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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-11579
TBC CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-0600670
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4770 Hickory Hill Road
Memphis, Tennessee 38141
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (901) 363-8030
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [X] No [ ]
21,454,534 Shares of Common Stock were outstanding as of March 31, 2003.
INDEX TO EXHIBITS at page 18 of this report
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TBC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
March 31, December 31,
2003 2002
---------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,711 $ 2,319
Accounts and notes receivable, less allowance
for doubtful accounts of $7,996 on March 31,
2003 and $8,701 on December 31, 2002:
Related parties 16,002 16,507
Other 111,563 103,201
-------- --------
Total accounts and notes receivable 127,565 119,708
Inventories 188,947 170,867
Deferred income taxes 12,086 12,364
Other current assets 11,528 12,515
-------- --------
Total current assets 342,837 317,773
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements 6,068 6,068
Buildings and leasehold improvements 29,172 28,795
Furniture and equipment 64,604 64,052
-------- --------
99,844 98,915
Less accumulated depreciation 45,172 42,993
-------- --------
Total property, plant and equipment 54,672 55,922
-------- --------
TRADEMARKS, NET 15,824 15,824
-------- --------
GOODWILL, NET 58,381 58,381
-------- --------
OTHER ASSETS 25,573 25,971
-------- --------
TOTAL ASSETS $497,287 $473,871
======== ========
See accompanying notes to consolidated financial statements.
-2-
TBC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2003 2002
---------- -----------
(Unaudited)
CURRENT LIABILITIES:
Outstanding checks, net $ 5,031 $ 4,209
Notes payable to banks 25,100 35,000
Current portion of long-term debt
and capital lease obligations 10,989 18,500
Accounts payable, trade 79,024 45,200
Federal and state income taxes payable 993 767
Other current liabilities 44,827 47,481
--------- ---------
Total current liabilities 165,964 151,157
--------- ---------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, LESS CURRENT PORTION 80,961 79,700
--------- ---------
NONCURRENT LIABILITIES 14,129 14,243
--------- ---------
DEFERRED INCOME TAXES 5,931 5,561
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, shares issued and outstanding -
21,455 on March 31, 2003 and 21,292 on December 31, 2002 2,145 2,129
Additional paid-in capital 18,284 16,687
Other comprehensive income (loss) (1,182) (1,281)
Retained earnings 211,055 205,585
--------- ---------
Total stockholders' equity 230,302 223,120
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 497,287 $ 473,871
========= =========
See accompanying notes to consolidated financial statements.
-3-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2003 2002
--------- ---------
NET SALES* $ 256,545 $ 249,704
COST OF SALES 180,150 183,482
--------- ---------
GROSS PROFIT 76,395 66,222
--------- ---------
EXPENSES:
Distribution expenses 13,419 12,497
Selling, administrative and
retail store expenses 53,125 44,481
Interest expense - net 1,812 2,021
Other (income) expense - net (512) (364)
--------- ---------
Total expenses 67,844 58,635
--------- ---------
INCOME BEFORE INCOME TAXES 8,551 7,587
PROVISION FOR INCOME TAXES 3,081 2,780
--------- ---------
NET INCOME $ 5,470 $ 4,807
========= =========
EARNINGS PER SHARE -
Basic $ .26 $ .23
========= =========
Diluted $ .25 $ .22
========= =========
* Including sales to related parties of $17,353 and $26,082 in the three
months ended March 31, 2003 and 2002, respectively.
See accompanying notes to consolidated financial statements.
-4-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Other
Common Stock Compre-
--------------------- Additional hensive
Number of Paid-In Income Retained
Shares Amount Capital (Loss) Earnings Total
--------- ------- ---------- -------- --------- ---------
Three Months Ended
March 31, 2002
BALANCE, JANUARY 1, 2002 21,003 $ 2,100 $ 11,783 $(713) $ 181,149 $ 194,319
Net income for period 4,807 4,807
Issuance of common stock under
stock option and incentive plans 335 34 2,702 -- -- 2,736
Repurchase and retirement
of common stock (230) (23) (138) -- (2,946) (3,107)
Tax benefit from exercise of
stock options -- -- 635 -- -- 635
Change in other comprehensive
income associated with interest
rate swap agreements, net -- -- -- 273 -- 273
------ ------- -------- ------- --------- ---------
BALANCE, MARCH 31, 2002 21,108 $ 2,111 $ 14,982 $ (440) $ 183,010 $ 199,663
====== ======= ======== ======= ========= =========
Three Months Ended
March 31, 2003
BALANCE, JANUARY 1, 2003 21,292 $2,129 $ 16,687 $(1,281) $ 205,585 $ 223,120
Net income for period 5,470 5,470
Issuance of common stock under
stock option and incentive plans 163 16 1,380 -- -- 1,396
Tax benefit from exercise of
stock options -- -- 217 -- -- 217
Change in other comprehensive
income associated with interest
rate swap agreements -- -- -- 99 -- 99
------ ------- -------- ------- --------- ---------
BALANCE, MARCH 31, 2003 21,455 $2,145 $ 18,284 $(1,182) $ 211,055 $ 230,302
====== ====== ======== ======= ========= =========
See accompanying notes to consolidated financial statements.
-5-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2003 2002
-------- --------
Operating Activities:
Net income $ 5,470 $ 4,807
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 3,538 3,009
Amortization of intangible assets 10 --
Amortization of other comprehensive income (26) 88
Provision for doubtful accounts and notes 691 611
(Gain) loss on sale of fixed assets 48 (29)
Deferred income taxes 497 337
Equity in (earnings) loss from joint ventures 62 2
Changes in operating assets and liabilities,
net of effect of assets acquired:
Receivables (8,513) (15,836)
Inventories (18,080) (14,123)
Other current assets 439 23
Other assets 1,168 1,808
Accounts payable, trade 33,824 46,540
Federal and state income taxes refundable or payable 443 1,661
Other current liabilities (2,560) (1,399)
Noncurrent liabilities 58 (29)
-------- --------
Net cash provided by operating activities 17,069 27,470
-------- --------
Investing Activities:
Purchase of property, plant and equipment (2,434) (4,417)
Purchase of net assets of retail tire stores -- (10,781)
Distributions received from joint ventures, net of investments 196 341
Proceeds from asset dispositions 98 355
-------- --------
Net cash used in investing activities (2,140) (14,502)
-------- --------
Financing Activities:
Net bank borrowings under short-term borrowing arrangements (9,900) (13,200)
Increase (decrease) in outstanding checks, net 822 6,018
Reduction of long-term debt and capital lease obligations (6,250) (5,774)
Issuance of common stock under stock option
and incentive plans 791 2,605
Repurchase and retirement of common stock -- (3,107)
-------- --------
Net cash used in financing activities (14,537) (13,458)
-------- --------
Change in cash and cash equivalents 392 (490)
Cash and cash equivalents:
Balance - Beginning of year 2,319 2,298
-------- --------
Balance - End of period $ 2,711 $ 1,808
======== ========
-6-
TBC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
---------------------
2003 2002
-------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid for - Interest $ 1,879 $ 1,930
- Income Taxes 2,141 782
Supplemental Disclosure of Non-Cash Financing Activity:
Tax benefit from exercise of stock options 217 635
Issuance of restricted stock under stock incentive plan 605 131
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
In the first three months of 2002, the Company purchased the assets of
certain retail tire stores. The transaction was accounted for under the
purchase method, as follows:
Estimated fair value of assets acquired 3,890
Goodwill 6,891
Cash paid (10,781)
--------
Liabilities assumed $ --
========
See accompanying notes to consolidated financial statements.
-7-
TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The December 31, 2002 consolidated balance sheet was derived
from audited financial statements. The consolidated balance sheet as
of March 31, 2003, and the consolidated statements of income,
stockholders' equity and cash flows for the periods ended March 31,
2003 and 2002, have been prepared by the Company, without audit. It is
Management's opinion that these statements include all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position, results of operations and cash flows as
of March 31, 2003 and for all periods presented. The results for the
periods presented are not necessarily indicative of the results that
may be expected for the full year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial
statement disclosures. Actual results could differ from those
estimates.
The Company's 2002 Annual Report on Form 10-K includes a
summary of the significant accounting policies used in the preparation
of the consolidated financial statements. The summary of significant
accounting policies, as well as certain other footnote disclosures and
information normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted for the purposes of this quarterly report. It is
suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto included
in the Company's 2002 Form 10-K.
Impact of Recently Issued Accounting Standards - See page 13
of the Management's Discussion & Analysis of Financial Condition and
Results of Operations for a discussion of the impact of recently
issued accounting standards on the consolidated financial statements
as of March 31, 2003 and for the three months then ended, as well as
the expected impact on the financial statements for future periods.
2. 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, if any, represent
shares issuable upon assumed exercise of stock options. The weighted
average number of common shares and equivalents outstanding were as
follows (in thousands):
Three Months
Ended March 31,
---------------------
2003 2002
-------- ------
Weighted average common shares outstanding 21,378 21,077
Common share equivalents 752 811
------ ------
Weighted average common shares and
equivalents outstanding 22,130 21,888
====== ======
-8-
3. SEGMENT INFORMATION
The Company is principally engaged in the marketing and
distribution of tires in the automotive replacement market and has two
operating segments: retail and wholesale. The retail segment includes
the franchised retail tire business conducted by Big O Tires, Inc., as
well as the operation of retail tire and service centers by Tire
Kingdom, Inc. Both of these retail systems are evaluated using similar
operating measurements and are aggregated for segment reporting
purposes since they have similar marketing concepts, distribution
methods, customers and other economic characteristics. The wholesale
segment markets and distributes the Company's proprietary brands of
tires, as well as other tires and related products, on a wholesale
basis to distributors who resell to or operate independent tire
dealers.
Accounting policies of both the retail and wholesale segments
are the same as those described in the summary of significant
accounting policies included in the Form 10-K for the year ended
December 31, 2002. The Company evaluates the performance of its two
segments based on earnings before interest, taxes, depreciation,
amortization and any special items (Operational EBITDA). There were no
special items to consider in the three months ended March 31, 2003 or
2002. Net sales by the wholesale segment to the retail segment are
eliminated in consolidation and totaled $38,244,000 and $35,225,000 in
the three months ended March 31, 2003 and 2002 respectively. Such
intersegment sales had no effect on the Operational EBITDA of the
individual reporting segments.
Segment information for the three months ended March 31, 2003
and 2002 is as follows (in thousands):
Retail Wholesale Total
-------- --------- --------
Three months ended March 31, 2003
Total assets $245,317 $251,970 $497,287
Operating results -
Net sales to external customers 126,502 130,043 256,545
Operational EBITDA 7,733 6,178 13,911
Three months ended March 31, 2002
Total assets $245,418 $254,870 $500,288
Operating results -
Net sales to external customers 110,712 138,992 249,704
Operational EBITDA 6,697 5,920 12,617
-9-
4. STOCK OPTION AND INCENTIVE PLANS
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure."
Accordingly, no compensation expense has been recognized for the stock
options granted in the three months ended March 31, 2003 or 2002.
Using fair value assumptions specified in SFAS No. 123, the weighted
average per share value of options granted during the first quarter of
2003 and 2002 was $4.70 and $5.16, respectively. Had compensation cost
for such option grants been determined using such assumptions, results
for the first quarter of 2003 and 2002 would have been as follows (in
thousands):
Three Months
Ended March 31,
------------------------
2003 2002
--------- ---------
Net income, as reported $ 5,470 $ 4,807
Add: Stock-based compensation included
in reported net income, net of tax effects 27 13
Less: Total stock-based compensation expense determined
using fair value assumptions, net of tax effects (532) (430)
--------- ---------
Pro forma net income $ 4,965 $ 4,390
========= =========
Earnings per share:
Basic - as reported $ 0.26 $ 0.23
========= =========
- pro forma $ 0.23 $ 0.21
========= =========
Diluted - as reported $ 0.25 $ 0.22
========= =========
- pro forma $ 0.22 $ 0.20
========= =========
The fair value of each option granted in the first three
months of 2003 and 2002 was estimated on the date of grant using the
Black-Scholes option-pricing model and the following weighted-average
assumptions: dividend yield of 0%; risk-free interest rates equal to
zero-coupon governmental issues; and expected lives of 5.0 years. The
expected volatility percentages used for options granted were 36.3% in
the first quarter of both 2003 and 2002.
5. ACQUISITION OF MERCHANT'S, INCORPORATED ON APRIL 1, 2003
On April 1, 2003, the Company acquired all of the outstanding
capital stock of Merchant's, Incorporated ("Merchant's"), which was a
privately-owned company operating 112 retail tire centers in the
Mid-Atlantic region of the United States. The acquisition was
accounted for as a purchase, with total consideration of $57.5 million
payable by TBC at closing plus up to $15 million payable in the future
depending upon the performance of the existing Merchant's retail
stores during the five year period beginning January 1, 2004. For the
year ended December 31, 2002, Merchant's had sales of $174.2 million,
of which $154.6 million related to its retail business. The remaining
sales in 2002 were attributable to Merchant's commercial and
retreading business, which TBC sold effective April 30, 2003 for $5.8
million.
-10-
6. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
On March 31, 2003, the Company executed a new borrowing
agreement with a group of 11 banks, which replaced its existing bank
borrowing facilities. The new agreement increases the aggregate amount
which TBC may borrow under the facilities to $208.5 million, including
a $121.5 million revolving loan, a $62 million five-year term loan
facility to replace then-existing term loans and $25 million in
five-year term loans which TBC may utilize prior to September 30,
2003. Additionally, the new agreement provides that TBC and one or
more of its lenders may agree to increase the amount which TBC may
borrow on a revolving credit basis under such facilities by an
additional $28.5 million. Interest under each of the new facilities is
at the eurodollar rate plus a variable rate between 1.75% and 2.75%
dependent on the Company's leverage ratio. The bank credit facilities
are collateralized by substantially all of the Company's assets and
contain certain cross-default provisions in conjunction with the
long-term Senior Notes described below. The credit facilities require
the payment of certain commitment and administrative fees and contain
certain financial covenants dealing with, among other things, the
Company's funded indebtedness, leverage, fixed charge coverage ratio,
accounts receivable and inventories. The 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.
On April 1, 2003, the Company entered into a new agreement
with a lender that allowed the Company to borrow $50 million under
Series D variable rate Senior Notes, due April 16, 2009, which are
collateralized by substantially all of the Company's assets and
incorporate all of the financial covenants and restrictions contained
in the bank credit facilities noted above. Principal payments under
the Senior Notes are required to be made semi-annually and interest is
payable quarterly. Borrowings under the Series D Senior Notes were
made April 16, 2003, with the proceeds being used to help finance the
acquisition of Merchant's (see Note 5). Also on April 1, 2003, the
previously existing agreement, under which the Company's Series A,
Series B and Series C Senior Notes were issued, was restated to, among
other things, modify the covenants set forth therein to make them
consistent with the covenants under the new bank borrowing agreement
and the new Series D Senior Notes.
The current and long-term portions of long-term debt included
in the Company's balance sheet as of March 31, 2003 reflect the
repayment terms of the new borrowing agreements.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's financial position and liquidity continue to be strong.
Working capital totaled $176.9 million at March 31, 2003 compared to $166.6
million at December 31, 2002.
Current accounts and notes receivable increased by $7.9 million and
inventories increased by $18.1 million compared to the December 31, 2002
levels, due principally to seasonal fluctuations and the addition of new stores
by the Company's retail segment. The net amount owed to banks and vendors
(consisting of the combined balances of cash and cash equivalents, outstanding
checks, notes and debt payable to banks, and accounts payable) increased by
$18.1 million from December 31, 2002 to March 31, 2003. This increase, together
with cash generated from operations, enabled the Company to fund the increased
levels of receivables and inventories, as well as capital expenditures totaling
$2.4 million during the first three months of 2003.
As discussed in Note 6 to the consolidated financial statements, a new
bank borrowing agreement was entered into effective March 31, 2003, which
replaced the Company's existing bank borrowing facilities. In addition, on
April 1, 2003, the Company entered into a new agreement with a lender that
allowed the Company to borrow an additional $50 million under Senior Notes. The
Company's strong cash flow, solid financial position and sizable credit
facilities allowed it to make the acquisition of Merchant's, Incorporated on
April 1, 2003 (see Note 5 to the consolidated financial statements), and the
Company believes these resources should allow for the continued execution of
its retail expansion strategy, including the pursuit of attractive acquisition
opportunities as well as internal store development.
RESULTS OF OPERATIONS
Net sales (which equals revenues from sales of product, plus franchise
and royalty fees, less estimated returns, allowances and customer rebates)
increased 2.7% during the first quarter of 2003 compared to the year-earlier
level. The overall increase in net sales included a gain by the retail segment
of $15.8 million, or 14.3%, and a decline in net sales by the wholesale segment
of $8.9 million, or 6.4%. Of the $15.8 million gain in retail net sales, $8.1
million was related to tires, due to a 6.3% gain in tire unit volume and a 4.3%
increase in the average retail tire sales price. The remaining $7.7 million of
the increase in retail net sales was principally attributable to greater
service revenues in Company-operated tire outlets. An increased number of
franchised and Company-operated stores was the primary reason for the growth in
retail tire volume and service revenues compared to the year-earlier level. The
decline in net sales by the wholesale segment was principally due to an 8.6%
decrease in unit tire shipments which more than offset a 3.4% increase in the
average wholesale tire sales price.
The percentage of total sales attributable to tires was 83% in the
current quarter and 85% in the first quarter of 2002. Total unit tire volume in
the first quarter of 2003 declined 4.2% compared to the year-earlier level and
the average tire sales price for the Company as a whole increased 4.8%. In
comparison, unit tire shipments for the replacement tire industry as a whole
decreased approximately 4.1% during the same period (based on preliminary
data).
Gross profit as a percentage of net sales increased from 26.5% in the
first quarter of 2002 to 29.8% in the current quarter. Gross profit percentages
were favorably affected by the increased contribution from the retail segment.
In addition, the Company's growth over the past several years has resulted in
greater purchasing leverage and an improvement in net prices from tire
suppliers. Gross profit percentages on sales by the Company's retail segment
increased from 42.8% in the first quarter of 2002 to 44.7% in the current
quarter, while wholesale margins increased from 13.5% in the year- earlier
first quarter to 15.3% in the current quarter.
-12-
Distribution expenses as a percentage of net sales increased from 5.0%
in the first quarter of 2002 to 5.2% in the current quarter, due principally to
the impact of higher fuel costs and other expenses associated with product
delivery.
Selling, administrative and retail store expenses increased by $8.6
million in the first quarter of 2003 compared to the year-earlier level, due
principally to a greater number of company-operated retail stores. Expenses for
such retail stores include payroll, operating and service-related costs, in
addition to certain other selling and administrative expenses. Excluding the
impact of expenses associated with the company-operated stores added during
2002 and 2003, selling, administrative and retail store expenses increased $1.9
million, or 4.5%, in the first three months of 2003 compared to the
year-earlier level due to the impact of general inflation and various other
cost increases in both the retail and wholesale segments.
Net interest expense decreased $209,000 in the first quarter of 2003
compared to the year- earlier level, due principally to the combined effects of
lower overall borrowing rates and lower average borrowings. The decreased
borrowing rates were a reflection of lower market interest rates, as well as
successful efforts by the Company to manage working capital and minimize
interest rate spreads under its borrowing agreements. The reductions in average
borrowing levels in the current quarter were principally the result of cash
generated from operations during the past twelve months and the above-
mentioned management efforts which allowed the Company to reduce its debt to
banks and other lenders.
Net other income increased $148,000 in the current quarter compared to
the first quarter of 2002, due to greater service charge income from customers,
favorable results from franchised store development transactions, and increases
in other miscellaneous income.
The Company's effective tax rate declined from 36.6% in the first
quarter of 2002 to 36.0% in the current quarter, due principally to reduced
provisions for state income taxes.
The previously-mentioned acquisition of Merchant's, Incorporated was
effective April 1, 2003 and therefore had no impact on operating results for
the quarter ended March 31, 2003. The Company expects the acquisition, and the
borrowings required to make the acquisition, to result in greater net sales,
gross profit, operating expenses, interest expenses and income taxes in future
periods compared to the year-earlier levels, with the net impact accretive to
earnings within twelve months after the close of the transaction.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued, effective for
financial statements for fiscal years beginning after June 15, 2002. SFAS 143
requires entities to establish liabilities for legal obligations associated
with the retirement of tangible long-lived assets. The Company adopted this
statement effective January 1, 2003 as required, and such adoption had no
material impact on the Company's financial statements.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" was issued,
effective for such activities initiated after December 31, 2002. The statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and establishes
that fair value is the objective for initial measurement of the liability. The
Company adopted this statement effective January 1, 2003 as required, and such
adoption had no material impact on the Company's financial statements.
-13-
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including indirect Guarantees of
Indebtedness of Others," was issued. FIN 45 elaborates on the financial
statement disclosures to be made by a guarantor about its obligations under
certain guarantees. It also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements in the interpretation were effective for financial
statements of interim or annual periods ending after December 15, 2002 and the
Company included such disclosures in Note 11 to the consolidated financial
statements for the year ended December 31, 2002. The Company adopted the
initial recognition and initial measurement provision of this statement
effective January 1, 2003 as required, and such adoption had no material impact
on the Company's financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," was issued. This interpretation provides guidance
on how to identify a variable interest entity (VIE) and determine when the
assets, liabilities, noncontrolling interests, and results of operations of a
VIE need to be included in a company's consolidated financial statements. A
company that holds variable interests in an entity must consolidate the entity
if the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. The provisions of this interpretation apply immediately to VIE's
created after January 31, 2003; however, there were no VIE's applicable to the
Company that were created between January 31, 2003 and March 31, 2003. For
VIE's created prior to February 1, 2003, the Company must apply FIN 46 to
financial statements for periods beginning July 1, 2003. The Company has
certain pre-existing synthetic lease agreements that may be affected by the
provisions of FIN 46, but the Company does not expect this interpretation to
have a material impact on its financial position or results of operations.
FORWARD-LOOKING STATEMENTS AND RISKS
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 expectations for future financial performance, which involve known and
unknown risks, uncertainties and other factors. Such factors include, but are
not limited to: changes in economic and business conditions in the world;
increased competitive activity; consolidation within and among both
competitors, suppliers and customers; unexpected changes in the replacement
tire market; the Company's inability to attract as many new franchisees or open
as many company-operated retail outlets as planned; changes in the Company's
ability to identify and acquire additional companies in the replacement tire
industry and the failure to achieve synergies or savings anticipated in such
acquisitions; fluctuations in tire prices charged by manufacturers, including
fluctuations due to changes in raw material and energy prices; product
shortages and supply disruptions; changes in interest and foreign exchange
rates; the cyclical nature of the automotive industry and the loss of a major
customer or program. It is not possible to foresee or identify all such
factors. Any forward-looking statements in this report are based on certain
assumptions and analyses made by the Company in light of its experience and
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the
circumstances. Such statements are not a guarantee of future performance and
actual results or developments may differ materially from those projected.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain financial market risks. The most
predominant of these risks is the fluctuation in interest rates associated with
bank borrowings, since changes in interest expense affect the Company's
operating results. At March 31, 2003, the Company owed $85.1 million to banks
under its credit facilities, of which $66.4 million was not hedged by
interest-rate swap agreements and was thus subject to market risk for a change
in interest rates. If interest rates increase by 25 basis points, the Company's
annual interest expense would increase by approximately $166,000 based on the
outstanding balance which was not hedged at March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this quarterly report, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and its Chief Financial Officer, carried out
an evaluation of the design and operation of the Company's disclosure controls
and procedures. Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information required to be included in reports filed with the Securities and
Exchange Commission for the Company and its consolidated subsidiaries.
There have been no significant changes in the Company's internal
controls or, to the knowledge of the Company's management, in other factors
that could significantly affect those controls subsequent to the date of
management's last evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Index to Exhibits.
(b) During the quarter ended March 31, 2003, the Company filed
the following reports on Form 8-K:
(1) A Form 8-K dated February 11, 2003 was filed which
included the text of the Company's press release
reporting its financial results for the quarter and
year ended December 31, 2002.
(2) A Form 8-K dated March 26, 2003 was filed which
included the text of the Company's press release
reporting the signing of a definitive agreement to
acquire Merchant's, Incorporated.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TBC CORPORATION
May 13, 2003 By /s/ Thomas W. Garvey
- ------------ -----------------------------------------
Thomas W. Garvey
Executive Vice President and Chief
Financial Officer (principal financial
and accounting officer)
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CERTIFICATIONS
I, Lawrence C. Day, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TBC Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 13, 2003 By /s/ Lawrence C. Day
- ------------ -----------------------------------------
Lawrence C. Day
President and Chief Executive Officer
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I, Thomas W. Garvey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TBC Corporation
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 13, 2003 By /s/ Thomas W. Garvey
- ------------ -----------------------------------------
Thomas W. Garvey
Executive Vice President and Chief
Financial Officer (principal financial
and accounting officer)
-17-
INDEX TO EXHIBITS
Located at
Sequentially
Exhibit No. Description Numbered Page
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
2.1 Stock Purchase Agreement, dated March 25, 2003, by and among
TBC Corporation, Linda Merchant Bell, Carol Merchant Kirby, and
Wilson C. Merchant III, was filed as Exhibit 2.1 to the TBC
Corporation Current Report on Form 8-K dated April 1, 2003................. *
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.
4.1 $208,500,000 Credit Agreement, dated as of March 31, 2003, among
TBC Corporation, the Lenders party thereto, U.S. Bank National
Association, as Documentation Agent, SunTrust Bank, as Syndication
Agent, First Tennessee Bank National Association, as
Administrative Agent, and JP Morgan Chase Bank, as
Co-Administrative Agent, was filed as Exhibit 4.1 to the TBC
Corporation Current Report on Form 8-K dated April 1, 2003................. *
4.2 Second Amended and Restated Note Agreement, dated as of April 1,
2003, between TBC Corporation and The Prudential Insurance Company
of America, was filed as Exhibit 4.2 to the
TBC Corporation Current Report on Form 8-K dated April 1, 2003............. *
4.3 Note Purchase Agreement, dated as of April 1, 2003, among TBC
Corporation, The Prudential Insurance Company of America, and
certain of its affiliates, managed funds, and accounts purchasing
Notes thereunder, including as Exhibit 1 thereto the form of
Senior Secured Note evidencing the Series D Variable Rate Senior
Secured Notes in the aggregate principal amount of $50,000,000
issued thereunder, was filed as Exhibit 4.3 to the TBC
Corporation Current Report on Form 8-K dated April 1, 2003................. *
4.4 Form of Deed of Trust, Assignment of Leases and Security
Agreement, dated March 31, 2003, executed by TBC in favor of JP
Morgan Chase Bank, as Collateral Agent and beneficiary, was filed
as Exhibit 4.4 to the TBC Corporation Current Report
on Form 8-K dated April 1, 2003............................................ *
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Located at
Sequentially
Exhibit No. Description Numbered Page
(99) OTHER EXHIBITS
99.1 Certification by Lawrence C. Day pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002................................................. 20
99.2 Certification by Thomas W. Garvey pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002................................................. 21
- ---------
"*" Indicates that the Exhibit is incorporated by reference into this
Quarterly Report on Form 10-Q from a previous filing with the
Commission.
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