UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

COMMISSION FILE NUMBER 0-11579

TBC CORPORATION

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

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 [  ]

22,266,364 Shares of Common Stock were outstanding as of September 30, 2004.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TBC CORPORATION

ASSETS

See accompanying notes to consolidated financial statements.

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TBC CORPORATION

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes to consolidated financial statements.

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TBC CORPORATION

* Including sales to related parties of $34,086 and $24,168 and $86,699 and $62,858 in the three and nine months ended September 30, 2004 and 2003, respectively.

See accompanying notes to consolidated financial statements.

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TBC CORPORATION

See accompanying notes to consolidated financial statements.

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TBC CORPORATION

(Continued)

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TBC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)

•     During 2003, the Company acquired Merchant’s, Incorporated. and NTW Incorporated (the “Purchased Companies”) and these acquisitions were accounted for under the purchase method. In connection with the Purchased Companies, the Company has adjusted the carrying value of certain balance sheet items to account for changes to their respective fair market values. During the nine months ended September 30, 2004, the Company increased goodwill by $348 comprised primarily of adjustments to inventory, property, plant and equipment, other assets and other accrued liabilities.

•     In connection with the acquisition of NTW Incorporated during 2003, the Company continues to evaluate purchase costs allocated to the assets acquired. The Company may, from time to time, adjust the carrying value of these assets as more accurate information regarding these values becomes available. These adjustments have no impact on the Company’s cash flows but may alter the carrying value of the assets as reflected in the accompanying balance sheet.

See accompanying notes to consolidated financial statements.

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TBC CORPORATION

1. Basis of Presentation

     The December 31, 2003 restated condensed consolidated balance sheet was derived from audited financial statements and restated as discussed in Note 2 “Restatement” of this Form 10-Q. The condensed consolidated balance sheet, statement of income, stockholders’ equity and cash flow for the period ended September 30, 2004, and the restated consolidated statements of income, stockholders’ equity and cash flow for the period ended September 30, 2003, have been prepared by the Company, without audit. It is Management’s opinion that these statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2004 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 2003 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 2003 Form 10-K.

     In addition to the consolidated financial statements that have been restated, as described in Note 2 “Restatement” of this Form 10-Q, certain previously reported amounts have been reclassified to conform to the current financial statement presentation with no impact on previously reported net income or stockholders’ equity.

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Restatement

     The Company historically used the last-in, first-out (“LIFO”) method for approximately 45% of its inventories, with the remaining inventories valued on a first-in, first-out (“FIFO”) basis. Effective January 1, 2004, the Company changed its method of determining the cost of its LIFO inventories to the FIFO method. The Company has applied this change retroactively by restating its financial statements as required by Accounting Principles Board No. 20, “Accounting Changes,” and accordingly, previously reported retained earnings as of December 31, 2003 has been decreased by $286,000.

     During the second quarter of 2004, the Company changed its inventory costing from LIFO to FIFO. The method was changed to obtain a more current inventory valuation at period end and to achieve a better matching of revenues and expenses. Costing for retail inventories has historically been on the FIFO method and it is expected that continued growth in this segment will result in the continuing liquidation of LIFO layers. The financial statements presented for the three and nine months ended September 30, 2003 have been retroactively restated to reflect this change. The effect of the change on previously reported net income and earnings per share are reflected in the table below (in thousands).

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. 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):

4. 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 dealerships.

     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, 2003 with the exception of the change in inventory valuation method as described in Note 2 “Restatement” of this Form 10-Q. The Company evaluates the performance of its two segments based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). Net sales by the wholesale segment to the retail segment are eliminated in consolidation and totaled $67.4 million and $187.8 million and $49.1 million and $133.8 million for the three and nine months periods ended September 30, 2004 and the three and nine month periods ended September 30, 2003, respectively. Such intersegment sales had no effect on the EBITDA of the individual reporting segments.

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Segment Information (continued)

Segment information for the three and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. 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 periods ended September 30, 2004 or 2003. Using fair value assumptions specified in SFAS No. 123, the weighted average per share values of options granted during the three and nine months ended September 30, 2004 was $9.44. No stock options were awarded during the three months ended September 30, 2003. Had compensation cost for such option grants been determined using such assumptions, results for the third quarter and first nine months of 2004 and 2003 would have been as follows (in thousands):

     The fair value of each option granted in the first nine months of 2004 and 2003 was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions: dividend yield of 0%; expected lives of 5.0 years; and interest rates based on risk-free governmental issues with maturities equal to the expected term of the option. The expected volatility percentages used for options granted during the first nine months of 2004 were 38.10%.

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Variable Interest Entities

     In January 2003 and December 2003, the Financial Accounting Standards Board (“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 Company adopted FIN 46-R effective January 1, 2004. In applying such guidance for purposes of determining whether an entity is a VIE, the Company has reviewed arrangements 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 to an entity or provided that entity with financing.

     As of September 30, 2004, the Company has determined that it holds interests in VIE’s associated with the franchise business activities conducted at its Big O Tires, Inc. (“Big O”) subsidiary. The Company has identified 153 retail stores operated by Big O franchisees that meet the VIE conditions due to lending, leasing or guarantee arrangements. These stores make retail tire sales and provide automotive services to consumers under the trade name of Big O Tires through franchise agreements entered into with the Company’s subsidiary. Under the franchise agreements, Big O sells private-branded and other tires to the franchised stores and receives a 2% royalty on all revenues of the stores. As of September 30, 2004, the Company’s subsidiary had extended loans in the aggregate of $9.1 million, entered into leasing or subleasing arrangements for minimum payments totaling $41.9 million and guaranteed loans or leases on behalf of these franchisees totaling $2.9 million. During the three and nine months ended September 30, 2004, Big O recorded product sales of $10.4 million and $31.9 million, respectively, and royalty fee revenue for the three and nine months ended September 30, 2004 of $0.7 million and $2.1 million, respectively, related to these 153 franchised stores. During the three and nine months ended September 30, 2004, the stores themselves had retail sales of approximately $34.4 million and $105.8 million, respectively. Since the 153 franchised stores are owned and/or operated by numerous entities and persons, the process of obtaining complete financial information for the stores is a lengthy one and the Company has thus far been unsuccessful in obtaining complete financial information to finalize its assessment. The Company’s efforts to obtain this information are ongoing and, once received, the Company will perform a thorough review to determine if the information is credible and reliable. In order to make a determination as of September 30, 2004 of whether the Company is the primary beneficiary, the Company evaluated these 153 stores based on their economic characteristics and made certain assumptions in instances where financial information was not available. Based on these evaluations, the Company is the primary beneficiary of three VIE’s. However, the consolidation of those entities for which the Company is the primary beneficiary would not have a material impact on the Company’s consolidated financial statements and therefore, the three entities are not included in the consolidated results of operations of the Company.

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TBC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Consideration Received from a Vendor

     On March 20, 2003, the Emerging Issues Task Force (“EITF”) issued EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” which states that cash consideration received from a vendor is presumed to be a reduction of the price of the vendor’s products or services and should, therefore, be characterized as a reduction of cost of goods sold and a portion of these amounts be capitalized into ending inventory. This presumption is overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor’s products, or a payment for assets or services delivered to the vendor. EITF 02-16 is effective for volume-based rebate agreements entered into after November 21, 2002 and for all other rebate agreements entered into or modified after December 31, 2002.

     During 2003, the Company adopted EITF 02-16, however, the adoption of this pronouncement did not have a material impact on the results of operations. Prior to the effective date of EITF 02-16, the Company entered into numerous multi-year supply agreements. Consistent with EITF 02-16, the Company continued accounting for these agreements under its historical method of recognizing the vendor allowances based on the Company’s fulfillment of the related obligations of the agreement. In the second quarter of 2004, the Company entered into a new supply agreement with one of its major vendors. As required by EITF 02-16, the Company began capitalizing a portion of the allowances afforded it under this new agreement. Earnings during the nine months ended September 30, 2004 reflect the impact of EITF 02-16 of $3.3 million, or $0.09 per diluted share, related to the Company’s new purchase agreement with this major vendor. In addition, certain reclassifications have been made with respect to certain vendor allowances previously classified in selling, general and administrative expenses to properly record these as cost of goods sold with no impact on net income.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     The Company is one of the nation’s largest independent marketers of tires for the automotive replacement market. The Company has determined that its operating activities consist of two reportable operating segments: the Company’s Retail Division and the Company’s Wholesale Division. The Company operates and acts as a franchisor of retail tire and automotive service centers throughout the entire United States under the trade names Tire Kingdom, Merchant’s Tire & Auto Centers, National Tire & Battery and Big O Tires. The Company’s wholesale customers include retailers and other wholesalers, primarily in the United States, Canada and Mexico. As of September 30, 2004, the Company had a total of 1,171 retail locations consisting of 602 Company-operated and 569 franchised stores.

     The following discussion should be read in conjunction with the consolidated historical financial statements, including the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements, and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Restatement

     The Company historically used the last-in, first-out (“LIFO”) method for approximately 45% of its inventories, with the remaining inventories valued on a first-in, first-out (“FIFO”) basis. Effective January 1, 2004, the Company changed its method of determining the cost of its LIFO inventories to the FIFO method. The Company has applied this change retroactively by restating its financial statements as required by Accounting Principles Board No. 20, “Accounting Changes,” and accordingly, previously reported retained earnings as of December 31, 2003 has been decreased by $286,000.

     During the second quarter of 2004, the Company changed its inventory costing from LIFO to FIFO. The method was changed to obtain a more current inventory valuation at period end and to achieve a better matching of revenues and expenses. Costing for retail inventories has historically been on the FIFO method and it is expected that continued growth in this segment will result in the continuing liquidation of LIFO layers. The financial statements presented for the three and nine months ended September 30, 2003 have been retroactively restated to reflect this change. The effect of the change on previously reported net income and earnings per share are reflected in the table below (in thousands).

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Financial Condition

     At September 30, 2004, the Company’s financial position and liquidity were strong, with working capital of $136.8 million and stockholders’ equity of $293.6 million. Current accounts and notes receivable increased by $33.0 million and inventories increased by $20.1 million compared to the December 31, 2003 levels, due largely to seasonal fluctuations. The number of days of sales in accounts receivable and number of days inventory on hand decreased at September 30, 2004 compared to their levels at the end of 2003.

     The net amount owed to banks and vendors (consisting of the combined balances of cash and cash equivalents, outstanding checks, notes payable to banks, and accounts payable) increased by $32.4 million from December 31, 2003 to September 30, 2004. This increase enabled the Company to fund the seasonally higher levels of receivables and inventories, as well as capital expenditures totaling $18.1 million during the first nine months of 2004.

Consolidated Results of Operations

     A total of 337 Company-operated retail stores were added to the Company’s retail segment as a result of the Company’s acquisitions of Merchant’s, Incorporated (“Merchant’s”) on April 1, 2003 and NTW Incorporated (“NTW”) on November 29, 2003. Thus, there were a number of significant changes in income statement line items between the first nine months of 2003 and the same period in 2004. These acquisitions are also expected to impact the Company’s overall seasonality pattern, since many of the acquired stores operate in geographic areas that have different sales trends than the Company has experienced in the past. While the first quarter has historically been the Company’s weakest and the third quarter the strongest in terms of sales and earnings, overall results are now expected to be more heavily skewed toward the last half of the year.

     During the quarter ended September 30, 2004, the Company was negatively impacted by four major hurricanes that affected Florida and the East Coast of the United States. The Company operates approximately 170 stores, representing 28.2% of the total Company-operated retail stores, in the affected areas. The hurricanes caused numerous store closures due to power outages, property damage and evacuations. The financial results of the impacts are reflected in the accompanying consolidated financial statements.

Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30, 2003

     Net sales (which equals revenues from sales of products and mechanical services, plus franchise and royalty fees, less estimated returns, allowances and customer rebates) increased 31.5% during the third quarter of 2004 compared to the third quarter of 2003. The $114.1 million increase in total net sales included a $112.6 million, or a 58.8%, increase for the retail segment and a $1.5 million, or 0.9%, increase for the wholesale segment. Of the $112.6 million gain in retail net sales during the quarter, $71.4 million was due to increased tire sales and the remaining $41.2 million was related to increased service revenues at Company-operated stores and sales of products other than tires. The increase in retail sales dollars was principally due to a 37.6% gain in retail unit volume due entire to the acquisition of NTW. In addition, the average retail tire sales price was 17.2% greater than in the third quarter of 2003 due largely to changes in the product mix, principally driven by the acquisition of the NTW stores. The 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 third quarter of 2003. At the end of September

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2004, the Company had 245, or 68.6%, more Company-operated stores and 8, or 1.4%, more franchised stores than at September 30, 2003. The increase in sales was partially offset by approximately $4.0 million in lost sales due to the hurricanes. The above-mentioned NTW retail stores acquired after the third quarter of 2003 contributed $109.1 million to the overall $112.6 million retail sales increase during the period.

     Net sales within the wholesale segment increased $1.5 million, while tire units declined 5.1% as compared to the third quarter of 2003. The increase in net sales was primarily due to a 10.2% increase in unit tire sales prices, which was due to the pass-through of price increases from suppliers and a favorable shift in the product mix towards specialty tires which was partially offset by approximately $2.0 million in lost sales due to the hurricanes.

     The percentage of total sales attributable to tires declined from 78.7% in the third quarter of 2003 to 76.5% for the third quarter of 2004, due to the impact of service revenues contributed by the additional Company-operated stores. Total unit tire volume in the third quarter of 2004 increased 9.9% compared to the third quarter of 2003. Unit tire shipments for the replacement tire industry as a whole decreased approximately 3.6% in the third quarter of 2004 (based on preliminary data as of September 2004). Excluding the unit tire sales contributed by the acquired NTW stores and reflecting the effect of the hurricanes, total unit tire volume decreased 4.8% in the third quarter of 2004 versus the third quarter ended 2003. After adjusting for the effect of the hurricances total unit tire volume decreased approximately 3%. Average tire sales prices for the Company as a whole increased 16.4% in the third quarter of 2004 compared to the third quarter of 2003. The change in average tire sales prices was due largely to increased prices and favorable product mix changes as a result of the NTW acquisition.

     Gross profit increased $60.6 million from $114.7 million, or 31.6% of net sales in the third quarter of 2003 to $175.3 million, or 36.8% of net sales in the third quarter of 2004. The increases were primarily driven by the expansion of the Company’s retail segment with the addition of NTW. In addition, the Company’s retail expansion has resulted in greater purchasing leverage and an improvement in net purchase prices from tire suppliers. Gross profit percentages on sales by the Company’s retail and wholesale segments increased from 47.6% and 13.8%, respectively, in the third quarter of 2003 to 49.1% and 15.0%, respectively, in the current quarter.

     Distribution expenses increased $2.2 million from $15.8 million, or 4.4% of net sales in the third quarter of 2003 to $18.0 million, or 3.8% of net sales in the current quarter. The increase was primarily due to the retail acquisition of NTW in addition to the adverse impact of higher fuel prices. As a percentage of net sales, the improvement in the current quarter reflected improved cost leveraging associated with NTW, as well as improved efficiencies related to warehousing and product delivery expenses.

     Selling, administrative and retail store expenses increased by $56.5 million from $81.2 million, or 22.4% of net sales in the third quarter of 2003 to $137.6 million, or 28.9% in the current quarter. The increases were principally due to the greater number of Company-operated retail stores as a result of the NTW acquisition. Excluding the impact of expenses associated with the NTW stores acquired during 2003, selling, administrative and retail store expenses increased by $6.6 million, or 8.2%, versus an increase in comparable net sales of 1.4%. The resulting increase was due to the addition of 19 Company-operated retail stores as compared to the third quarter of 2003, $2.3 million in repair expenses related to damage caused by the four major hurricanes and $1.0 million in consulting fees related to the on-going assessment, documentation and testing of the Company’s control environment as required by Section 404 of the Sarbanes-Oxley Act.

     Net interest expense increased by $1.9 million, or 68.3%, in the third quarter of 2004 compared to the third quarter of 2003. The increase was due principally to an increase in average borrowing levels on the Company’s credit facility primarily used to fund the acquisition of NTW after the

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third quarter of 2003. The impact of the increased credit facility borrowings was partially offset by lower average borrowing rates associated with a decline in market interest rates and continued efforts by the Company to keep interest rate spreads to a minimum. Average credit facility borrowing rates in the current quarter were approximately 26 basis points less than in the third quarter of 2003.

     Net other income in the third quarter of 2004 increased by $1.0 million compared to the third quarter of 2003. The increase is principally due to the equity earnings in a joint venture. Net other income consisted primarily of the Company’s equity interest in joint ventures and net gains and/or losses on sales of assets and miscellaneous other income and expense items.

     The Company’s effective tax rate was 35.0% in the current quarter, compared to 36.5% in the third quarter of 2003. The lower effective rates in the current year were due principally to reduced provision for state income taxes.

Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003

     Net sales (which equals revenues from sales of products and mechanical services, plus franchise and royalty fees, less estimated returns, allowances and customer rebates) increased 44.2% during the first nine months of 2004 compared to the first nine months of 2003. The $419.0 million increase in total net sales included a $378.2 million, or 75.1%, increase for the retail segment and a $40.8 million, or 9.2%, increase for the wholesale segment. Of the $419.0 million gain in retail net sales during the nine months ended September 30, 2004, $229.5 million was due to increased tire sales and the remaining $189.5 million was related to increased service revenues at Company-operated stores and sales of products other than tires. The increased retail tire sales dollars was principally due to a 51.2% gain in retail unit volume. In addition, the average retail tire sales price was 14.8% greater than in the year-earlier period, due largely to changes in the product mix which was principally driven by the acquisition of the Merchant’s and NTW stores. The 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 and was partially offset by approximately $4.0 million in lost sales due to the four major hurricanes that affected Florida and the East Coast of the United States. The above-mentioned Merchant’s and NTW retail stores acquired after the first quarter of 2003 contributed $351.8 million to the overall $378.2 million retail sales increase during the period.

     The $40.8 million increase in net sales by the wholesale segment during the nine months ended September 30, 2004 was due in part to an 1.8% gain in unit tire shipments. In addition, the average wholesale tire sales price increased 8.9% in the current period compared to the nine months ended September 30, 2003 mainly due to the pass-through of price increases from suppliers and a favorable shift in the product mix towards specialty tires. These increases were partially offset by approximately $2.0 million in lost sales due to the hurricanes.

     The percentage of total sales attributable to tires declined from 79.2% during the nine months ended September 30, 2003 to 75.2% during the nine months ended September 30, 2004, due to the impact of service revenues contributed by the additional Company-operated stores. Total unit tire volume during the nine months ended September 30, 2004 increased 19.1% compared to the nine months ended September 30, 2003. Unit tire shipments for the replacement tire industry as a whole increased approximately 3.4% in the first nine months of 2004 (based on preliminary data as of September 2004). Excluding the unit tire sales contributed by the acquired Merchant’s and NTW stores and reflecting the effect of the hurricances, total unit tire volume increased 1.4% during the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. After adjusting for the effect of the hurricanes, total unit tire volume increased approximately 2%. The total unit tire volume was negatively impacted by a reduction in sales due to a change in a wholesale customer’s tire product line and a short-term shift in the Company’s wholesale segment’s focus required to meet the fulfillment demands during the initial product transition of the acquired NTW stores. Average tire sales prices for the Company as a whole increased 15.1% during the nine months ended September 30, 2004 as compared to the nine months ended

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September 30, 2003, due largely to increased prices and favorable product mix changes as a result of the Merchant’s and NTW acquisitions.

     Gross profit increased $213.8 million from $298.5 million, or 31.5% of net sales during the nine months ended September 30, 2003 to $512.3 million, or 37.5% of net sales during the nine months ended September 30, 2004. The increases are primarily driven by the expansion of the Company’s retail segment with the addition of Merchant’s and NTW. In addition, the Company’s retail expansion has resulted in greater purchasing leverage and an improvement in net purchase prices from tire suppliers. Gross profit percentages on sales by the Company’s retail and wholesale segments increased from 46.7% and 14.3%, respectively, during the nine months ended September 30, 2003 to 49.9% and 14.9%, respectively, during the nine months ended September 30, 2004.

     Distribution expenses increased $10.2 million from $44.6 million, or 4.7% of net sales during the nine months ended September 30, 2003 to $54.8 million, or 4.0% of net sales during the nine months ended September 30, 2004. The increase was primarily due to the retail acquisition of Merchant’s and NTW in addition to the adverse impact of higher fuel prices. As a percentage of net sales, the improvement in the current period reflected improved cost leveraging associated with Merchant’s and NTW during 2003, as well as improved efficiencies related to warehousing and product delivery expenses.

     Selling, administrative and retail store expenses increased by $193.6 million from $213.8 million, or 22.6% of net sales during the nine months ended September 30, 2003 to $407.4 million, or 29.8% during the nine months ended September 30, 2004. The increases were principally due to the greater number of Company-operated retail stores as a result of the Merchant’s and NTW acquisitions. The retail store expenses also included approximately $1.5 million in costs incurred during the three months ended March 31, 2004 associated with the conversion of the acquired NTW stores to the Company’s point-of-sale and operating systems and the replacement of a portion of NTW’s previous product assortment with product lines offered by the other Company-operated stores. Excluding the impact of expenses associated with the Merchant’s and NTW stores acquired during 2003, selling, administrative and retail store expenses increased by $20.5 million, or 12.3%, versus an increase in comparable net sales of 7.8%. The resulting increase was due to the addition of 19 Company-operated retail stores as compared to nine months ended September 30, 2003, $2.3 million in repair expenses related to damage caused by the four major hurricanes and $1.4 million in consulting fees related to the on-going assessment, documentation and testing of the Company’s control environment as required by Section 404 of the Sarbanes-Oxley Act.

     Net interest expense increased by $6.8 million, or 97.2%, during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. The increase was due principally to an increase in average borrowing levels on the Company’s credit facility primarily used to fund the acquisition of Merchant’s and NTW after the first quarter of 2003. The impact of the increased credit facility borrowings was partially offset by lower average borrowing rates associated with a decline in market interest rates and continued efforts by the Company to keep interest rate spreads to a minimum. Average credit facility borrowing rates in the current period were approximately 60 basis points less than in the nine months ended September 30, 2003.

     Net other income during the nine months ended September 30, 2004 increased by $1.0 million as compared to the nine months ended September 30, 2003. The increase is principally due to the equity earnings in a joint venture. Net other income consists primarily of the Company’s equity interest in joint ventures and net gains and/or losses on sales of assets and miscellaneous other income and expense items.

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     The Company’s effective tax rate was 35.3% during the nine months ended September 30, 2004, as compared to 36.0% during the nine months ended September 30, 2003. The lower effective rates in the current year were due principally to reduced provision for state income taxes.

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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 Exchange 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 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.

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 September 30, 2004, the Company owed $203.6 million to banks under its credit facilities, of which $191.2 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 $478,000 based on the outstanding balance which was not hedged at September 30, 2004.

Item 4. Controls and Procedures

     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 effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 disclosed in reports filed with the Securities and Exchange Commission for the Company and its consolidated subsidiaries.

     During the quarter ended September 30, 2004, there was no change in the Company’s system of internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

	(a)		Exhibits – see Index to Exhibits.
	(b)		During the quarter ended September 30, 2004, the Company filed the following reports on Form 8-K:

	(1)		A Form 8-K dated July 26, 2004 was filed which reported in Item 12, and included as an Exhibit the text of the Company’s press release reporting, its financial results for the quarter ended June 30, 2004.
	(2)		A Form 8-K dated September 15, 2004 was filed which reported in Item 8.01, and included as an Exhibit the text of the Company’s press release reporting, the financial impact of the Florida hurricanes.
	(3)		A Form 8-K dated September 22, 2004 was filed which reported in Item 8.01, and included as an Exhibit the text of the Company’s press release reporting, the restatement for the four quarters and the full year ended December 31, 2003 related to the change in its inventory valuation method from Last-In-First-Out (“LIFO”) to First-In-First-Out (“FIFO”).

INDEX TO EXHIBITS