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CONFORMED
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-11579
TBC CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 31-0600670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4770 Hickory Hill Road
Memphis, Tennessee 38141
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(Address of principal executive offices) (Zip Code)
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 42 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, 2000 (for purposes of
this calculation, 1,803,263 shares beneficially
owned by directors and executive officers of the
Company were treated as being held by affiliates
of the Company) ............................................ $87,308,009
Number of shares of Common Stock, par value $.10,
outstanding at the close of business on December 31, 2000 .....20,939,265
DOCUMENT INCORPORATED BY REFERENCE
----------------------------------
TBC Corporation's Proxy Statement for its Annual Meeting of Stockholders to be
held on April 25, 2001. 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 Company was incorporated in Delaware in 1970 under
the name THE Tire and Battery Corporation. In 1983, the Company changed its name
to TBC Corporation.
TBC and its wholly-owned subsidiaries are principally engaged in the
marketing and distribution of tires in the automotive replacement market. The
Company believes it is the largest independent marketer/distributor of private
brand replacement tires in the United States.
Until 2000, substantially all of the Company's business consisted of
the wholesale distribution of tires. In June 2000, the Company acquired Tire
Kingdom, Inc. ("Tire Kingdom"), which operates retail tire and automotive
service centers in the southeastern United States. This acquisition represented
the Company's first significant entry into the retail distribution of tires. As
a result of the Tire Kingdom acquisition, the Company's financial statements now
include information about two reportable segments: wholesale tire distribution
and retail tire distribution. See Note 13 to the consolidated financial
statements included in this Report.
Unless the context indicates otherwise, the term "Company" refers to
TBC Corporation and its subsidiaries, taken as a whole.
Wholesale Tire Distribution
- ---------------------------
The wholesale tire distribution segment of the Company's business
(the Company's "Wholesale Business") consists of all of the Company's
operations, other than the retail business conducted by Tire Kingdom. During
2000, the Company's Wholesale Business included sales of the Company's
proprietary Cordovan(R), Multi-Mile(R) and Sigma(R) brand tires marketed through
a network of distributors who operate under written distributor agreements with
the Company. These distributors resell the Company's products to retailers or
through retail outlets primarily consisting of independent tire dealers. In
addition, the Company's Wholesale Business included sales by Big O Tires, Inc.,
the Company's wholly-owned subsidiary ("Big O"), of its proprietary Big O(R)
brand tires and other tires.
Tires marketed under the Company's proprietary brand trademarks are
manufactured for the Company by leading manufacturers. The Company's
Cordovan(R), Multi-Mile(R), Sigma(R) and Big O(R) brand lines of tires are four
of the most complete lines in the replacement tire market for automobiles, light
trucks and sport utility vehicles. The Company also distributes tires under
other brands for automobile, truck, sport utility vehicle, farm, industrial,
recreational and other applications.
-3-
Big O franchises retail tire and automotive service stores located
primarily in the western and midwestern United States and sells Big O(R) brand
tires and other tires to these franchisees. At December 31, 2000, the Company
had a total of 462 Big O stores, including 436 franchisee-owned stores, 16
stores owned by joint ventures in which the Company has an equity interest, and
10 stores owned by the Company. Big O products are also sold by Big O to 30
unaffiliated retail stores in British Columbia, Canada. Big O franchise
agreements grant a ten-year license to sell Big O 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. With the exception of retail tire stores
converting to the Big O franchise system, each franchisee is required to pay an
initial franchise fee. All franchisees are required to pay monthly royalty fees.
Retail Tire Distribution
- ------------------------
The retail tire distribution segment of the Company's business (the
Company's "Retail Business") consists of the retail operations conducted by Tire
Kingdom.
At the end of 2000, Tire Kingdom operated a total of 163 retail tire
and automotive service centers in the southeastern United States, an increase of
15 stores compared to the 148 Tire Kingdom stores which were in operation when
the Company acquired Tire Kingdom in June 2000. Tire Kingdom markets a broad
selection of tires under nationally-advertised brands and private brands,
including the Company's own Sigma(R) brand. Tire Kingdom's retail centers
provide full service tire replacement including tire balancing, wheel alignment,
extended service programs and warranties, and also perform maintenance and
mechanical services such as brake repairs, suspension system replacement, and
oil changes.
Products and Suppliers
- ----------------------
Sales of tires accounted for approximately 89% of the Company's total
sales in 2000, 93% in 1999, and 95% in 1998. The remainder of the Company's
sales include tubes, wheels, and other products for the automotive replacement
market. In 2000, sales also included tire and mechanical services rendered by
Tire Kingdom during the seven months following its acquisition.
The Company purchases its products, in finished form, from a number
of major rubber companies and other suppliers to the automotive replacement
market. In the case of tires bearing the Company's trademarks, the Company owns
many of the molds in which they are made.
The Goodyear Tire & Rubber Company manufactured more than half of the
tires purchased by the Company in 2000, pursuant to a supply agreement entered
into in 1977 and a 10-year commitment signed in 1994. This ongoing supply
relationship began in 1963 with The Kelly-Springfield Tire Company as the
supplier. Kelly-Springfield later became a wholly-owned subsidiary of Goodyear
and was ultimately merged into Goodyear in December 1996. 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.
-4-
From time to time, the tire industry has faced shortages affecting
the availability of particular sizes of tires, for reasons such as production
difficulties, labor unrest, and recalls. As an example, as a result of the
Firestone ATX Wilderness tire recalls during 2000, tires were not immediately
available in sufficient quantities to replace all recalled tires. While the
Company has not been immune from difficulties in purchasing products in
quantities desired, the Company believes that its long-term relationships with
its primary suppliers have been beneficial in minimizing the impact of any
shortages existing in the industry. Despite the Company's past experiences, if
either of its two largest suppliers significantly curtailed its manufacturing
for the Company or if tires from either supplier were unavailable, the Company's
business would be adversely affected pending the establishment of new, alternate
suppliers. There are, however, a number of other large tire manufacturers on a
worldwide basis.
Trademarks
- ----------
In addition to its Cordovan(R), Multi-Mile(R), Sigma(R), Big O(R) and
Tire Kingdom(R) trademarks, the Company also holds federal registrations for
trademarks such as Grand Prix(R), Grand Am(TM), Grand Spirit(R), Wild Spirit(R),
Aqua Flow(R), Wild Country(R), Wild Trac(R), Supreme(TM), Stampede(R), Power
King(R), Harvest King(R), Big Foot(R), Legacy(R), Prestige(R), and Sun
Valley(R).
The ability to offer products and services 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.
Customers
- ---------
The Company's ten largest customers (all in its Wholesale Business)
accounted for 24% of the Company's consolidated sales in 2000. No customer
individually accounted for 10% or more of the Company's consolidated sales in
2000.
The loss of any major customer in the Wholesale Business could have a
material adverse effect upon this segment and the Company's business as a whole,
pending the establishment of a replacement customer to market the Company's
products. See Note 2 to the consolidated financial statements and Item 13 of
this Report for additional information concerning major customers.
Sales to domestic customers represented 95% of the Company's
consolidated sales in 2000, 96% in 1999, and 95% in 1998. The remainder of the
Company's sales was attributable to customers located outside the United States,
principally in Mexico and Canada.
Seasonality and Inventory
- -------------------------
The Company normally experiences its highest level of sales in the
third quarter of each year, with the first quarter exhibiting the lowest level.
Since 1996, first quarter sales have represented, on the average, approximately
21% of annual sales; the second quarter and third quarters approximately 24% and
29%, respectively; and the fourth quarter approximately 26%. These levels
represent the Company's experience in that part of its business which is now in
the Wholesale Business segment; however, the Company does not expect the
seasonality in its Retail Business segment to be materially different.
-5-
Orders for the Company's products, except for those sold in the
Retail Business segment, are usually placed with the Company by computer,
facsimile, or telephone. These orders are filled either out of the Company's
inventory or by direct shipment to the customer from the manufacturers' plants
at the Company's request.
Since customers look to the Company to fulfill their needs on short
notice, the Company maintains a large inventory of tires and other products,
both for its Wholesale Business and its Retail Business segments. Average
inventories, based on quarter-end levels on hand and in transit, were $160.3
million during 2000. The Company's inventory turn rate (cost of sales, including
the cost of direct shipments from manufacturers to customers, divided by average
inventory) was 4.4 for 2000.
Competition
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The industry in which the Company operates is highly competitive. In
the case of the Company's Wholesale Business, many of the Company's competitors
are significantly larger and have greater financial and other resources than the
Company. These competitors include the Company's own suppliers and other tire
manufacturers, other wholesale tire distributors, as well as mass merchandisers
and retailers with sufficient purchasing power to command wholesale prices.
The Company believes its Wholesale Business is able to compete
successfully because of its ability to offer quality products under proprietary
brand names, its efficient distribution systems, its good relationships with
distributors, franchisees, and suppliers, and its established presence in the
markets it serves.
Competition in retail replacement tire sales is based primarily upon
market presence in a specific geographic area. In the case of the Company's
Retail Business, Tire Kingdom had 145 retail stores in Florida as of December
31, 2000 and is one of the leading tire retailers in the State of Florida. Its
market position outside the State of Florida varies depending upon the location.
Competitors include stores operated by tire manufacturers, other retail outlets
such as warehouse clubs, chains and mass merchandisers, and other independent
tire dealers, some of whom are customers or who buy from customers of the
Company's Wholesale Business.
Employees
- ---------
As of December 31, 2000, the Company employed approximately 2,900
persons, of which approximately 2,000 were employed by Tire Kingdom. None of the
Company's employees are represented by a union, and the Company considers its
employee relations to be satisfactory.
-6-
Item 2. PROPERTIES
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TBC Corporation's executive offices are located in Memphis,
Tennessee, along with two of its warehouse distribution facilities. The Company
has a total of 33 warehouse distribution facilities, totaling approximately 3.6
million square feet, located in 14 states across the United States. The Company
owns its executive office building and four of its distribution facilities. The
remainder of the distribution facilities, totaling approximately 2.9 million
square feet, are leased. All of the stores operated by Big O are leased.
Approximately 205,000 square feet of the Company's warehouse
distribution facilities are utilized for the Company's Retail Business. In
addition, all of the retail tire and service centers operated by Tire Kingdom
are leased.
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, as well as coverage for
damages, workmanship and repairs relative to its retail operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
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The table which follows 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 25, 2001) or
until their respective successors are elected.
Capacities in which
Individual Serves
Name Age the Company
---- --- -------------------
Lawrence C. Day 51 President and Chief Executive Officer
Thomas W. Garvey 46 Executive Vice President, Chief Financial
Officer and Treasurer
Kenneth P. Dick 54 Executive Vice President, Sales
Larry D. Coley 43 Vice President, Corporate Controller and
Assistant Secretary
-7-
Mr. Day has been the Company's Chief Executive Officer since October 1999
and President since October 1998. Mr. Day served as the Company's Chief
Operating Officer from the time he joined the Company in April 1998 until his
election as Chief Executive Officer. Mr. Day was an Executive Vice President of
the Company prior to his election as President. Mr. Day was President and Chief
Executive Officer of Monro Muffler Brake, Inc. from 1995 to 1998. Prior to
joining Monro in 1993, Mr. Day was Vice President of Montgomery Ward's Auto
Express Division. His experience in the tire industry includes 13 years in a
series of managerial positions with the Firestone Tire & Rubber Company.
Mr. Garvey has been Executive Vice President, Chief Financial Officer and
Treasurer of the Company since January 2001. From 1993 to January 2001, Mr.
Garvey was Executive Vice President and Chief Financial Officer of Tire Kingdom,
which TBC acquired in June 2000. Prior to joining Tire Kingdom, Mr. Garvey
served as Audit Consultant for Phar-Mor, Inc. and as Executive Vice President
and Chief Financial Officer of Fisher Scientific Company.
Mr. Dick has been the Company's Executive Vice President Sales since April
2000. From 1988 until his election as Executive Vice President, Mr. Dick served
as Senior Vice President Sales of the Company. From 1982 until 1988, Mr. Dick
was the Company's Vice President of Sales. Mr. Dick joined the Company in 1971
and served in a number of sales management positions prior to his election as
Vice President.
Mr. Coley has been a Vice President of the Company since 1993 and Corporate
Controller and Assistant Secretary since April 1999. Mr. Coley was Controller of
the Company from 1989 to April 1999. Mr. Coley joined the Company in 1984 and
served in a number of financial management positions prior to his election as
Controller.
-8-
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, 2000, the Company had approximately
3,700 stockholders based on the number of holders of record and an estimate of
the number of individual participants represented by security position listings.
Historically, the Company has not paid cash dividends and the Company has no
intention to do so in the foreseeable future. In addition, the Company's
short-term and long-term credit facilities restrict its ability to declare cash
dividends (see Note 6 to the consolidated financial statements).
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
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03/31/99............ $7.63 $5.50
06/30/99............ 8.00 5.69
09/30/99............ 8.38 6.75
12/31/99............ 7.13 5.44
03/31/00............ 6.38 4.56
06/30/00............ 6.25 4.50
09/30/00............ 6.25 4.25
12/31/00............ 5.00 3.88
-9-
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, 2000. 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 discussions of the 2000
acquisition of Tire Kingdom, Inc. in Note 3 to the consolidated financial
statements and the 1998 acquisition of Carroll's, Inc. in Note 4 to such
financial statements. Information regarding the 1996 acquisition of Big O Tires,
Inc. was included in Note 4 to the consolidated financial statements included in
Form 10-K for the year ended December 31, 1998. The Company did not declare any
cash dividends during the five-year period ended December 31, 2000.
Year ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
INCOME STATEMENT DATA (1):
- --------------------------
Net sales .......................................... $902,740 $743,050 $646,135 $642,852 $604,585
EBITDA (2) ........................................ 53,456 44,674 40,926 44,984 35,694
Net income ......................................... 18,724 17,939 16,894 19,700 15,499
Earnings per share (3) ............................. .88 .85 .75 .84 .65
Average shares and
equivalents outstanding ......................... 21,191 21,189 22,481 23,571 23,840
BALANCE SHEET DATA (1):
- -----------------------
Total assets ....................................... $450,633 $348,373 $333,790 $264,948 $253,882
Working capital .................................... 156,644 113,669 108,251 130,414 117,980
Long-term debt ..................................... 113,531 47,000 59,653 67,647 69,550
Stockholders' equity ............................... 174,052 156,382 138,431 134,187 119,805
(1) In thousands, except per share amounts.
(2) Earnings before interest, income taxes, depreciation and amortization.
(3) Basic and diluted.
-10-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
2000 Compared to 1999:
- ----------------------
As a result of the Company's acquisition of Tire Kingdom, Inc.
("Tire Kingdom") in June 2000 (see Note 3 to the consolidated financial
statements), the Company's financial statements for the year ended December 31,
2000 include information about two business segments: wholesale tire
distribution, which includes all of the Company's operations other than the
retail business conducted by Tire Kingdom (the "Wholesale Business"); and retail
tire distribution, which consists of the Tire Kingdom retail operations (the
"Retail Business"). See Note 13 to the consolidated financial statements for
segment information. The results of operations for 2000 include results for Tire
Kingdom for the seven months following the acquisition and thus there were a
number of significant changes in income statement items between the years 2000
and 1999.
Net sales for 2000 increased 21.5% from the 1999 level. Sales of
tires accounted for approximately 89% of total sales in 2000 compared to 93% in
1999. Unit tire shipments increased 11.2% in 2000 and the average tire sales
price increased 4.4%, due largely to the addition of tire units sold by Tire
Kingdom and the higher percentage of volume represented by retail sales. The
addition of the Retail Business also led to a reduction in the percentage of
total sales attributable to tires in 2000, because the revenue from mechanical
and maintenance services performed by the retail stores is included in non-tire
sales. Excluding the results of Tire Kingdom, net sales increased 2.2%, due
principally to a 1.5% increase in unit tire volume and a 1.0% increase in the
average tire sales price. Industrywide pricing pressures, prevalent throughout
most of the last several years, continued throughout 2000.
Cost of sales as a percentage of net sales decreased from 82.6% in
1999 to 78.0% in 2000, due primarily to the addition of the Retail Business. The
gross margin percentages on retail sales are generally higher than on sales by
the Company's Wholesale Business. Excluding the impact of Tire Kingdom, the cost
of sales as a percentage of net sales was relatively unchanged, at 82.4% in 2000
versus 82.6% in 1999.
Distribution expenses as a percentage of net sales decreased from
6.2% in 1999 to 5.4% in 2000. Excluding Tire Kingdom, which has lower
warehousing and product delivery costs than the Wholesale Business, distribution
expenses were 6.1% of net sales in 2000. The 1999 expenses included $1.2 million
in expenses connected with a revised logistics plan for the Company's Big O
subsidiary. The plan involved the closing of one facility and the opening of
four new distribution facilities (see Note 5 to the consolidated financial
statements). Excluding the impact of the expenses related to the Big O
logistical changes, distribution expenses in 1999 were also 6.1% of net sales.
Selling, administrative and retail store expenses increased $62.0
million in 2000 compared to 1999, due principally to the effect of the Tire
Kingdom acquisition. The expenses for Tire Kingdom totaled $59.9 million during
the period following the acquisition and included payroll, operating and
service-related costs for the retail stores, in addition to other selling and
administrative expenses. Excluding the expenses of Tire Kingdom, selling and
administrative expenses in 2000 increased only $2.1 million, or 4.6%, from the
1999 level. Expenses in 2000 included approximately $1.2 million related to
certain management restructuring.
-11-
The provision for doubtful accounts and notes in 1999 was greater
than in 2000, due to a $4.6 million charge recorded in 1999 in conjunction with
a note receivable from a former distributor which had been the subject of
litigation since 1989 (see Note 14 to the consolidated financial statements).
Excluding that charge and the impact of Tire Kingdom on 2000 results, the
provision for doubtful accounts and notes was only 0.13% of net sales in 2000
and 0.07% of net sales in 1999.
Net interest expense increased $3.7 million from the 1999 level,
reflecting a $3.9 million increase related to short-term borrowings and a
decline of $217,000 related to long-term borrowings. The greater interest
associated with short-term borrowings was due to the combined effects of higher
borrowing levels and higher interest rates, both of which were significantly
affected by borrowings to fund the Tire Kingdom acquisition. Average short-term
borrowings totaled $86.9 million in 2000 compared to $51.0 million in 1999.
Average short-term interest rates, which were also affected by overall economic
conditions, increased from 6.2% in 1999 to 8.3% in 2000.
Net other income in 2000 was $2.0 million less than in 1999. The
1999 total included a net gain of $2.6 million from the sale of a Big O
distribution center in conjunction with the previously-mentioned revised
logistics plan. (See Note 5 to the consolidated financial statements.) The 2000
total included improved results from joint ventures in which the Company has
equity interests.
The Company's effective tax rate increased from 38.7% in 1999 to
39.7% in 2000, due largely to the impact of non-deductible goodwill associated
with the Tire Kingdom acquisition.
Earnings per share in 2000 totaled $0.88 and included a net charge
of $0.04 as a result of the previously-noted management restructuring expenses.
Earnings per share in 1999 were $0.85, which included a net charge of $0.10 for
the aforementioned $4.6 million note receivable charge, the gain on the sale of
the Big O distribution facility and the costs of relocating to four new Big O
distribution centers. Excluding the effects of these items, earnings were $0.92
per share in 2000 compared to $0.95 per share in 1999. The decline in
year-to-year adjusted earnings was largely associated with the higher interest
expense noted above.
1999 Compared to 1998:
- ----------------------
As a result of the Company's acquisition of Carroll's, Inc.
("Carroll's") on November 19, 1998 (see Note 4 to the consolidated financial
statements), there were a number of significant changes in income statement
items between the years 1999 and 1998. Carroll's, a wholesale distributor of
tires and automotive products in the Southeast, was the Company's largest
customer and also was classified as a related party in the consolidated
financial statements prior to the acquisition.
Net sales for 1999 increased 15.0% from the 1998 level. Sales of
tires accounted for approximately 93% of total sales in 1999 compared to 95% in
1998. Unit tire shipments increased 9.3% in 1999 and the average tire sales
price increased 3.8%, due principally to the positive impact of the Carroll's
acquisition. Excluding the net contribution of the Carroll's acquisition on the
year-to-year comparisons, net sales increased 3.9%, including the effects of a
3.4% increase in unit tire volume, a 1.0% decrease in the average tire sales
price, and an increase in non-tire sales compared to the 1998 level. An
industrywide trend of lower prices, prevalent throughout most of the last
several years, persisted in 1999.
-12-
Cost of sales as a percentage of net sales decreased from 84.1% in
1998 to 82.6% in 1999, due primarily to the positive impact of the Carroll's
acquisition on consolidated profit margins. Excluding the net effect of the
Carroll's acquisition, cost of sales as a percentage of net sales was relatively
unchanged from the 1998 level.
Distribution expenses as a percentage of net sales increased from
5.3% in 1998 to 6.2% in 1999. The 1999 expenses included $1.2 million in
expenses connected with a revised logistics plan for Big O, which resulted in
the closing of one facility and the opening of four new distribution facilities
(see Note 5 to the consolidated financial statements). The remainder of the
increase was largely due to the greater labor and warehousing costs associated
with servicing the customers of Carroll's compared to much of the Company's
other customer base. Excluding the net effect of the Carroll's acquisition and
the expenses related to the Big O logistical changes, distribution expenses were
5.3% of net sales in 1999.
Selling, administrative and retail store expenses increased $9.7
million in 1999 compared to 1998, due largely to the effect of the Carroll's
acquisition. (Prior to the acquisition of Tire Kingdom in June 2000, this income
statement item included only selling and administrative expenses.) Excluding the
expenses of Carroll's, selling and administrative expenses increased $3.0
million, or 8.6%, from the 1998 level due principally to increased retirement
and compensation expenses, related in part to higher staffing levels in 1999.
The increased provision for doubtful accounts and notes was due to
the $4.6 million charge recorded in 1999 in conjunction with a note receivable
from a former distributor which had been the subject of litigation since 1989.
See Note 14 to the consolidated financial statements.
Net interest expense increased $1.7 million from the 1998 level.
Interest related to short-term borrowings increased $2.1 million and interest on
long-term borrowings declined $383,000. The greater interest associated with
short-term borrowings was due to higher borrowing levels, which more than offset
a reduction in borrowing rates compared to the prior year. Short-term borrowings
were used in the fourth quarter of 1998 to fund the acquisition of Carroll's for
$28.2 million and investments in joint ventures totaling $4.6 million and were
thus higher in 1999 than in 1998.
Net other income in 1999 was $2.9 million greater than in 1998.
The 1999 total included a net gain of $2.6 million from the sale of a Big O
distribution center in conjunction with the previously-mentioned revised
logistics plan. See Note 5 to the consolidated financial statements.
The Company's effective tax rate decreased from 39.2% in 1998 to
38.7% in 1999, due to a reduction in the effective state income tax rate
compared to the prior year level.
Earnings per share in 1999 included a net charge of $.10 as a
result of the aforementioned $4.6 million note receivable charge, the gain on
the sale of the Big O distribution facility and the costs of relocating to four
new Big O distribution centers. Excluding the effect of these items, earnings
for 1999 were $.95 per share, up 27% from the 1998 level.
-13-
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $156.6 million at December 31,
2000 compared to $113.7 million at the end of 1999. The Company's current ratio
was 2.04 at the end of 2000 compared to 1.84 at December 31, 1999.
At December 31, 2000, the Company had a 364-day committed bank
facility which allowed the Company to borrow up to $133 million. A total of
$92.0 million was borrowed under this facility at December 31, 2000. As
discussed in Note 6 to the consolidated financial statements, new bank borrowing
agreements were entered into in January 2001 which replaced the previous
short-term credit facility. The new arrangement allows the Company to borrow up
to $160 million and includes an $80 million, three-year revolving loan facility
and an $80 million, five-year term loan. The Company's balance sheet as of
December 31, 2000 reflects the terms of the new agreements and the conversion of
$80 million in previous short-term borrowings from notes payable to banks to
long-term debt. The Company's long-term debt also included Senior Notes incurred
in 1996 to finance the acquisition of Big O. Of the total $127.5 million in
long-term debt on the Company's balance sheet at the end of 2000, $13.9 million
was classified as current and the remainder was considered noncurrent. The
Company is subject to certain financial covenants and other restrictions under
its bank borrowing agreements and Senior Notes (see Note 6 to the consolidated
financial statements).
Cash generated by operations, together with the available credit
arrangements, enabled the Company to fund the June 2000 acquisition of Tire
Kingdom for $43.5 million. The Company was also able to fund capital
expenditures as well as the December 2000 purchase of the net assets of 14
retail tire stores for $3.9 million. Additionally, the Company was able to fund
repurchases of common stock totaling $1.3 million in 2000. As of December 31,
2000, the Company had an unused authorization from the Board of Directors for
the repurchase of 1,634,000 additional shares of common stock.
Capital expenditures, primarily for equipment and tire molds,
totaled $12.0 million in 2000 and $15.3 million in 1999. The Company had no
material commitments for capital expenditures at the end of 2000. The Company
expects to fund 2001 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, bank borrowing
facilities and expected funds from operations will be sufficient to operate on
both a short-term and long-term basis.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
No. 133, as amended, requires the Company to recognize all derivative
instruments on the balance sheet at fair value, beginning in January 2001. If
the instrument is a hedge, depending on the nature of the hedge, changes in the
fair value of the instrument will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings,
or recognized in other comprehensive income until the hedged item is recognized
in earnings. Any ineffective portion of a derivative's change in fair value will
be recognized immediately in earnings and any derivatives that are not hedges
must be adjusted to fair value through income. The Company does not expect the
impact of adopting SFAS 133 to be material.
-14-
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended, including, without limitation,
statements containing the words "believes," "expects," "anticipates,"
"estimates" and words of similar import. Such forward-looking statements relate
to future events and the future financial performance of the Company, and
involve known and unknown risks, uncertainties and other factors which may cause
the actual results or performance of the Company to be materially different from
the results expressed or implied by such forward-looking statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to certain financial market risks, the most
predominant of which is the fluctuation in interest rates. At December 31, 2000,
the Company owed $92.0 million to banks under bank credit facilities, which
represented its primary exposure to market risk for a change in interest rates.
The Company's operating results are affected by changes in interest rates. If
interest rates increased by 25 basis points, the Company's annual interest
expense would have increased by approximately $230,000 based on the balance
outstanding at the end of 2000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary financial information
required by this Item 8 are included on the following 20 pages of this Report.
-15-
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
1000 Morgan Keegan Tower
Fifty North Front Street
Memphis, TN 38103
Telephone (901) 522 2000
Facsimile (901) 523 2045
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
TBC Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of TBC Corporation and
its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
January 29, 2001
-16-
TBC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31,
2000 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,681 $ 1,273
Accounts and notes receivable, less
allowance for doubtful accounts of
$7,831 in 2000 and $7,751 in 1999:
Related parties 16,942 9,546
Other 94,836 75,756
-------- --------
Total accounts and notes receivable 111,778 85,302
Inventories 168,141 138,054
Refundable federal and state income taxes 3,099 3,306
Deferred income taxes 12,506 6,079
Other current assets 10,594 15,553
-------- --------
Total current assets 307,799 249,567
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements 6,782 8,129
Buildings and leasehold improvements 27,906 27,330
Furniture and equipment 48,132 35,124
-------- --------
82,820 70,583
Less accumulated depreciation 27,787 25,269
-------- --------
Total property, plant and equipment 55,033 45,314
-------- --------
TRADEMARKS, NET 15,987 16,437
-------- --------
GOODWILL, NET 50,760 18,018
-------- --------
OTHER ASSETS 21,054 19,037
-------- --------
TOTAL ASSETS $450,633 $348,373
======== ========
The accompanying notes are an integral part of the financial statements.
-17-
TBC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2000 1999
-------- -------
CURRENT LIABILITIES:
Outstanding checks, net $ 10,037 $ 5,170
Notes payable to banks 11,993 63,762
Current portion of long-term debt
and capital lease obligations 13,948 6,514
Accounts payable, trade 75,407 40,417
Other current liabilities 39,770 20,035
-------- --------
Total current liabilities 151,155 135,898
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, LESS CURRENT PORTION 113,531 47,000
-------- --------
NONCURRENT LIABILITIES 5,111 1,420
-------- --------
DEFERRED INCOME TAXES 6,784 7,673
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
shares issued and outstanding -
20,939 in 2000 and 21,182 in 1999 2,094 2,118
Additional paid-in capital 9,760 9,639
Retained earnings 162,198 144,625
-------- --------
Total stockholders' equity 174,052 156,382
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $450,633 $348,373
======== ========
The accompanying notes are an integral part of the financial statements.
-18-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
NET SALES * $ 902,740 $ 743,050 $ 646,135
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 704,493 613,491 543,214
Distribution expenses 49,144 46,313 34,027
Selling, administrative and
retail store expenses 107,662 45,637 35,916
Provision for doubtful accounts
and notes 1,468 5,090 742
Interest expense - net 11,391 7,676 5,940
Other (income) expense - net (2,465) (4,417) (1,513)
--------- --------- ---------
Total costs and expenses 871,693 713,790 618,326
--------- --------- ---------
INCOME BEFORE INCOME TAXES 31,047 29,260 27,809
PROVISION FOR INCOME TAXES 12,323 11,321 10,915
--------- --------- ---------
NET INCOME $ 18,724 $ 17,939 $ 16,894
========= ========= =========
EARNINGS PER SHARE -
Basic and diluted $ .88 $ .85 $ .75
========= ========= =========
* Including sales to related parties of $86,961, $78,880 and $133,170 in
the years ended December 31, 2000, 1999 and 1998, respectively.
The accompanying notes are an integral part of the financial statements.
-19-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(In thousands)
Years ended December 31, 1998, 1999 and 2000
-------------------------------------------------------------
Common Stock
------------------- Additional
Number of Paid-In Retained
Shares Amount Capital Earnings Total
------- ------ ----------- -------- -----------
BALANCE, JANUARY 1, 1998 23,163 $ 2,316 $ 9,788 $ 122,083 $ 134,187
Net income for year 16,894 16,894
Issuance of common stock under
stock option and incentive plans 84 8 626 -- 634
Repurchase and retirement
of common stock (2,075) (207) (931) (12,203) (13,341)
Tax benefit from exercise of
stock options -- -- 57 -- 57
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 21,172 2,117 9,540 126,774 138,431
Net income for year 17,939 17,939
Issuance of common stock under
stock option and incentive plans 23 2 95 -- 97
Repurchase and retirement
of common stock (13) (1) (6) (88) (95)
Tax benefit from exercise of
stock options -- -- 10 -- 10
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 21,182 2,118 9,639 144,625 156,382
Net income for year 18,724 18,724
Issuance of common stock
under stock option and
incentive plans, net 47 5 255 -- 260
Repurchase and retirement
of common stock (290) (29) (134) (1,151) (1,314)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 20,939 $ 2,094 $ 9,760 $ 162,198 $ 174,052
========= ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
-20-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
------------------------
2000 1999 1998
--------- --------- ---------
Operating Activities:
Net income $ 18,724 $ 17,939 $ 16,894
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 9,036 6,624 6,226
Amortization 1,982 1,114 951
Provision for doubtful accounts and notes 1,468 5,090 742
(Gain) on sale of fixed assets (109) (2,704) --
Deferred income taxes 687 526 (464)
Equity in (earnings) loss from joint ventures (462) (6) 217
Changes in operating assets and liabilities, net
of effects of assets and liabilities acquired:
Receivables (17,647) (2,256) 8,006
Inventories (903) (9,363) (15,335)
Other current assets 7,843 (5,481) 3,159
Other assets 427 (623) (1,148)
Accounts payable, trade 10,647 (3,314) 15,593
Federal and state income taxes
refundable or payable 352 (1,819) 219
Other current liabilities (2,093) 1,346 (275)
Noncurrent liabilities (405) (1,192) (263)
-------- -------- --------
Net cash provided by operating activities 29,547 5,881 34,522
-------- -------- --------
Investing Activities:
Purchase of property, plant and equipment (12,043) (15,265) (12,405)
Acquisition of Tire Kingdom, Inc.,
net of cash acquired (43,471) -- --
Purchase of net assets of 14 retail tire
stores, net of cash acquired (3,861) -- --
Acquisition of Carroll's, Inc. -- -- (28,201)
Investments in joint ventures, net
of distributions received 237 (575) (5,074)
Net proceeds from asset dispositions 4,948 9,981 --
Other -- 413 518
-------- -------- --------
Net cash used in investing activities (54,190) (5,446) (45,162)
-------- -------- --------
Financing Activities:
Net bank borrowings under short-term
borrowing arrangements 28,231 13,810 23,648
Increase (decrease) in outstanding checks, net 4,867 (507) 1,623
Payments on long-term debt and capital
lease obligations (6,733) (13,999) (826)
Issuance of common stock under stock option
and incentive plans -- 67 318
Repurchase and retirement of common stock (1,314) (95) (13,314)
Other -- (137) --
-------- -------- --------
Net cash provided by (used in)
financing activities 25,051 (861) 11,422
-------- -------- --------
Change in cash and cash equivalents 408 (426) 782
Cash and cash equivalents:
Balance - Beginning of year 1,273 1,699 917
-------- -------- --------
Balance - End of year $ 1,681 $ 1,273 $ 1,699
======== ======== ========
-21-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years ended December 31,
------------------------
2000 1999 1998
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid for - Interest $ 11,417 $ 8,477 $ 6,278
- Income Taxes 11,284 12,614 11,162
Supplemental Disclosure of Non-Cash Financing Activity:
Refinancing of short-term borrowings to long-term debt $ 80,000 $ -- $ --
Tax benefit from exercise of stock options -- 10 57
Issuance of restricted stock under stock incentive plan 260 30 316
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Effective June 1, 2000, the Company completed
the acquisition of Tire Kingdom, Inc. for a total
purchase price of $45,000, less certain adjustments
and plus applicable closing costs. The acquisition
was accounted for under the purchase method,
as follows:
Estimated fair value of assets acquired $ 61,881
Goodwill 31,224
Cash paid, net of cash acquired (43,471)
--------
Liabilities assumed $ 49,634
========
In December 2000, the Company purchased the
net assets of 14 retail stores located in Louisiana,
Florida and Georgia at a combined cash purchase
price of $3,863. The transactions were accounted
for under the purchase method, as follows:
Estimated fair value of assets acquired $ 1,928
Goodwill 2,980
Cash paid, net of cash acquired (3,861)
--------
Liabilities assumed $ 1,047
========
On November 19, 1998, the Company completed
the acquisition of Carroll's, Inc. for a total
purchase price of $28,000, plus applicable closing
costs. The acquisition was accounted for under the
purchase method, as follows:
Estimated fair value of assets acquired $ 50,381
Goodwill 4,037
Cash paid (28,201)
--------
Liabilities assumed $ 26,217
=======
The accompanying notes are an integral part of the financial statements.
-22-
TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Operations
- ----------
The Company is principally engaged in the marketing and distribution
of tires in the automotive replacement market, through both wholesale and retail
channels. The Company's wholesale customers include retailers and other
wholesalers, primarily in the United States, Canada and Mexico. Through Tire
Kingdom, Inc., acquired in June 2000, the Company operates retail tire and
automotive service centers in the southeastern United States. Through its
subsidiary Big O Tires, Inc., the Company also acts as a franchisor of
independent retail tire and automotive service stores located primarily in the
western and midwestern United States.
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 are accounted for using the
equity method.
Accounting estimates - The financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of such financial statements 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. Actual results could differ from those estimates.
Cash equivalents - Cash equivalents consist of short-term, highly
liquid investments which are readily convertible into cash.
Inventories - Inventories, consisting of tires and other automotive
products held for resale, are valued at the lower of cost or market. Certain
inventories are valued using the last in-first out method and the current costs
of those inventories exceeded the LIFO value by $354,000 and $799,000 at
December 31, 2000 and 1999, 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 the results of operations.
Revenue recognition - Sales are recognized upon shipment of
products. Estimated costs of returns and allowances are accrued at the time
products are shipped.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
- -----------------------------------------------
Goodwill, Trademarks and Other Intangible Assets - Goodwill
represents the excess of cost over the fair value of identifiable net assets
acquired. Goodwill was recorded as a result of the Company's acquisition of Tire
Kingdom in June 2000, as well as the purchase of the net assets of 14 retail
tire stores during December 2000. In 1998, goodwill was recorded in conjunction
with the Company's acquisition of Carroll's, Inc. Goodwill, trademarks and other
intangible assets are amortized on a straight-line basis, over 20 - 40 years.
Accumulated amortization on intangible assets totaled $4,824,000 and $2,896,000
at December 31, 2000 and 1999, respectively.
Long-lived assets - 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 assets and
determine if the assigned value is recoverable or if an adjustment to the
carrying value of the assets is necessary. The Company does not believe that
there were any facts or circumstances which indicated an impairment of recorded
assets as of December 31, 2000.
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 2000, 1999 and 1998 were franchise and royalty fees of $10,362,000,
$9,854,000 and $8,549,000, respectively.
Warranty costs - The costs of anticipated adjustments for
workmanship and materials that are the responsibility of the Company are
estimated and charged to expense currently. Reserves for future warranty claims
and service of $9,265,000 and $7,486,000 were included in liabilities in the
balance sheets at December 31, 2000 and 1999, 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 1.2% of net sales during 2000, 1.3% in 1999 and 1.4% in 1998.
Earnings per share - Earnings per share have been calculated
according to Statement of Financial Accounting Standards No. 128, "Earnings per
share". 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. Common share
equivalents represent shares issuable upon assumed exercise of stock options.
Average common shares and equivalents outstanding were as follows (in
thousands):
2000 1999 1998
------- ------- -------
Weighted average common shares outstanding 21,191 21,177 22,430
Common share equivalents -- 12 51
------ ------ ------
Weighted average common shares and
equivalents outstanding 21,191 21,189 22,481
====== ====== ======
-24-
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, 2000. Sales to
distributors represented on the Board, including affiliates of such distributors
(and including Carroll's, Inc. prior to being acquired by the Company in
November 1998), accounted for approximately 6% of the Company's net sales during
2000, 7% during 1999 and 17% in 1998. Sales to Carroll's, Inc., prior to being
acquired by the Company, accounted for approximately 10% of net sales in 1998,
and 11% in 1997. Another major customer, unaffiliated with the board of
directors, accounted for approximately 7% of net sales in 2000, 9% of net sales
in 1999, and 10% in 1998. Sales to joint ventures in which the Company has an
ownership interest accounted for approximately 3% of the Company's net sales
during 2000, 1999 and 1998. Accounts receivable resulting from transactions with
related parties are presented separately in the balance sheets.
3. ACQUISITION OF TIRE KINGDOM, INC.
- -------------------------------------
On June 5, 2000, the Company acquired Tire Kingdom, Inc. ("Tire
Kingdom"), a privately-owned company which operates retail tire centers in the
southeastern United States. The acquisition, which was effective June 1, 2000,
was accounted for as a purchase and was made with cash, for a total purchase
price of $45,000,000 less certain adjustments. The Company's consolidated
financial statements include the operating results of Tire Kingdom since June 1,
2000.
The following unaudited pro forma information (adjusted for items
such as interest on required borrowings, estimated amortization of goodwill,
improved sourcing strength, and anticipated operating synergies) was prepared as
if the companies had been combined prior to 1999. The pro forma results for 2000
exclude an after-tax charge of $767,000, or $0.04 per share, related to certain
management restructuring. The pro forma results for 1999 exclude an after-tax
charge of $2.8 million, or $0.13 per share, related to the write-off of a note
receivable that had been the subject of litigation since 1989, as well as a net
gain of $700,000, or $0.03 per share related to the gain on the sale of a Big O
distribution facility and the costs of relocating to four new Big O distribution
centers. This unaudited pro forma information does not purport to present what
actual results of operations would have been or to project results for any
future period. Pro forma net sales were $998,402,000 and $966,978,000 for the
years ended December 31, 2000 and 1999, respectively. Pro forma net income was
$19,316,000 in 2000 and $19,837,000 in 1999. Pro forma earnings per share were
$.91 and $.94 in 2000 and 1999, respectively.
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. ACQUISITION OF CARROLL'S, INC.
- ----------------------------------
On November 19, 1998, the Company acquired all of the common stock
of Carroll's, Inc., a privately-owned wholesale distributor of tires and
automotive products located in the southeastern United States. The acquisition,
which was accounted for as a purchase, was made with cash, for a total purchase
price of $28,000,000. Prior to the acquisition, Carroll's was the Company's
largest customer. These consolidated financial statements include the operating
results of Carroll's from the date of acquisition.
The following unaudited pro forma information for 1998 (adjusted for
interest on required borrowings, estimated amortization of goodwill, elimination
of intercompany sales and profits, etc.) was prepared as if the companies had
been combined prior to 1998. This unaudited pro forma information does not
purport to present what actual results of operations would have been or to
project results for any future period. For the year ended December 31, 1998, pro
forma net sales were $727,000,000, pro forma net income was $18,800,000 and pro
forma earnings per share were $.84.
5. DISTRIBUTION CENTER SALE AND RELATED COSTS
- ----------------------------------------------
During 1999, the Company sold a distribution center in Las Vegas,
Nevada and opened four new distribution facilities in the western United States
in conjunction with a revised logistics plan for Big O Tires, Inc. Proceeds from
the sale of the Las Vegas facility were used to retire debt, offset relocation
costs of $1,180,000 and provide additional working capital. The sale resulted in
a pre-tax gain of $2,618,000, which was included in net other income in the
consolidated statements of income. The relocation costs were included in
distribution expenses for the year 1999.
6. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
- ---------------------------------------------
At December 31, 2000, the Company had a 364-day committed credit
facility with a group of five banks, which allowed the Company to borrow up to
$133,000,000, with interest at the eurodollar or federal funds rate plus 1.75%.
The facility was collateralized by accounts receivable and inventory, required
the payment of certain commitment and administrative fees, and included various
financial covenants and restrictions typical of such a facility. A total of
$91,993,000 was borrowed under this facility at December 31, 2000. The weighted
average interest rate on short-term borrowings at December 31, 2000 and 1999 was
8.46% and 6.63%, respectively.
In January 2001, the Company entered into new borrowing agreements
with a group of 11 banks, which replaced the previous short-term credit
facility. The new arrangement includes an $80 million, three-year revolving loan
facility and an $80 million, five-year term loan facility, with interest at the
eurodollar or federal funds rate plus a variable rate between 1.75% and 3.0%
dependent on the Company's leverage ratio. The Company's balance sheet as of
December 31, 2000 reflects the terms of the new agreements and the conversion of
$80 million, which was previously included in Notes Payable to Banks, to
Long-Term Debt. Of the total amount converted, $7 million is included in the
Current Portion of Long-Term Debt and the remaining $73,000,000 is considered
noncurrent.
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT (Continued)
- ---------------------------------------------------------
The new credit facilities are collateralized by all of the
Company's unencumbered assets and contain certain cross-default provisions in
conjunction with the long-term Senior Notes described below. The new bank credit
facilities require the payment of certain commitment and administrative fees and
contain certain financial covenants dealing with, among other things, the
Company's net worth, total liabilities, funded indebtedness, leverage, fixed
charge coverage ratio, accounts receivable and inventories. The new credit
facilities also include certain restrictions which affect the Company's ability
to incur additional debt, acquire other companies, make certain investments,
repurchase its own common stock, sell or place liens upon assets, provide
guarantees and pay dividends.
Long-term debt and capital lease obligations on the balance sheet
consisted of the following, after considering the effect of the
previously-mentioned $80 million reclassification of notes payable to banks (in
thousands):
December 31,
------------
2000 1999
-------- -------
7.55% Series A Senior Note, due currently through 2003 $ 19,500 $26,000
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
Variable-Rate Term Loan Payable to Banks, due
from 2001 through 2006 80,000 --
Capital lease obligations and other debt 479 14
-------- -------
127,479 53,514
Less current portion 13,948 6,514
-------- -------
$113,531 $47,000
======== =======
The Senior Notes were issued in 1996 to finance the acquisition of
Big O Tires, Inc., with interest payable quarterly. The note agreement related
to such borrowings contained certain financial covenants and placed certain
restrictions on the Company. As a result of other acquisitions made since 1996
and the impact of such acquisitions on the Company's financial position, the
note agreement was changed in January 2001. The new agreement is collateralized
by all of the Company's unencumbered assets and includes interest rates which
are a minimum of 75 basis points higher than the previous rates for the Senior
Notes cited above. The new agreement incorporates all of the financial covenants
and restrictions contained in the new bank credit facilities noted above and
requires principal payments to be made semi-annually.
Maturities of long-term debt and capital lease obligations are as
follows: $13,948,000 due in 2001, $16,531,000 in 2002, $18,500,000 in 2003,
$20,500,000 in 2004, $17,500,000 in 2005 and $40,500,000 thereafter.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. OPERATING LEASES
- --------------------
The Company's commitments under operating leases relate substantially
to distribution facilities and retail store locations. In addition to rental
payments, the Company is obligated in some instances to pay real estate taxes,
insurance and certain maintenance costs.
The Company, through its Big O subsidiary, also has agreements with a
bank and a third party which provide financing for the development and leasing
of retail stores. Up to $15,000,000 in financing is provided, with the third
party entity leasing the properties to the Company at a variable rate for an
initial period of up to five years, renewable for a total period up to 15 years.
At any time during the lease term, the Company has the option to purchase
individual sites subject to certain limitations and at the end of the term may
purchase all sites, request a five-year extension or terminate the lease. The
Company has guaranteed that the residual value of the property at the end of the
original lease term will be no less than 85% of the remaining balance financed.
The Company accounts for such leases as operating leases and intends to sublease
the sites to Big O franchisees subject to the terms and conditions of the
agreements. As of December 31, 2000, $9,860,000 had been financed under the
program, representing nine properties, eight of which had been sublet to Big O
franchisees.
Rental expense of $17,816,000, $6,798,000 and $3,564,000 was charged
to operations in 2000, 1999 and 1998, respectively, after deducting sublease
income of $3,079,000 in 2000, $1,841,000 in 1999 and $1,887,000 in 1998. Minimum
noncancelable real property lease commitments at December 31, 2000 were as
follows (in thousands):
Year Amount
---- ------
2001 $ 25,252
2002 23,346
2003 28,073
2004 18,287
2005 16,152
Thereafter 95,843
---------
206,953
Less sublease income (14,257)
---------
$ 192,696
=========
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, 2000,
1999 and 1998 were as follows (in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal $10,075 $ 9,554 $ 9,843
State 1,561 1,241 1,536
------- ------- --------
11,636 10,795 11,379
Deferred 687 526 (464)
------- ------- --------
$12,323 $11,321 $ 10,915
======= ======= ========
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES (Continued)
- ----------------------------
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 any 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 assets of Tire Kingdom which were acquired in June 2000 were deferred income
tax assets totaling $8,003,000. Included in the Carroll's assets acquired in
1998 were deferred income tax assets totaling $2,594,000.
The net deferred income tax asset in the financial statements at
December 31, 2000 included $2,389,000 related to the allowance for doubtful
accounts and notes, $2,473,000 for insurance-related accruals, and $3,384,000
for warranty-related reserves. At December 31, 1999, the net deferred income tax
asset included $1,907,000 related to the allowance for doubtful accounts and
notes and $2,832,000 related to warranty reserves. The net deferred income tax
liability at December 31, 2000 included $5,190,000 related to trademarks and
intangible assets and $3,043,000 for depreciation differences, partially offset
by a noncurrent deferred tax asset of $1,543,000 associated with lease accruals.
At December 31, 1999, the net deferred income tax liability included $6,319,000
for trademarks and $1,124,000 attributable to depreciation.
The difference between the Company's effective income tax rate and
the statutory U.S. Federal income tax rate is reconciled as follows:
2000 1999 1998
------ ------ ------
Statutory U.S. Federal rate 35.0% 35.0% 35.0%
State income taxes 3.6 2.6 3.6
Other 1.1 1.1 .6
---- ---- ----
Effective tax rate 39.7% 38.7% 39.2%
==== ==== ====
The Company has available a minimum tax credit carryforward of
$519,000 which has an indefinite carryforward period and is subject to certain
limitations. Additionally, the Company has available a state net operating loss
carryforward of $1,418,000 which expires in 2010.
9. RETIREMENT PLANS
- --------------------
The Company has a defined benefit pension plan covering some 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.
The table which follows sets forth the defined benefit pension
plan's changes in projected benefit obligations for service rendered to date,
changes in the fair value of plan assets, the funded status and amounts
recognized in the Company's balance sheets (in thousands):
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. RETIREMENT PLANS (Continued)
- --------------------------------
2000 1999
-------- -------
Actuarial present value of projected benefit
obligations, at beginning of year $(5,600) $(6,535)
Service cost (291) (379)
Interest cost (427) (438)
Actuarial gain 76 828
Settlement gain 33 --
Benefits paid 169 851
Expenses paid 58 73
------- -------
Actuarial present value of projected benefit
obligations, at end of year (5,982) (5,600)
------- -------
Fair value of plan assets, at beginning of year 6,392 5,864
Actual return on plan assets 990 952
Employer contribution -- 500
Benefits and expenses paid (227) (924)
------- -------
Fair value of plan assets, at end of year 7,155 6,392
------- -------
Funded Status - plan assets over projected
benefit obligation, at end of year 1,173 792
Unrecognized net gain from experience
different from that assumed (498) (66)
Unrecognized net assets and prior service cost 75 74
------- -------
Prepaid pension cost, at end of year $ 750 $ 800
======= =======
The net expense for 2000, 1999 and 1998 was comprised of the following
(in thousands):
2000 1999 1998
------- ------- -------
Service cost $ 291 $ 379 $ 400
Interest cost 427 438 443
Return on plan assets (990) (952) (942)
Net amortization, deferral and
settlement charges 322 386 794
----- ----- -----
$ 50 $ 251 $ 695
===== ===== =====
The discount rates used in determining the actuarial present values
of benefit obligations for the defined benefit plan were 7.75% in 2000 and 7.5%
in 1999. In both the 2000 and 1999 projections, a 5% increase in future
compensation levels was used and the expected long-term rate of return on assets
was 10%. Actuarial present values of accumulated benefit obligations were
$4,006,000 at December 31, 2000 and $3,350,000 at December 31, 1999.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. RETIREMENT PLANS (Continued)
- --------------------------------
The Company also has unfunded supplemental retirement plans for
certain of its key executives, to provide benefits in excess of amounts
permitted to be paid by its other retirement plans under current tax law. The
2000 expense for supplemental retirement benefits totaled $1,134,000, including
settlement charges of $665,000. The 1999 expense for supplemental retirement
benefits totaled $1,462,000 and included settlement charges of $766,000.
Supplemental retirement expenses were $538,000 in 1998. At December 31, 2000,
the projected benefit obligation, computed using the same discount rate and
compensation assumptions as for the defined benefit pension plan, was
$1,642,000. The accumulated benefit obligation at December 31, 2000 totaled
$1,447,000, of which $964,000 was reflected as a current liability and $483,000
was reflected as a noncurrent liability.
The Company maintains employee savings plans under Section 401(k)
of the Internal Revenue Code. Contributions by the Company to the 401(k) plans
include those based on a specified percentage of employee contributions, as well
as discretionary contributions. Expenses recorded for the Company's
contributions totaled $1,394,000 in 2000, $1,030,000 in 1999 and $409,000 in
1998.
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, 2000 or
1999.
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 a public announcement that
a person or group has acquired 20% or more of the Company's common stock or any
earlier date designated by the Board of Directors. Under defined circumstances,
the rights allow TBC stockholders (other than the 20% acquiror) to purchase
common stock in the Company at a price which may be substantially less than the
market price. The rights expire on July 31, 2008 unless redeemed at an earlier
date.
In 2000, 1999 and 1998, shares of the Company's common stock were
repurchased and retired under authorizations made by the Board of Directors. As
of December 31, 2000, the Company had unused authorizations from the Board for
the repurchase of approximately 1,634,000 additional shares.
11. STOCK OPTION AND INCENTIVE PLANS
- -------------------------------------
The Company has a 1989 stock incentive plan ("1989 Plan") and a
2000 stock option plan ("2000 Plan"). The 2000 Plan was approved by stockholders
on April 26, 2000. The plans provide 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.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCK OPTION AND INCENTIVE PLANS (Continued)
- -------------------------------------------------
Options granted by the committee under the 2000 Plan may also
contain a "reload" feature, which provides for the grant of a new option, called
a "reload option," for a number of shares equal to the number of shares
delivered by the optionee to pay the exercise price of the original option and
to pay any tax withholding payments associated with the exercise of the original
option. As of December 31, 2000, the committee had not granted any options with
such a reload feature.
The committee is authorized under the 1989 Plan 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, 2000, 4,084,000 shares were reserved for
issuance under the 1989 and 2000 Plans.
A summary of stock option activity during 1998, 1999 and 2000 is
shown below:
Weighted
Average
Option Option Price Exercise
Shares Range Price
-------- --------------- --------
Outstanding at January 1, 1998
(330,225 exercisable) 749,780 $ 5.03 - $12.13 $ 8.12
Granted in 1998 397,025 9.25 - 10.25 9.86
Exercised in 1998 (52,632) 5.03 - 7.75 6.03
Forfeited in 1998 (17,210) 7.75 - 12.13 9.38
-------- --------------- -----
Outstanding at December 31, 1998
(407,605 exercisable) 1,076,963 $ 5.03 - $12.13 $ 8.84
Granted in 1999 477,230 6.63 - 7.50 7.47
Exercised in 1999 (32,897) 5.03 - 6.55 5.14
Forfeited in 1999 (55,094) 7.50 - 12.13 8.59
-------- --------------- -----
Outstanding at December 31, 1999
(631,590 exercisable) 1,466,202 $ 5.72 - $12.13 $ 8.49
Granted in 2000 620,867 4.63 - 6.00 5.64
Exercised in 2000 -- -- -- --
Forfeited in 2000 (195,077) 5.75 - 9.88 7.37
-------- --------------- -----
Outstanding at December 31, 2000
(902,139 exercisable) 1,891,992 $ 4.63 - $12.13 $ 7.67
========= =============== ====
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCK OPTION AND INCENTIVE PLANS (Continued)
- -------------------------------------------------
Additional information regarding stock options outstanding at
December 31, 2000 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
------------------ ---------- --------- ----------- ------- ---------
$ 4.63 - $ 6.50 598,611 $ 5.64 8.5 yrs. 47,121 $ 5.75
$ 6.51 - $ 9.00 778,990 7.56 6.7 yrs. 471,673 6.82
$ 9.01 - $12.13 514,391 10.21 6.0 yrs. 383,345 10.33
---------- -------
1,891,992 902,139
========= =======
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation expense has been recognized for the
stock options granted in 2000, 1999 or 1998. Using fair value assumptions
specified in SFAS No. 123, the weighted average per share value of options
granted during 2000, 1999 and 1998 was $2.42, $3.26 and $4.28, 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 $17,896,000 in
2000, $16,947,000 in 1999 and $16,196,000 in 1998, compared to reported net
income of $18,724,000 in 2000, $17,939,000 in 1999 and $16,894,000 in 1998. Pro
forma earnings per share would have been $0.84, $0.80 and $0.72 in 2000, 1999
and 1998, respectively, rather than the reported totals of $0.88 in 2000, $0.85
in 1999, and $0.75 in 1998.
The fair value of each option granted in 2000, 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model
using the following weighted-average assumptions: dividend yield of 0%;
risk-free interest rates equal to zero-coupon governmental issues; and expected
lives of 4.9 years in 2000, 4.8 years in 1999, and 4.9 years in 1998. The
expected volatility percentages used for options granted were 38.2% in 2000,
43.4% for 1999 and 40.5% for 1998.
12. FINANCIAL GUARANTEES AND CREDIT RISKS
- ------------------------------------------
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,
2000. 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 $14,627,000 as of December 31, 2000, including $2,304,000
related to franchisee financing and $12,323,000 related to store and real estate
leases.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. FINANCIAL GUARANTEES AND CREDIT RISKS (Continued)
- ------------------------------------------------------
Most of the guarantees related to franchisee financing and leases
extend for more than five years and expire in decreasing amounts through 2010.
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 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.
As of December 31, 2000, the Company had entered into certain
interest rate swap agreements to hedge the cash flows associated with the $15
million, third-party lease financing arrangement described in Note 7. Under
these arrangements, which expire in increments ending in 2004, the Company
agreed to exchange its variable rate obligation for fixed rate obligations
averaging 6.41%. As of December 31, 2000, $5.1 million related to such
arrangements was unborrowed and was therefore not accounted for as a hedging
transaction. The unborrowed amount was marked to market in 2000, which resulted
in additional interest expense of $116,000.
In conjunction with the new bank borrowing agreements described in
Note 6, in January 2001, the Company also entered into a $25 million interest
rate swap agreement to exchange a portion of its variable rate loan for a fixed
rate obligation based on the 90-day LIBOR rate. The swap agreement expires in
increments over a five-year period.
13. SEGMENT INFORMATION
- ------------------------
The Company is principally engaged in the marketing and
distribution of tires in the automotive replacement market. Prior to the
acquisition of Tire Kingdom in June 2000, the Company's only business segment
was wholesale distribution, which consisted of TBC Corporation's wholesale
distribution business as well as the operations of Big O Tires, Inc. and
Carroll's, Inc. Subsequent to the acquisition of Tire Kingdom and its chain of
retail tire and automotive service centers, the Company now has two business
segments: wholesale and retail. Accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company evaluates the performance of its two operating segments based on
earnings before interest, taxes, depreciation and amortization (EBITDA). Segment
information for the year ended December 31, 2000 (with retail segment results
for the seven months since the acquisition) is as follows (in thousands):
Wholesale Retail Total
--------- --------- --------
Net sales to external customers $773,017 $129,723 $902,740
Inter-segment net sales 10,566 -- 10,566
Segment EBITDA 48,606 4,850 53,456
Segment total assets 354,376 96,257 450,633
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES
- ----------------------------------------------
In 1999, the Company's provision for doubtful accounts and notes
included $4,589,000 associated with the write-off of a note receivable from a
former distributor. The Company had held written guarantees from the
distributor's former owners and had filed suit in 1989 to recover under such
guarantees. The lawsuit was tried and a jury verdict was reached in July 1999 in
favor of the distributor's former owners, which resulted in the charge to
earnings by the Company.
15. LEGAL PROCEEDINGS
- ----------------------
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.
SUPPLEMENTARY DATA:
- -------------------
QUARTERLY FINANCIAL INFORMATION
- -------------------------------
Unaudited quarterly results for 2000 and 1999 are summarized as
follows:
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
----
Net sales $177,389 $206,434 $267,883 $251,034
Cost of sales 145,503 164,744 205,608 188,638
Net income 3,945 5,009 5,302 4,468
Earnings per share -
Basic and diluted * $ .19 $ .24 $ .25 $ .21
1999
----
Net sales $162,202 $187,664 $210,469 $182,715
Cost of sales 134,379 154,553 173,221 151,338
Net income 3,806 2,310 6,557 5,266
Earnings per share -
Basic and diluted $ .18 $ .11 $ .31 $ .25
* The total of earnings per share for each of the quarters of 2000
does not equal earnings per share for the year ended December 31,
2000, due to the effect of rounding the individual quarters.
-35-
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 25, 2001, 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 25, 2001, 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 25, 2001, 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 25, 2001, under the captions "Election of Directors" and "Executive
Compensation", and is incorporated herein by this reference.
-36-
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, 2000,
and 1999
Consolidated Statements of Income - Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a) (2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Certified Public Accountants
(at p. 40 of this Report)
Schedule II - Valuation and qualifying accounts
(at p. 41 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. 42 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, 2000.
-37-
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 on this 29th day
of March, 2001.
TBC CORPORATION
By: /s/ LAWRENCE C. DAY
-------------------------
Lawrence C. Day
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/ LAWRENCE C. DAY President, Chief March 29, 2001
- ---------------------- Executive Officer
Lawrence C. Day and Director
/s/ THOMAS W. GARVEY Executive Vice President, March 29, 2001
- -------------------- Chief Financial Officer
Thomas W. Garvey and Treasurer
----------------------------------
* MARVIN E. BRUCE Chairman of the Board March 29, 2001
- ------------------------ of Directors
Marvin E. Bruce
* ROBERT H. DUNLAP Director March 29, 2001
- ------------------------
Robert H. Dunlap
* CHARLES A. LEDSINGER, JR. Director March 29, 2001
- ---------------------------
Charles A. Ledsinger, Jr.
-38-
* WILLIAM J. McCARTHY Director March 29, 2001
- -------------------------
William J. McCarthy
Director March , 2001
- -----------------------
Richard A. McStay
* DONALD RATAJCZAK Director March 29, 2001
- ----------------------
Donald Ratajczak
* ROBERT R. SCHOEBERL Director March 29, 2001
- --------------------------
Robert R. Schoeberl
* RAYMOND E. SCHULTZ Director March 29, 2001
- -------------------------
Raymond E. Schultz
* 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/ LAWRENCE C. DAY
-----------------------------
Lawrence C. Day
Attorney-in-Fact
-39-
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
1000 Morgan Keegan Tower
Fifty North Front Street
Memphis, TN 38103
Telephone (901) 522 2000
Facsimile (901) 523 2045
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of TBC Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 29, 2001 appearing on page 16 of this Form 10-K also included an
audit of the financial statement schedule listed in Item 14(a) (2) of this Form
10-K. In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
January 29, 2001
-40-
TBC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
Additions
-----------------------
Charged Charged
to Costs to
Balance and Other Balance
January 1, Expenses Accounts Deductions December 31,
---------- -------- -------- ---------- ------------
2000
----
Warranty reserve............ $ 7,486 $ 3,850 $ 2,125 (1) $ 4,196 (3) $ 9,265
Allowance for
doubtful accounts..... 7,751 1,468 785 (1) 2,173 (4) 7,831
1999
----
Warranty reserve............ 8,025 4,881 - 5,420 (3) 7,486
Allowance for
doubtful accounts..... 9,298 5,090 92 6,729 (4) 7,751
1998
----
Warranty reserve............ 6,931 5,647 1,200 (2) 5,753 (3) 8,025
Allowance for
doubtful accounts..... 7,344 742 2,144 (2) 932 (4) 9,298
- ------------------------
(1) Includes amounts for Tire Kingdom, Inc. as of the June 1, 2000
effective date of the acquisition.
(2) Includes amounts for Carroll's, Inc. as of the November 19, 1998
acquisition date.
(3) Amounts added during current year and payable at year end less amount
payable at beginning of year.
(4) Accounts written off during year, net of recoveries.
-41-
INDEX TO EXHIBITS
-----------------
Located at
Manually
Numbered Page
-------------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION:
2.1 Share Purchase Agreement, dated November 19, 1998, by and
among TBC Corporation, Robert E. Carroll, Jr., and William J.
Baker II, Trustee, was filed as Exhibit 2.1 to the TBC Corporation
Current Report on Form 8-K, dated November 19, 1998 ..................... *
2.2 Agreement and Plan of Merger, dated as of June 2, 2000, by
and among TBC Corporation, TBC Retail Enterprises, Inc.,
TKI Holdings, Inc. and Certain Stockholders of TKI Holdings, Inc.,
was filed as Exhibit 2.1 to TBC's Current Report of Form 8-K,
dated June 5, 2000 and filed June 20, 2000......................................... *
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Certificate of Incorporation of TBC Corporation, restated as of
August 6, 1987, as amended by Certificate of Amendment to Restated
Certificate of Incorporation dated April 24, 1992, was filed as
Exhibit 4.1 to the TBC Corporation Registration Statement on
Form S-8 (Reg. No. 333-48802) filed on October 27, 2000.................. *
3.2 By-Laws of TBC Corporation as amended through April 22, 1998, were
filed as Exhibit 3.1 to the TBC Corporation Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.............................. *
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES:
4.1 Note Purchase and Private Shelf Agreement, dated July 10, 1996,
between TBC Corporation and The Prudential Insurance Company of
America, was filed as Exhibit 4.1 to the TBC Corporation Current
Report on Form 8-K, dated July 10, 1996.............................................. *
4.2 Series A, Series B, and Series C Senior Notes, dated July 10, 1996,
issued by TBC Corporation pursuant to the Note Purchase Agreement
referenced in item 4.1 above, were filed as Exhibit 4.2 to the TBC
Corporation Current Report on Form 8-K, dated July 10, 1996 ............ *
-42-
4.3 Amendment No. 1, dated September 20, 1996, to the Note Purchase
Agreement referenced in item 4.1 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 ................................................................ *
4.4 Amendment No. 2, dated October 28, 1998, to the Note Purchase
Agreement referenced in item 4.1 above was filed as Exhibit 4.6
to the TBC Corporation Annual Report on Form 10-K for the year
ended December 31, 1998 ................................................................. *
4.5 Amendment No. 3, dated January 21, 2000, to the 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 Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000 ........................... *
4.6 Amendment No. 4, dated as of June 2, 2000, to the Note Purchase
and Private Shelf Agreement, dated July 10, 1996, as amended,
between TBC Corporation and The Prudential Insurance Company
of America, was filed as Exhibit 4.1 to the TBC Corporation Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 ................. *
4.7 Amended and Restated Rights Agreement, dated as of July 23, 1998,
between TBC Corporation and BankBoston, N.A., as Rights Agent,
including as Exhibit A thereto the form of Rights Certificate, was
filed as Exhibit 4.1 to the TBC Corporation Form 8-A/A-1 Registration
Statement filed with the Commission on July 30, 1998 ........................ *
(10) MATERIAL CONTRACTS:
Management Contracts and Compensatory Plans or Arrangements
-----------------------------------------------------------
10.1 Form of Trust Agreement (between the Company and certain executive
officers - 1/1/98 version) was filed as Exhibit 10.3 to the TBC
Corporation Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 ..................................................................... *
10.2 TBC Corporation 2000 Stock Option Plan was filed as Exhibit 4.3
to the TBC Corporation Registration Statement on Form S-8
(Reg. No. 333-48802) filed on October 27, 2000 ................................. *
10.3 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 .................................................................................. *
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10.4 TBC Corporation Deferred Compensation Plan for Directors ............... 47
10.5 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 ................................................................ *
10.6 Executive Employment Agreement between the Company and
Lawrence C. Day, amended and restated as of November 1, 2000
(without Exhibit A thereto, which is substantially identical to the form
of Trust Agreement referenced in Exhibit 10.1) .................................... 52
10.7 Executive Employment Agreement, dated as of October 31, 2000,
between the Company and Kenneth P. Dick (without Exhibit A
thereto, which is substantially identical to the form of Trust
Agreement referenced in Exhibit 10.1) ................................................. 62
10.8 Letter agreement, dated December 11, 2000, between TBC
Corporation and Barry D. Robbins ....................................................... 71
10.9 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 ........................................................................ *
10.10 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 ...................................................... *
10.11 TBC Corporation Executive Retirement Plan was filed as Exhibit 10.1
to the TBC Corporation Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 ......................................................... *
10.12 TBC Corporation Executive Deferred Compensation Plan, effective
August 1, 1999, was filed as Exhibit 10.6 to the TBC Corporation
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 ................................................................ *
Other Material Contracts
------------------------
10.13 Form of TBC Corporation's standard Distributor Agreement ................ 75
10.14 Form of Franchise Agreement in use by Big O Tires, Inc.
was filed as Exhibit 10.25 to the TBC Corporation Annual Report
on Form 10-K for the year ended December 31, 1997 ......................... *
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10.15 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) .......................................................................... *
10.16 Ten-Year Commitment Agreement, dated March 21, 1994,
between the Company and The Kelly-Springfield Tire Company .......... 81
10.17 Agreement, effective January 1, 1994, between the Company
and Cooper Tire & Rubber Company .................................................... 82
(21) SUBSIDIARIES OF THE COMPANY:
21.1 List of the names and jurisdictions of incorporation of the
subsidiaries of the Company ............................................................. 98
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants,
to incorporation by reference of their report dated January 29, 2001
in Post-Effective Amendment No. 1 to the Registration Statement
on Form S-8 for the Company's 1989 Stock Incentive Plan
(Reg. No. 33-43166) and in the Registration Statement on Form S-8
for the Company's 2000 Stock Option Plan (Reg. No. 333-48802) ....... 99
(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 ..... 100
"*" Indicates that the Exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the
Commission.
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TBC CORPORATION
EXHIBITS
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 2000
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