UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

COMMISSION FILE NUMBER 0-11579

TBC CORPORATION

Registrant’s telephone number, including area code: (561) 227-0955

Securities registered pursuant to Section 12(b) of the Act:

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. [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes [X] No [   ]

INDEX TO EXHIBITS at page 45 of this Report

DOCUMENT INCORPORATED BY REFERENCE

TBC Corporation’s Proxy Statement for its Annual Meeting of Stockholders to be held on April 28, 2004. 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.

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Table of Contents

PART I

     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 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. The Company has two operating segments: retail and wholesale. Net sales in 2003 for the retail segment totaled $734.1 million, which represented 56% of the Company’s consolidated net sales. Net sales during 2003 for the wholesale segment were $584.4 million, or 44% of total sales. (See Note 12 to the consolidated financial statements included in this Report for additional financial information about each of the reportable segments.) Unless the context indicates otherwise, the term “Company” refers to TBC Corporation and its subsidiaries, taken as a whole.

Retail Business

     The retail segment of the Company’s business (the “Retail Business”) consists of both company-operated retail tire stores as well as franchised stores. The Company-operated stores are operated by a number of the Company’s wholly owned subsidiaries, including Tire Kingdom, Inc. (“Tire Kingdom”), Merchant’s, Incorporated (“Merchant’s”) and NTW Incorporated (“NTW”). Merchant’s was acquired by the Company on April 1, 2003 and NTW (which operates its retail business under the trade name “National Tire & Battery”, or “NTB”) was acquired by the Company on November 29, 2003. The Company’s franchised retail tire business is conducted by its Big O Tires, Inc. subsidiary (“Big O”).

     The retail tire and automotive service centers operated by the Company are located primarily in the eastern two-thirds of the United States. At the end of 2003, there were 591 locations in the Company-operated retail network, an increase of 369 stores compared to the end of 2002, when the Company had 222 locations. A total of 337 stores were added in 2003 as a result of the above-mentioned acquisitions of Merchant’s (112 stores) and NTW (225 stores). The Company has three distribution centers dedicated solely to servicing its company-operated retail network and also utilizes the distribution centers operated by its wholesale segment to supply products to certain of its retail stores. The Company-operated retail stores market a broad selection of tires under nationally-advertised brands and private brands, including the Company’s own Sigma® brand. In addition, the stores 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.

     Big O franchises retail tire and automotive service stores located primarily in the western and midwestern United States and sells Big O^® brand tires and other tires to these franchisees. At December 31, 2003, the Company had a total of 576 Big O stores, serviced by six distribution centers. Included in the 576 total outlets were 557 franchisee-owned stores, 14 stores owned by joint ventures in which the Company has an equity interest, and 5 stores operated by the Company. Big O products are also sold by Big O to 34 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.

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Wholesale Business

     The wholesale segment of the Company’s business (the “Wholesale Business”) markets and distributes the Company’s proprietary brands of tires, as well as other tires and related products, on a wholesale basis to distributors located throughout the United States and in Canada and in Mexico. These distributors operate under written distributor agreements with the Company and resell the Company’s products to retailers or through retail outlets primarily consisting of independent tire dealers. The Wholesale Business operates a total of 29 warehouse distribution centers, all of which are located in the United States.

     Tires marketed under the Company’s proprietary brand trademarks are manufactured for the Company by leading manufacturers. The Company believes that its Cordovan^®, Multi-Mile^®, Sigma^® and Vanderbilt^® lines of tires are among the most complete lines in the replacement tire market, covering the majority of tire sizes and types available 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.

Products and Suppliers

     Sales of tires accounted for approximately 79% of the Company’s total sales in 2003, 85% in 2002, and 86% in 2001. Tire and mechanical services performed by Company-operated retail stores represented approximately 19%, 12% and 10% of total sales in 2003, 2002 and 2001, respectively. The remainder of the Company’s sales include tubes, wheels, and other products for the automotive replacement market.

     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 most of the molds in which they are made.

     The Goodyear Tire & Rubber Company manufactured approximately 40% of the tires purchased by the Company in 2003, pursuant to a supply agreement entered into in 1977 and a commitment letter which extends until 2013. This ongoing supply relationship with Goodyear began in 1963. The Company also has a supply agreement with Cooper Tire and Rubber Company, its second-largest supplier, which extends until 2011. In addition, the Company has written contracts with certain other suppliers.

     From time to time, the tire industry has faced shortages and supply disruptions affecting the availability of particular sizes of tires, for reasons such as production difficulties, labor unrest, and recalls. 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 industry shortages or supply disruptions. In the event that any of its primary suppliers curtail their manufacturing or otherwise encounter difficulties in meeting the Company’s production requirements, the Company’s business would be adversely affected pending the implementation of contingency plans. Such contingency plans, which are continually updated to reflect changing industry conditions, are designed to mitigate any long-term adverse effect of a significant supply disruption and include the use of alternate suppliers. In addition to the Company’s current suppliers, there are a number of other large tire manufacturers on a worldwide basis that may have the desire and capacity to meet the Company’s needs for its proprietary lines of tires.

Trademarks

     In addition to its Cordovan^®, Multi-Mile^®, Sigma^®, Vanderbilt^®, Big O^®, Tire Kingdom^®, Merchant’s^®, and NTB National Tire & Battery^® trademarks, the Company also holds federal registrations for trademarks such as Grand Prix^®, Grand Am™, Grand Spirit^®, Wild Spirit^®, Aqua Flow^®, Wild Country^®, Wild Trac^®, Turbo-Tech^®, Supreme™, Stampede^®, Power King^®, Harvest King^®, Big Foot^®, Legacy^®, Prestige^®, and Sun Valley^®.

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     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 in its Wholesale Business accounted for approximately 33% of total wholesale sales and 15% of the Company’s total consolidated sales in 2003, with the largest customer accounting for less than 4% of total consolidated sales. The loss of a 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 96% of the Company’s consolidated sales in 2003 and 94% in 2002 and 2001. The remainder of the Company’s sales was attributable to customers located outside the United States, principally in Mexico and Canada. The Company has no significant foreign currency translation risks, since its sales to customers located outside the United States are made and settled in U.S. dollars.

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. During the five-year period from January 1, 1999 through December 31, 2003, first quarter sales averaged approximately 21% of annual sales; the second quarter and third quarters 25% and 28%, respectively; and the fourth quarter 26%. In 2003, the trend was slightly different from the historical pattern, due to the impact of acquisitions during the year. First quarter sales in 2003 represented approximately 19% of total sales, the second quarter 25%, the third quarter 28%, and the fourth quarter 28%.

     Orders for the Company’s products, except for those sold directly to consumers 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 $213.6 million during 2003. The Company’s inventory turn rate (cost of sales, including the cost of direct shipments from manufacturers to customers, divided by average inventory) was 4.1 for 2003.

Competition

     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 at competitive prices, its efficient distribution systems, its good relationships with customers and suppliers, and its established presence in the markets it serves.

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     In the case of the Company’s Retail Business, competition is based primarily upon market presence in a specific geographic area. Big O’s 576 franchised retail outlets are primarily concentrated in western and midwestern states, which gives Big O a significant market share in many of the retail markets it serves. The market position for TBC’s Company-operated retail stores varies depending upon the city or region. For example, in the states of Florida and Virginia, the Company is one of the leading tire retailers, with 171 and 73 Company-operated outlets, respectively. Retail 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, 2003, the Company employed approximately 9,200 persons, of which approximately 8,600 were in its Retail Business. None of the Company’s employees are represented by a union, and the Company considers its employee relations to be excellent.

Internet Website Address and Availability of SEC Filings

     The Company maintains an internet website, www.tbccorp.com. The Company makes its SEC filings, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, immediately available on its website after filing, via an electronic link from the Company’s website to the SEC’s EDGAR database. Paper copies of such SEC filings are also available free of charge from the Company, upon request.

     TBC Corporation’s executive offices are located in leased facilities in Palm Beach Gardens, Florida. The Company has a total of 38 warehouse distribution facilities, totaling approximately 3.8 million square feet, located in 16 states across the United States. The Company owns the office building where its wholesale business is headquartered and two of its distribution facilities. The remainder of the distribution facilities, totaling approximately 3.2 million square feet, are leased under operating leases. The majority of the retail tire and service centers operated by the Company are in leased facilities. In the case of 51 retail store locations, the Company owns buildings situated on leased land. See Note 6 to the consolidated financial statements for information regarding the Company’s operating lease commitments.

     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 claims relating to repairs and services performed by its Retail Business.

     None.

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EXECUTIVE OFFICERS OF THE REGISTRANT

     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 28, 2004) or until their respective successors are elected.

     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 and Chief Financial Officer of the Company since January 2001 and also served as Treasurer from January 2001 to August 2002. From 1993 to January 2001, Mr. Garvey was Executive Vice President and Chief Financial Officer of Tire Kingdom, which TBC acquired in June 2000. From 1987 to 1992, Mr. Garvey served as Executive Vice President and Chief Financial Officer of Fisher Scientific Company.

     Mr. Dick has been President and Chief Executive Officer of the TBC Wholesale Division since November 2003 and prior to that was President of the TBC Private Brands Division since its formation in July 2001. From 2000 until July 2001, Mr. Dick served as the Company’s Executive Vice President of Sales and was Senior Vice President Sales of the Company from 1988 until 2000. 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. Gravatt has been Executive Vice President of Purchasing since November 2003 and prior to that served as the Company’s Senior Vice President of Purchasing. From 1987 until his election as Senior Vice President in 1999, Mr. Gravatt was a Vice President of the Company. Mr. Gravatt joined the Company in 1984 as Manager of Purchasing and served in that role until his election as a Vice President.

     Mr. Potts has been Senior Vice President of Human Resources since November 2003 and prior to that served as Vice President of Human Resources since joining the Company in 1998. From 1994 until joining the Company, Mr. Potts was Vice President, Human Resources of Millard Refrigerated Services, Inc., and from 1988 to 1994 was Corporate Director of Human Resources for Griffin Industries, Inc.

     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 1999. Mr. Coley joined the Company in 1984 and served in a number of financial management positions prior to his election as Controller.

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PART II

     The Common Stock of the Company is traded on The Nasdaq Stock Market under the symbol TBCC. As of December 31, 2003, the Company had approximately 4,000 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 the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 4 to the consolidated financial statements).

     The following table sets forth for the periods indicated the high and low sales prices for the Company’s Common Stock on the Nasdaq National Market System.

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     Set forth below is selected financial information of the Company for each year in the five-year period ended December 31, 2003. 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 acquisitions during 2003 of Merchant’s, Incorporated and NTW, Incorporated in Note 3 to the consolidated financial statements. Information regarding the 2000 acquisition of Tire Kingdom, Inc. was last included in Note 3 to the consolidated financial statements included in Form 10-K for the year ended December 31, 2002. The Company did not declare any cash dividends during the five-year period ended December 31, 2003.

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RESULTS OF OPERATIONS

2003 Compared to 2002:

         The Company 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., Merchant’s, Incorporated (“Merchant’s”) and NTW Incorporated (“NTW”). As discussed in Note 3 to the consolidated financial statements, Merchant’s was acquired by TBC on April 1, 2003 and NTW and its operations were acquired from Sears, Roebuck & Co. on November 29, 2003. The Company’s 2003 consolidated results from operations include the results from these companies since the date they were acquired. The Company’s wholesale segment markets and distributes TBC’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.

         Net sales (which equals revenues from sales of products and services, plus franchise and royalty fees, less estimated returns, allowances and customer rebates) increased 18.8% during 2003 versus the 2002 level. The $208.9 million increase in total net sales included a $222.2 million, or 43.4%, increase for the retail segment and a $13.3 million, or 2.2%, decline for the wholesale segment. The $222.2 million increase in retail net sales during 2003 included a $110.2 million increase in tire sales, a $108.8 million gain in service revenues at Company-operated stores, and a $3.2 million increase related to franchise and royalty fees and to sales of products other than tires. The increased retail tire sales dollars included a 24.2% gain in retail unit volume and a 5.7% increase in the average retail tire sales price. 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. At the end of December 2003, the Company had 40 more franchised stores and 369 more Company-operated stores than at December 31, 2002, with the acquisitions of Merchant’s in April 2003 and NTW in November 2003 adding 112 and 225 Company-operated stores, respectively, to the retail segment. The acquired Merchant’s stores contributed $126.0 million to 2003 retail sales during the nine months following the acquisition. For the one month following the NTW acquisition, the acquired NTW stores contributed net sales of $44.9 million. The $13.3 million decrease in net sales by the wholesale segment was primarily due to a 4.5% decline in unit tire shipments that exceeded the impact of a 3.4% increase in the average wholesale tire sales price.

         The percentage of total sales attributable to tires declined from 85% in 2002 to 79% in 2003, due to the impact of increased service revenues at Company-operated retail stores. Total unit tire volume in 2003 increased 4.5% compared to the 2002 level. In comparison, unit tire shipments for the replacement tire industry as a whole increased approximately 1.7% during 2003 (based on preliminary data). Average tire sales prices for the Company as a whole increased 6.4% compared to a year earlier, due largely to favorable mix changes.

         Gross profit as a percentage of net sales increased from 27.2% in 2002 to 32.9% in 2003. The improved overall gross profit percentage was largely due to the increased contribution from the retail segment and from the increased level of service revenues within 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 purchase costs from tire suppliers. Gross profit percentages on sales by the Company’s retail segment increased from 42.5% in 2002 to 47.2% in 2003. Wholesale margins as a percentage of sales increased from 14.1% in 2002 to 15.0% in 2003.

         Distribution expenses as a percentage of net sales decreased from 4.8% in 2002 to 4.7% in 2003, due primarily to improved cost leveraging associated with the above-mentioned acquisitions as well as improved efficiencies related to warehousing and product delivery.

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         Selling, administrative and retail store expenses increased by $114.3 million in 2003 compared to 2002. The increase was due principally to the greater number of Company-operated retail stores, including the 112 stores added on April 1, 2003 as a result of the Merchant’s acquisition and the 225 NTW stores added at the end of November 2003. 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 by $5.7 million, or 3.1%, in 2003 compared to the 2002 level. The increased expenses after deducting the impact of new stores was largely due to the impact of general inflation and various other cost increases in both the retail and wholesale segments.

         Net interest expense increased by $1.7 million during 2003 compared to 2002, due largely to a 21.5% increase in average borrowing levels. Borrowings necessary to fund the acquisitions of Merchant’s and NTW caused average borrowing levels to increase, but the impact was somewhat offset by the Company’s cash from operations which totaled $37.7 million during the year. The impact of amended credit facilities associated with the acquisitions caused interest rate spreads to increase; however, average borrowing rates were 2.3% lower in 2003 than in 2002 due to a decline in market interest rates. In both 2003 and 2002, the Company made significant efforts to keep interest rate spreads and borrowing rates to a minimum.

         Net other income in 2003 was relatively unchanged compared to the year-earlier level, increasing by 5.6%. A net decrease in the Company’s equity in operating results from joint ventures, which in 2003 included a $744,000 charge in connection with the exit from a joint venture, was more than offset by an aggregate increase in other income items.

         The Company’s effective tax rate was 35.6% in 2003 compared to 37.3% in 2002, due principally to reduced provisions for state income taxes.

         Earnings per diluted share were $1.47 in 2003 and $1.25 in 2002. Earnings per diluted share in 2003 included a charge of approximately $0.02 in conjunction with the above-noted exit from a joint venture. Excluding the effect of this item, earnings in 2003 would have been approximately $1.49 per diluted share, an increase of 19.2% compared to the 2002 level.

2002 Compared to 2001:

     Net sales for 2002 increased 9.9% from the 2001 level. The $100.4 million increase in total net sales included a $66.2 million, or 14.8%, increase for the retail segment and a $34.2 million, or 6.1%, increase for the wholesale segment. The $66.2 million increase in retail net sales during 2002 included a $33.4 million increase in tire sales, a $30.2 million gain in service revenues at Company-operated stores, and a $2.6 million increase related to franchise and royalty fees and to sales of products other than tires. The increased retail tire sales dollars included a 7.7% gain in retail unit volume and a 2.6% increase in the average retail tire sales price. Sales by the retail segment were favorably affected by an increase in the number of Company-operated and franchised stores in the Company’s retail systems. At the end of 2002, the Company had a total of 758 stores in its two retail systems compared to 686 stores at December 31, 2001. The $34.2 million increase in net sales by the wholesale segment included a 4.4% increase in unit tire shipments and a 2.4% increase in the average wholesale tire sales price.

     The percentage of total sales attributable to tires was 85% in 2002 compared to 86% in 2001. Total unit tire volume in 2002 increased 5.4% compared to the 2001 level. In comparison, unit tire shipments for the replacement tire industry as a whole declined approximately 0.3% during 2002. Average tire sales prices for the Company as a whole increased 2.7% in 2002 compared to 2001, due principally to favorable mix changes.

     Gross profit as a percentage of net sales increased from 26.3% in 2001 to 27.2% in 2002. The improved overall gross profit percentage was largely due to the increased contribution from the retail segment. In addition, the Company’s increased overall unit volume led to greater purchasing leverage with suppliers and a resulting improvement in net purchase prices. Gross margin percentages on sales by the Company’s retail segment increased to 42.5% in 2002 from 41.7% in 2001, while wholesale margins were 14.1% in 2002 compared to 14.0% in 2001.

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     Distribution expenses as a percentage of net sales decreased from 5.0% in 2001 to 4.8% in 2002. Increases in total sales helped to leverage the Company’s warehousing and product delivery costs, since many of them, such as rent, do not vary in relation to sales.

     Selling, administrative and retail store expenses increased $27.7 million in 2002 compared to 2001, 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. Expenses in 2001 included amortization of goodwill and trademarks of $2.8 million. No amortization of such assets was recorded in 2002, under the provisions of Statement of Financial Accounting Standards No. 142 (SFAS No. 142), which was adopted by the Company on January 1, 2002 (see Note 1 to the consolidated financial statements.) Expenses in 2001 also included $720,000 related to the writeoff of a prepaid pension asset. Excluding the impact of the amortization and pension charge in the prior year and the expenses associated with the new stores, selling, administrative and retail store expenses increased only 4.5% in 2002 compared to the 2001 level, while net sales (excluding the new stores) increased 5.7%.

     Net interest expense decreased $2.5 million in 2002 compared to 2001 level, due principally to the combined effects of lower overall borrowing rates and lower average borrowings. The Company’s average borrowing rate in 2002 was approximately 16% lower than in 2001, which was a reflection of lower market interest rates as well as efforts by the Company to better manage receivables, inventories and other key components of working capital and thereby minimize interest rate spreads under its borrowing agreements. Average borrowings declined 12% from the 2001 level, principally as a result of cash generated from operations and the above-mentioned management efforts which allowed the Company to reduce its debt to banks and other lenders. Net interest expense in 2001 included interest income of $606,000 related to refunds on amended tax returns filed in prior years.

     Net other income in 2002 was $557,000 less than in 2001, due primarily to a decline in interest and service charge income from customers as well as a decrease in the Company’s equity in operating results from joint ventures.

     The Company’s effective tax rate was 37.3% in 2002 compared to 39.9% in 2001. The lower effective rate in 2002 was due to reduced provisions for state income taxes as well as the impact of SFAS No. 142, since the majority of goodwill amortized in prior years was not deductible for tax purposes.

     Earnings per diluted share were $1.25 in 2002 and $0.98 in 2001. Earnings per diluted share in 2001 included a charge of $0.02 as a result of the previously-noted writeoff of a prepaid pension asset and a credit of $0.02 related to interest on prior year amended tax returns, in addition to the approximate $0.12 charge related to the amortization of goodwill and certain other intangible assets prior to the adoption of SFAS No. 142. Excluding the effects of these items, earnings in 2001 would have been approximately $1.10 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

         On March 31, 2003, the Company executed a new borrowing agreement with a group of 11 banks, which replaced its existing bank borrowing facilities. On November 29, 2003, the new agreement was amended and restated to enable the Company to consummate its acquisition of NTW Incorporated. The amended and restated agreement includes a term loan facility and a revolving loan facility, both of which mature on April 1, 2008. The revolving loan facility allows the Company to borrow up to $121.5 million, with the option to increase that amount by an additional $28.5 million. At December 31, 2003, $29.1 million was borrowed under the revolving loan facility and $147.3 million was outstanding under the term loan facility. The Company’s long-term debt at the end of 2003 also included a total of $77.5 million in Senior Notes. Of the total $253.9 million borrowed at December 31, 2003 under these combined credit arrangements, $57.1 million was classified as current on the Company’s balance sheet and the remaining $196.8 million was considered noncurrent.

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         Under its agreements with the respective lenders, the Company is subject to certain financial covenants dealing with, among other things, the Company’s funded indebtedness, leverage, fixed charge coverage ratio, accounts receivable and inventories. The agreements 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 cash dividends. The Company was in compliance with all of its borrowing covenants as of December 31, 2003 and for the year then ended. The bank credit facilities are collateralized by substantially all of the Company’s assets and contain certain cross-default provisions in conjunction with the Senior Notes.

         The Company had working capital of $137.4 million at December 31, 2003 and its current ratio was 1.50. During 2003, total cash generated by operating activities totaled $37.7 million. The Company’s strong annual cash flow, solid financial position and sizable credit facilities allowed it to make the acquisitions of Merchant’s, Incorporated on April 1, 2003 and NTW Incorporated on November 29, 2003 (see Note 3 to the consolidated financial statements). The Company was also able to fund capital expenditures totaling $21.0 million in 2003. Capital expenditures, including those during 2003 and 2002, have historically been primarily for equipment and tire molds. The Company had no material commitments for capital expenditures at the end of 2003. The Company expects to fund 2004 day-to-day operating expenses and normally recurring capital expenditures out of operating funds and its present financial resources. The Company expects its future growth to include additional strategic acquisitions such as the acquisitions during 2003 of Merchant’s and NTW. Significant future acquisitions could require additional capital resources and would involve new or amended credit facilities. See “Forward-Looking Statements and Risks” below, which identifies certain risks associated with the Company’s acquisition strategy, as well as many of the other factors which influence the Company’s operating results, its future growth potential and the industry in which it operates.

OFF-BALANCE SHEET ARRANGEMENTS

         Financial guarantees - As discussed in Note 11 to the consolidated financial statements, 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, 2003. 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 $3,874,000 as of December 31, 2003. 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 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.

     Variable Interest Entities - As discussed in Note 13 to the consolidated financial statements, in January 2003 and December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), and its revision, FIN 46-R, respectively. FIN 46 and FIN 46-R provide guidance on the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (VIE’s), by the primary beneficiary of the entity and also require certain disclosures by primary beneficiaries and other significant variable interest holders. The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. The guidance of FIN 46 was immediately applicable for VIE’s created after January 31, 2003. In applying such guidance for purposes of determining whether an entity is a VIE, the Company has reviewed arrangements created after that date in which it has: 1) an economic interest in an entity or obligations to that entity; 2) issued guarantees related to the liabilities of an entity; 3) transferred assets to an entity; 4) managed the assets of an entity; or 5) leased assets from an entity or provided that entity with financing. For any VIE’s created prior to February 1, 2003, the Company will perform such analysis for the quarter ending March 31, 2004.

     As of December 31, 2003, the Company has determined that it holds interests in certain VIE’s created after January 31, 2003 in connection with the franchise business activities conducted at its Big O Tires, Inc. subsidiary. However, there were no material expected losses that the Company would have been required to absorb nor were there any significant residual returns that the Company expected to receive from such entities as of December 31, 2003, and therefore no VIE’s are included in the consolidated financial statements of the Company as of December 31, 2003 and for the year then ended.

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CONTRACTUAL OBLIGATIONS

         In addition to the debt obligations discussed in the Liquidity and Capital Resources section, the Company has operating and capital lease commitments as set forth in Note 6 to the consolidated financial statements. The table below summarizes the Company’s known material contractual obligations as of December 31, 2003 (in thousands).

CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Significant accounting policies employed by the Company, including the use of estimates and assumptions, are presented in the Notes to Consolidated Financial Statements. Management bases its estimates on its historical experience, together with other relevant factors, in order to form the basis for making judgements, which will affect the carrying values of assets and liabilities. On an ongoing basis, management evaluates its estimates and makes revisions as deemed necessary. The following areas are considered to be of critical importance:

         Net sales - Net sales include revenues from sales of products and services, plus franchise and royalty fees charged to Big O franchisees, less estimated returns, allowances and customer rebates. Sales are recognized at the time products are shipped or services are rendered and the estimated costs of returns, allowances and rebates are accrued at the same time. Historically, management’s estimates for the costs of returns, allowances and rebates have not been materially different than the actual costs later incurred. Each Big O franchisee is required to pay an initial franchise fee as well as monthly royalty fees of 2% of gross sales. Initial franchise fees are deferred and recognized when all material services or conditions relating to the sale or transfer of the franchise have been substantially completed.

         Allowance for doubtful accounts and notes - The Company maintains an allowance for doubtful accounts and notes for estimated losses resulting from the inability of its customers to make required payments. The allowance is based on review of the overall condition of receivable balances and review of significant past due accounts. The Company evaluated its allowance for doubtful account at December 31, 2003 and determined that such amount was adequate but not excessive, based on facts and conditions known at that time. If the financial condition of the Company’s customers were to deteriorate in such a way as to impair their ability to make payments, additional allowances may be required.

         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; however, the amount by which the current costs of those inventories exceeded the LIFO value did not change significantly from December 31, 2002 to December 31, 2003 and thus the reported results would not have been materially different under a different inventory costing method.

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         Goodwill, Trademarks and Other Intangible Assets - Goodwill represents the excess of cost over the fair value of identifiable net assets acquired. Under the provisions of SFAS No. 142, goodwill and other indefinite-lived intangible assets ceased the amortization of goodwill effective January 1, 2002, with charges being recorded only if impairment is found to exist. At least annually, the Company compares the carrying values of its “reporting units” to their fair value, with a reporting unit being defined as an operating segment or one level below a segment if discrete financial information is prepared and reviewed regularly by management. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is required to be recognized. No impairment to the recorded value of Company’s indefinite-lived assets was found to exist as a result of the required testing.

         Warranty costs - The costs of anticipated adjustments for workmanship and materials that are the responsibility of the Company are estimated based on historical experience and charged against earnings currently. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available. During 2003, accruals for warranty expenses were adjusted to reflect changes in purchasing arrangements with certain suppliers that caused the Company’s responsibility for warranty costs to be lessened. Reserves for future warranty claims and service are included in liabilities in the balance sheets.

         Retirement plan obligations - The values of certain assets and liabilities associated with the Company’s retirement plan obligations are determined on an actuarial basis and include estimates and assumptions such as the expected return on plan assets and discount rates. Discount rates are determined based on rates of high quality, fixed income investments. Actual changes in the fair market value of plan assets, differences between the actual return and the expected return on plan assets and changes in the discount rate affect the amount of the pension expense recognized.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         See “Recent Accounting Pronouncements” in Note 1 to the consolidated financial statements for a complete discussion of the impact of recently issued accounting standards on the Company’s consolidated financial statements as of December 31, 2003 and for the year then ended, as well as the expected impact on the financial statements for future periods.

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 successfully integrate acquisitions and achieve anticipated synergies or savings; 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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         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 December 31, 2003, the Company owed a total of $176.4 million to banks under its credit facilities, of which $160.5 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 $401,000 based on the outstanding balance which was not hedged at December 31, 2003. See Note 5 to the consolidated financial statements for information regarding the Company’s interest rate swap agreements.

         The Company has no significant foreign currency translation risks, since its sales to customers located outside the United States are made and settled in U.S. dollars.

     The financial statements and supplementary financial information required by this Item 8 are included on the following 22 pages of this Report.

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PRICEWATERHOUSECOOPERS

Report of Independent Auditors

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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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.

     As discussed in Note 1 to the consolidated financial statements, the Company adopted FASB Statement No. 142, “Goodwill and Other Intangible Assets,” during 2002.

PricewaterhouseCoopers LLP

February 6, 2004, except for Note 3 for which the date is March 10, 2004; and
Note 13 for which the date is March 12, 2004.

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TBC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

The accompanying notes are an integral part of the consolidated financial statements.

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TBC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of the consolidated financial statements.

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TBC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

*

Including sales to related parties of $82,010, $100,406 and $92,813 in the years ended December 31, 2003, 2002 and 2001, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

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TBC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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TBC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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TBC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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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. The Company operates retail tire and automotive service centers, primarily in the eastern two-thirds of the United States, under its Tire Kingdom, Merchant’s Tire & Auto Centers, and National Tire & Battery business units. 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.

         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.

         Equity investments - The Company has invested in certain tire distributors and independent tire dealers. The investments in these 50% or less-owned entities are accounted for using the equity method and are included in other assets on the balance sheets. The carrying value of such equity investments totaled $10,754,000 and $13,982,000 at December 31, 2003 and 2002, respectively. For its share of earnings and losses from such equity investments, the Company recorded net losses of $128,000 in 2003 and $24,000 in 2002 and earnings of $364,000 in 2001. The net loss recorded during 2003 included a $744,000 charge in connection with the Company’s exit from a joint venture.

         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 $1,595,000 and $1,389,000 at December 31, 2003 and 2002, respectively.

         Concentrations of credit risk - The Company performs ongoing credit evaluations of its franchisees and wholesale 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. In situations where lease terms are for a period of less than 20 years, leasehold improvements are depreciated over the life of the lease. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.

NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Acquisitions - The Company accounts for asset and business acquisitions using the purchase method, under the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations.” Assets acquired and liabilities assumed are recorded at their fair value on the date of purchase. Purchase cost in excess of the fair value of the net assets acquired is allocated to identifiable intangibles, to the extent of their fair value. Any remaining excess cost is allocated to goodwill.

         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 acquisitions of Merchant’s, Incorporated and NTW Incorporated in 2003, as well as the purchase of the net assets of certain other retail tire stores during 2002 and 2001. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Under SFAS No. 142, goodwill and other indefinite-lived intangible assets are no longer amortized but are tested for impairment annually, with charges being recorded only if impairment is found to exist. SFAS No. 142 requires the fair values of these intangible assets to be assigned to the Company’s “reporting units” and tested accordingly, with a reporting unit being defined as an operating segment or one level below a segment if discrete financial information is prepared and reviewed regularly by management. No impairment to the recorded value of the Company’s indefinite-lived assets was found to exist as a result of the required testing.

         Expenses for the year ended December 31, 2001 included amortization of goodwill and trademarks of $2,755,000. If SFAS No. 142 had been in effect during 2001 and amortization had not been recorded, net income would have been approximately $2,480,000 greater than the reported total of $21,010,000 and diluted earnings per share would have been approximately $1.10 compared to the reported total of $0.98.

         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, 2003 or 2002.

         Net sales - Net sales include revenues from sales of products and services, plus franchise and royalty fees charged to Big O franchisees, less estimated returns, allowances and customer rebates. Sales are recognized at the time products are shipped or services are rendered and the estimated costs of returns, allowances and rebates are accrued at the same time. Each Big O franchisee is required to pay an initial franchise fee as well as monthly royalty fees of 2% of gross sales. Initial franchise fees are deferred and recognized when all material services or conditions relating to the sale or transfer of the franchise have been substantially completed.

         Warranty costs - The costs of anticipated adjustments for workmanship and materials that are the responsibility of the Company are estimated based on historical experience and charged against earnings currently. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available. During 2003, accruals for warranty expenses were adjusted to reflect changes in purchasing arrangements with certain suppliers that caused the Company’s responsibility for warranty costs to be lessened. Reserves for future warranty claims and service, including those associated with acquired operations, totaled $29,394,000 and $10,997,000 at December 31, 2003 and 2002, respectively, of which a portion was classified as noncurrent in the balance sheets.

         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 0.9% of net sales in 2003, 1.0% during 2002 and 1.2% in 2001.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.

NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

         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):

Recent Accounting Pronouncements

         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.

         In June 2003, Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” was issued, principally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133. The Company adopted this statement effective July 1, 2003 as required, and such adoption had no material impact on the Company’s financial statements.

         In May 2003, Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” was issued. SFAS No. 150 addresses the classification and measurement of certain financial instruments that, under previous guidance, could be accounted for as equity and requires that those instruments be classified as liabilities on the balance sheet. The statement also requires disclosures about alternative ways of settling the instruments and the related capital structure of entities. Most of the guidance in SFAS No.150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company on July 1, 2003. The adoption of this statement had no material impact on the Company’s financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1.

NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

         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.

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 7% of the Company’s common stock at December 31, 2003. Sales to a distributor represented on the Board, including affiliates of that distributor, accounted for approximately 3% of the Company’s net sales during 2003, 4% during 2002 and 5% in 2001. One major customer, unaffiliated with the board of directors or the Company, accounted for approximately 3% of net sales in 2003, 5% of net sales in 2002, and 4% in 2001. Sales to joint ventures and entities in which the Company has an ownership interest accounted for approximately 3% of the Company’s net sales during 2003, 5% in 2002 and 4% in 2001. Accounts receivable resulting from transactions with related parties are presented separately in the balance sheets.

3.

ACQUISITIONS IN 2003 OF MERCHANT’S, INCORPORATED AND NTW INCORPORATED

         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 made to increase the size and geographic reach of TBC’s retail store network and to enhance TBC’s purchasing, distribution and marketing economies. The acquisition was accounted for as a purchase, with total consideration of $57,494,000 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 a net price of $5.6 million, with no gain being recognized.

         On November 29, 2003, the Company acquired all of the outstanding capital stock of NTW Incorporated from Sears, Roebuck and Co. NTW was operated as a separate operating division by Sears under the name National Tire & Battery (NTB), with 225 retail tire and automotive centers in 20 states generating annual revenues in excess of $425 million. Like the Merchant’s acquisition, the NTW acquisition was made to increase the size and geographic reach of TBC’s retail store network and further enhance TBC’s purchasing, distribution and marketing economies. The acquisition was accounted for as a purchase, with total consideration of $225 million financed through debt and sale/leaseback arrangements. Contemporaneously with the closing of the acquisition, the Company sold and leased back 86 retail tire stores owned by NTW, with net proceeds from that transaction totaling approximately $132 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.

ACQUISITIONS IN 2003 OF MERCHANT’S, INCORPORATED AND NTW INCORPORATED (Continued)

         The Company’s consolidated financial statements include the operating results of Merchant’s since April 1, 2003 and NTW since November 30, 2003. The following unaudited pro forma results (adjusted for items such as interest on required borrowings, differences in purchasing costs for goods, operating expenses, etc.) were prepared as if the companies had been combined as of January 1, 2002 and exclude an after-tax charge of $53,978,000 in 2002 by NTW for the cumulative effect of a change in accounting for goodwill. Such pro forma results give no consideration to anticipated changes in the mix of products and services offered by the acquired stores and the favorable effect that such changes would be expected to have on gross profit. Thus, the pro forma results do 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 $1,751,527,000 in 2003 and $1,727,358,000 in 2002. Pro forma net income was $34,251,000 in 2003 and $33,442,000 in 2002 and pro forma diluted earnings per share were $1.52 in both 2003 and 2002.

4.

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. On November 29, 2003, the new agreement was amended and restated to enable the Company to consummate its acquisition of NTW Incorporated. The amended and restated agreement includes a term loan facility and a revolving loan facility, both of which mature on April 1, 2008. The revolving loan facility allows the Company to borrow up to $121.5 million, with the option to increase that amount 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 cash 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. 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 3). On November 29, 2003, the agreements under which the Company’s Series A, B,C and D Senior Notes were issued were amended to modify the interest rates payable thereunder and, among other things, incorporate all of the financial covenants and restrictions contained in the amended and restated bank credit facilities noted above. The Company’s obligations under the Senior Notes are collateralized by substantially all of the Company’s assets, with principal payments required to be made semi-annually and interest payable quarterly.

         The Company was in compliance with all of its borrowing covenants as of December 31, 2003 and for the year then ended. A total of $29,100,000 was borrowed under the bank revolving loan facility at December 31, 2003. The weighted average interest rate on short-term borrowings at December 31, 2003 and 2002 was 5.25% and 4.03%, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.

NOTES PAYABLE TO BANKS AND LONG-TERM DEBT (Continued)

         Long-term debt and capital lease obligations on the balance sheets are summarized as follows (in thousands):

         Maturities of long-term debt and capital lease obligations are as follows: $28,723,000 due in 2004, $41,270,000 in 2005, $41,327,000 in 2006, $46,441,000 in 2007, $46,510,000 in 2008, and $33,072,000 thereafter.

5.

INTEREST RATE SWAP AGREEMENTS

         The Company has certain interest-rate swap agreements which are hedge instruments accounted for under Statement of Financial Accounting Standards No. 133, adopted by the Company on January 1, 2001. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires the recognition of all derivative instruments on the balance sheet at fair value. The Company’s interest-rate swap agreements expire over periods of five years or less and are cash-flow hedges since they are used to convert a portion of the Company’s variable-rate bank debt to fixed rates and thereby minimize earnings fluctuations caused by interest rate volatility. Changes in the fair value of interest-rate swaps are recorded in other comprehensive income, until earnings are affected by the variability of actual cash flows. As of December 31, 2003, deferred losses on interest-rate swaps, net of deferred taxes, totaled $559,000 and were included in other comprehensive income (loss) on the balance sheet. At the end of 2003, interest expense of approximately $617,000 was expected to be recorded within the next twelve months, in conjunction with the realization of assumed interest rates. For the year ended December 31, 2001, amounts included in the statement of income associated with the adoption and provisions of SFAS No. 133 were not material.

6.

LEASE COMMITMENTS

         The Company’s commitments under operating leases relate substantially to retail store locations and distribution facilities. In addition to rental payments, the Company is obligated in some instances to pay real estate taxes, insurance and certain maintenance costs. Leased capital assets are included in property, plant and equipment on the consolidated balance sheets. Other facilities and equipment are leased under arrangements that are accounted for as operating leases. Rental expense of $52,845,000, $35,623,000 and $29,441,000 was charged to operations in 2003, 2002 and 2001, respectively, after deducting sublease income of $4,169,000 in 2003, $4,429,000 in 2002 and $3,459,000 in 2001. Minimum rent is expensed on a straight-line basis over the terms of the operating leases.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.

LEASE COMMITMENTS (Continued)

         Future minimum capital and operating lease payments and the related present value of capital lease payments at December 31, 2003 were as follows (in thousands):

         In conjunction with the acquisition of NTW Incorporated in November 2003, the Company entered into a transaction whereby 86 retail stores were sold and leased back pursuant to leases that qualified and were accounted for as operating leases. The Company does not have any retained or contingent interests in the sold stores. Proceeds from this sale-leaseback transaction, net of related fees, totaled $132,185,000, with no gain being recognized since the net book value of the sold properties was the same as the fair market value. In addition to the NTW stores, certain other retail stores were sold and leased back during the year under sale-leaseback arrangements. The leases that resulted from these sale-leaseback transactions are included in the above table.

7.

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, 2003, 2002 and 2001 were as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. 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, excluding deferred taxes related to other comprehensive income or loss and 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. Deferred income tax assets of $1,355,000 were recorded in connection with the acquisition of Merchant’s in April 2003. No deferred income tax assets were recorded in connection with the November 2003 acquisition of NTW. The major components of deferred income tax assets and liabilities on the balance sheets are summarized as follows (in thousands):

         A reconciliation of the statutory U. S. Federal income tax rate to the Company’s effective income tax rate is as follows:

         At December 31, 2003, certain of the Company’s consolidated subsidiaries had net operating loss carryforwards available in certain states. These state loss carryforwards are expected to be utilized prior to expiring in 2023.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.

RETIREMENT PLANS

         The Company maintains employee savings plans under Section 401(k) of the Internal Revenue Code. Contributions are typically made by the Company to the 401(k) plans based on specified percentages of employee contributions, but may also include discretionary contributions. Expenses recorded for the Company’s contributions totaled $1,405,000 in 2003, $1,807,000 in 2002 and $1,274,000 in 2001.

         The Company has a defined benefit pension plan which covered less than 100 of its employees at the end of 2003. The benefits are based on years of service and the employee’s final compensation. The plan is funded by contributions by the Company, not to exceed the maximum amount that can be deducted for federal income tax purposes. The plan was amended as of December 31, 2001 to freeze accrued participant benefits by providing that years of service and compensation after that date shall not be taken into account in the calculation of plan benefits. Although no decision has been made to terminate the plan, it may be terminated at some point in the future (in accordance with the requirements of ERISA and the Pension Benefit Guaranty Corporation). The Company wrote off the remaining balance of its prepaid pension asset during 2001 and recorded an expense of $720,000. In 2003 and 2002, the Company recorded minimum pension liability adjustments of $59,000 and $624,000, respectively, related to the excess of accumulated benefit obligations over the underlying plan assets. Accumulated adjustments, reflected in other comprehensive income or loss on the balance sheets net of deferred income taxes, were $428,000 and $391,000 as of December 31, 2003 and 2002, respectively.

         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):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.

RETIREMENT PLANS (Continued)

         The net expense for the defined benefit plan for 2003, 2002 and 2001 was comprised of the following (in thousands):

         The discount rates used in determining the actuarial present values of benefit obligations for the defined benefit plan were 6.25% in 2003 and 6.50% in 2002. Estimated increases in future compensation levels were not applicable due to the plan amendment freezing participant benefits. The expected long-term rate of return on assets was 7.5% in 2003 and 6% in 2002. Actuarial present values of accumulated benefit obligations were $5,261,000 at December 31, 2003 and $5,894,000 at December 31, 2002.

         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. Expenses recorded for supplemental retirement benefits totaled $409,000 in 2003, $387,000 in 2002 and $215,000 in 2001. At December 31, 2003, the projected benefit obligation, computed using a 6.25% discount rate and 5% expected increase in future compensation, was $2,277,000. The accumulated benefit obligation, which was reflected as a noncurrent liability at December 31, 2003, totaled $1,498,000.

9.

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, 2003 or 2002.

         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 2002 and 2001, shares of the Company’s common stock were repurchased and retired under authorizations made by the Board of Directors. No common stock repurchases were made during 2003. As of December 31, 2003, the Company had unused authorizations from the Board for the repurchase of approximately 1,199,000 additional shares.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10.

STOCK OPTION AND INCENTIVE PLANS

         The Company has a 1989 stock incentive plan (“1989 Plan”) and a 2000 stock option plan (“2000 Plan”). 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.

         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 $10,000 ($5,000 for years prior to 2003) 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, 2003, 2,660,000 shares were reserved for issuance under the 1989 and 2000 Plans.

         A summary of stock option activity during 2001, 2002 and 2003 is shown below:

         Additional information regarding stock options outstanding at December 31, 2003 is shown below:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10.

STOCK OPTION AND INCENTIVE PLANS (Continued)

         As of December 31, 2003, 755,441 of the outstanding options contained a “reload” feature. Options granted by the committee with a reload feature provide 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.

         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 2003, 2002 or 2001. Using fair value assumptions specified in SFAS No. 123, the weighted average per share value of options granted during 2003, 2002 and 2001 was $4.80, $5.16 and $2.81, respectively. Had compensation cost for such option grants been determined using such assumptions, results for the years ended December 31, 2003, 2002 and 2001 would have been as follows (in thousands):

         The fair value of each option granted in 2003, 2002 and 2001 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 5.0 years in 2003 and 2002 and 4.9 years in 2001. The expected volatility percentages used for options granted were 36.4% in 2003, 36.3% for 2002 and 37.7% for 2001.

11.

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, 2003. 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 $3,874,000 as of December 31, 2003, including $2,917,000 related to franchisee financing and $957,000 related to store and real estate leases. Most of the guarantees extend for more than five years and expire in decreasing amounts through 2009. The credit risk associated with these guarantees is essentially the same as that involved in extending loans to the franchisees. Big O evaluates each franchisee’s creditworthiness 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

12.

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., Merchant’s, Incorporated and NTW Incorporated. The franchised and Company-operated 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. The Company evaluates the performance of its two segments based on earnings before interest, taxes, depreciation, amortization and any special items (Operational EBITDA). Special items considered in the determination of Operational EBITDA included a $744,000 charge recorded in 2003 in conjunction with the Company’s exit from a joint venture and a $720,000 charge recorded in 2001 related to the writeoff of a prepaid pension plan asset. Net sales by the wholesale segment to the retail segment are eliminated in consolidation and totaled $176,862,000, $164,899,000 and $159,020,000 in 2003, 2002 and 2001 respectively. Such intersegment sales had no effect on the Operational EBITDA of the individual reporting segments.

         Segment information for the three years ended December 31, 2003, 2002 and 2001 is as follows (in thousands):