMENT AND PROMISSORY NOTE PLEDGE AGREEMENT Dated: As of January ____, 1996 1. DEBTOR(S): C.S.B. PARTNERSHIP, a California corporation and their successors and assigns. 27131 Calle Arroyo Suite 1703 San Juan Capistrano, California 92675 Telephone: (714) 443-4155 Tax I.D. - 33-0235374 DEBTOR'S BUSINESS(ES): Those certain Big O Franchise outlets as listed on the attached EXHIBIT A. 2. PLEDGOR(S): C.S.B. PARTNERSHIP, a California corporation Federal Tax I.D. #33-0235374 3. SECURED PARTY: BIG O TIRES, INC., a Nevada corporation and its successors and assigns 11755 E. Peakview Avenue Englewood, Colorado 80111 Telephone: (303) 790-2800 Telecopier: (303) 790-2800 4. COLLATERAL. The following property and all accessions thereto, substitutions therefore and replacements thereto: 4.1. Promissory Note dated December 11, 1995, in the original principal amount of $47,000.00, payable to the order of C.S.B. Partnership, a California general partnership, Uni-Mech, Inc., a California corporation, Maker, together with all proceeds thereof. The original of the promissory note, duly endorsed in blank by the Pledgor(s), has been delivered to Secured Party by Pledgor(s) and Secured Party hereby acknowledges receipt thereof. The pledged promissory note, together with any proceeds thereof is hereinafter called the "Collateral". 5. OBLIGATIONS. 5.1. Any and all obligations of Debtor to Secured Party under that certain promissory note dated as of January 1, 1996, in the original principal amount of $250,000.00, payable to the order of Secured Party, C.S.B. Partnership, Maker, and all other agreements and instruments executed by Debtor and delivered to Secured Party in consummating all transactions contemplated in said promissory note; 5.2. All obligations, including, but not limited to, all franchise fees, advertising fees, accounting fees, lease rentals, and other fees, owed to Secured Party by Debtor; 1 5.3. All amounts charged in invoices and billings of Secured Party for purchases by Debtor of certain inventory, including tires, car care products and related automotive goods, accessories and equipment; 5.4. Future advances made and/or credit granted by Secured Party to Debtor, plus interest thereon; 5.5. Pursuant to the terms of this Agreement, all expenditures of any kind or nature made by Secured Party to preserve the Collateral, including, but not limited to, all amounts paid to discharge taxes, liens, security interests and any other encumbrances against the Collateral or to otherwise preserve or maintain the Collateral and all insurance thereon; and 5.6. All expenditures made or incurred by Secured Party pursuant to the provisions of this Agreement, the Collateral, and all other obligations of Debtor and/or Pledgor(s) to Secured Party, direct or indirect, absolute or contingent, due or to become due, whether existing or hereafter arising. 6. SECURITY INTEREST AND PLEDGE. To secure payment and performance of the Obligations, Pledgor(s) hereby pledge(s) and grant(s) to Secured Party a security interest in the Collateral and in all attachments, replacements and accessions thereto and proceeds therefrom. Pledgor(s) hereby warrant(s) and represent(s) that Pledgor(s) has/have, or forthwith will acquire, title to the Collateral free and clear of all liens, security interests and encumbrances. Contemporaneously with the execution and delivery hereof, the Pledgor is delivering the original pledged note representing the Collateral to the Secured Party. The Secured Party's security interest in the Collateral is being granted as security only and shall not affect or modify any obligation or liability of Debtor and/or Pledgor(s). 7. WARRANTIES AND REPRESENTATIONS. Pledgor(s) warrant(s) and represent(s) to Secured Party the following: 7.1. Except for the security interests created by this Agreement, Pledgor(s) is/are the owner(s) of all of the Collateral, or will be at the time such Collateral is created or acquired, free and clear of all liens, security interests and encumbrances and any rights to subscribe for or rights or options to purchase or acquire the same; 7.2. Pledgor(s) is/are not and shall not become a party to or otherwise be bound by any agreement, document or other instrument (other than this Agreement) that restricts in any manner the rights of any present or future holder of all or any part of the Collateral. 7.3. The Assignment and granting of the security interest hereunder represents a legally binding obligation of Pledgor(s), and, upon delivery of the original of the promissory note, duly endorsed in blank, representing the Collateral, shall constitute a valid, effective, enforceable and perfected security interest in the Collateral in favor of Secured Party. Furthermore, no registration, recordation or filing with any governmental authority is required in connection with the execution, delivery or performance of this Agreement or necessary to establish the validity, effectiveness or enforceability hereof or of the security interest or for the perfection of the security interest. Pledgor(s) has/have not performed and shall not perform any act that might prevent the Secured Party from enforcing any of the terms and conditions of this Agreement or that would limit the Secured Party in any such enforcement; 7.4. Pledgor(s) agree(s) to warrant and defend Secured Party's right, title, security interest in and assignment of Collateral and/or any cash or property distributed thereunder; 7.5. Pledgor(s) has/have no undisclosed knowledge of any circumstances or conditions with respect to the Collateral that could reasonably be expected to adversely affect the value or marketability of such Collateral; 7.6. The execution and delivery of this Agreement will not violate any agreement to which Pledgor(s) is/are a party or, to the best of Pledgor's knowledge, will not violate any law and/or agreement governing Pledgor(s); and 2 7.7. All information and statements with respect to Pledgor(s) on the front of this Agreement are true and correct. 8. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default under this Agreement: 8.1. Default in the payment or performance of any of the Obligations when due, after written notice of such default is provided to Debtor by Secured Party and the applicable grace or cure period has expired; 8.2. Failure of Debtor to perform or observe other covenants contained in this Agreement or any other agreements or any other documents or instruments evidencing an obligation of Debtor to Secured Party, whether now or hereafter in existence, and Debtor fails to cure such default(s) within the allotted time period after receipt of written notice of such default(s) by Secured Party; and 8.3. Any warranty, representation or statement of Pledgor(s) in this Agreement, or by the Debtor in any other agreement, document or instrument, or otherwise made or furnished to Secured Party by or on behalf of Debtor, proves to have been false in any material respect when made or furnished. 9. REMEDIES. 9.1. Upon the occurrence of any Event of Default and at any time thereafter, Secured Party shall have, in addition to all other rights and remedies, the remedies of a secured party under the Uniform Commercial Code as then in effect in California ("UCC"), regardless of whether the UCC applies to the security transactions covered by this Agreement; 9.2. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party, in its sole discretion, may assign or transfer the whole or any part of the Obligations and may transfer and deliver the whole or any part of the Collateral into the name of any transferee and the transferee shall be vested with all the rights and powers of Secured Party hereunder with respect to the Collateral so transferred; 9.3. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to receive and retain as Collateral hereunder all payments and distributions made upon or with respect to the Collateral and the Pledgor(s) shall take all such actions and execute and deliver all such instruments as the Secured Party may deem necessary or desirable to give effect to such right; 9.4. Upon the occurrence of an Event of Default and at any time thereafter, the proceeds of any sale of, or other realization upon all or any part of the Collateral and any cash held by the Secured Party on behalf of Debtor shall be applied by the Secured Party in the following order of priorities: (i) to the payment of the reasonable expenses of such sale or other realization including reasonable compensation to the Secured Party and Counsel, and all expenses, liabilities and advances incurred or made by the Secured Party in connection therewith, and any other unreimbursed expenses or other amounts for which the Secured Party is to be reimbursed hereunder, (ii) to the ratable payment in respect of accrued but unpaid interest, if any, on the obligations; (iii) to the ratable payment in respect of due but unpaid principal of any and all unpaid Obligations; and (iv) to payment to the Pledgor or to its respective successors, or as a court of competent jurisdiction may direct, or any surplus then remaining from such proceeds. 9.5. It is further agreed and understood that no delay on the part of Secured Party in exercising any of the rights hereunder shall operate as a waiver of said rights, nor shall Secured Party be liable to the undersigned for any delay in collecting or realizing upon the Collateral or substitutes therefor or additions thereto; 9.6. Secured Party may delay exercising or omit to exercise any right or remedy under this Security Agreement without waiving that or any other part, present or future right or remedy; and 3 9.7. Upon payment in full of all Obligations of the Debtors to the Secured Party, the Secured Party shall deliver the Collateral to the Pledgor(s) and this Agreement shall terminate. 9.8. Upon the occurrence of an Event of Default and at any time thereafter, the Secured Party shall have the right to the extent permitted by law and the Pledgor(s) shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consent, ratifications and waivers, and take any other actions, with respect to any or all of the collateral with the same force and effect as if the Secured Party were the absolute and sole owner. 10. GENERAL. 10.1. The terms "Debtor(s)", "Debtor's Business", "Pledgor(s)", "Secured Party", "Collateral" and "Obligations" are defined in paragraphs 1,2,3,4 and 5; 10.2. No defaults shall be waived by Secured Party except in writing and no waiver by Secured Party or other right under this Agreement shall operate as a waiver of any other payment or right; 10.3. Secured Party may assign or transfer its rights under this Agreement to any transferee. Pledgor(s) hereby agree(s) that on such assignment or other transfer, all rights, powers and remedies of Secured Party hereunder shall belong to and be exercisable by the transferee. 10.4. If there is more than one Pledgor(s), all of the terms and conditions of this Agreement shall apply to each and any of them jointly and severally; 10.5. Without affecting any obligations of Pledgor(s) under this Agreement, Secured Party without notice or demand may renew or extend the terms and conditions of any of the Obligations; take or release any other collateral as security for any of the Obligations, and add or release any guarantor, endorser, surety or other party to any of the Obligations; 10.6. Beyond the exercise of reasonable care in the custody thereof, and as otherwise provided in Section 9207 of the UCC, the Secured Party shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in their possession if the Collateral is accorded treatment substantially equal to that accorded by the Secured Party to their own property. The Secured Party shall not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any agent or bailee selected by the Secured Party in good faith. 10.7. Any consent, notice or other communication required or contemplated by this Agreement shall be in writing. It shall be deemed given when hand delivered or three (3) days after deposit in U.S. mail, if mailed, certified or registered U.S. mail, return receipt requested, postage prepaid, to the other party at the address given on the first page hereof or at such other address given by notice as herein provided; or one (1) business day after being sent via air express carrier, fare prepaid; or on the business day or next following business day such item is transmitted by telecopier; provided such consent, notice or other communication is made to the respective addressee at the address such party stated herein or as may be requested to the other in writing to deliver; 10.8. All of the rights of Secured Party under this Agreement shall be cumulative and shall inure to the benefit of its successors and assigns. All obligations of Pledgor(s) hereunder shall be binding upon the heirs, legal representatives, successors or assigns of Pledgor(s); 4 10.9. Any provision hereof contrary to, prohibited by, or invalid under applicable laws or regulations shall be inapplicable and deemed omitted herefrom, but shall not invalidate the remaining provisions hereof. Pledgor(s) acknowledge(s) receipt of a true copy and waives acceptance hereof; 10.10. This Agreement may be signed in one or more counterparts, each of which shall have the effect of an original, but all such counterparts shall be deemed one and the same agreement; 10.11. The Pledgor shall defend, indemnify and hold the Secured Party harmless for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Secured Party in any way relating to or arising out of this Agreement any other related document or any other document contemplated by or referred to herein or therein or the transactions contemplated by or referred to herein or therein or the encroachment of any of the terms hereof or thereof or otherwise arising or relating in any manner to the pledges contemplated hereunder. 10.12. This Agreement shall be construed under, governed by and enforced under the laws of the State of California; and 10.13. This Agreement represents the entire agreement and understanding between Secured Party and Pledgor(s) and supersedes all prior agreements relating to the subject matter hereof. Any modification or amendments to this Agreement shall be in writing and signed by the party to be charged. 10.14. Any sale or realization upon any Collateral shall operate to divest all right, title and interest, at law or in equity against the Pledgor(s) thereon and thereto, and shall be a perpetual bar both at law and in equity against the Pledgor(s) and against any and all persons claiming or attempting to claim the Collateral. Date: 1/11/96 -------- PLEDGOR(S): C.S.B. PARTNERSHIP, a California general partnership Federal Tax I.D. #33-0235374 By: C.E.P. Developments, Inc., a California corporation, as general partner 33791 Glocamora Lane San Juan Capistrano, California 92675 Federal Tax I.D.# 33-0255435 By: /s/Christopher R. Phillips ------------------------------------ Christopher R. Phillips, President By: Someday, Inc., a California corporation, as general partner 729 Red Arrow Trail Palm Desert, California 92211 Federal Tax I.D.# 68-0127269 By: /s/Ronald D. Asher ------------------------------- Ronald D. Asher, President 5 By: Four Kyles, Inc., a California corporation, as general partner 35 Ticknor Place Laguna Miguel, California 92677 Federal Tax I.D.# 68-0193761 By: /s/Virgil Kyle Kyle, III ------------------------------------ Virgil Kyle Kyle, III, President By: J.M.C., Inc., a California corporation, as general partner 845 Sunningdale Drive Oceanside, California 92056 Federal Tax I.D.# 33-0366139 By: /s/John Connelly ------------------------------- John Connelly, President 6 EXHIBIT A 27812 Aliso Creek Road 399 Broadway Aliso Viejo, CA 92656 Chula Vista, CA 91910 1002 W. 6th Street 636 S. Santa Fe Drive Corona, CA 91720 Vista, CA 92084 20742 Lake Forest Rd., #C3 499 College Blvd. Lake Forest, CA 92630 Oceanside, CA 92056 40525 Winchester Rd. 3181 Harbor Blvd. Temecula, CA 92590 Costa Mesa, CA 92626 23081 Orange Avenue 19411 Beach Blvd. El Toro, CA 92630 Huntington Beach, CA 92647 6994 Broadway 1825 E. Katella Ave. Lemon Grove, CA 92045 Orange, CA 92667 4596 El Cajon Blvd. 1211 W. Warner Avenue San Diego, CA 92115 Santa Ana, CA 92727 927 N. El Camino Real 131 East First Street San Clemente, CA 92672 Tustin, CA 92680 7 SECURITY AGREEMENT PARTNERSHIP INTERESTS 1. DEBTOR. Christopher R. Phillips and Emiko J. Phillips, Trustees or Successor Trustees of the Phillips Family Living Trust dated September 23, 1991, a 20% partner in C.S.B. Properties Christopher R. Phillips, Co-Trustee S.S.# ###-##-#### Emiko J. Phillips, Co-Trustee S.S.# ###-##-#### Ronald D. Asher and Andria L. Asher, Trustees or Successor Trustees of the Ronald D. Asher and Andria L. Asher Trust dated June 1, 1989, a 20% partner in C.S.B. Properties Ronald D. Asher, Co-Trustee S.S.# ###-##-#### Andria L. Asher, Co-Trustee S.S.# ###-##-#### John Lawrence Connelly, Individually, a 20% partner in C.S.B. Properties S.S.# ###-##-#### Virgil Kyle Kyle, III, Individually, a 20% partner in C.S.B. Properties S.S.# ###-##-#### and (his) (her) (its) (their) successors, assigns, heirs and personal representatives 27131 Calle Arroyo San Juan Capistrano, California 92675 Telephone #: (714) 443-4155 2. SECURED PARTY. BIG O TIRES, INC., a Nevada corporation and its subsidiaries, successors and assigns. 11755 East Peakview Avenue Englewood, Colorado 80111 Telephone #: (303) 790-2800 Telecopier #: (303) 790-0225 3. COLLATERAL. Each of the Debtors' twenty percent (20%) partnership interest in C.S.B. Properties, a California general partnership ("partnership"), which in the aggregate totals eighty percent (80%) of the partnership interests in the Partnership, which Partnership holds a ground leasehold interest 1 in that certain real property, and all improvements thereon, consisting of a Big O Tires retail store, located at 499-A College Blvd., Oceanside, California 92056, as more particularly described in EXHIBIT A to this financing statement, attached hereto and made a part hereof, and any and all proceeds thereof, accessions thereto, substitutions therefore and replacements thereto, now owned or hereafter acquired. 4. LOCATION OF COLLATERAL. 27131 Calle Arroyo, Suite 1703 San Juan Capistrano, California 92675 5. PRIMARY USE OF COLLATERAL. The primary use of the Collateral is for business purposes and not for personal, family or household purposes or farming operations. 6. OBLIGATIONS. 6.1 Any and all obligations of C.S.B. Partnership, a California general partnership (of which each of the Debtor's have equity ownership in a corporation which is a partner in such partnership, to Secured Party under that certain Promissory Note dated January 1, 1996 in the original principal amount of $250,000.00, payable to the order of Secured Party ("Note"), any and all other loan documents and all other agreements and instruments executed by C.S.B. Partnership and delivered to Secured Party in consummating all transactions contemplated in conjunction with the Note; 6.2 Future advances made by Secured Party to C.S.B. Partnership under the Note, plus any interest thereon; 6.3 All expenditures of any kind or nature made by Secured Party to preserve the Collateral, including, but not limited to, all amounts paid to discharge taxes, liens, security interests and any other encumbrances against the Collateral, and to repair any damage to the Collateral or otherwise preserve or maintain the Collateral and all insurance coverages thereon; and 6.4 All expenditures made or incurred by Secured Party pursuant to the provisions of the Note and this Agreement, and all other obligations of Debtor to Secured Party, direct or indirect, absolute or contingent, due or to become due, whether now existing or hereafter arising, including, but not limited to, interest due to Secured Party hereunder or thereunder, and attorneys' fees and costs incurred by Secured Party to enforce any provision herein or therein. 7. SECURITY INTEREST. To secure payment and performance of any and all of the Obligations to be performed by C.S.B. Partnership, Debtor hereby transfers, conveys, grants and assigns to Secured Party a security interest in the Collateral and in all improvements, attachments, additions, accessions and replacements thereto and all proceeds and products therefrom. Debtor warrants and represents that Debtor has, or forthwith will acquire, title to the Collateral free and clear of all liens, security interests, encumbrances and/or leases (except security interests, liens, encumbrances and/or leases, if any, set forth in EXHIBIT B, attached hereto and incorporated herein) and that Debtor has the right to transfer, grant, convey and assign this security interest. 8. WARRANTIES AND REPRESENTATIONS OF DEBTOR. Debtor warrants and represents to Secured Party the following: 8.1 Except for the security interest created by this Agreement and any security interests liens, encumbrances and/or leases, if any, set forth on EXHIBIT B, attached hereto and incorporated herein by reference, Debtor is the owner of all of the Collateral, or will be at 2 the time such Collateral is created or acquired, free and clear of all liens, security interests encumbrances and/or leases. 8.2 The transfer, conveyance, grant and assignment of the security interest hereunder is valid and enforceable in accordance with its terms and represents a legally binding obligation of debtor and constitutes a security interest in the Collateral in favor of Secured Party. 8.3 Debtor agrees to warrant and defend Secured Party's right, title, security interest in and assignment of Collateral and/or any cash or property distributed thereunder. 8.4 Debtor has no undisclosed knowledge of any circumstances or conditions with respect to the Collateral that could reasonably be expected to adversely affect the value or marketability of such Collateral. 8.5 No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement and those set forth on EXHIBIT B, if any. 8.6 The execution and delivery of this Agreement will not violate any agreement to which Debtor is a party or to the best of Debtor's knowledge, will not violate any law governing Debtor. 8.7 All information and statements with respect to Debtor on the front page of this Agreement are true and correct. 9. COVENANTS OF DEBTOR. Unless and until Secured Party consents in writing to another course of action, Debtor covenants and agrees to the following: 9.1 Debtor will not sell, assign, transfer, pledge, lease, abandon or otherwise dispose of any of the Collateral or any interest therein. 9.2 At the request of Secured Party, Debtor will from time to time execute financing statements, and extensions and/or modifications thereof and other documents in form satisfactory to Secured Party (and pay the cost of filing or recording them in whatever public offices Secured Party deems reasonably necessary) and perform such other acts as Secured Party may reasonably request to perfect and maintain a valid security interest in the Collateral. 9.3 Debtor will, upon an Event of Default hereunder, pay all expenses and reimburse Secured Party for any expenditures, including reasonable attorneys' fees and legal expenses, incurred in connection with Secured Party's exercise of any of its rights and remedies under this Agreement. 9.4 Debtor will defend, at Debtor's own cost and expense, any action, 1. proceeding or claim affecting the Collateral. 9.5 The Debtor agrees that the security interest granted by Debtor to Secured Party shall remain in effect irrespective of the various payments required by the obligation so long as there are any Obligations of any kind, including Obligations under guarantees or assignments, owed by C.S.B. Partnership to Secured Party; provided, however, that upon any assignment of this Agreement by Secured Party, that the assignee shall thereafter be deemed, for the purpose of this paragraph, the Secured Party under this Agreement. 3 9.6 Debtor hereby acknowledges that the security interests granted herein are to secure payment and performance of certain obligations by an affiliated partnership, C.S.B. Partnership, and that Debtors are providing these security interests by reason of the fact that the Debtor will directly benefit from the borrowings of C.S.B. Partnership. 10. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default under this Agreement: 10.1 Failure of C.S.B. Partnership to pay any of the Obligations when due; 10.2 Failure of C.S.B. Partnership to perform or observe any other covenant (after the applicable cure period has expired) contained in this Agreement or any other documents or instruments evidencing any obligation of C.S.B. Partnership to Secured Party, whether now or hereafter in existence; 10.3 Any warranty, representation or statement of C.S.B. Partnership in or any agreement, document or instrument, or otherwise made or furnished to Secured Party by or on behalf of C.S.B. Partnership proves to have been false in any material respect when made or furnished; 10.4 Dissolution or termination of existence of Debtor without Secured Party's consent; insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws of, by or against, Debtor or any guarantor or surety of Debtor of any of the Obligations. 10.5 The sale or transfer of Debtor's interest in Debtor's Business or any part thereof, or interest therein, without the prior written consent of Secured Party or the sale or transfer of the partnership interests in Debtor without the prior written consent of Secured Party. 11. RIGHTS AND REMEDIES OF SECURED PARTY. 11.1 Upon the occurrence of any event of default and at any time thereafter, Secured Party shall have, in addition to all other rights and remedies, the remedies of a secured party under the Uniform Commercial Code as then in effect ("UCC"), regardless of whether the UCC applies to the secured transactions covered by this Agreement, including without limitation the right to accelerate the maturity of the Obligations, without notice or demand (except for such notices or demands required under the terms of the Obligations), and to take possession of the Collateral and any proceeds thereof wherever located. Debtor shall assemble the Collateral and make the Collateral and all records relating thereto available to Secured Party at a place to be designated by Secured Party that is reasonably convenient for both parties. If notice is required, Secured Party shall give to Debtor at least five (5) days' prior written notice of the time and place of any public sale of the Collateral or of the time after which any private sale or any other intended disposition is to be made. 11.2 During the time that Secured Party is in possession of the Collateral, and to the extent permitted by law, Secured Party shall have the right to hold, use, operate, manage and control all or any part of the Collateral; to make all such repairs, replacements, alterations, additions and improvements to the Collateral as it may deem proper; and to demand, collect and retain all earnings, proceeds from such use and all other costs, expenses, charges, damage or loss by reason of such use. 4 11.3 Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if it takes such action for that purpose as Debtor shall request, but failure to honor any such request shall not of itself be deemed a failure to exercise reasonable care. Secured Party shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties nor to protect, preserve or maintain any security interest given to secure any of the Collateral. 11.4 After an Event of Default as set forth in SECTION 10 hereof, Debtor hereby irrevocably appoints Secured Party as the attorney- in-fact of the Debtor, with full powers of substitution and at the cost and expense of Debtor, to reasonably exercise any of the following powers with respect to any of the accounts; a. Demand, sue for, collect and give receipts for any payments due thereon or by virtue thereof; b. Receive, take, endorse, assign and deliver chattel paper, documents, instruments and all other property taken or received by Secured Party in connection therewith; c. Settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; d. Sell, transfer, assign or otherwise deal therein or therewith as fully and effectually as if Secured Party were the absolute owner thereof; and e. Extend the time of payment thereof and make allowances and other adjustments with reference thereof. In exercising any power herein granted, Secured Party may act in its name or the name of the Debtor. This power of attorney appointment, being coupled with an interest, shall be irrevocable. 11.5 If Secured party in good faith believes that any state or federal law prohibits or restricts the customary manner of sale or distribution of any of the Collateral, Secured Party may sell such Collateral privately or in any other manner deemed commercially reasonable by Secured Party at such price or prices as Secured Party determines in its sole discretion. Debtor recognizes that such prohibition or restriction may cause the Collateral to have less value than it otherwise would have and that, consequently, such sale or disposition by Secured Party may result in a lower sales price than if the sale were otherwise held. 11.6 To the extent allowed by law, Debtor shall pay Secured Party all expenses of retaking, holding, preparing for sale, selling and the like, including reasonable attorneys' fees and legal expenses, and such costs shall be paid out of the proceeds of disposition of the Collateral. Such proceeds may be applied to the Obligations in any order of priority. 11.7 As a supplementary or additional remedy, Secured Party shall also be entitled, without notice or demand and to the extent permitted by law, to exercise or continue all of the rights granted to Secured Party above and/or to have a receiver appointed, upon EX-PARTE application, without notice to Debtor, to take charge of all or any part of the Collateral, exercising all of the rights granted to Secured Party above. 11.8 Secured Party may recover from Debtor any deficiency between the amount due under any of the Obligations and the proceeds of such sale or disposal together with all costs and expenses, including, without limitation, reasonably attorneys' fees incurred or paid by 5 Secured Party in exercising any right, power or remedy provided by this Security Agreement or by law. 11.9 Notwithstanding that which is granted and provided herein, Secured Party shall be under no duty to exercise, or to withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to Secured Party under this Agreement, and shall not be responsible for any failure to do so or delay in doing so. 12. GENERAL. 12.1 The terms "Debtor," "Debtor's Business," "Secured Party," "Collateral" and "Obligations" are defined in PARAGRAPHS 1, 2, 3 AND 6. Where Debtor and the obliger on the Obligations are not the same, the term "Debtor" herein means the owner of the Collateral in any provision dealing with the Collateral, the obligor in any provision dealing with the Obligations, and both where the context so requires. 12.2 No defaults shall be waived by Secured Party except in writing and no waiver of any payment or other right under this Agreement shall operate as a waiver of any other payment or right. 12.3 Secured Party may assign or transfer its rights under this Agreement to any transferee. Debtor hereby agrees that; (a) on such assignment or other transfer, all rights, powers and remedies of Secured Party hereunder shall belong to and be exercisable by the transferee, and, on receipt of notice of such assignment or other transfer, Debtor will tender performance of Debtor's obligations hereunder, if requested, to such transferee rather than to Secured Party; (b) upon delivery of Secured Party's security interest in the Collateral to the transferee, Secured Party shall thereafter be fully discharged from all responsibility with respect to such Collateral; and (c) in any action brought by the transferee against Debtor to recover any sums under this Agreement or to recover possession of the Collateral, Debtor will not assert as a defense, counterclaim, set off, cross complaint, or otherwise, any claim, known or unknown, which Debtor now has or hereafter acquires against Secured Party. 12.4 If there is more than one Debtor, all of the terms and conditions of this Agreement shall apply to each and any of them jointly and severally. 12.5 Without affecting any Obligations of Debtor under this Agreement, Secured Party without notice or demand may renew, extend or otherwise change the terms and conditions of any of the Obligations; take or release any other collateral as security for any of the Obligations, and add or release any guarantor, endorser, surety or other party to any of the Obligations. 12.6 Any notice, request, consent and demand which is required or given hereunder shall be in writing and shall be deemed effective and received (a) upon personal delivery to the proper party, (b) on the day transmitted by telecopier, if on a business day, and if not transmitted on a business day, the first business day thereafter, to the proper party via the telecopier number stated on the first page hereof, (c) three (3) business days after deposit in the United States mail by registered or certified mail, postage prepaid, return receipt requested, addressed to the proper party at the address stated on the first page hereof, or (d) one (1) business day after deposit with an air express carrier, fare prepaid, addressed to the proper party at the address stated on the first page hereof. Each of the parties 6 hereto may designate such other address and/or telecopier number as either of such parties may hereafter specify in writing to the other party. 12.7 A carbon, photographic or other reproduction of this Agreement or a financing statement shall be sufficient as a financing statement. 12.8 All of the rights of Secured Party under this Agreement shall be cumulative and shall inure to the benefit of its successors and assigns. All obligations of Debtor hereunder shall be binding upon the heirs, legal representatives, successors or assigns of Debtor. 12.9 Any provision hereof contrary to, prohibited by, or invalid under applicable laws or regulations shall be inapplicable and deemed omitted herefrom, but shall not invalidate the remaining provisions hereof. Debtor acknowledges receipt of a true copy and waives acceptance hereof. 12.10 This Agreement may be signed in one or more counterparts, each of which shall have the effect of an original, but all such counterparts shall be deemed one and the same agreement. 12.11 This Agreement shall be construed under and governed by the laws of the state of California. 12.12 This Agreement represents the entire agreement and understanding between Secured Party and Debtor and supersedes all prior agreements. Any modification or amendments to this Agreement shall be in writing and signed by the party to be charged. DATED: 1/11/96 ------------ DEBTOR: Christopher R. Phillips and Emiko J. Phillips, Trustees or Successor Trustees of the Phillips Family Living Trust dated September 23, 1991 Twenty Percent (20%) General Partner of C.S.B. Properties, a California general partnership 33791 Glocamora Lane San Juan Capistrano, California 92675 By: /s/Christopher R. Phillips ------------------------------- Christopher R. Phillips, Co-Trustee S.S.# ###-##-#### By: /s/Emiko J. Phillips ------------------------------- Emiko J. Phillips, Co-Trustee S.S.# ###-##-#### 7 Ronald D. Asher and Andria L. Asher, Trustees or Successor Trustees of the Ronald D. Asher and Andria L. Asher Trust dated June 1, 1989, Twenty Percent (20%) General Partner of C.S.B. Properties, a California general partnership 729 Red Arrow Trail Palm Desert, California 92211 By: /s/Ronald D. Asher ------------------------------- Ronald D. Asher, Co-Trustee S.S.# ###-##-#### By: /s/Andria L. Asher ------------------------------- Andria L. Asher, Co-Trustee S.S.# ###-##-#### Connelly, John Lawrence, Individually Twenty Percent (20%) General Partner of C.S.B. Properties, a California general partnership 845 Sunningdale Drive Oceanside, California 92056 By: /s/John Connelly ------------------------------- John Lawrence Connelly S.S. # ###-##-#### Acknowledgment and Consent of Spouse: /s/Monika Connelly ----------------------------------- Monika Connelly S.S.# ###-##-#### Kyle, Virgil Kyle, III, Individually Twenty Percent (20%) General Partner of C.S.B. Properties, a California general partnership 35 Ticknor Place Laguna Miguel, California 92677 By: /s/Virgil Kyle Kyle, III ------------------------------- Virgil Kyle Kyle, III S.S.# ###-##-#### Acknowledgment and Consent of Spouse: /s/Diane Rose Kyle ----------------------------------- Diane Rose Kyle S.S.# ###-##-#### 8 SECURED PARTY: DATED: BIG O TIRES, INC., -------- a Nevada corporation BY: /s/John B. Adams -------------------------------- John B. Adams, Executive Vice President 9 EXHIBIT A ALL THAT CERTAIN PROPERTY LOCATED IN THE COUNTY OF SAN DIEGO, STATE OF CALIFORNIA MORE PARTICULARLY DESCRIBED AS FOLLOWS: ALL THAT PORTION OF LOT 2, OF THE RANCHO GUAJOME, AS SHOWN ON THE PARTITION MAP MADE AND FILED IN THE OFFICE OF THE COUNTY CLERK OF SAID SAN DIEGO COUNTY, ATTACHED TO AND MADE A PART OF THE REFEREE'S REPORT IN ACTION IN PARTITION IN SUPERIOR COURT OF SAN DIEGO COUNTY NO. 20201 WHEREIN SUSAN G. COOTS WAS PLAINTIFF AND RICHARD O'NEIL, ET. AL. WERE DEFENDANTS, DESCRIBED AS FOLLOWS: BEGINNING AT THE MOST WESTERLY CORNER OF SAID RANCHO; THENCE NORTH 32 DEG. 46' 06" EAST A DISTANCE OF 1361.89 FEET (RECORDED NORTH 32 DEG. 11' 10" EAST) ALONG THE NORTHWESTERLY LINE THEREOF TO A POINT OF INTERSECTION WITH THE CENTER LINE OF COUNTY ROAD SURVEY NO. 1294, SAID POINT BEGINS ON THE ARC OF A CURVE CONCAVE SOUTHWESTERLY AND HAVING A RADIUS OF 2000.00 FEET; A RADIAL LINE TO SAID POINT BEARS NORTH 34 DEG. 18' 14" EAST (RECORDED NORTH 33 DEG. 47' 50" EAST); THENCE SOUTHEASTERLY ALONG THE ARC OF SAID CURVE AND ALONG THE CENTER LINE OF SAID ROAD THROUGH A CENTRAL ANGLE OF 12 DEG. 39' 09" (RECORD 12 DEG. 38' 10") AN ARC DISTANCE OF 441.66 FEET (RECORD 441.08 FEET); THENCE TANGENT TO SAID CURVE SOUTH 43 DEG. 02' 37" EAST, CONTINUING ALONG SAID CENTER LINE 69.96 FEET, (RECORD SOUTH 43 DEG. 34' EAST, CONTINUING ALONG SAID CENTER LINE 70.64 FEET) TO THE BEGINNING OF A TANGENT CURVE CONCAVE SOUTHWESTERLY AND HAVING A RADIUS OF 2000.00 FEET; THENCE SOUTHERLY ALONG THE ARC OF SAID CURVE. BEING THE CENTER LINE OF SAID ROAD, THROUGH A CENTRAL ANGLE OF 37 DEG. 34' 03" (RECORD 37 DEG. 35") AN ARC DISTANCE OF 1311.41 FEET, (RECORD 3311.91 FEET); THENCE TANGENT TO SAID CURVE, SOUTH 5 DEG. 28' 08" EAST, CONTINUING ALONG SAID CENTER LINE, 150.31 FEET, (RECORD SOUTH 5 DEG. 59' EAST, CONTINUING ALONG SAID CENTER LINE, 160.15 FEET) TO AN INTERSECTION WITH THE CENTER LINE OF STATE HIGHWAY NO. 135-1 (SAN LUIS HWY ROAD NO. 2); THENCE SOUTH 94 DEG. 32' 25" WEST ALONG THE CENTER LINE OF SAID STATE HIGHWAY, 31.34 FEET (RECORD SOUTH 84 DEG. 01' WEST ALONG THE CENTER LINE OF SAID STATE HIGHWAY, 28.32 FEET) TO THE BEGINNING OF A TANGENT CURVE CONCAVE SOUTHERLY AND HAVING A RADIUS OF 2000.00 FEET; THENCE WESTERLY ALONG THE ARC OF SAID CURVE AND ALONG THE CENTER LINE OF SAID STATE HIGHWAY, THROUGH A CENTRAL ANGLE OF 7 DEG. 56' 11" (RECORD 8" 00') AN ARC DISTANCE OF 277.24 FEET (RECORD 279.25 FEET); THENCE TANGENT TO SAID CURVE, SOUTH 76 DEG. 35' 57" WEST 371.17 FEET, (RECORD SOUTH 76 DEG. 01' WEST 370.11 FEET) CONTINUING ALONG SAID CENTER LINE, TO A POINT OF INTERSECTION WITH THE SOUTHWESTERLY LINE OF SAID RANCHO; THENCE, LEAVING SAID CENTER LINE, NORTH 56 DEG. 27' 35" WEST, (RECORD NORTH 57 DEG. 00' 50" WEST) ALONG THE SOUTHWESTERLY LINE OF SAID RANCHO 1197.84 FEET (RECORD 1137.00) TO THE MOST WESTERLY CORNER THEREOF AND THE POINT OF BEGINNING. EXCEPTING ALL OIL, GAS AND OTHER HYDROCARBONS AND MINERALS NOW AND HEREAFTER IN. ON AND UNDER THAT PART OF SAID LAND LYING BELOW A DEPTH OF 500 VERTICAL FEET BELOW THE SURFACE OF SAID LAND, BUT WITHOUT THE RIGHT OF ENTRY UPON SAID LAND, OR WITHIN SAID TOP ?00 FEET THEREOF FOR ANY PURPOSES WHATSOEVER, AS RESERVED BY EARNEST A. WATSON, ET. AL., IN DEED RECORDED FEBRUARY 25, 1964 AS FILE NO. 35207 AND IN DEED RECORDED FEBRUARY 25, 1964 AS FILE NO. 35208. SECURITY AGREEMENT AND STOCK PLEDGE AGREEMENT Dated: As of January , 1996 ---- 1. DEBTOR(S): C.S.B. PARTNERSHIP, a California corporation and their successors and assigns. 27131 Calle Arroyo Suite 1703 San Juan Capistrano, California 92675 Telephone: (714) 443-4155 Tax I.D. - 33-0235374 DEBTOR'S BUSINESS(ES): Those certain Big O Franchise outlets as listed on the attached EXHIBIT A. 2. PLEDGOR(S): C.S.B. PARTNERSHIP, a California corporation, Federal Tax I.D. #33-0235374 3. SECURED PARTY: BIG O TIRES, INC., a Nevada corporation and its successors and assigns 11755 E. Peakview Avenue Englewood, Colorado 80111 Telephone: (303) 790-2800 Telecopier: (303) 790-2800 4. COLLATERAL. The following property and all accessions thereto: 4.1. One thousand eight hundred eighty (1,880) shares of common stock of Big O Tires, Inc., a Nevada corporation held by Pledgor(s) which constitutes all of the issued and outstanding shares of all classes of stock of Big O Tires, Inc. owned by Pledgor(s), as represented by stock certificates numbered 11322 and 12520, and any substitutes or additions to the stock, together with executed blank stock power assignments, have been delivered to Secured Party by Pledgor(s) and Secured Party hereby acknowledges receipt of said items. 5. OBLIGATIONS. 5.1. Any and all obligations of Debtor to Secured Party under that certain promissory note dated as of January 1, 1996, in the original principal amount of $250,000.00, payable to the order of Secured Party, C.S.B. Partnership, Maker, and all other agreements and instruments executed by Debtor and delivered to Secured Party in consummating all transactions contemplated in said promissory note; 5.2. All obligations, including, but not limited to, all franchise fees, advertising fees, accounting fees, lease rentals, and other fees, owed to Secured Party by Debtor; 5.3. All amounts charged in invoices and billings of Secured Party for purchases by Debtor of certain inventory, including tires, car care products and related automotive goods, accessories and equipment; 1 5.4. All promissory notes which Debtor and/or Pledgor(s) shall make in favor of Secured Party from time to time pursuant to any franchise agreements, any credit agreements or any other agreement or arrangement between Secured Party and Debtor; 5.5. Future advances made and/or credit granted by Secured Party to Debtor, plus interest thereon; 5.6. Pursuant to the terms of this Agreement, all expenditures of any kind or nature made by Secured Party to preserve the Collateral, including, but not limited to, all amounts paid to discharge taxes, liens, security interests and any other encumbrances against the Collateral, and to repair any damage to the Collateral or otherwise preserve or maintain the Collateral and all insurance thereon; and 5.7. All expenditures made or incurred by Secured Party pursuant to the provisions of the Franchise Agreement, any credit agreements, any promissory notes and this Agreement, and all other obligations of Debtor and/or Pledgor(s) to Secured Party, direct or indirect, absolute or contingent, due or to become due, whether existing or hereafter arising. 6. SECURITY INTEREST. To secure payment and performance of the Obligations, Pledgor(s) hereby pledge(s) and grant(s) to Secured Party a security interest in the Collateral and in all attachments, replacements and accessions thereto and proceeds therefrom. Pledgor(s) hereby warrants and represents that Pledgor(s) has, or forthwith will acquire, title to the Collateral free and clear of all liens, security interests and encumbrances. Contemporaneously with the execution and delivery hereof, the Pledgor is delivering the certificates representing the Collateral to the Secured Party, together with executed blank stock power assignments. The Secured Party's security interest in the Collateral is being granted as security only and shall not affect or modify any obligation or liability of Debtor and/or Pledgor. 7. WARRANTIES AND REPRESENTATIONS. Pledgor(s) warrants and represents to Secured Party the following: 7.1. Except for the security interests created by this Agreement, Pledgor(s) is/are the owner(s) of all of the Collateral, or will be at the time such Collateral is created or acquired, free and clear of all liens, security interest and encumbrances and any rights to subscribe for or rights or options to purchase or acquire the same (including without limitation, through any securities convertible into or exchangeable for any such pledged securities); 7.2. The Collateral has been duly authorized and validly issued and is fully paid and non-assessable, and is subject to no option to purchase for similar rights of any person. Pledgor(s) is/are not and shall not become a party to or otherwise bound by any agreement, document or other instrument (other than this Agreement) that restricts in any manner the rights of any present or future holder of any part of the Collateral with respect thereto. 7.3. The Assignment and granting of the security interest hereunder represents a legally binding obligation of Pledgor(s), and, upon delivery of the stock certificates representing the Collateral, shall constitute a valid, effective, enforceable and perfected security interest in the Collateral in favor of Secured Party. Furthermore, upon delivery of the stock certificates no registration, recordation or filing with any governmental authority is required in connection with the execution, delivery or performance of this Agreement or necessary to establish the validity, effectiveness or enforceability hereof or of the security interest or for the perfection of the security interest. Pledgor(s) has/have not performed and shall not perform any act that might prevent the secured party from enforcing any of the terms and conditions of this Agreement or that would limit the secured party in any such enforcement; 7.4. Pledgor(s) agree(s) to warrant and defend Secured Party's right, title, security interest in and assignment of Collateral and/or any cash or property distributed thereunder; 2 7.5. Pledgor(s) has/have no undisclosed knowledge of any circumstances or conditions with respect to the Collateral that could reasonably be expected to adversely affect the value or marketability of such Collateral; 7.6. The execution and delivery of this Agreement will not violate any agreement to which Pledgor(s) is a party or, to the best of Pledgor's knowledge, will not violate any law or agreement governing Pledgor(s); and 7.7. All information and statements with respect to Pledgor(s) on the front of this Agreement are true and correct. 8. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default under this Agreement: 8.1. Default in the payment or performance of any of the Obligations when due, after written notice of such default is provided to Debtor by Secured Party and the applicable grace period has expired; 8.2. Failure of Debtor to perform or observe other covenants contained in this Agreement, or any other agreements or any other documents or instruments evidencing an obligation of Debtor to Secured Party, whether now or hereafter in existence, and Debtor fails to cure such default(s) within the allotted time period after receipt of written notice of such default(s) by Secured Party; 8.3. Any warranty, representation or statement of Pledgor(s) on this Agreement, or by the Debtor in any other agreement, document or instrument, or otherwise made or furnished to Secured Party by or on behalf of Debtor, proves to have been false in any material respect when made or furnished; and 8.4. The sale or transfer of Pledgor's interest in the Collateral or any part thereof, or interest therein, without the prior written consent of Secured Party. 9. REMEDIES. 9.1. Upon the occurrence of any Event of Default and at any time thereafter, Secured Party shall have, in addition to all other rights and remedies, the remedies of a secured party under the Uniform Commercial Code as then in effect in California ("UCC"), regardless of whether the UCC applies to the security transactions covered by this Agreement; 9.2. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party, in its sole discretion, may assign or transfer the whole or any part of the Obligations and may transfer and deliver the whole or any part of the Collateral into the name of any transferee and the transferee shall be vested with all the rights and powers of Secured Party hereunder with respect to the Collateral so transferred; 9.3. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to receive and retain as Collateral hereunder all dividends and other payments and distributions made upon or with respect to the Collateral and the Pledgor shall take all such actions and execute and deliver all such instruments as the Secured Party may deem necessary or desirable to give effect to such right; 9.4. Upon the occurrence of an Event of Default and at any time thereafter, the proceeds of any sale of, or other realization upon all or any part of the Collateral and any cash held by the Debtor shall be applied by the Secured Party in the following order of priorities: (i) to the payment of the reasonable expenses of such sale or other realization including reasonable compensation to the Secured Party and Counsel, and all expenses, liabilities and advances incurred or made by the Secured Party in connection therewith, and any other unreimbursed expenses or other amounts for which the Secured Party is to be reimbursed hereunder, (ii) to the ratable payment in respect of accrued but unpaid interest, if any, on the obligations; (iii) to the ratable payment in respect of due but unpaid principal of any and all other unpaid Obligations; and (iv) to 3 payment to the Pledgor(s) or to its/their respective successors, or as a court of competent jurisdiction may direct, or any surplus then remaining from such proceeds. 9.5. It is further agreed and understood that no delay on the part of Secured Party in exercising any of the rights hereunder shall operate as a waiver of said rights, nor shall Secured Party be liable to the undersigned for any delay in collecting or realizing upon the Collateral or substitutes therefor or additions thereto; 9.6. Secured Party may delay exercising or omit to exercise any right or remedy under this Security Agreement without waiving that or any other part, present or future right or remedy; and 9.7. Upon payment in full of all Obligations of the Debtors to the Secured Party, the Secured Party shall deliver the Collateral to the Pledgor(s) and this Agreement shall terminate. 9.8. Upon the occurrence of an Event of Default and at any time thereafter (whether or not any or all of the pledged securities have been transferred of record into the secured parties names), the Secured Party shall have the right to the extent permitted by law and the Pledgor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consent, ratifications and waivers, and take any other actions, with respect to any or all of the pledged securities with the same force and effect as if the Secured Party were the absolute and sole owner. 10. GENERAL. 10.1. The terms "Debtor", "Debtor's Business", "Pledgor(s)", "Secured Party", "Collateral" and "Obligations" are defined in paragraphs 1,2,3,4 and 5; 10.2. No defaults shall be waived by Secured Party except in writing and no waiver by Secured Party or other right under this Agreement shall operate as a waiver of any other payment or right; 10.3. Secured Party may assign or transfer its rights under this Agreement to any transferee. Pledgor(s) hereby agrees that on such assignment or other transfer, all rights, powers and remedies of Secured Party hereunder shall belong to and be exercisable by the transferee. 10.4. If there is more than one Pledgor(s), all of the terms and conditions of this Agreement shall apply to each and any of them jointly and severally; 10.5. Without affecting any obligations of Pledgor(s) under this Agreement, Secured Party without notice or demand may renew or extend the terms and conditions of any of the Obligations; take or release any other collateral as security for any of the Obligations, and add or release any guarantor, endorser, surety or other party to any of the Obligations; 10.6. Beyond the exercise of reasonable care in the custody thereof, and as otherwise provided in Section 9207 of the UCC, the Secured Party shall have no duty as to any Collateral in their possession or control or in the possession or control of any agent or bailee or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in their possession if the Collateral is accorded treatment substantially equal to that accorded by the Secured Party to their own property. The Secured Parties shall not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any agent or bailee selected by the Secured Party in good faith. 10.7. Any consent, notice or other communication required or contemplated by this Agreement shall be in writing. It shall be deemed given when hand delivered or three (3) days after deposit in U.S. mail, if mailed, certified or registered U.S. mail, return receipt requested, postage prepaid, to the other party at the address given on the first page hereof or at such other address given by notice as herein provided; or 4 one (1) business day after being sent via air express carrier, fare prepaid; or on the business day or next following business day such item is transmitted by telecopier; provided such consent, notice or other communication is made to the respective addressee at the address such party may have requested the other in writing to deliver; 10.8. All of the rights of Secured Party under this Agreement shall be cumulative and shall inure to the benefit of its successors and assigns. All obligations of Pledgor(s) hereunder shall be binding upon the heirs, legal representatives, successors or assigns of Pledgor(s); 10.9. Any provision hereof contrary to, prohibited by, or invalid under applicable laws or regulations shall be inapplicable and deemed omitted herefrom, but shall not invalidate the remaining provisions hereof. Pledgor(s) acknowledges receipt of a true copy and waives acceptance hereof; 10.10. This Agreement may be signed in one or more counterparts, each of which shall have the effect of an original, but all such counterparts shall be deemed one and the same agreement; 10.11. The Pledgor(s) shall defend, indemnify and hold the Secured Party harmless for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Secured Party in any way relating to or arising out of this Agreement any other related document or any other document contemplated by or referred to herein or therein or the transactions contemplated by or referred to herein or therein or the encroachment of any of the terms hereof or thereof or otherwise arising or relating in any manner to the pledges contemplated hereunder. 10.12. This Agreement shall be construed under, governed by and enforced under the laws of the State of California; and 10.13. This Agreement represents the entire agreement and understanding between Secured Party and Pledgor(s) and supersedes all prior agreements with regard to the subject matter hereof. Any modification or amendments to this Agreement shall be in writing and signed by the party to be charged. 10.14. Any sale or realization upon any Collateral shall operate to divest all right, title and interest, at law or in equity against the Pledgor thereon and thereto, and shall be a perpetual bar both at law and in equity against the Pledgor and against any and all persons claiming or attempting to claim the Collateral. Date: 1/11/96 --------- PLEDGOR(S): C.S.B. PARTNERSHIP, a California general partnership Federal Tax I.D. #33-0235374 By: C.E.P. Developments, Inc., a California corporation, as general partner 33791 Glocamora Lane San Juan Capistrano, California 92675 Federal Tax I.D.# 33-0255435 By: /S/CHRISTOPHER R. PHILLIPS ------------------------------------ Christopher R. Phillips, President 5 By: Someday, Inc., a California corporation, as general partner 729 Red Arrow Trail Palm Desert, California 92211 Federal Tax I.D.# 68-0127269 By: /S/RONALD D. ASHER -------------------------------------- Ronald D. Asher, President By: Four Kyles, Inc., a California corporation, as general partner 35 Ticknor Place Laguna Miguel, California 92677 Federal Tax I.D.# 68-0193761 By: /S/VIRGIL KYLE KYLE III -------------------------------------- Virgil Kyle Kyle, III, President By: J.M.C., Inc., a California corporation, as general partner 845 Sunningdale Drive Oceanside, California 92056 Federal Tax I.D.# 33-0366139 By: /S/JOHN CONNELLY -------------------------------------- John Connelly, President 6 EXHIBIT A 27812 Aliso Creek Road 399 Broadway Aliso Viejo, CA 92656 Chula Vista, CA 91910 1002 W. 6th Street 636 S. Santa Fe Drive Corona, CA 91720 Vista, CA 92084 20742 Lake Forest Rd., #C3 499 College Blvd. Lake Forest, CA 92630 Oceanside, CA 92056 40525 Winchester Rd. 3181 Harbor Blvd. Temecula, CA 92590 Costa Mesa, CA 92626 23081 Orange Avenue 19411 Beach Blvd. El Toro, CA 92630 Huntington Beach, CA 92647 6994 Broadway 1825 E. Katella Ave. Lemon Grove, CA 92045 Orange, CA 92667 4596 El Cajon Blvd. 1211 W. Warner Avenue San Diego, CA 92115 Santa Ana, CA 92727 927 N. El Camino Real 131 East First Street San Clemente, CA 92672 Tustin, CA 92680 7 STOCK POWER ASSIGNMENT FOR VALUE RECEIVED, the undersigned does (do) hereby sell, assign and transfer to: - -------------------------------------------------------------------------------- [NAME OF TRANSFEREE] Social Security or Tax Identifying Number :__________________________ shares of the capital stock of Big O Tires, Inc., a Nevada corporation, as the same is evidenced on the attached stock certificate numbered 11322, standing in the name of the undersigned on the books of said corporation. The undersigned does (do) hereby irrevocably constitute and appoint: ___________________________ , attorney to transfer the said Stock on the books of said company, with full power of substitution in the premises. C.S.B. PARTNERSHIP, a California General Partnership, DATE: 1/11/96 BY: C.E.P. Developments, Inc., ------- a California corporation as General Partner BY: /s/Christopher R. Phillips -------------------------- TITLE: President ------------------------ DATE: 1/12/96 BY: Someday, Inc., ------- a California corporation as General Partner BY: /s/Ronald D. Asher -------------------------- TITLE: President ------------------------ DATE: 1/16/96 BY: J.M.C., Inc., ------- a California corporation as General Partner BY: /s/John Connelly -------------------------- TITLE: President ------------------------ DATE: 1/15/96 BY: FOUR KYLES, INC., ------- a California corporation as General Partner BY: /s/Virgil Kyle Kyle,III -------------------------- TITLE: President ------------------------ SIGNATURE) GUARANTEED) IMPORTANT - READ CAREFULLY The signature(s) to this Power must correspond with the name(s) as written upon the face of the Stock Certificate in every particular without alteration or enlargement or any change whatever. Signature guarantee should be made by a member or member organization of the New York Stock Exchange, members of other Exchanges having signatures on file with transfer agents or by a commercial bank or trust company. STOCK POWER ASSIGNMENT - -------------------------------------------------------------------------------- FOR VALUE RECEIVED, the undersigned does (do) hereby sell, assign and transfer to: - -------------------------------------------------------------------------------- (NAME OF TRANSFEREE) Social Security or Tax Identifying Number: ___________________________ shares of the capital stock of Big O Tires, Inc., a Nevada corporation, as the same is evidenced on the attached stock certificate numbered 12520, standing in the name of the undersigned on the books of said corporation. The undersigned does (do) hereby irrevocably constitute and appoint: __________________________________, attorney to transfer the said Stock on the books of said company, with full power of substitution in the premises. C.S.B. PARTNERSHIP. a California General Partnership. DATE: 1/11/96 BY: C.E.P. Developments, Inc., ------- a California corporation as General Partner BY: /s/Christopher R. Phillips -------------------------- TITLE: President ------------------------ DATE: 1/12/96 BY: Someday, Inc., ------- a California corporation as General Partner BY: /s/Ronald D. Asher -------------------------- TITLE: President ------------------------ DATE: 1/16/96 BY: J.M.C., Inc., ------- a California corporation as General Partner BY: /s/John Connelly -------------------------- TITLE: President ------------------------ DATE: 1/15/96 BY: FOUR KYLES, INC., ------- a California corporation as General Partner BY: /s/Virgil Kyle Kyle,III -------------------------- TITLE: President ------------------------ SIGNATURE) GUARANTEED) IMPORTANT - READ CAREFULLY The signature(s) to this Power must correspond with the name(s) written upon the face of the Stock Certificate in every particular without alternation or enlargement of any change whatever. Signature guarantee should be made by a member or member organization of the New York Stock Exchange, members of other Exchanges having signatures on file with transfer agents or by commercial bank or trust company. EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES Big O Tire of Idaho, Inc., an Idaho corporation Big O Retail Enterprises, Inc., a Colorado corporation Big O Development, Inc., a Colorado corporation O Advertising, Inc., a Colorado corporation EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-36802, Registration Statement No. 33-41875, and Registration Statement No. 33-42021 of Big O Tires, Inc. on Forms S-8 of our report dated March 14, 1996, appearing in this Annual Report on Form 10-K of Big O Tires, Inc. for the year ended December 31, 1995. /s/ Deloitte & Touche, LLP DELOITTE & TOUCHE, LLP Denver, Colorado March 26, 1996 EX-25.1 8 EXHIBIT 25.1 EXHIBIT 25.1 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints John B. Adams and Philip J. Teigen, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an Officer, Director, or both, of Big O Tires, Inc., a Nevada corporation ("Company"), to sign the Form 10-K Report of the Company for the year-ended December 31, 1995, and any and all amendments thereto and to file the same with the United States Securities and Exchange Commission, granting on said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite necessary to be done in and about the premises, as fully to all agents and purposes as he might or could do in person, hereby qualifying and confirming all that said attorneys-in-fact or agents or any of them, or their or his substitute or substitutes, may fully do or cause to be done by virtue hereof. SIGNATURE TITLE DATE - --------- ------ ----- Executive Vice President, /s/John B. Adams Chief Financial Officer 3/12/96 - ------------------------ and Director John B. Adams /s/Ronald D. Asher Director 3/6/96 - ------------------------ Ronald D. Asher /s/Frank Carney Director - ------------------------ Frank L. Carney /s/Steven P. Cloward President and Director 3/13/96 - ------------------------ Steven P. Cloward /s/Everett Johnston Director 3/18/96 - ------------------------ Everett H. Johnston /s/Robert K. Lallatin Director March 5, 1996 - ------------------------ /s/H.K. Mehlfeldt Vice-Chairman and Director 3/12/96 - ------------------------ Horst K. Mehlfeldt /s/John E. Siipola Chairman and Director 3/12/96 - ------------------------ John E. Siipola /s/R.J. Weiger Director 3/5/96 - ------------------------ Ralph J. Weiger /s/C. Thomas Wernholm Director - ------------------------ C. Thomas Wernholm EX-27 9 FINANCIAL DATA SCHEDULE
5 4-MOS DEC-31-1995 DEC-31-1995 1,094,000 0 11,433,000 (1,421,000) 13,249,000 32,639,000 21,592,000 (5,266,000) 63,394,000 10,598,000 0 335,000 0 0 37,072,000 63,394,000 142,122,000 142,122,000 111,456,000 111,456,000 26,501,000 0 1,441,000 2,724,000 1,181,000 1,543,000 0 0 0 1,543,000 .46 .46
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