-----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, I9SwWCKPP8mE58qBL6t787/PDjbJl/NkjS4RSHXty8nZp5jC1HmDmG4KS+QFGlcT I8NpFqjOP7RI4323oT87CQ== 0000718449-98-000002.txt : 19980217 0000718449-98-000002.hdr.sgml : 19980217 ACCESSION NUMBER: 0000718449-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TBC CORP CENTRAL INDEX KEY: 0000718449 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLES & MOTOR VEHICLE PARTS & SUPPLIES [5010] IRS NUMBER: 310600670 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11579 FILM NUMBER: 98532826 BUSINESS ADDRESS: STREET 1: 4770 HICKORY HILL RD CITY: MEMPHIS STATE: TN ZIP: 38141 BUSINESS PHONE: 9013638030 MAIL ADDRESS: STREET 1: 4770 HICKORY HILL RD CITY: MEMPHIS STATE: TN ZIP: 38141 10-K 1 CONFORMED SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER DECEMBER 31, 1997 0-11579 TBC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 31-0600670 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4770 Hickory Hill Road Memphis, Tennessee 38141 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (901)363-8030 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK 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 ] INDEX TO EXHIBITS at page 37 of this Report Aggregate market value of outstanding shares of Common Stock, par value $.10, held by non-affiliates of the Company on December 31, 1997 (for purposes of this calcu- lation, 1,793,923 shares beneficially owned by directors and executive officers of the Company were treated as being held by affiliates of the Company)................. $204,337,744 Number of shares of Common Stock, par value $.10, outstanding at the close of business on December 31, 1997 ............................ 23,162,576 DOCUMENT INCORPORATED BY REFERENCE TBC Corporation's Proxy Statement for its Annual Meeting of Stockholders to be held on April 22, 1998. Definitive copies of the Proxy Statement will be filed with the Commission within 120 days after the end of the Company's fiscal year. Only such portions of the Proxy Statement as are specifically incorporated by reference under Part III of this Report shall be deemed filed as part of this Report. _______________________ -2- PART I Item 1. BUSINESS TBC Corporation's business began in 1956 under the name Cordovan Associates, Incorporated. The present company was incorporated in Delaware in 1970 under the name THE Tire & Battery Corporation. In 1983, the Company changed its name to TBC Corporation. TBC Corporation and its wholly-owned subsidiaries are principally engaged in the business of distributing tires and other products in the automotive replacement market. Through its Big O Tires, Inc. ("Big O") subsidiary, which was acquired on July 10, 1996, the Company is also engaged in the business of franchising independent retail tire and automotive service stores. On a limited basis, Big O also owns and operates retail stores and engages in site selection and real estate development for retail stores. Big O's retail stores are located primarily in the Midwest and western United States. Unless the context indicates otherwise, the term "Company" refers to TBC Corporation and all of its subsidiaries. Products Sales of tires accounted for approximately 94% of the Company's total sales in 1997, 88% in 1996 and 89% in 1995. The Company's tire lines, substantially all of which carry the Company's proprietary brand names, are made by leading manufacturers. The Company's Cordovan ("R" - Registered Trademark), Multi-Mile (R) and Sigma (R) brand lines of tires are three of the most complete lines in the replacement tire market, including tires for passenger, truck, farm, industrial, recreational and other applications. Big O (R) brand tires, as well as other tires sold through Big O's retail stores, are primarily for passenger and light truck applications. The Company is one of the largest wholesale distributors of replacement tires in the United States. Other brands under which the Company's products are marketed include Grand Prix (R), Grand Am ("TM" - Trademark), Grand Spirit (R), Wild Spirit (R), Grand Sport (R), Gran Esprit (TM), Aqua-Flow (R), Wild Country (R), Wild Trac (R), Stampede (R), Power King (R), Harvest King (R), Big Foot (R), Legacy (R), Prestige (R), and Sun Valley (R). Through 1996, the Company's products also included automotive parts lines such as batteries, wheels, ride-control products, filters, brake parts and chassis parts. In December 1996, the Company announced its decision to refocus operations on the replacement tire business and discontinue the marketing of automotive parts lines to independent distributors. In connection with this decision, the Company sold certain assets of its former battery distribution subsidiary in December 1996 and completed the remainder of the marketing and operational changes in early 1997. There was no impact on the products marketed and distributed by Big O, which include wheels, ride-control products and certain other automotive products, in addition to its tire lines. There was also no impact on the Company's marketing of tubes to independent distributors. -3- Marketing and Distribution The Company distributes its products other than those sold through its Big O subsidiary ("TBC products"), through a network of distributors located across the United States, Canada and Mexico. Some of these distributors act as wholesalers, some as retailers and some as both wholesalers and retailers. The retail outlets handling TBC products consist primarily of independent tire dealers. The loss of any major distributor of TBC products could have a material adverse effect upon the Company's business, pending the Company's establishment of a replacement distributor. Big O distributes its products principally through its franchised independent retail tire and automotive service stores. At December 31, 1997, Big O had a total of 415 stores in the United States, including 399 franchisee-owned stores, three joint venture stores and 13 company-owned stores. Big O also distributes its products to 36 unaffiliated retail stores in British Columbia, Canada. Big O franchise agreements grant a ten-year license to sell Big O (R) brand tires and to use Big O trademarks and trade secrets in the operation of a retail store at a specific location within a defined trade area. Each franchisee is required to pay an initial franchise fee as well as monthly royalty fees. Major Customers The Company's ten largest customers accounted for 44% of the Company's gross sales in 1997. Sales to Les Schwab Warehouse Center, Inc., Prineville, Oregon, represented 11% of the Company's gross sales in 1997. Sales to Carroll's, Inc., Hapeville, Georgia, excluding sales to distributors which operate under arrangements with and may pay compensation to Carroll's, also represented 11% of the Company's gross sales in 1997. No other customers individually accounted for more than 10% of the Company's 1997 gross sales. See Item 13 of this Report for additional information concerning major customers. Suppliers The Company purchases its products, in finished form, from a number of major rubber companies and other suppliers to the automotive replacement market. The Company owns the brand names under which most of its products are sold and, in the case of tires, many of the molds in which they are made. The Kelly-Springfield Tire Company, a division of Goodyear Tire and Rubber Company, has been a supplier to the Company since 1963. Kelly- Springfield manufactured more than half of the tires purchased by the Company in 1997, pursuant to a supply agreement entered into in 1977 and a 10-year commitment signed in 1994. The Company also has a 10-year supply agreement, signed in 1994, with Cooper Tire and Rubber Company, its second-largest supplier. In addition, the Company has written contracts with certain other suppliers. The Company has not heretofore experienced any difficulty in purchasing products in quantities needed by it, but there can be no assurance that such difficulties will not be encountered in the -4- future. If one of its two largest suppliers became unavailable, the Company's business could be adversely affected, pending the establishment of new, alternate suppliers. There are a number of other large tire manu- facturers on a worldwide basis. Trademarks Substantially all of the Company's products carry the Company's own brand names, as previously set forth. The ability to offer products under established trademarks represents an important marketing advantage in the automotive replacement industry, and the Company regards its trademarks as valuable assets of its business. The Company holds federal registrations for substantially all of its trademarks. Seasonality and Inventory The Company normally experiences its highest level of sales in the second and third quarters of each year, with the first quarter exhibiting the lowest level. Since 1993, first quarter sales have represented, on the average, approximately 23% of annual sales; the second and third quarters approximately 25% and 28%, respectively; and the fourth quarter approximately 24%. The Company's inventories generally fluctuate with anticipated seasonal sales volume. Orders for the Company's products are usually placed with the Company by computer transmission, facsimile or telephone. Orders are filled either out of the Company's inventory or by direct shipment to the customer from the manufacturers' plants at TBC's request. Since distributors and franchisees look to the Company to fulfill their needs on short notice, the Company maintains a large inventory of products. The average of beginning and end-of-year inventories was $78,000,000 in 1997. The Company's inventory turn rate (cost of sales, including the cost of direct shipments from manufacturers to customers, divided by average inventory) was 7.0 for 1997. Competition The industry in which the Company operates is highly competitive, and many of the Company's competitors are significantly larger and have greater financial and other resources than the Company. The Company's competitors include its own suppliers and other tire manufacturers, as well as other wholesale tire distributors. The Company also competes against chain and department stores, warehouse clubs, oil companies and other tire and automotive product retailers. The Company believes it is able to compete successfully in its industry because of its ability to offer quality products under proprietary brand names, its efficient distribution systems, and its good relationships with distributors, franchisees and suppliers. Employees As of December 31, 1997, the Company employed 585 persons. The Company considers its employee relations to be satisfactory. The Company's employees are not represented by a union. -5- Item 2. PROPERTIES TBC Corporation's executive offices are located in Memphis, Tennessee. Warehouse distribution facilities for TBC products, which total approximately 1,300,000 square feet under roof, are also located in Memphis. The Company owns the executive office building and one of its warehouses. One TBC warehouse is leased under an agreement expiring in 2005 and two other TBC warehouses are leased under agreements expiring in 2000. The Company's Northern States Tire, Inc. subsidiary owns facilities in New Hampshire, Vermont and Maine. Big O leases its executive offices, which are located in Englewood, Colorado. Big O owns its warehouse distribution facilities, which total approximately 480,000 square feet and are located in Boise, Idaho, New Albany, Indiana and Henderson, Nevada. Big O also owns certain retail store locations. Item 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings which are routine to the conduct of its business, none of which is believed to be material to the Company. Some of these proceedings involve personal injury lawsuits based upon alleged defects in products sold by the Company. The Company believes that in substantially all such product liability cases, it is covered by its manufacturers' indemnity agreements or product liability insurance. The Company also maintains its own product liability insurance. See Note 6 to the consolidated financial statements for informa- tion with respect to pending legal proceedings relative to the collection of a promissory note receivable held by the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT The following table presents certain information concerning the executive officers of the Company. The term of office of all executive officers of the Company is until the next Annual Meeting of Directors (April 22, 1998) or until their respective successors are elected. -6- Capacities in which Individual Serves Name Age the Company Louis S. DiPasqua 63 President and Chief Executive Officer Bob M. Hubbard 63 Executive Vice President Purchasing and Engineering Kenneth P. Dick 51 Senior Vice President Sales Ronald E. McCollough 57 Senior Vice President Operations and Treasurer Barry D. Robbins 55 Senior Vice President Strategic Planning Larry D. Coley 40 Vice President and Controller Mr. DiPasqua has been Chief Executive Officer since July 1994, and President since joining the Company in 1991. Mr. DiPasqua has been a director since 1991 and served as the Company's Chief Operating Officer from 1991 until July 1994. Prior to joining the Company, Mr. DiPasqua was an executive with the Goodyear Tire & Rubber Company. During his 28 years at Goodyear, Mr. DiPasqua held a variety of positions, including Vice President of Replacement Tire Sales and Marketing, President and Chief Executive Officer of Kelly Springfield Tire Company (a division of Goodyear) and Chairman and Managing Director of Goodyear Great Britain. Mr. Hubbard was named Executive Vice President Purchasing and Engineering of the Company in December 1997. Mr. Hubbard served as Senior Vice President Purchasing and Engineering from 1982 until being named Executive Vice President. From 1973 to 1982, Mr. Hubbard served as Vice President Purchasing and Quality Assurance of the Company. Mr. Dick has served as Senior Vice President Sales of the Company since 1988. From 1982 until his election as Senior Vice President, Mr. Dick served as Vice President Sales of the Company. Mr. Dick joined the Company in 1971, and from 1980 until 1982, served as Sales Manager of the Company. Mr. McCollough has been Senior Vice President Operations of the Company since 1982 and Treasurer since May 1996. Mr. McCollough served as Controller of the Company from 1973 to 1985 and as Vice President Operations from 1978 until his election as a Senior Vice President. -7- Mr. Robbins joined the Company as Senior Vice President Strategic Planning in June 1996. From 1995 until joining the Company, Mr. Robbins was President and Chief Executive Officer of Tire Alliance Groupe. Prior to 1995, Mr. Robbins had been continuously employed by Goodyear Tire & Rubber Company and its subsidiaries in a number of management and other positions since 1968. Mr. Coley has been a Vice President of the Company since 1993 and the Controller of the Company since 1989. Prior to that, Mr. Coley was the Company's Manager of Financial Reporting. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded on The Nasdaq Stock Market under the symbol TBCC. As of December 31, 1997, the Company had approximately 4,800 stockholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings. The Company did not declare any cash dividends during 1997 or 1996. The following table sets forth for the periods indicated the high and low sale prices for the Company's Common Stock on the Nasdaq National Market System. Price Range High Low Quarter ended 03/31/96............ 8.63 6.38 06/30/96............ 9.13 6.63 09/30/96............ 8.75 6.38 12/31/96............ 8.38 5.25 03/31/97............ 9.94 7.00 06/30/97............ 10.00 6.75 09/30/97............ 9.75 7.38 12/31/97............ 11.00 9.00 -8- Item 6. SELECTED FINANCIAL DATA Set forth below is selected financial information of the Company for each year in the five-year period ended December 31, 1997. The selected financial information should be read in conjunction with the consolidated financial statements of the Company and notes thereto which appear elsewhere in this Report. Specific reference should be made to the discussion of the 1996 acquisition of Big O Tires, Inc. in Note 3 to the consolidated financial statements. The Company did not declare any cash dividends during the five-year period ended December 31, 1997. Year ended December 31, 1997 1996 1995 1994 1993 INCOME STATEMENT DATA (1): Net sales ................ $642,852 $604,585 $547,785 $563,661 $580,104 Net income ............... 19,700 15,499 15,249 19,546 21,375 Earnings per share (2) ... .84 .65 .62 .71 .74 Average shares outstanding .......... 23,466 23,793 24,583 27,551 28,758 BALANCE SHEET DATA (1): Total assets ............. $262,141 $253,882 $179,952 $169,682 $166,746 Working capital .......... 130,414 117,980 76,600 91,279 95,114 Long-term debt ........... 67,647 69,550 555 - - Stockholders' equity ..... 134,187 119,805 104,823 113,983 116,550 (1) In thousands except per share amounts. (2) Basic and assuming dilution. -9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1997 Compared to 1996: As a result of the Company's acquisition of Big O Tires, Inc. on July 10, 1996 (see Note 3 to the consolidated financial statements), there were a number of significant changes in income statement items between the years 1997 and 1996. Additionally, the impact of the Company's decision in December 1996 to discontinue the marketing of automotive parts, except those sold through Big O, affected the comparison of year-to-year results. Included in the 1996 operating results were $2.4 million in pre-tax charges related to this decision. The discontinued product lines comprised approximately 6.5% of net sales in 1996. (See Note 14 to the consolidated financial statements.) Net sales for 1997 increased 6.3% from the 1996 level, with Big O contributing an additional $75.3 million in net sales. Sales of tires accounted for approximately 94% of total sales in 1997 compared to 88% in 1996. The increased percentage of tire sales was the result of the above- mentioned decision to discontinue the marketing of certain non-tire products to TBC's independent distributors. Excluding the contribution by Big O, TBC's unit tire volume increased 2.9% compared to the 1996 level. The average tire sales price excluding Big O declined 1.7%, due principally to industry-wide price discounting that was prevalent throughout much of 1996 and 1997. Cost of sales as a percentage of net sales decreased from 87.4% in 1996 to 84.6% in 1997, due largely to the full-year effect of the Big O acquisition, including the positive impact on the Company's overall sourcing strength. In addition, an increase in the percentage of shipments through the Company's distribution facilities rather than direct from manufacturers affected the comparison to 1996 results. Gross margin percentages on shipments through the Company's own facilities are typically higher than on shipments direct from manufacturers, since sales prices are generally higher to help offset the incremental costs of distribution. Distribution expenses increased $6.5 million in 1997 compared to 1996. The increase was principally due to the inclusion of additional warehousing and product delivery expenses at Big O of $5.1 million. The increase was also due in part to the above-noted increase in the percentage of TBC's shipments through the Company's distribution facilities. Selling and administrative expenses increased $8.9 million in 1997 compared to 1996, due primarily to the inclusion of additional Big O expenses of approximately $9.8 million. The 1997 increase was also affected by a charge of $810,000 associated with an early retirement program accepted by certain employees. Expenses in 1996 included charges of approximately $700,000 related to the decision to discontinue selling automotive parts to TBC's independent distributors. Excluding these items, selling and administrative expenses were reduced by $1.0 million in 1997. -10- Interest expenses increased $1.7 million compared to the 1996 level. The full-year impact of the long-term borrowings incurred to finance the Big O acquisition resulted in increased interest in 1997. This more than offset an $887,000 reduction in interest on short-term borrowings related to lower borrowing levels. Net other income was higher in 1997 than in 1996, due primarily to greater interest income and an increase in the equity in earnings from the Company's joint ventures. The Company's effective tax rate decreased from 39.0% in 1996 to 37.6% in 1997. The lower effective rate reflects a reduction in TBC's state taxes, as well as the impact of certain other 1997 tax reductions. 1996 Compared to 1995: Net sales for 1996 were $604.6 million, a 10.4% increase from 1995 net sales of $547.8 million. The increase was due principally to the addition of sales by Big O, which was acquired July 10, 1996. Sales of tires accounted for approximately 88% of total sales in 1996 compared to 89% in 1995. Excluding the contribution by Big O, sales of tires declined 2.4%, due principally to industry-wide price discounting throughout much of 1996 which caused average tire sales prices to be 3.7% lower than in 1995. TBC's unit tire volume (excluding Big O) increased 1.3% in 1996 compared to the 1995 level. Cost of sales as a percentage of net sales decreased from 89.2% in 1995 to 87.4% in 1996, due to the positive effects of the Big O acquisition, including the Company's improved overall sourcing strength. In addition, a shift in the Company's sales toward shipments through the Company's distribution facilities rather than direct from manufacturers affected the year-to-year comparison. Distribution expenses increased $5.5 million in 1996 compared to 1995, due primarily to Big O warehousing and product delivery expenses totaling $3.9 million since the acquisition date. Approximately $643,000 of the increase was associated with the addition of certain facilities in the northeastern United States in September 1995. The 1996 increase was also related in part to the above-noted increase in the percentage of TBC's shipments through its own distribution facilities. Selling and administrative expenses increased $10.2 million in 1996 compared to 1995, due principally to expenses for Big O of approx- imately $7.1 million since the July 10, 1996 acquisition date. Expenses in 1996 included charges of approximately $700,000 related to the decision to discontinue selling automotive parts to TBC's independent distributors. Increased expenses of $1.6 million were attributable to the facilities added in the northeastern United States in September 1995. The remainder of the increase in selling and administrative expenses was principally related to salary increases and related expenses. Interest expenses increased $1.0 million compared to the 1995 level. Interest on the additional long-term borrowings required to finance the Big O acquisition totaled $2.2 million in 1996, but was partially offset by the effect of reduced short-term borrowing levels. Net other income was higher in 1996 than in 1995, due primarily to income from the settlement of a trademark infringement matter. -11- The Company's effective tax rate increased from 38.4% in 1995 to 39.0% in 1996. The increased effective rate reflected the impact of the Big O acquisition, due to the additional goodwill amortization and greater overall state tax burden. LIQUIDITY AND CAPITAL RESOURCES The Company's financial position and liquidity remain strong, with working capital of $130.4 million at December 31, 1997 compared to $118.0 million at the end of 1996. The Company's current ratio was 3.47 at the end of 1997 compared to 3.18 at December 31, 1996. The Company's short-term borrowing agreements consist of a one- year committed bank facility and a three-year committed bank facility, which allow the Company to borrow up to $51.5 million. The unused amount under these facilities at December 31, 1997 was $28.4 million. Long-term debt totaled $68.3 million at December 31, 1997, of which $690,000 was current and the remainder was due after one year. Of the total long-term debt, $60 million was incurred to finance the 1996 acquisition of Big O. Capital expenditures, primarily for equipment and tire molds, totaled $9.1 million in 1997 and $5.3 million in 1996. The Company had no material commitments for capital expenditures at the end of 1997. The Company expects to fund 1998 day-to-day operating expenses and normally recurring capital expenditures out of operating funds and its present financial resources. The Company believes that the combination of its net assets, committed bank facilities and expected funds from operations will be sufficient to operate on both a short-term and long-term basis. Cash generated by operations, together with the available credit arrangements, enabled the Company to fund stock repurchases totaling $5.7 million in 1997 and $634,000 in 1996, as well as the above-mentioned capital expenditures. As of December 31, 1997, the Company had unused authorizations from the Board of Directors for the repurchase of approximately 2,011,000 additional shares of common stock. Accounts and notes receivable decreased from $85.8 million at December 31, 1996 to $77.3 million at the end of 1997, due principally to improved receivable turnover. Inventories increased from $71.1 million at the end of 1996 to $84.8 million at December 31, 1997, due to the addition of a number of new lines and sizes of tires during 1997 and to the effect of less-than-anticipated sales demand during the fourth quarter of 1997. Included in other assets at December 31, 1997 and 1996 is a promissory note receivable of $4,897,000 from a former distributor. (See Note 6 to the Consolidated Financial Statements for a discussion of the legal proceedings relative to that receivable.) The Company is addressing any "Year 2000" issues and does not believe that the costs will be significant. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial informa- tion required by this Item 8 are included on the following 17 pages of this Report. -12- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders TBC Corporation We have audited the accompanying consolidated balance sheets of TBC Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TBC Corporation and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Memphis, Tennessee January 30, 1998 -13- TBC CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS December 31, 1997 1996 CURRENT ASSETS Cash and Cash Equivalents $ 917 $ - Accounts and notes receivable, less allowance for doubtful accounts of $7,344 in 1997 and $8,879 in 1996: Related parties 15,072 18,362 Other 62,267 67,444 Total accounts and notes receivable 77,339 85,806 Inventories 84,806 71,102 Refundable federal and state income taxes 2,489 - Deferred income taxes 4,863 6,716 Other current assets 12,784 8,409 Total current assets 183,198 172,033 PROPERTY, PLANT AND EQUIPMENT, AT COST Land and improvements 5,604 5,285 Buildings and leasehold improvements 23,167 21,691 Furniture and equipment 29,455 25,929 58,226 52,905 Less accumulated depreciation 21,967 17,818 Total property, plant and equipment 36,259 35,087 TRADEMARKS, NET 17,337 17,787 GOODWILL, NET 14,628 14,900 OTHER ASSETS 13,526 14,075 TOTAL ASSETS $264,948 $253,882 The accompanying notes are an integral part of the financial statements. -14- TBC CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1997 1996 CURRENT LIABILITIES Outstanding checks, net $ 3,237 $ 559 Notes payable to banks 22,496 21,092 Current portion of long-term debt 690 1,537 Accounts payable, trade 10,879 16,761 Federal and state income taxes payable - 106 Other current liabilities 15,482 13,998 Total current liabilities 52,784 54,053 LONG-TERM DEBT, LESS CURRENT PORTION 67,647 69,550 NONCURRENT LIABILITIES 2,876 2,753 DEFERRED INCOME TAXES 7,454 7,721 STOCKHOLDERS' EQUITY Common stock, $.10 par value, shares issued and outstanding - 23,163 in 1997 and 23,727 in 1996 2,316 2,373 Additional paid-in capital 9,788 9,624 Retained earnings 122,083 107,808 Total stockholders' equity 134,187 119,805 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $264,948 $253,882 The accompanying notes are an integral part of the financial statements. -15- TBC CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Years ended December 31, 1997 1996 1995 NET SALES* $642,852 $604,585 $547,785 COSTS AND EXPENSES Cost of sales 544,119 528,610 488,717 Distribution 31,479 24,933 19,461 Selling and administrative 33,218 24,294 14,073 Interest expense 5,796 4,115 3,110 Other (income) expense - net (3,347) (2,766) (2,348) Total costs and expenses 611,265 579,186 523,013 INCOME BEFORE INCOME TAXES 31,587 25,399 24,772 PROVISION FOR INCOME TAXES 11,887 9,900 9,523 NET INCOME $ 19,700 $ 15,499 $ 15,249 EARNINGS PER SHARE - Basic and assuming dilution $ .84 $ .65 $ .62 * Including sales to related parties of $138,511, $137,219 and $130,215 in the years ended December 31, 1997, 1996 and 1995, respectively. The accompanying notes are an integral part of the financial statements. -16- TBC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Years ended December 31, 1995, 1996 and 1997
Common Stock Additional Number of Paid-In Retained Shares Amount Capital Earnings Total BALANCE, JANUARY 1, 1995 26,282 $2,628 $10,391 $100,964 $113,983 Net income for year 15,249 15,249 Issuance of common stock under stock option and incentive plans, net 19 2 132 - 134 Repurchase and retirement of common stock (2,517) (252) (1,002) (23,311) (24,565) Tax benefit from exercise of stock options - - 22 - 22 BALANCE, DECEMBER 31, 1995 23,784 2,378 9,543 92,902 104,823 Net income for year 15,499 15,499 Issuance of common stock under stock option and incentive plans, net 24 3 114 - 117 Repurchase and retirement of common stock (81) (8) (33) (593) (634) BALANCE, DECEMBER 31, 1996 23,727 2,373 9,624 107,808 119,805 Net income for year 19,700 19,700 Issuance of common stock under stock option and incentive plans 59 6 364 - 370 Repurchase and retirement of common stock (623) (63) (254) (5,425) (5,742) Tax benefit from exercise of stock options - - 54 - 54 BALANCE, DECEMBER 31, 1997 23,163 $2,316 $ 9,788 $122,083 $134,187 The accompanying notes are an integral part of the financial statements.
-17- TBC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years ended December 31,
1997 1996 1995 Operating Activities: Net income $ 19,700 $ 15,499 $ 15,249 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,742 5,750 4,612 Amortization 979 530 23 Write-off of intangible assets - 276 - Deferred income taxes 1,586 (845) (461) Equity in (earnings) loss from joint ventures (426) (265) - Changes in operating assets and liabilities: Receivables 9,260 19,383 6,179 Inventories (13,704) (2,815) (9,784) Other current assets (4,375) (1,986) 230 Other assets (15) (40) (280) Accounts payable, trade (5,882) 589 (10,646) Federal and state income taxes refundable or payable (2,541) 1,240 (67) Other current liabilities 1,484 1,366 187 Noncurrent liabilities 123 203 332 Net cash provided by operating activities 12,931 38,885 5,574 Investing Activities: Purchase of property, plant and equipment (9,104) (5,260) (9,151) Acquisition of Big O Tires, Inc. - (55,433) - Investments in joint ventures - - (1,562) Net proceeds from asset disposition - 2,099 - Other 1,130 777 13 Net cash used in investing activities (7,974) (57,817) (10,700) Financing Activities: Net bank borrowings (repayments) under short-term borrowing arrangements 1,404 (29,746) 25,058 Increase (decrease) in outstanding checks, net 2,678 (8,480) 3,863 Increase in long-term debt - 60,000 697 Payments on long-term debt (2,750) (2,325) (61) Issuance of common stock under stock option and incentive plans, net of repurchase 370 117 134 Repurchase and retirement of common stock (5,742) (634) (24,565) Net cash provided by (used in) financing activities (4,040) 18,932 5,126 Change in cash and cash equivalents 917 - - Cash and cash equivalents: Balance - Beginning of year - - - Balance - End of year $ 917 $ - $ -
-18- TBC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) Years ended December 31,
1997 1996 1995 Supplemental Disclosures of Cash Flow Information: Cash paid for - Interest $ 6,090 $ 3,510 $ 2,956 - Income Taxes 12,842 9,506 10,051 Supplemental Disclosure of Non-Cash Financing Activity: Tax benefit from exercise of stock options $ 54 $ - $ 22 Supplemental Disclosure of Non-Cash Investing and Financing Activities: On July 10, 1996, the Company completed the acquisition of Big O Tires, Inc. for a total purchase price of approximately $54,646, plus applicable closing costs. The acquisition was accounted for under the purchase method, as follows: Estimated fair value of assets acquired $ 60,263 Trademarks and Goodwill 33,072 Cash Paid (55,433) Liabilities assumed $ 37,902 During 1996, the Company disposed of certain assets of its battery distribution subsidiary, as follows: Assets sold $ (2,882) Cash received 2,099 Liabilities assumed by purchaser $ (783) The accompanying notes are an integral part of the financial statements.
-19- TBC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Operations The Company is principally engaged in the business of distributing tires and other products in the automotive replacement market, through wholesale and retail customers in the United States, Canada and Mexico. Through its Big O Tires, Inc. subsidiary, which was acquired on July 10, 1996, the Company also acts as a franchisor of independent retail tire and automotive service stores located primarily in the Midwest and western United States. On a limited basis, Big O engages in site selection and real estate development for franchised stores and owns and operates a limited number of retail stores. Significant Accounting Policies Principles of consolidation - The accompanying financial statements include the accounts of TBC Corporation and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in 50% or less-owned joint ventures over which the Company has the ability to exercise significant influence are accounted for using the equity method. Accounting 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, liabilities, revenues and expenses, as well as certain financial statement disclosures. Cash equivalents - Cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash. Inventories - Inventories, consisting of automotive products held for resale, are valued at the lower of cost (principally last in-first out) or market. Current costs of inventories exceeded the LIFO value by $3,517,000 and $4,759,000 at December 31, 1997 and 1996, respectively. Concentrations of credit risk - The Company performs ongoing credit evaluations of its customers and typically requires some form of security, including collateral, guarantees or other documentation. The Company maintains allowances for potential credit losses. The Company maintains cash balances with financial institutions with high credit ratings. The Company has not experienced any losses with respect to bank balances in excess of government-provided insurance. Property, plant and equipment - Depreciation is computed principally using the straight-line method, over estimated lives of 3-15 years for furniture and equipment and 20-40 years for buildings and leasehold improvements. Amounts expended for maintenance and repairs are charged to operations, and expenditures for major renewals and betterments are capitalized. When property, plant and equipment is retired or otherwise disposed of, the related gain or loss is included in operations. -20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES (Continued) Goodwill, Trademarks and Other Intangible Assets - Goodwill and trademarks were recorded as a result of the acquisition of Big O Tires, Inc. on July 10, 1996. Goodwill represents the excess of cost over the fair value of identifiable net assets acquired. The value assigned to trademarks was based on an independent third-party valuation prepared at the time of acquisition. Goodwill, trademarks and other intangible assets are amortized on a straight-line basis, principally over 40 years. Accumulated amortization on intangible assets totaled $1,266,000 and $414,000 at December 31, 1997 and 1996, respectively. The Company periodically reviews the recoverability of intangible and other long-lived assets. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows of the specific intangible assets and determine if the assigned value is recoverable based on such projection. If impairment is indicated, an adjustment will be made to the carrying value of the assets based on the discounted future cash flows. The Company does not believe that there are any facts or circumstances indicating impairment of any of its recorded intangible assets. Revenue recognition - Sales are recognized upon shipment of products. Estimated costs of returns and allowances are accrued at the time products are shipped. Franchise fees - Each Big O franchisee is required to pay an initial franchise fee as well as monthly royalty fees of 2% of gross sales. Included in net sales in 1997 and 1996 were franchise and royalty fees of $7,811,000 and $3,742,000, respectively. Standard warranty - The costs of anticipated adjustments for workmanship and materials that are the responsibility of the Company are estimated and charged to expense currently. Warranty reserves of $6,931,000 and $6,675,000 were included in other current liabilities in the balance sheets at December 31, 1997 and 1996, respectively. Interest on early payments to suppliers for product - Interest income associated with early payments to suppliers for product is recorded as a reduction to cost of sales in the statements of income. This interest income represented 1.5% of net sales during 1997 and 1996 and 1.6% in 1995. Earnings per share - In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per share", which established new standards for computing and presenting earnings per share. Earnings per share for all periods presented have been calculated according to this standard. Basic earnings per share have been computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average number of common shares and equivalents outstanding. The weighted average number of common shares outstanding totaled 23,466,000 in 1997, 23,793,000 in 1996 and 24,583,000 in 1995. Common stock equivalents, representing shares issuable upon assumed exercise of stock options, totaled 105,000 in 1997, 47,000 in 1996 and 99,000 in 1995. The weighted average number of common shares and equivalents outstanding totaled 23,571,000 in 1997, 23,840,000 in 1996 and 24,682,000 in 1995. -21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS The Company's operations are managed through its Board of Directors, members of which owned or are affiliated with companies which owned approximately 8% of the Company's common stock at December 31, 1997. Sales to distributors represented on the Board, including affiliates of such distributors, accounted for approximately 18% of the Company's net sales during 1997, 20% during 1996 and 24% in 1995. One such distributor accounted for approximately 11% of net sales in 1997, 12% in 1996 and 15% in 1995. Another major customer, unaffiliated with the board of directors, accounted for approximately 11% of net sales in 1997, 9% in 1996 and 8% in 1995. Sales to joint ventures in which the Company has an ownership interest accounted for approximately 4% of the Company's net sales during 1997, 3% in 1996 and 1% in 1995. Accounts receivable resulting from transactions with related parties are presented separately in the balance sheets. 3. ACQUISITION OF BIG O TIRES, INC. On July 10, 1996, the Company completed the acquisition of Big O Tires, Inc. Under the terms of the merger agreement, Big O stockholders received $16.47 in cash for each of the 3,317,916 outstanding shares of common stock, a total purchase price of $54,646,000. The acquisition was accounted for as a purchase. These consolidated financial statements include the operating results of Big O from the date of acquisition. The following unaudited pro forma information (adjusted for interest on required borrowings, estimated amortization of intangible assets, improved sourcing strength, etc.) was prepared as if the companies had been combined as of January 1, 1995. The pro forma information does not purport to present what actual results of operations would have been if the acquisition of Big O had occurred on such date or to project results for any future period. (In millions, except per share data) Years Ended December 31, 1996 1995 (Unaudited) Net sales $ 673.7 $ 684.4 Net income 18.0 18.3 Earnings per share .76 .74 4. CREDIT FACILITIES The Company's short-term borrowing agreements consist of a one- year committed bank facility and a three-year committed bank facility. The credit facilities allow the Company to borrow up to $51,500,000, with interest on the one-year facility at the federal funds rate plus 1.15% and interest on the three-year facility based on LIBOR plus a variable rate between 0.45% and 0.875%. The credit facilities also require the payment of certain commitment and administrative fees. The unused amount under these facilities at December 31, 1997 was $28.4 million. The weighted average interest rate on short-term borrowings at December 31, 1997 and 1996 was 7.22% and 6.61%, respectively. -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. CREDIT FACILITIES (Continued) The credit facilities contain certain financial covenants dealing with the Company's tangible net worth, working capital, funded indebtedness and fixed charge coverage ratio. The credit facilities also include certain restrictions which affect the Company's ability to incur additional debt, sell or place liens upon assets, provide guarantees and make loans, advances, investments and certain expenditures. 5. LONG-TERM DEBT Long-term debt consists of the following (in thousands): December 31, 1997 1996 7.55% Series A Senior Note, due from 1999 through 2003 $32,500 $32,500 7.87% Series B Senior Note, due from 2004 through 2005 11,000 11,000 8.06% Series C Senior Note, due from 2006 through 2008 16,500 16,500 8.71% Senior loan, collateralized by certain real estate, due from 1998 through 2004 8,000 8,000 Prime rate credit loan from supplier - 1,415 Prime rate bank mortgage loan - 1,267 Other debt 337 405 68,337 71,087 Less current portion 690 1,537 $67,647 $69,550 The Senior Notes, issued in order to finance the acquisition of Big O Tires, Inc., are unsecured with interest payable quarterly. The note agreement related to such borrowings contains certain financial covenants dealing with the Company's working capital ratio, interest expense coverage and tangible net worth. In addition, the note agreement places certain restrictions on the Company, including its ability to incur additional debt, transfer or place liens upon assets, provide guarantees and make loans, advances, investments and certain expenditures. The 8.71% Senior loan provides for interest only to be paid through July 1998, after which principal and interest are due in quarterly installments. Maturities of long-term debt for the next five years are as follows: $690,000 due in 1998, $7,859,000 in 1999, $7,844,000 in 2000, $7,833,000 in 2001 and $7,833,000 in 2002. -23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. OTHER ASSETS Other assets consist of the following (in thousands): December 31, 1997 1996 Notes receivable $ 8,445 $ 9,274 Investments in joint ventures 2,811 2,433 Other intangible assets, net 741 831 Other 1,529 1,537 $13,526 $14,075 The notes receivable totals include a note for $4,897,000 from a former distributor. The maker of the note was discharged in a proceeding under Chapter 11 of the Bankruptcy Code in 1991. The Company received distributions totaling $308,000 from the bankruptcy proceeding. The Company holds written guarantees of the distributor's account, absolute and continuing in form, signed by the principal former owners and officers of the distributor and their wives, upon which the Company filed suit in 1989. The defendants have pleaded various defenses based on, among other things, an alleged oral cancellation of the guarantees. The defendants have also filed a third party complaint against the Company's former chief executive officer in which they claim the right to recover against him for any liability they may have to the Company. No trial date has been set at this time; however, the Company expects that the lawsuit will be tried within the next few months. The Company believes that the defendants' defenses are invalid and that there is no merit to the third-party complaint. The Company knows of no reason to believe that the defendants will be unable to pay any judgment that may be entered against them in the action. 7. LEASES Rental expense of $3,031,000, $2,545,000 and $2,069,000 was charged to operations in 1997, 1996 and 1995, respectively, after deducting sublease income applicable to 1997 and 1996 of $2,122,000 and $996,000, respectively. Minimum noncancelable real property lease commitments at December 31, 1997 were as follows (in thousands): Year Amount 1998 $ 5,018 1999 4,746 2000 4,275 2001 3,285 2002 3,092 Thereafter 9,893 30,309 Less sublease income 10,483 $19,826 The commitments relate substantially to distribution facilities. In addition to the above rental payments, the Company is obligated in some instances to pay real estate taxes, insurance and certain maintenance. -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. INCOME TAXES The Company records income taxes using the liability method prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income taxes provided for the years ended December 31, 1997, 1996 and 1995 were as follows (in thousands): 1997 1996 1995 Current: Federal $ 8,910 $ 9,375 $ 8,868 State 1,391 1,370 1,116 10,301 10,745 9,984 Deferred 1,586 (845) (461) $11,887 $ 9,900 $ 9,523 The provision for deferred income taxes represents the change in the Company's net deferred income tax asset or liability during the year, including the effect of enacted tax rate changes. Deferred income taxes arise from temporary differences between the tax basis of the Company's assets and liabilities and their reported amounts in the financial statements. Included in the Big O assets acquired was a deferred income tax asset of $3,365,000, while liabilities assumed in the Big O acquisition included a deferred income tax liability of $7,604,000. The net deferred income tax asset in the financial statements at December 31, 1997 included $824,000 related to the allowance for doubtful accounts and notes, $1,366,000 related to inventory reserves and basis differences, and $2,696,000 related to accrued warranty reserves. At December 31, 1996, the net deferred income tax asset included $3,156,000 related to the allowance for doubtful accounts and notes, $1,364,000 related to inventories and $2,596,000 related to warranty reserves. The net deferred income tax liability at December 31, 1997 and 1996 included $6,913,000 and $7,093,000, respectively, related to trademarks. The difference between the Company's effective income tax rate and the statutory U. S. Federal income tax rate is reconciled as follows: 1997 1996 1995 Statutory U.S. Federal rate 35.0% 35.0% 35.0% State income taxes 2.9 3.5 2.9 Other (.3) .5 .5 Effective tax rate 37.6% 39.0% 38.4% 9. RETIREMENT PLANS The Company has a defined benefit pension plan covering many of its employees. The benefits are based on years of service and the employee's final compensation. The Company makes contributions to the plan, not to exceed the maximum amount that can be deducted for federal income tax purposes. This amount is computed using a different actuarial cost method and different assumptions from those used for financial reporting purposes. -25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. RETIREMENT PLANS (Continued) The following table sets forth the defined benefit pension plan's funded status and amounts recognized in the Company's balance sheets (in thousands): December 31, 1997 1996 Actuarial present value of accumulated benefit obligations, including vested benefits of $4,123 in 1997 and $3,991 in 1996 $(4,206) $(4,273) Actuarial present value of projected benefit obligations for service rendered to date $(6,852) $(6,589) Plan assets at fair value, primarily listed stocks and U.S. bonds 6,176 6,590 Plan assets over (under) projected benefit obligation (676) 1 Unrecognized net loss from experience different from that assumed 1,782 2,147 Unrecognized net assets at January 1, 1997 and 1996 being recognized over 15.53 years (47) (75) Unrecognized prior service cost 111 123 Prepaid pension cost $ 1,170 $ 2,196 The net expense for the defined benefit pension plan in 1997 included a charge of $810,000 associated with an early retirement program accepted by certain employees. The net expense for 1997, 1996 and 1995 was comprised of the following (in thousands): 1997 1996 1995 Service cost $ 404 $ 392 $ 274 Interest cost 454 419 349 Return on plan assets (1,093) (639) (757) Net amortization, deferral and settlement charges 1,412 131 616 $ 1,177 $ 303 $ 482 The weighted average discount rates used in determining the 1997 and 1996 actuarial present values of projected benefit obligations were 7.00% and 7.25%, respectively. In both the 1997 and 1996 projections, a 5% increase in future compensation levels was used and the expected long- term rate of return on assets was 10%. -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. RETIREMENT PLANS (Continued) The Company also has an unfunded supplemental retirement plan for certain of its executive officers, to provide benefits in excess of amounts permitted to be paid by its defined benefit pension plan under current tax law. In addition, supplemental retirement provisions are included in the employment agreement of the Company's President and Chief Executive Officer. Expenses for supplemental retirement benefits totaled $377,000 in 1997, $313,000 in 1996 and $199,000 in 1995. At December 31, 1997, the projected benefit obligation, computed using the same discount rate and compensation assumptions as for the defined benefit pension plan, was $2,296,000. The accumulated benefit obligation, which was reflected as a noncurrent liability at December 31, 1997, totaled $1,847,000. The Company maintains an employee savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all of its employees. Contributions by the Company to the 401(k) plan include those based on a specified percentage of employee contributions, as well as discretionary contributions. Expenses recorded for the Company's contributions totaled $422,000 in 1997, $194,000 in 1996 and $62,000 in 1995. 10. STOCKHOLDERS' EQUITY The Company is authorized to issue 50,000,000 shares of $.10 par value common stock. In addition, 2,500,000 shares of $.10 par value preferred stock are authorized, none of which were outstanding at December 31, 1997 or 1996. The Company has a Stockholder Rights Plan whereby outstanding shares of the Company's common stock are accompanied by preferred stock purchase rights. The rights become exercisable ten days after either a person or group has acquired 20% or more of the Company's common stock or the commencement of a tender offer which would result in the offeror's ownership of 30% or more of TBC's common stock. Under defined circumstances, the rights allow TBC stockholders to purchase stock in either the Company or an acquiring company at a price less than the market price. The rights expire on July 31, 1998 unless redeemed at an earlier date. In 1997, 1996 and 1995, shares of the Company's common stock were repurchased and retired under authorizations made by the Board of Directors. As of December 31, 1997, the Company had unused authorizations from the Board for the repurchase of approximately 2,011,000 additional shares. 11. STOCK OPTIONS AND INCENTIVE PLAN The Company's 1989 stock incentive plan ("1989 Plan") provides for the grant of options to purchase shares of the Company's common stock to officers and other key employees upon terms and conditions determined by a committee of the Board of Directors. Options typically are granted at the fair market value of the stock on the date of grant, vest ratably over a three-year period and expire in ten years. The committee may also grant -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. STOCK OPTIONS AND INCENTIVE PLAN (Continued) stock appreciation rights, either singly or in tandem with stock options, which entitle the holder to benefit from market appreciation in the Company's common stock without requiring any payment on the part of the holder. The 1989 Plan also authorizes the committee to grant performance awards and restricted stock awards to officers and other key employees. Additionally, the 1989 Plan provides for the annual grant of restricted stock with a market value of $5,000 to each non-employee director of the Company. Each of these shares of restricted stock is accompanied by four options, which are only exercisable under certain conditions and the exercise of which results in the forfeiture of the associated share of restricted stock. The options expire in one-third increments as the associated restricted stock vests. Such tandem options are not included in the totals shown below for outstanding options. At December 31, 1997, 2,216,000 shares were available for future option and restricted stock grants under the 1989 Plan. A summary of stock option activity during 1995, 1996 and 1997 is shown below: Weighted Average Option Option Price Exercise Shares Range Price Outstanding at January 1, 1995 (330,360 exercisable) 438,540 $ 1.48 - $12.13 $ 6.73 Granted in 1995 119,325 9.69 9.69 Exercised in 1995 37,918 1.48 - 8.00 3.10 Forfeited in 1995 6,604 9.69 - 12.13 11.22 Outstanding at December 31, 1995 (332,099 exercisable) 513,343 $ 1.48 - $12.13 $ 7.62 Granted in 1996 72,731 6.38 - 8.88 8.47 Exercised in 1996 58,038 1.48 - 6.55 2.35 Forfeited in 1996 14,396 9.69 - 12.13 10.17 Outstanding at December 31, 1996 (331,784 exercisable) 513,640 $ 5.03 - $12.13 $ 8.27 Granted in 1997 324,112 7.75 7.75 Exercised in 1997 53,261 5.03 - 6.55 6.20 Forfeited in 1997 34,711 6.55 - 12.13 9.81 Outstanding at December 31, 1997 (330,225 exercisable) 749,780 $ 5.03 - $12.13 $ 8.12 Additional information regarding stock options outstanding at December 31, 1997 is shown below: Outstanding Options Exercisable Options Weighted Weighted Weighted Average Average Average Option Exercise Remaining Option Exercise Option Price Range Shares Price Term Shares Price $5.03 - $7.50 183,293 $ 5.90 3.0 yrs. 181,212 $ 5.89 $7.51 - $10.00 478,670 8.24 8.7 yrs. 79,949 9.38 $10.01 - $12.13 87,817 12.09 5.6 yrs. 69,064 12.08 749,780 330,225 -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. STOCK OPTIONS AND INCENTIVE PLAN (Continued) The option shares listed for the three-year period ended December 31, 1997 include any with stock appreciation rights (SAR's). No SAR's were granted during this three-year period. 63,280 SAR's were outstanding at January 1, 1995, each with an exercise price of $1.71 per share. 25,000 SAR's were exercised in 1995 and 38,280 were exercised in 1996. No stock appreciation rights were outstanding as of December 31, 1997 or 1996. Amounts in the statements of income relating to stock appreciation rights included a credit of $30,000 in 1996 and a charge of $23,000 in 1995. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation has been recognized for the stock options granted in 1997, 1996 or 1995. Using fair value assumptions specified in SFAS No. 123, the weighted average per share value of options granted during 1997, 1996 and 1995 was $3.36, $3.29 and $3.66, respectively. Had compensation cost for such option grants been determined using such assumptions, the Company's net income on a pro forma basis would have been $19,355,000 in 1997, $15,405,000 in 1996 and $15,238,000 in 1995, compared to reported net income of $19,700,000 in 1997, $15,499,000 in 1996 and $15,249,000 in 1995. Earnings per share on a pro forma basis would have been $.82 in 1997 rather than the reported $.84. Pro forma earnings per share in both 1996 and 1995 were the same as the reported amounts. The fair value of each option granted in 1997, 1996 and 1995 was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: dividend yield of 0%; expected lives of 5 years and risk-free interest rates equal to zero- coupon governmental issues. The expected volatility used for options granted were 37.8% for 1997 and 30% for 1996 and 1995. 12. FINANCIAL GUARANTEES AND CREDIT RISK The Company's Big O Tires, Inc. subsidiary has provided certain financial guarantees associated with real estate leases and financing of its franchisees. Although the guarantees were issued in the normal course of business to meet the financing needs of its franchisees, they represent credit risk in excess of the amounts reported on the balance sheet as of December 31, 1997. The contractual amounts of the guarantees, which represent the Company's maximum exposure to credit loss in the event of non-performance by the franchisees, totaled $8,440,000 as of December 31, 1997, including $3,937,000 related to franchisee financing and $4,503,000 related to real estate leases. In addition, Big O is the guarantor of the mortgage loan on a formerly-owned building. At December 31, 1997, the exposure to credit loss on such mortgage loan totaled $2,642,000. Most of the above franchisee financing and lease guarantees extend for more than five years and expire in decreasing amounts through 2009. The credit risk associated with these guarantees is essentially the same as that involved in extending loans to the franchisees. Big O evaluates each franchisee's creditworthiness -29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. FINANCIAL GUARANTEES AND CREDIT RISK (Continued) and requires that sufficient collateral (primarily inventories and equipment) and security interests be obtained by the third party lenders or lessors, before the guarantees are issued. There are no cash requirements associated with the guarantees, except in the event that an actual financial loss is subsequently incurred due to non-performance by the franchisees. 13. LEGAL PROCEEDINGS In addition to the litigation described in Note 6, the Company is involved in various legal proceedings which are routine to the conduct of its business. The Company does not believe that any such routine litigation will have a material adverse effect on its consolidated financial position, results of operations or cash flows. 14. REFOCUS OF OPERATIONS ON REPLACEMENT TIRE BUSINESS In December 1996, the Company decided to refocus its operations on the replacement tire business and discontinue the marketing of certain non-tire products such as batteries, wheels, ride-control products and filters to independent distributors. The decision resulted in the December 1996 sale of certain assets of the Company's former battery distribution subsidiary, as well as other marketing and operational changes which were completed by the end of the first quarter of 1997. There was no impact on the products marketed through the Company's Big O Tires subsidiary. A total of $2.4 million in pre-tax charges was recorded in the fourth quarter of 1996 related to these changes. Included were charges of $1.2 million to cost of goods sold associated with inventory write-downs, $700,000 in selling and administrative expenses and $460,000 in other expenses. SUPPLEMENTARY DATA: QUARTERLY FINANCIAL INFORMATION Unaudited quarterly results for 1997 and 1996 are summarized as follows: (In thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter 1997 Net sales $144,367 $163,785 $182,648 $152,052 Cost of sales 123,071 139,261 155,713 126,074 Net income 3,231 4,784 6,042 5,643 Earnings per share* $ .14 $ .20 $ .26 $ .24 1996 Net sales $124,005 $137,561 $177,338 $165,681 Cost of sales 110,065 123,854 153,875 140,816 Net income 3,389 3,227 4,730 4,153 Earnings per share* $ .14 $ .14 $ .20 $ .17 * Basic and assuming dilution -30- Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information concerning executive officers of the Company which is set forth in Part I of this Report, the information required by this Item 10 is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held April 22, 1998, under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated herein by this reference. Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held April 22, 1998, under the captions "Election of Directors" and "Executive Compensation", and, with the exception of the information disclosed in the Proxy Statement pursuant to Item 402(k) or 402(l) of Regulation S-K, is incorporated herein by this reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held April 22, 1998, under the caption "Security Ownership of Management and Principal Stockholders", and is incorporated herein by this reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held April 22, 1998, under the captions "Election of Directors" and "Executive Compensation", and is incorporated herein by this reference. -31- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following items, including consolidated financial statements of the Company, are set forth at Item 8 of this Report: Report of Independent Certified Public Accountants Consolidated Balance Sheets - December 31, 1997, and 1996 Consolidated Statements of Income - Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements (a) (2) FINANCIAL STATEMENT SCHEDULES Report of Independent Certified Public Accountants (at p. 35 of this Report) Schedule II - Valuation and qualifying accounts (at p. 36 of this Report) All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) (3) EXHIBITS See INDEX to EXHIBITS included at p. 37 of this Report (b) REPORTS ON FORM 8-K The Company did not file any Reports on Form 8-K during the quarter ended December 31, 1997. -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TBC Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Memphis, Tennessee, on this 11th day of February, 1998. TBC CORPORATION By: /s/ LOUIS S. DiPASQUA Louis S. DiPasqua President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of TBC Corporation and in the capacities and on the dates indicated: Name Title Date /s/ LOUIS S. DiPASQUA President, Chief February 11, 1998 Louis S. DiPasqua Executive Officer and Director /s/ RONALD E. McCOLLOUGH Senior Vice President February 11, 1998 Ronald E. McCollough Operations and Treasurer (principal accounting and financial officer) * MARVIN E. BRUCE Chairman of the Board February 11, 1998 Marvin E. Bruce of Directors * ROBERT E. CARROLL, JR. Director February 11, 1998 Robert E. Carroll, Jr. * ROBERT H. DUNLAP Director February 11, 1998 Robert H. Dunlap -33- * DWAIN W. HIGGINBOTHAM Director February 11, 1998 Dwain W. Higginbotham * CHARLES A. LEDSINGER, JR. Director February 11, 1998 Charles A. Ledsinger, Jr. * RICHARD A. McSTAY Director February 11, 1998 Richard A. McStay * ROBERT M. O'HARA Director February 11, 1998 Robert M. O'Hara * ROBERT R. SCHOEBERL Director February 11, 1998 Robert R. Schoeberl * The undersigned by signing his name hereto does sign and execute this Report on Form 10-K on behalf of each of the above-named directors of TBC Corporation pursuant to a power of attorney executed by each such director and filed with the Securities and Exchange Commission as an exhibit to this Report. /s/ LOUIS S. DiPASQUA Louis S. DiPasqua Attorney-in-Fact -34- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders TBC Corporation Our report on the consolidated financial statements of TBC Corporation and Subsidiaries is included on page 13 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index at Item 14(a) (2) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Memphis, Tennessee January 30, 1998 -35- TBC CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In thousands)
Additions Charged Charged to Costs to Balance and Other Balance January 1, Expenses Accounts Deductions December 31, 1997 Warranty reserve......$ 6,675 $ 6,422 $ - $ 6,166 $ 6,931 Allowance for doubtful accounts........... 8,879 1,394 - 2,929 7,344 1996 Warranty reserve...... 1,002 4,159 5,613 4,099 6,675 Allowance for doubtful accounts........... 8,014 1,640 1,954 2,729 8,879 1995 Warranty reserve...... 975 1,591 - 1,564 1,002 Allowance for doubtful accounts........... 7,069 1,546 123 724 8,014 Includes amounts for Big O Tires, Inc. as of the July 10, 1996 acquisition date. Amounts added during current year and payable at year end less amount payable at beginning of year. Accounts written off during year, net of recoveries.
-36- INDEX TO EXHIBITS Located at Manually Numbered Page (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION: 2.1 Agreement and Plan of Merger, dated as of April 30, 1996, by and among TBC Corporation, TBCO Acquisition, Inc. and Big O Tires, Inc., was filed as Exhibit 2.1 to the TBC Corporation Current Report on Form 8-K, dated April 30, 1996 ........... * (3) ARTICLES OF INCORPORATION AND BY-LAWS: 3.1 Certificate of Incorporation of TBC Corporation, as amended April 29, 1988, was filed as Exhibit 3.1 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1994 ..... * 3.2 Amendment to Restated Certificate of Incorporation of TBC Corporation dated April 23, 1992, was filed as Exhibit 3.2 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 .. * 3.3 By-Laws of TBC Corporation as amended through July 25, 1996, were filed as Exhibit 3.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 ........... * (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.1 $30,000,000 Long Term Credit Agreement, dated as of September 25, 1996, among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent, including as Exhibit A the form of Note, dated September 25, 1996, issued by TBC Corporation to each lender pursuant thereto, and including as Exhibit F the form of Continuing Guaranty executed by certain subsidiaries of TBC Corporation in connection therewith, was filed as Exhibit 4.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 ................................. * -37- 4.2 First Amendment, dated July 1, 1997, to Long Term Credit Agreement among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent, was filed as Exhibit 4.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ........... * 4.3 $48,500,000 Short Term Credit Agreement, dated as of September 25, 1996, among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent, including as Exhibit A-1 the form of Revolving Note, dated September 25, 1996, issued by TBC Corporation to each lender pursuant thereto, including as Exhibit A-2 the form of Swing Line Note, dated September 25, 1996, issued by TBC Corporation to First Tennessee Bank National Association pursuant thereto, and including as Exhibit F the form of Continuing Guaranty executed by certain subsidiaries of TBC Corporation in connection therewith, was filed as Exhibit 4.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.................................. * 4.4 First Amendment, dated July 1, 1997, to Short Term Credit Agreement among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent, was filed as Exhibit 4.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ........... * 4.5 Second Amendment, dated September 23, 1997, to Short Term Credit Agreement among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent, was filed as Exhibit 4.3 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ........................... * 4.6 Third Amendment to Short Term Credit Agreement and Second Amendment to Long Term Credit Agreement, dated October 28, 1997, among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent ........................... 45 4.7 Third Amendment to Long Term Credit Agreement and Fourth Amendment to Short Term Credit Agreement, dated December 17, 1997, among TBC Corporation, the lending institutions party thereto, First Tennessee Bank National Association as Administrative Agent, and NBD Bank as Co-Agent ........................... 48 -38- 4.8 Note Purchase and Private Shelf Agreement, dated July 10, 1996, between TBC Corporation and The Prudential Insurance Company of America, was filed as Exhibit 4.1 to the TBC Corporation Current Report on Form 8-K, dated July 10, 1996 ............ * 4.9 Series A, Series B, and Series C Senior Notes, dated July 10, 1996, issued by TBC Corporation pursuant to the Note Purchase Agreement referenced in item 4.8 above, were filed as Exhibit 4.2 to the TBC Corporation Current Report on Form 8-K, dated July 10, 1996 ................... * 4.10 Amendment No. 1, dated September 20, 1996, to the Note Purchase Agreement referenced in item 4.8 above, including form of Continuing Guaranty executed by certain subsidiaries of TBC Corporation in connection therewith, was filed as Exhibit 4.5 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 ...... * 4.11 Other long-term debt instruments ................... # (10) MATERIAL CONTRACTS: Management Contracts and Compensatory Plans or Arrangements 10.1 Executive Employment Agreement between the Company and Mr. Louis S. DiPasqua, amended and restated as of January 31, 1995, was filed as Exhibit 10.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 .......... * 10.2 Executive Consulting Agreement between the Company and Mr. Marvin E. Bruce dated January 1, 1995, was filed as Exhibit 10.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 .............................. * 10.3 Louis S. DiPasqua Trust Agreement dated as of October 22, 1992 between the Company and First Tennessee Bank National Association was filed as Exhibit 10.6 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 .. * 10.4 Amendment, dated July 1, 1996, to Executive Employment Agreement between the Company and Mr. Louis S. DiPasqua was filed as Exhibit 10.4 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1996 ............... * 10.5 TBC Corporation 1989 Stock Incentive Plan, as amended and restated April 23, 1997 was filed as Exhibit 10.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 ...................................... * -39- 10.6 TBC Corporation Deferred Compensation Plan for Directors was filed as Exhibit 10.10 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1993 ....................... * 10.7 Resolution adopted by the Compensation Committee of the TBC Corporation Board of Directors, September 26, 1996, relating to interest payable on deferred compensation of officers and directors of TBC Corporation, was filed as Exhibit 10.3 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996............ * 10.8 Executive Employment Agreement dated as of November 1, 1988 between the Company and Mr. Kenneth P. Dick, including Trust Agreement as Exhibit A thereto, as extended as of November 1, 1991 and as amended as of July 1, 1992, was filed as Exhibit 10.10 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 .................................. * 10.9 Amendment, dated July 1, 1996, to Executive Employment Agreement between the Company and Mr. Kenneth P. Dick was filed as Exhibit 10.10 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1996 ............... * 10.10 Agreement to Extend Executive Employment Agreement, between the Company and Mr. Kenneth P. Dick dated October 31, 1997.................................... 51 10.11 Executive Employment Agreement dated as of November 1, 1988 between the Company and Mr. Bob M. Hubbard, including Trust Agreement as Exhibit A thereto, as extended as of November 1, 1991 and as amended as of July 1, 1992, was filed as Exhibit 10.11 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 .................................. * 10.12 Agreement to Extend Executive Employment Agreement, between the Company and Mr. Bob M. Hubbard dated October 31, 1994, was filed as Exhibit 10.11 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1994 ....................... * 10.13 Amendment, dated July 1, 1996, to Executive Employment Agreement between the Company and Mr. Bob M. Hubbard was filed as Exhibit 10.13 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1996 ............... * -40- 10.14 Executive Employment Agreement dated as of November 1, 1988 between the Company and Mr. Ronald E. McCollough, including Trust Agreement as Exhibit A thereto, as extended as of November 1, 1991 and as amended as of July 1, 1992, was filed as Exhibit 10.12 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 .................................. * 10.15 Amendment, dated July 1, 1996, to Executive Employment Agreement between the Company and Mr. Ronald E. McCollough was filed as Exhibit 10.16 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1996 ............... * 10.16 Agreement to Extend Executive Employment Agreement, between the Company and Mr. Ronald E. McCollough dated October 31, 1997.............................. 52 10.17 Amended and Restated Executive Employment Agreement dated as of August 1, 1997 between the Company and Mr. Barry D. Robbins, including Trust Agreement as Exhibit A thereto was filed as Exhibit 10.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ............... * 10.18 TBC Corporation Management Incentive Compensation Plan, effective January 1, 1997, was filed as Exhibit 10.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ................................. * 10.19 TBC Corporation Executive Supplemental Retirement Plan, as amended through August 1, 1997, was filed as Exhibit 10.3 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ........................................... * Other Material Contracts 10.20 Lease Agreement, dated February 25, 1980, between TBC Corporation and Vantage-Memphis, Inc. was filed as Exhibit 10.2 to TBC Corporation Registra- tion Statement on Form S-1, filed on April 21, 1983 (Reg. No. 2-83216).................................. * 10.21 Modification and Ratification of Lease, dated April 16, 1991, between TBC Corporation and Vantage-Memphis, Inc. was filed as Exhibit 10.11 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1991 ............... * 10.22 Lease Agreement, dated September 23, 1992, between TBC Corporation and Weston Management Company (for Weston Building #105) was filed as Exhibit 10.18 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 ..... * -41- 10.23 Lease Agreement, dated September 23, 1992, between TBC Corporation and Weston Management Company (for Weston Building #108) was filed as Exhibit 10.19 to the TBC Corporation Annual Report on Form 10-K for the year ended December 31, 1992 ..... * 10.24 Form of TBC Corporation's standard Distributor Agreement was filed as Exhibit 10.1 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 ........................ * 10.25 Form of Franchise Agreement in use by Big O Tires, Inc. ............................................... 53 10.26 Agreement, dated October 1, 1977, between TBC Corporation and The Kelly-Springfield Tire Company, including letter dated June 30, 1978, was filed as Exhibit 10.6 to TBC Corporation Registration Statement on Form S-1, filed on April 21, 1983 (Reg. No. 2-83216) .................. * 10.27 Ten-Year Commitment Agreement, dated March 21, 1994, between the Company and The Kelly-Springfield Tire Company, was filed as Exhibit 10.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 ....................... * 10.28 Agreement, effective January 1, 1994, signed April 25, 1994, between the Company and Cooper Tire & Rubber Company, was filed as Exhibit 10.2 to the TBC Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 ................ * (21) SUBSIDIARIES OF THE COMPANY: 21.1 List of the names and jurisdictions of incorporation of the subsidiaries of the Company ... 106 (23) CONSENTS OF EXPERTS AND COUNSEL: 23.1 Consent of Coopers & Lybrand L.L.P., Independent Certified Public Accountants, to incorporation by reference of their report dated January 30, 1998 in Post-Effective Amendment No. 1 to Registration Statement on Form S-8 for the Company's 1989 Stock Incentive Plan (Reg. No. 33-43166) ................. 107 (24) POWER OF ATTORNEY: 24.1 Power of attorney of each person who signed this Annual Report on Form 10-K on behalf of another pursuant to a power of attorney .................... 108 -42- (27) FINANCIAL DATA SCHEDULE: 27.1 Financial Data Schedule ............................ + (99) ADDITIONAL EXHIBITS: 99.1 Rights Agreement, dated as of July 21, 1988, between TBC Corporation and the First National Bank of Boston, as Rights Agent, was filed as an Exhibit to the Company's Registration Statement on Form 8-A dated July 21, 1988. The Rights Agreement includes as Exhibit A the form of Certificate of Designation, Preferences and Rights; as Exhibit B, the form of Rights Certificate; and as Exhibit C, the form of Summary of Rights .................................. * "*" Indicates that the Exhibit is incorporated by reference into this Annual Report on Form 10-K from a previous filing with the Commission. "#" With respect to all other instruments defining the rights of holders of long-term debt, the amount of securities authorized under each of such instruments does not exceed 10% of the total assets of TBC Corporation and its subsidiaries on a consolidated basis. A copy of each of such instruments will be furnished to the Commission upon request. "+" Included only in the Company's electronic filing with the Commission. -43- TBC CORPORATION EXHIBITS TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 -44- EX-4.6 2 EXHIBIT 4.6 THIRD AMENDMENT TO SHORT AND (SECOND AMENDMENT TO) LONG TERM CREDIT AGREEMENT THIS THIRD AMENDMENT TO SHORT AND (SECOND AMENDMENT TO) LONG TERM CREDIT AGREEMENT (the "Third Amendment") is entered into this the 28th day of October, 1997, by and between TBC CORPORATION ("Borrower") and FIRST TENNESSEE BANK NATIONAL ASSOCIATION as administrative agent ("Administrative Agent") for itself as Lender and the banks named as Lenders under the Short and Long Term Credit Agreement dated September 25, 1996 between Borrower, First Tennessee Bank National Association as Lender and as Administrative Agent ("First Tennessee"), NBD Bank (now known as First National Bank of Chicago) as Lender and Suntrust Bank, Nashville, N.A. as Lender, as previously amended, (the "Credit Agreement"). Borrower has agreed, pursuant to Section 6.23 of the Credit Agreement that the repurchase of capital stock during any fiscal year will not exceed an aggregate amount of $5,000,000. The parties hereto have agreed to amend the Credit Agreement on the terms and conditions hereinafter set out. THEREFORE, for valuable consideration the receipt of which is hereby acknowledged, the parties agree as follows: 1. Section 6.23 of the Credit Agreement is hereby amended by inserting the following language at the end thereof before the period: "; provided, that for fiscal year 1997 only, such amount shall not be in excess of $6,000,000." 2. In all other respects the Credit Agreement is ratified and remains in full force and effect. IN WITNESS WHEREOF, the undersigned duly authorized officers have executed this Third Amendment on behalf of the parties on this the 28th day of October, 1997. FIRST TENNESSEE BANK NATIONAL ASSOCIATION, as Administrative Agent and Lender By: /s/ T. J. Miller Title: National Account Officer TBC CORPORATION By: /s/ R. E. McCollough Title: Senior Vice President Operations & Treasurer -45- CONSENT OF LENDER The undersigned duly authorized officer of SUNTRUST BANK, NASHVILLE, N.A. as Lender under that certain Short and Long Term Credit Agreement dated September 25, 1996 between TBC Corporation, First Tennessee Bank National Association as Lender and Administrative Agent, Suntrust Bank, Nashville, N.A. as Lender, and NDB Bank (now known as First National Bank of Chicago) as Lender, as previously amended, does hereby consent to the foregoing Third Amendment to Short and Long Term Credit Agreement. Dated: 10/28/97 SUNTRUST BANK, NASHVILLE, N.A. By: /s/ Anneliese H. Tyler Title: Vice President -46- CONSENT OF LENDER The undersigned duly authorized officer of FIRST NATIONAL BANK OF CHICAGO as Lender under that certain Short and Long Term Credit Agreement dated September 25, 1996 between TBC Corporation, First Tennessee Bank National Association as Lender and Administrative Agent, and NBD Bank (now known as First National Bank of Chicago) as Lender, and Suntrust Bank, Nashville, N.A. as Lender, as previously amended, does hereby consent to the foregoing First Amendment to Short and Long Term Credit Agreement. Dated: 10/27/97 FIRST NATIONAL BANK OF CHICAGO By: /s/ Curtis Price Title: As Agent -47- EX-4.7 3 EXHIBIT 4.7 THIRD AMENDMENT TO LONG TERM CREDIT AGREEMENT AND FOURTH AMENDMENT TO SHORT TERM CREDIT AGREEMENT THIS THIRD AMENDMENT TO LONG TERM CREDIT AGREEMENT and FOURTH AMENDMENT TO SHORT TERM CREDIT AGREEMENT (the "Amendment") is entered into this the 17 day of December, 1997, by and among TBC CORPORATION ("Borrower"), FIRST TENNESSEE BANK NATIONAL ASSOCIATION as administrative agent ("Administrative Agent") for itself as Lender and the other undersigned Lenders, FIRST NATIONAL BANK OF CHICAGO and SUNTRUST BANK, NASHVILLE, N.A. (each a "Lender"). W I T N E S S E T H: WHEREAS, the Borrower, the Administrative Agent and the Lenders are each a party to the Short Term Credit Agreement and the Long Term Credit Agreement each dated September 25, 1996 and each as previously amended (each a "Credit Agreement" and collectively the "Credit Agreements"); and WHEREAS, the parties hereto have agreed to amend the Credit Agreements on the terms and conditions hereinafter set out. NOW, THEREFORE, for valuable consideration the receipt of which is hereby acknowledged, the parties agree as follows: 1. Capitalized terms used herein but not otherwise defined shall have the meaning set forth in the Credit Agreements. 2. Section 6.17 of each Credit Agreement is amended as follows: (a) Subsection (iv) is hereby amended by deleting "10%" and inserting in lieu thereof "20%". (b) Subsection (vii) is hereby amended by deleting "$3,000,000" and inserting in lieu thereof "$8,000,000." 3. Section 6.21 of each Credit Agreement is amended by deleting "$10,000,000" and inserting in lieu thereof "$15,000,000." 4. Section 6.23 of each Credit Agreement is deleted in its entirety and the following new Section 6.23 inserted in lieu thereof: -48- "Section 6.23 Minimum Working Capital. Borrower will maintain working capital (calculated as current assets less current liabilities, each determined in accordance with GAAP) of at least $40,000,000, such amount to be determined quarterly. 5. In all other respects each Credit Agreement is ratified and remains in full force and effect. 6. This Amendment may be executed in any number of counterparts by the parties hereto, each of which shall then be deemed to be an original and all of which taken together shall constitute one and the same agreement. -49- IN WITNESS WHEREOF, the undersigned duly authorized officers have executed this Amendment on behalf of the parties on this the 17 day of December, 1997. FIRST TENNESSEE BANK NATIONAL ASSOCIATION, as Administrative Agent and Lender By: /s/ T. J. Miller Title: National Account Officer SUNTRUST BANK, NASHVILLE, N.A. By: /s/ Anneliese H. Tyler Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Curtis Price Title: As Agent TBC CORPORATION By: /s/ Ronald E. McCollough Title: Senior Vice President Operations & Treasurer BORROWER -50- EX-10.10 4 EXHIBIT 10.10 AGREEMENT TO EXTEND EXECUTIVE EMPLOYMENT AGREEMENT THE UNDERSIGNED HEREBY AGREE to extend the Executive Employment Agreement, dated November 1, 1998, between them (as later amended and extended, the "Agreement"), until the later of October 31, 2000 or one year after the ocurrence of a Change in Control of the Company (as defined in the Agreement), in the event of a Change in Control of the Company shall have occurred on or prior to October 31, 2000. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the 31st day of October, 1997. TBC CORPORATION By /s/ Louis S. DiPasqua Louis S. DiPasqua, President and Chief Executive Officer /s/ Kenneth P. Dick KENNETH P. DICK -51- EX-10.16 5 EXHIBIT 10.16 AGREEMENT TO EXTEND EXECUTIVE EMPLOYMENT AGREEMENT THE UNDERSIGNED HEREBY AGREE to extend the Executive Employment Agreement, dated November 1, 1998, between them (as later amended and extended, the "Agreement"), until the later of October 31, 2000 or one year after the ocurrence of a Change in Control of the Company (as defined in the Agreement), in the event of a Change in Control of the Company shall have occurred on or prior to October 31, 2000. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the 31st day of October, 1997. TBC CORPORATION By /s/ Louis S. DiPasqua Louis S. DiPasqua, President and Chief Executive Officer /s/ Ronald E. McCollough RONALD E. McCOLLOUGH -52- EX-10.25 6 EXHIBIT 10.25 BIG O TIRES, INC. FRANCHISE AGREEMENT -53- 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 . . . . . . . . . . . . . . . . . . . 2 3.01 First Option Rights . . . . . . . . . . . . . . . . 2 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. . . . . . . . . . . 4 6.01 Financing Approval. . . . . . . . . . . . . . . . . 4 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. . . . . . . . . . . . 5 7.01 Pre-Opening Assistance. . . . . . . . . . . . . . . 5 7.02 On-Going Assistance . . . . . . . . . . . . . . . . 6 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. . . . . . . . . . . . . . . 7 9. LICENSED MARKS. . . . . . . . . . . . . . . . . . . . . . 7 9.01 Licensed Marks. . . . . . . . . . . . . . . . . . . 7 9.02 Limitation on Use . . . . . . . . . . . . . . . . . 7 9.03 Infringement. . . . . . . . . . . . . . . . . . . . 7 9.04 Franchisee's Business Name. . . . . . . . . . . . . 7 -54- 9.05 Change of Licensed Marks. . . . . . . . . . . . . . 7 9.06 Franchisor's Rights . . . . . . . . . . . . . . . . 8 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 . . . . . . . . . . . . . .11 14. PRODUCTS AND SERVICES . . . . . . . . . . . . . . . . . .11 14.01 Products and Services. . . . . . . . . . . . . . .11 14.02 Approval of Products and Services. . . . . . . . .11 14.03 Inventory. . . . . . . . . . . . . . . . . . . . .12 14.04 Warranties and Guaranties. . . . . . . . . . . . .12 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. . . . . . . . . . . . . .14 16. STATEMENTS AND RECORDS. . . . . . . . . . . . . . . . . .14 16.01 Invoices . . . . . . . . . . . . . . . . . . . . .14 16.02 Audit. . . . . . . . . . . . . . . . . . . . . . .14 16.03 Monthly Reports. . . . . . . . . . . . . . . . . .14 16.04 Financial Statements . . . . . . . . . . . . . . .14 16.05 Management System. . . . . . . . . . . . . . . . .15 16.06 Retail Accounting Center . . . . . . . . . . . . .15 17. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . .15 17.01 Noncompetition During Term . . . . . . . . . . . .15 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. . . . . . . . . . . . .16 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 -55- 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. . . . . . . . . . . . . . . .23 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. . . . . . . . . . . .25 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 . . . . . . . . . . . . . . . . . .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 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 28. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . .27 28.01 Notices. . . . . . . . . . . . . . . . . . . . . .27 -56- 29. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . .28 29.01 Governing Law. . . . . . . . . . . . . . . . . . .27 29.02 Jurisdiction . . . . . . . . . . . . . . . . . . .27 30. SEVERABILITY AND CONSTRUCTION . . . . . . . . . . . . . .28 30.01 Severability . . . . . . . . . . . . . . . . . . .28 30.02 Counterparts . . . . . . . . . . . . . . . . . . .28 30.03 Construction . . . . . . . . . . . . . . . . . . .28 31. ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . .28 Schedule 1 - Premises and Trade Area Schedule 2 - Ownership Verification Schedule 3 - Guaranty Schedule 4 - Lease Rider and Modification Schedule 5 - Renewal Rider Schedule 6 - Trademarks Schedule 7 - Converter Rider -57- 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 CONTRIBUTION: Minimum of four percent (4%) of Gross Sales 5. NATIONAL ADVERTISING CONTRIBUTION: See sections 15 and 25 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 -58- 12. Effective Date: 13. Commencement Date: 14. Expiration Date: 15. Franchisee's Advisor: 16. Send Notices to Big O to: Name: Susan D. Hendee (Legal Department) Address: Big O Tires, Inc. 11755 E. Peakview Avenue, Suite A Englewood, Colorado 80111 17. Send Notices to Franchisee to: Name: Address: 18. Business not subject to Section 17.01 Name: Address: -59- 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". 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 develop Big O's strategic 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. 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. -60- 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 or any other 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 the first year of business from 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 6 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. 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, point of sale systems and inventory control systems, and other systems designed to provide information for the management of Big O Stores, including but not limited Boss2. Manager - An individual other than the Operator who is responsible for the day-to-day operation of a Store. -61- Manual - The various written, electronic, audio and video instructions and manuals, 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 A Blueprint For Success, also known as "Blue II", Big O's Franchise Compliance and Procedures Manual, any training tapes, guides and any training module or any other proprietary information. 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 Center - A cooperative or association which provides 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. 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 -62- 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. -63- 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, Suite A, 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. In connection therewith, 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. -64- 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 by 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. -65- 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 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. -66- 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 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 7 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. Unless otherwise agreed in writing by Big O and Franchisee, Franchisee has sixteen (16) months from the Effective Date of this Agreement within which to have its Big O Store opened and operating ("Development Period"). Big O will extend the Development Period for a reasonable period of time in the event that factors beyond Franchisee's reasonable control prevent Franchisee from meeting this 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. -67- 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. 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 one or more locations 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) One (1) copy of Big O's Franchise Compliance and Procedures Manual and Big O's Operations Manual, known as "Blue II"or other such proprietary information. (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; -68- (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) Monthly 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 by Big O for which Big O may charge the franchisee a fee, 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 -69- 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 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 -70- 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 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. These standards and specifications may include, but are not limited to the safety, maintenance, cleanliness, sanitation, function and appearance of the Store and its equipment and signs, as well as the requirement that the employees of the Store shall be required to wear uniforms and to maintain a standard of appearance while employed at the Store. 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 -71- 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 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 Confidential Operating Manual, Big O's Blueprint for Success, otherwise known as Blue II, 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 -72- 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 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. Franchisee agrees that at least 75% on a quarterly basis of all products purchased for resale from your Store will be purchased from the RSC or BOX warehouses. In addition, Franchisee agrees that 50% of all tire sales at the Store will be Big O brand product, excluding sales of snow tires. 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 require. Franchisee may not sell any product or service which has not been selected, designated or approved by Big O. Big O is not obliged to approve any product, service, or merchandise selected by the Franchisee. Big O will not give its approval of suppliers selected by the -73- Franchisee which are not at the time approved by Big O for use by the Franchisee, except 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 or service and that the product or service does not conflict with Big O's existing marketing program of products and services; (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; (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. Big O may revoke its approval of an approved supplier at any time in its sole discretion. 14.03 Inventory. Franchisee shall at all times maintain an inventory of Products 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 -74- 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. 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 -75- 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 as directed by 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 agrees to be bound by the decisions of either Big O (or its designee) 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. -76- 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 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. Franchisee must implement any Management System required by Big O. 16.06 Retail Accounting Center. The Franchisee is required to use some or all of the services provided by a Retail Accounting Center 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. -77- 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 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. 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. -78- 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; (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; -79- (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 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, 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-five thousand dollars ($25,000.00), 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 Confidential Operating 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; -80- (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. 18.06 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; or (b) 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 or uses the Licensed Marks in a manner contrary to or inconsistent with this Agreement, specifications by Big O or as stated 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; -81- (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 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 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 -82- 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. 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) Confidential Operating Manual, Blue II, 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 including BOSS2 software and/or hardware; 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. -83- (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 or 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, 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 -84- 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. 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; -85- (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 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 canceled 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. -86- 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 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 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 in the -87- development of its strategic business plan 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. 25.02 Special Interest Issues. Big O has granted the DPB the authority to participate 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 policy committee by a representative of the DPB, Big O's policy committee 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. 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. 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 -88- 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. 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 representative. Any notice complying with the provisions hereof shall be deemed to be given on the date of mailing. -89- 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. (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 -90- 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. 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: -91- 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) BIG O TIRES, INC. By: Date: Title: Attest: Title: (Affix Corporate Seal) -92- 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 -93- 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 Franchise Agreement Page 1 -94- 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 -95- _________________________________________ Home Address _________________________________________ Home Telephone _________________________________________ Business Address _________________________________________ Business Telephone Schedule 3 to Franchise Agreement Page 2 -96- 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 make 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 -97- 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 -98- 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 -99- SCHEDULE 5 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 5 to Franchise Agreement Page 1 -100- 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 5 to Franchise Agreement Page 2 -101- SCHEDULE 6 TRADEMARKS Big O is the sole and exclusive owner of the following trademarks and service marks: Trademark, Service Mark, Trade Where Registration Registration Name or Logotype Registered Number Date Sonic Principal 805,575 03/15/66 Sonic Commercial Principal 805,578 03/15/66 Super Sonic Principal 805,574 03/15/66 Ultra Sonic Principal 805,577 03/15/66 Winter Sonic Principal 805,581 03/15/66 Sun Valley Principal 871,318 06/17/69 Sonic & Design Principal 890,380 05/05/70 Sonic Principal 891,936 06/02/70 Maxima Principal 926,329 12/28/71 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 Sonic Vagabond Principal 996,459 10/22/74 Sonic Sahara Principal 1,013,509 06/17/75 Big Haul Principal 1,018,800 08/26/75 Protectors of Safety Saxon and Design Principal 1,024,138 11/04/75 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 Schedule 6 to Franchise Agreement Page 1 -102- Trademark, Service Mark, Trade Where Registration Registration Name or Logotype Registered Number Date Sonic Principal 805,575 03/15/66 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 Arapahoe Principal 74/271,501 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 Big Lift Principal 11386T-2669 Pending USO Cost-U-Less Principal 1,952,457 01/30/96 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 6 to Franchise Agreement Page 2 -103- SCHEDULE 7 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 paragraphs are 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. If Big O provides assistance to Franchisee for the purchase of signage or displays (by way of matching funds or other financial contribution) at any one or more Big O Stores operated by Franchisee, then, Big O, at its discretion, may retain title to such signage and displays. At Big O's request, Franchisee will sign UCC financing statements and other documents, will take such other actions as reasonably requested by Big O to document and protect Big O's title to the same, and will not take any actions contrary to such title. If Franchisee remains a Big O franchisee at the Big O Store or Big O Stores where such signs and displays are located, in good standing ten years after such assistance is provided and has the contractual right to continue as a Big O Franchisee at such Big O Store or Big O Stores for not less than five additional years, then Big O shall transfer to Franchisee title to such signs and displays at each Big O Store meeting such qualifications within a reasonable time after the end of such ten year period. 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 Schedule 7 to Franchise Agreement Page 1 -104- 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. 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. The following language shall be added as Section 7.03: 7.03 Other Discretionary Assistance. Big O may, in its discretion, offer further assistance to the Franchisee in accordance with Big O's conversion programs as in effect from time to time or as otherwise negotiated by Big O and the Franchisee. 6. 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. 7. 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___. BIG O TIRES, INC. FRANCHISEE: _______________________________ __________________________________ (Print Name) By: By: Title: Title: Schedule 7 to Franchise Agreement Page 2 -105- EX-21.1 7 EXHIBIT 21.1 SUBSIDIARIES OF TBC CORPORATION As of December 31, 1997, TBC Corporation had three subsidiaries, each of which was wholly-owned by TBC Corporation. The subsidiaries and their states of incorporation were as follows: Name of Subsidiary State of Incorporation Big O Tires, Inc. Nevada Northern States Tire, Inc. Delaware TBC International, Inc. Delaware In addition, TBC Corporation has other subsidiaries which it owns indirectly through the above-named subsidiaries. Such indirectly- owned subsidiaries are not named because they would not, if considered in the aggregate as one subsidiary, constitute a "significant subsidiary," as defined in Rule 1.02(w) of Regulation S-X. -106- EX-23.1 8 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Form S-8 registration statement for TBC Corporation's 1989 Stock Incentive Plan of our reports dated January 30, 1998, on our audits of the consolidated financial statements and financial statement schedule of TBC Corporation and Subsidiaries as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Memphis, Tennessee February 10, 1998 -107- EX-24.1 9 EXHIBIT 24.1 TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Marvin E. Bruce Marvin E. Bruce -108- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Robert E. Carroll, Jr. Robert E. Carroll, Jr. -109- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Robert H. Dunlap Robert H. Dunlap -110- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Dwain W. Higginbotham Dwain W. Higginbotham -111- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 7th day of February, 1998. /s/ Charles A. Ledsinger Charles A. Ledsinger -112- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Richard A. McStay Richard A. McStay -113- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 6th day of February, 1998. /s/ Robert M. O'Hara Robert M. O'Hara -114- TBC CORPORATION LIMITED POWER OF ATTORNEY WHEREAS, TBC Corporation (the "Company") intends to file with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 1997; NOW, THEREFORE, the undersigned, in his capacity as a director of the Company, hereby appoints Louis S. DiPasqua and/or Ronald E. McCollough, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name, place and stead, the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (including any amendment to such report), and any and all other instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Either of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in the aforesaid capacity, every act whatsoever necessary or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person. The undersigned hereby ratifies and approves the acts of either of said attorneys. IN WITNESS WHEREOF, the undersigned has executed this instrument this 5th day of February, 1998. /s/ Robert R. Schoeberl Robert R. Schoeberl -115- EX-27 10
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1997 DEC-31-1997 (2320) 0 84683 7344 84806 183198 58226 21967 264948 52784 0 0 0 2316 131871 264948 642852 642852 544119 544119 61350 0 5796 31587 11887 19700 0 0 0 19700 .84 .84 THIS ITEM IS SHOWN NET OF "OUTSTANDING CHECKS, NET" ON THE CONSOLIDATED BALANCE SHEETS. AMOUNT IS "BASIC" EPS AS COMPUTED PER FASB STATEMENT NO. 128.
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