UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ______________.
Commission File Number: 1-8833
BIG O TIRES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0392481
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
11755 East Peakview Avenue, Suite A
ENGLEWOOD, COLORADO 80111
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 790-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$0.10 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held as of March
26, 1996, by nonaffiliates of the registrant was $40,214,816.
As of March 26, 1996, the registrant had 3,317,840 shares of its $0.10 par
value common stock outstanding.
The information required by Part III hereof will be filed either as an
amendment to this Annual Report on Form 10-K or it will be filed with the
definitive Proxy Statement for the 1996 Annual Meeting of Shareholders.
Total Pages 213.
Exhibit Index Page 56.
1
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
(a) (1) GENERAL. The primary business of Big O Tires, Inc. (the "Company")
is to franchise Big O retail stores ("Retail Stores") and supply Retail
Stores with tires and related automotive products. On a limited basis, the
Company engages in site selection and real estate development for new Retail
Stores and owns and operates Retail Stores. As used herein, the term Retail
Stores also includes the Company-owned Retail Stores unless a distinction is
warranted for clarification. Each independently owned corporation,
partnership and sole proprietorship that has entered into a Franchise
Agreement with the Company is hereinafter referred to as a "Franchisee" or
collectively as the "Franchisees."
As shown below, at January 31, 1996, the Company had 387 Retail Stores, 382
of which were franchised and 5 of which were Company-owned. The Company also
distributes its products at wholesale prices to 37 unaffiliated retail tire
stores in British Columbia, Canada (the "Canadian Licensees"), with which the
Company has a user agreement.
The Company sells to its Franchisees and Canadian Licensees an exclusive line
of premium private label Big O brand passenger, light truck, recreational and
high performance tires that are primarily manufactured by The
Kelly-Springfield Tire Company (a division of The Goodyear Tire & Rubber
Company ("Goodyear")) ("Kelly-Springfield") and by Continental General Tire,
Inc. (a subsidiary of Continental AG) ("General"). The Company currently
distributes tires, its exclusive ProComp high performance wheels and other
automotive products through its Regional Sales and Service Centers ("RSC")
located in the states of Idaho, Indiana and Nevada. During the first half
of 1995, the Company consolidated two (2) of its RSCs into a single facility
located near Las Vegas, Nevada (the "Las Vegas RSC").
The following table sets forth the number of Retail Stores, by marketing
region, as of January 31, 1996:
REGION # OF FRANCHISEE # OF JOINT VENTURE # OF COMPANY OWNED TOTAL
------ OWNED STORES STORES * STORES -----
--------------- ----------------- ------------------
SOUTHWEST REGION
(includes Arizona, southern California, 102 1 1 104
southern Nevada; and southern Utah)
WESTERN REGION
(northern California and western Nevada) 95 1 0 96
NORTHWEST REGION
(Idaho, Montana, northern Nevada, Oregon, 77 1 2 80
Utah, Washington and Wyoming)
CENTRAL REGION
(includes Colorado, Nebraska, New Mexico, 70 0 0 70
Oklahoma, South Dakota, Texas and Wyoming)
SOUTHEAST REGION
(includes Indiana, Kentucky and North 35 0 2 37
Carolina)
TOTAL 379 3 5 387
* THE COMPANY, THROUGH ITS WHOLLY-OWNED SUBSIDIARY, BIG O RETAIL
ENTERPRISES, INC., A COLORADO CORPORATION, HAS ENTERED INTO RETAIL JOINT
VENTURES WITH EXISTING FRANCHISEES SO THAT ADDITIONAL RETAIL STORES COULD BE
OPENED AND, IN CERTAIN SELECTED CASES, MAY BUY AN INTEREST IN EXISTING RETAIL
STORE(S) THROUGH AN EXISTING JOINT VENTURE. THE COMPANY LOOKS TO ITS JOINT
VENTURE PARTNER TO MANAGE THE RETAIL STORE AND TO PURCHASE THE RETAIL STORE
FROM THE JOINT VENTURE AFTER THREE (3) YEARS OF OPERATION USING A FORMULA
ALLOWING FOR A DETERMINATION OF THE PURCHASE PRICE TO BE PAID TO THE COMPANY.
In 1995, twenty-one (21) Franchisee owned Retail Stores were opened and
twelve (12) were closed. The Company acquired one (1) previously franchised
Retail Store in the state of Washington, which continues to be operated as a
Company owned Retail Store. The Company continues to look to convert
existing retail tire stores and retail tire store chains to the Big O system
as part of its growth strategy, but has met with limited success using this
growth strategy. The Company has not emphasized the use of Company-owned
Retail Stores as part of its business, but in certain circumstances the
Company may acquire tire stores and/or retail tire store chains as a means to
grow its business.
2
SHAREHOLDER PROPOSAL. At the Annual Meeting of Shareholders held in June
1994, the shareholders adopted a resolution requesting the Company to engage
an investment banker to explore all alternatives to enhance the value of the
Company. In implementing this resolution, the Company's Board of Directors
established the Investment Committee of the Board which retained PaineWebber
Incorporated ("PaineWebber") to assist in fulfilling this shareholder
proposal. In September 1994, the proponent of the June 1994 shareholder
proposal, upon invitation by the Board, began assisting the Investment
Committee in this process. In December 1994, the Company announced that the
Investment Committee had agreed to enter into a period of exclusive
negotiations with, and agreed to pay certain expenses of, a group of Company
officers, managers and Franchisees ("Dealer-Management Group") that made an
offer to acquire the outstanding shares of the Company for $18.50 per share,
subject to certain conditions including the Dealer-Management Group's ability
to obtain the necessary financing. The proposed transaction would have taken
the Company private and was led by the Company's President, other officers
and managers and Franchisees acting on behalf of certain of the Company's
Franchisees. In February 1995, the Company was notified that the
Dealer-Management Group elected not to continue negotiations to acquire the
Company due to the difficulties in obtaining commitments for the elements of
financing necessary to consummate the acquisition and the inability of the
representatives of the Franchisees and management to reach mutual
understandings on certain fundamental issues relating to the acquisition.
At the time the Dealer-Management Group withdrew the offer to acquire the
Company, the Company was also informed by representatives of management that
they continued to be interested in completing a purchase of the Company on
mutually agreeable terms to shareholders, management, certain Franchisees and
the Board. The Company advised the management representatives that it would
consider carefully credible proposals but the Board of Directors would
continue to review alternatives to enhance the value of the Company.
In April 1995, the Company received a proposal from the Dealer Management
Group to acquire the Company for a cash price of $16 per share and on
substantially the same other terms as the December 1994 proposal. The
Investment Committee determined not to accept the $16 per share and advised
the Dealer Management Group that it would be open to further negotiations at
a more favorable price. In June 1995, the Company's Board of Directors
approved in principle a proposal to recommend to the Company's shareholders
that the shareholders sell at a price of $16.50 per share to a group
consisting of a group of the Company's franchised dealers and senior managers
(the "Acquisition Group"). In July 1995, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement") with BOTI Holdings, Inc.
and BOTI Acquisition Corp., (collectively "Purchaser"), companies formed by
the Acquisition Group to accomplish the merger. The Merger Agreement was
subject to approval of the Company's stockholders. Among other conditions,
the consummation of the merger was also subject to the receipt of fairness
opinions, the Acquisition Group obtaining acceptable financing, participation
in the acquisition by not less than 80% of the shares held by the Company's
ESOP and participation in the acquisition by not less than 85% of the
franchised Big O Tire stores as of the date of the Merger Agreement, which
later was reduced to 82%. In March 1996, the Acquisition Group provided the
Company a review as to the status of all of these conditions and requested an
additional 180 day exclusive period in order to complete the transaction
contemplated by the Merger Agreement. On March 13, 1996, the Company
terminated the Merger Agreement.
In September 1995, TBC Corporation ("TBC") and certain members of the
Acquisition Group discussed TBC's potential interest in acquiring an interest
in the Company. In December 1995, TBC expressed its desire to perform due
diligence regarding the Company. Effective December 20, 1995, the Company, the
Purchaser and TBC entered into an agreement whereby the Company, at the
request of the Purchaser, agreed to facilitate TBC's investigation of the
Company. The Company also agreed to indemnify TBC against any claims,
expenses and costs that TBC may incur by reason of its investigation of the
Company and agreed, without making TBC whole for TBC's costs and expenses of
investigation, not to solicit or participate in any discussions with or
provide any information to any person or group (other than the Dealer
Management Group) regarding the acquisition of the Company until the earlier
of TBC's announcement that TBC did not wish to acquire the Company or March 20,
1996. TBC and the Company also agreed to hold in confidence nonpublic
information received by each from the other. Thereafter, the Company
provided information to TBC and its advisors. The Company entered into a
Letter of Intent with TBC dated March 13, 1996 relating to TBC's proposed
acquisition of all the outstanding shares of the Company in a transaction in
which the Company would be merged into a subsidiary of TBC.
3
Under the terms of the Letter of Intent, Company shareholders would receive a
cash price of $16.50 a share, subject to possible reductions based on a final
tabulation of transaction costs and other expenses, which the Company does
not believe will result in material adjustments, if any. The consummation of
the transaction is subject to certain conditions including the execution of a
Definitive Merger Agreement by April 15, 1996, unless extended, the Company
and TBC complying with any required regulatory filings; the execution of
employment agreements between TBC and certain officers of the Company; TBC
obtaining financing for the transaction; extensions of certain franchise
agreements expiring prior to 2001, and the approval of the merger by the
Company's shareholders.
(a) (2) INFORMATION REQUIRED FROM REGISTRANTS ON FORM S-1
Not applicable.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
During the three years ended December 31, 1995, over ninety percent (90%) of
the Company's revenues, operating profit and identifiable assets have been
attributable to one industry segment, i.e., ownership, operation and
franchising of Retail Stores and the related wholesale and retail marketing
of tires and other automotive aftermarket products to or through such Retail
Stores. During this same three year period, less than ten percent (10%) of
the Company's revenues, operating profit and identifiable assets have been
attributable to the Company's development of real estate sites for Retail
Stores through its wholly-owned subsidiary, Big O Development, Inc.
("Development"), and one partnership.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company's principal business is franchising of Retail Stores and
supplying these stores with tires and related automotive aftermarket products
through the Company's RSCs. The Retail Stores are located primarily in the
western United States as indicated on the chart on page 2. The Company also
distributes its products to the 37 Canadian Licensees (see "Canadian
Operations" on page 6).
The Company has been a member of Summit Tire and Battery, Inc. ("Summit"),
an independently owned buying group based in Brandon, Florida, since March
1994. In certain parts of the country, Summit provides the Company exclusive
access to the Heritage line of passenger and light truck tires. The Heritage
brand is manufactured by Kelly-Springfield.
Subject to certain Company established limitations for development
activities, the Company has a real estate development program involving
Retail Store site selection and development by one of the Company's
subsidiaries, and the subsequent sale of these developed store sites to
Franchisees that qualify for Small Business Administration ("SBA") guaranteed
loans. In certain instances, the Company may provide subordinated loans (as
to collateral) not to exceed $50,000 for the prospective Franchisee to
qualify for this SBA guaranteed funding. The Company anticipates that this
financing will be repaid to the Company by the Franchisee, amortized over a
period not to exceed five (5) years. During 1995, permanent financing had
been approved for ten development projects through AT&T Capital Corporation
("AT&T"). The agreement with AT&T was terminated in August 1995. While the
Company plans on continuing this real estate development program, the extent
of this development has been reduced significantly. The Company anticipates
funding future projects through its revolving line of credit, joint ventures
or directly with or through developers.
The Company has also assisted in obtaining financing for new Retail Store
development with an unrelated third party financing company by providing debt
guarantees for joint ventures. The Company also has provided lease
guarantees to developers on behalf of Franchisees and straight financing for
Retail Stores developed internally.
In February 1995, the Company acquired the Las Vegas RSC at a total cost of
approximately $7.7 million. Expenditures for new equipment, including
computer hardware and software to operate this facility totaled approximately
$1.3 million in 1995. The Company is financing this equipment through its
existing line of credit.
4
(i) PRODUCTS, SERVICES AND MARKETING.
FRANCHISE OPERATIONS:
With respect to the Company's franchise operations, the primary products
provided and services related thereto are described in the franchise
agreement with each Franchisee (the "Franchise Agreement"). The Franchise
Agreement essentially grants to the Franchisee a ten (10) year license to
sell Big O brand tires and to use Company trademarks and trade secrets in
the operation of a Retail Store at a specific location within a trade area
defined in the Franchise Agreement.
Franchisees are generally required to capitalize their business with
$157,500 to $366,600 which covers the initial franchise fee, inventories,
equipment, working capital, certain deposits and initial advertising costs.
Initial franchise fees range between $7,000 to $21,000 depending on the
Company's classification of the prospective Franchisee, as defined in the
Franchise Agreement. In addition to the initial franchise fee, all
Franchisees are required to pay monthly royalty fees of 2% of each Retail
Store's prior month's gross sales, as defined in the Franchise Agreement.
The Company offers a unique franchise program characterized by high
standards, quality products and ongoing support designed to establish and
grow successful Retail Stores. Most Franchisees are owner/operators,
instead of passive investors. Management believes that a Franchisee's
active involvement in the day-to-day operation of a Retail Store enhances
its performance. The Company provides (i) training to the Franchisee and
its supervisory personnel, (ii) assistance in store design and site and
equipment selection, (iii) assistance in store construction and
development, (iv) insurance programs, standardized manuals and computerized
accounting systems, (v) Big O brand and other approved tires and related
automotive aftermarket products, and (vi) continuing support with respect
to operations, marketing, merchandising and new product introductions. The
Company also promotes regional accounting centers, which may be nonprofit
corporations, cooperatives, mutual benefit corporations, or trusts designed
to provide assistance to the Franchisees. In an effort to build
efficiencies in the Company's franchise program on a national basis, a
nationally based advertising fund called Impact Advertising, Inc.
("Impact") is promoted by the Company to collect advertising fees from
participating Franchisees and disburse these funds for advertising
expenditures, which includes the development of advertising campaigns.
The Company also provides certain materials, e.g., broadcast and print
advertising materials, point of sale materials, equipment, uniforms and
other wearables and services to each Franchisee at varying costs and
assistance in obtaining financing through unaffiliated financing companies
and SBA qualified lenders.
The Company has established and requires Franchisees to meet certain
uniform guidelines for physical characteristics, inventories, efficiency,
speed and courteous service. Each new Franchisee or manager is required to
attend formal training covering sales, service, financial management,
personnel, business ethics, legal compliance, merchandising and other
management skills. In addition, Franchisees are to perform in accordance
with written standards outlined in manuals provided pursuant to the
Franchise Agreement. After the initial training requirements are met, the
Company offers regional training classes to maintain and improve this
expertise.
The Company's growth depends to a large measure on its ability to attract,
retain and maintain good relationships with Franchisees. Changes in that
relationship could cause existing Franchisees to purchase less merchandise
from the Company and more from its competitors or to decline to renew their
franchises upon expiration. Factors beyond the Company's control may
adversely affect the Company's relationship with its Franchisees. In
addition, there is no assurance that the Company will be able to continue
to attract and retain suitable Franchisees. The Company also loses
franchises from time to time due to financial and other problems of
Franchisees. Accordingly, while a significant part of the Company's
strategy is to increase the number of its franchised Retail Stores, there
is no assurance that it will be able to do so. In 1995, six (6) Franchise
Agreements expired and two (2) of these franchisees reapplied for a new
franchise agreement and were renewed and four (4) were transferred between
Franchisees resulting in new Franchise Agreements being executed. During
1996, one (1) Franchise Agreement is due to expire, and in 1997, four
5
(4) Franchise Agreements are due to expire, with the remaining Franchise
Agreements expiring in the eight years thereafter, including 101 Franchise
Agreements which will expire in 1999.
The Company is developing a master franchise program whereby the Company
intends to sell master franchises for specific areas where the master
franchisee will be authorized to offer franchises for Retail Stores, be
required to provide certain services in the specific area, and have the
opportunity to function as a distributor of the Company's products. The
Company anticipates that the master franchise program will be used
primarily to expand Retail Stores in areas of the eastern United States
where the Company does not yet have established franchised stores and
distribution, and possibly to expand internationally. As of March 22,
1996, the Company had not sold any master franchises.
CANADIAN OPERATIONS:
Since 1962, certain Canadian retail tire stores within the Province of
British Columbia, Canada, have been using the Company's trade name and
previous versions of the Company's trademarks, logos and colors. As of
March 22, 1996, 37 Canadian Licensees have signed user agreements for the
Company's new trademark, logo and colors, and efforts continue to sign
additional Canadian tire stores. While the Company has invited the
Canadian Licensees to become Franchisees under the Company's franchise
system, the Canadian Licensees have chosen to look to the Company only as a
wholesale supplier.
During 1995, the Company sold $85,000 in goods to 37 Canadian Licensees.
In November 1995, the Company began distributing to the Canadian Licensees
through its Boise, Idaho, RSC. Canadian sales were previously being
distributed by a subsidiary of the Goodyear Tire and Rubber Company.
DISTRIBUTION:
The Company distributes Big O branded passenger and light truck tires,
other approved brands of tires and automotive aftermarket products and
certain material and equipment used in the operation of Retail Stores.
Retail Stores may stock and sell other tires and automotive aftermarket
products which have been previously approved by the Company even though
such products are not distributed by the Company. The Company does not
manufacture any of the products it sells. During 1995, approximately 97%
of the Big O branded tires were manufactured by Kelly-Springfield, with the
remainder produced primarily by General. The termination of the May 1993
Marketing Agreement provided that General was to continue to discharge its
obligation to the Company and its Franchisees under a special warranty
program until July 26, 1995. Thereafter, all subsequent adjustments will
be subject to General's then current warranty adjustment policy. In 1995,
General continued to provide and sell private brand tires, but not Big O
brand tires to Tire Marketers Association ("TMA"), a former division of the
Company that supplied tires to distributors predominantly based in the
eastern United States. Effective March 31, 1995, the Company closed on a
cash sale of the assets, trademarks and copyrights of TMA to an unrelated
third party. TMA had been an operating division of the Company that
marketed non-Big O branded products to retailers outside the Big O system,
and was acquired by the Company in June 1993.
During 1995, the Company continued its membership with Summit, an
independently owned buying group. This agreement provides that Summit will
provide the Company exclusive access to the Heritage line of passenger and
light truck tires, manufactured by Kelly-Springfield.
In August 1991, the Company entered into a supply agreement with Kelly-
Springfield for the manufacture and sale to the Company of Big O branded
tires (the "Kelly Supply Agreement"). The term of the Kelly Supply
Agreement is a calendar year, which is automatically renewed for the next
calendar year unless either party elects to terminate upon three (3) months
prior written notice. The Kelly Supply Agreement was automatically renewed
for 1993, 1994, 1995 and 1996. Under the Kelly Supply Agreement, the
Company is required to provide Kelly-Springfield with monthly non-binding
estimates of the Company's tire requirements, by line and type, for the
succeeding three months, and on August 1 of each year, an itemized non-
binding forecast of the quantities of tires the Company will require during
the next calendar year.
6
The Company believes that it has adequate supply arrangements to meet
anticipated demand, subject to industry wide shortages or disaster.
However, the Kelly Supply Agreement only commits Kelly-Springfield to fill
those portions of the Company's monthly orders that Kelly-Springfield
agrees to fill. The obligation of Kelly-Springfield is also subject to
circumstances causing delay that are outside of its reasonable control.
BIG O BRAND MARKETING PROGRAM:
During 1995, the Company continued its Cost-U-LessTM marketing
program, a reduction in the cost of Big O brand tires to the Company's
Franchisees (with a small reduction in cost from the Company's suppliers).
This allowed the Franchisees to offer Big O brand products to retail
customers at lower retail pricing which generally allowed the Franchisees
to be more competitive in their markets.
In order to differentiate the Company's products in a commodity market,
Big O brand tires are sold with a "Premium Tire Service Policy" and a
"Limited Warranty for Free Replacement" (certain exceptions apply to non-
recreational vehicle light truck tires).
The Premium Tire Service Policy provides certain services and products free
of charge, which are generally provided at an additional charge from other
tire stores. These include free mounting and balancing of the new tires,
free wheel weights and new rubber valve stems, free flat repair, free
rotations and any necessary rebalancing throughout the Big O brand tire's
life.
The Limited Warranty for Free Replacement provides "no charge" service for
mounting, balancing, new valve stems, lifetime rebalancing service,
lifetime flat repair service, free rotations and free replacement during
the (i) first three years of ownership on certain quality Big O brand
tires; (ii) first four years of ownership of certain premium Big O brand
tires, and (iii) and the entire life of the tire on certain ultra premium
Big O brand tires that fail during the life of the tire tread due to
workmanship, material defects or road hazards.
The Company's suppliers have financial responsibility for workmanship and
material defect claims during the first 2/32 of an inch of tread in the
case of Kelly-Springfield supplied tires, and the first 10% of the tread
life in the case of General supplied tires, with prorations to the Company
thereafter. The Kelly Supply Agreement provides maximum limits on
workmanship and material defects for which the Company will have any
financial responsibility on each line and size of Big O branded products.
The Company or the Retail Stores have financial responsibility for
substantially all of the other costs associated with the Premium Tire
Service Policy and Limited Warranty for Free Replacement programs beyond
these prorations.
The Company's sales by product in 1995 were as follows (in thousands):
% OF TOTAL
UNITS REVENUES PRODUCT SALES
----- -------- -------------
Big O brand tires 1,570 $90,795 70%
Other brand tires 588 $22,059 17%
Wheels, shocks and other accessories 1,208 $16,088 13%
The Company believes that a Franchisee's decision to purchase Big O brand
products is based on several factors, including product profitability,
knowledge of Big O products, services and programs, the level of product
support provided by the Company, and the availability of products that meet
the quality demands of the Retail Store's customers. The Company plans to
meet these requirements and thereby increase sales of Big O brand products
to Retail Stores by continuing to provide (i) a broad line of quality
products that command higher margins for Retail Stores and that meet
changing consumer demands, (ii) extensive training for store personnel,
(iii) support of Retail Store operations, marketing, merchandising, and new
7
product introductions, and (iv) upgraded product quality, particularly as
measured by the industry's Uniform Tire Quality Grading Standards. Unit
sales of Big O brand tires increased by 11.4% in 1995 as compared to 1994,
following 1994's Big O brand unit sales increase of 6.5% as compared to
1993.
(ii) STATUS OF PRODUCT OR SEGMENT.
The Company has made no announcement of, nor has the Company otherwise made
public any information about any new product or industry segment requiring
investment of a material amount of the Company's total assets or which is
otherwise material to the Company's operations, other than its ongoing
investment in new product lines to meet Retail Store needs and its
consolidation of some of its warehouse facilities.
(iii) RAW MATERIALS.
The Company does not manufacture any products. The Company orders Big O
brand tires anywhere from 18 - 180 days before the beginning of the month
in which they are produced. Manufacturers normally produce these tires and
ship them directly to the appropriate RSCs thereby eliminating
manufacturers' inventories of Big O brand product. Because of the lack of
"safety stock," any unforecasted change in sales trends or interruptions in
production schedules may result in inventory shortages or outages.
If the Company should lose Kelly-Springfield as a supplier at a time when
there is sufficient production capacity within the tire manufacturing
industry, management believes the Company could accomplish a rapid and
orderly transition to a new supplier(s). If, however, production capacity
were limited, such as was experienced in 1988 and 1989, a change in
suppliers could be extremely difficult and could cause the Company to again
experience significant product shortages.
While the Company cannot completely assess the impact on its financial
performance if an industry-wide shortage, labor strike or natural disaster
should occur, such circumstances might result in higher costs, higher sales
prices and possibly lower demand.
In 1995, the Company received an approximate 3% price increase from its
suppliers on tires and other products. The Company has received notice of
a possible price increase from its suppliers of tires and other products to
be implemented in 1996. However, this increase has yet to be implemented
due to the current competitive pressures within the industry. Since price
increases are initiated by manufacturers and are then subject to
competitive pressures, the original announced increases are sometimes
reduced or rolled back. An increase in cost, over a sustained period, may
be significant to the overall cost of sales and working capital
requirements of the Company, particularly if sales decrease. However, the
tire industry in general, and the Company specifically raises prices in
response to such increases. As the cost of raw materials increases for all
manufacturers, the resulting costs are passed through, in the form of
higher prices, to the manufacturers' customers, i.e., distributors and
retailers, such as the Company. Such distributors and retailers, in turn,
increase their prices, and therefore the price increases are ultimately
borne by the consumer.
Should price increases occur, management believes that these increases will
be borne proportionately throughout the industry, as the pricing formula
used usually results in percentage margins which actually increase gross
profit (dollars) for distributors and retailers.
(iv) PATENTS, TRADEMARKS, LICENSES, AND FRANCHISES.
At January 31, 1996, the Company had 382 franchised Retail Stores operating
pursuant to Franchise Agreements. Please refer to "Products, Services and
Marketing" above, for a further explanation of the Company's franchises and
"Canadian Operations" above, for a further explanation of the Canadian
Licensees. The existence of the Franchise Agreements is of extreme
importance to the Company since almost all of the Company's revenue is
generated from sales to these Franchisees and from monthly royalty fees.
8
The Company is the owner of various United States, Canadian and state
trademark and service mark registrations and applications for marks used in
connection with the Company's tires and tire retailing concepts. These
trademarks and service marks include "Big O", and numerous secondary marks
for individual products and advertising slogans.
The Company is aware that two retail tire companies operating "Big 10"
outlets in the states of Alabama, Florida, Georgia, Louisiana and
Mississippi have raised issues regarding the Company's use of "Big O" in
such areas. After Big 10's national trademark registration expired, Big 10
attempted to obtain reinstatement and the Company has opposed this request.
The Company does not currently have any Retail Stores operating in
territories served by the other companies and the matter does not affect
the Company's ability to use the name "Big O" where currently used. Should
the Company begin franchising operations that overlap or are proximate to
those served by the Big 10 companies, it is possible that such companies
may contest usage of the Company's trade name and trademarks in such areas.
The Company does not own any United States or foreign issued patents or
pending patent applications.
(v) SEASONALITY.
The Retail Stores experience some seasonal variation in product sales
because tire sales are generally greater during the summer than in the
winter months. The Company generally experiences some seasonality,
although not to the same extent that the Retail Stores do, as the Company
maintains sales to certain Retail Stores, e.g., snow tires, that offset the
trend on a national basis.
(vi) WORKING CAPITAL ITEMS.
The Company's trade accounts receivable increased by $1,090,000 in 1995.
Approximately half of this increase resulted from the increased sales
associated with the Cost-U-LessTM marketing program. The remaining
increase in receivables balance is associated with slower payments from the
Company's customers. As a whole, the tire industry generally sells product
on varying extended payment terms, up to 180 days. The standard credit
terms extended by the Company to the Retail Stores are 3%/15, 2%/30,
COD/31. Through arrangements with manufacturers regarding struts, the
Company has arranged terms to encourage Retail Stores to stock sufficient
quantities and varieties to meet market demands. For certain items,
primarily snow tires, the Company provides extended payment terms similar
to those offered by wholesalers.
Of the Company's $3,171,000 in notes receivable at December 31, 1995,
$579,000 relate to the sale of Company-owned Retail Stores to Franchisees.
$2,075,000 of these notes receivable relates to trade receivables that have
been placed on notes as a financial strategy to maintain sales to
financially limited, franchised Retail Stores. By placing these Retail
Stores on level monthly payments, and with the development of a business
plan for each such Retail Store, management is attempting to assist the
Franchisees in reaching financial success while improving repayment
options. In 1995, the Company sold approximately $1,014,000 of long term
notes receivable.
The Company targets a 45-day inventory of Big O brand tires, and lesser
inventory levels for other tires, wheels, and related automotive
aftermarket products. Big O brand inventory levels are greater than those
normally carried by tire distributors because of the limited availability
due to production scheduling and lack of supplier floor stocks. The
Company has and will increase its Big O brand inventory due to anticipated
shortages, potential strikes and minimum production runs required by
suppliers. In lieu of obtaining extended payment terms generally provided
by manufacturers, the Company has negotiated lower net pricing from
suppliers. The Company periodically obtains extended payment terms on
purchases while maintaining this lower net pricing.
9
As part of the Company's warranty and marketing programs, Retail Stores
have the right to return certain merchandise to the RSCs for credit. The
Company believes that its warranty program provides certain significant
marketing advantages, but it also results in higher warranty expense to the
Company than is normal in the industry. Some of this expense has been and
will be offset by payments from manufacturers.
The increase in warranty expense in 1995 appears to have primarily been the
result of a higher ratio of road hazard type failures in the current
product lines as a percent of production, than was experienced with
previous product lines. This higher percent of failure, coupled with
increased Big O brand product sales, resulted in a greater number of tires
replaced under warranty than was anticipated. The Company does not receive
compensation from the manufacturers for road hazard tire failures.
Subject to Company established limitations, the Company has a real estate
development program involving Big O retail store site selection and
development by one of the Company's subsidiaries, and the subsequent sale
of these developed store sites to Franchisees that qualify for Small
Business Administration ("SBA") guaranteed loans. In certain instances,
the Company may provide subordinated loans (as to collateral and payment)
not to exceed $50,000 for the prospective Franchisee to qualify for this
SBA guaranteed funding. The Company anticipates that this financing will
be repaid to the Company by the Franchisee, amortized monthly over five (5)
years. During 1995, permanent financing had been approved for ten
development projects through AT&T Capital Corporation ("AT&T"). The
agreement with AT&T was terminated in August 1995. While the Company plans
on continuing this real estate development program, the extent of this
development has been reduced significantly. The Company anticipates funding
future projects through its revolving line of credit, joint ventures or
directly with developers. At December 31, 1995, Development had $4,861,000
invested in acquisition and construction in progress for fourteen (14)
sites, which was primarily financed from the earlier sale of notes
receivable and the Company's revolving credit agreement.
As additional Retail Stores are added, additional working capital for
accounts receivable, inventories, and certain real estate financing will be
needed. Accounts receivable financing is anticipated to be supplied
through the Company's existing credit facilities; inventory growth will be
financed partially by the Company's suppliers and partially through the
Company's existing credit facilities; and real estate financing will be
provided by a combination of the Company's revolving line of credit and
limited permanent (term) financing.
(vii) CUSTOMER DEPENDENCE.
Since the Company primarily sells its products to 382 Franchisees and 37
Canadian Licensees, its customer group is very limited. Of this customer
group, the Company does not depend upon a single customer, or a limited
number of customers, for its revenues, the loss of any one or more of which
would have a material adverse effect on the Company. However, certain
Franchisees (and Franchisee groups) continue their individual growth and
are becoming more significant customers.
Approximately 28% of the Company's sales were made to Retail Stores located
in the State of California, which includes sales made to the Company's
largest Franchisee who is affiliated with 28 Retail Stores. Total
California Retail Stores constitute about 38% of the total Retail Stores.
As a result, a high portion of the Company's receivables and credit risks
are concentrated in California with the result that adverse conditions or
adverse publicity affecting retail operations in California could more
significantly affect the operating results of the Company than if the
stores were more geographically diversified. In addition, at December 31,
1995, receivables and financial guarantees totaling approximately
$7,320,000 were associated with six (6) Franchisees who own and operate
multiple Big O Retail Stores. Of these six Franchisees, receivables and
financial guarantees totaling approximately $3,960,000 were associated with
one multiple store owner. Adverse financial results with these Franchisees
could adversely affect the Company more significantly than if the credit
risks were less concentrated.
10
(viii) BACKLOG OF ORDERS.
At March 22, 1996 and March 24, 1995, there were no material backlogs of
orders. Any sustained backlog the Company experiences with its suppliers
creates a backlog in fulfilling orders from the Retail Stores and Canadian
Licensees.
(ix) GOVERNMENT CONTRACTS.
The Company is not involved with any contracts or subcontracts with the
government which may allow for the renegotiation of profits or the
termination of such contracts at the election of the government.
(x) COMPETITION.
Since the Company is primarily a distributor to its Retail Stores and the
Canadian Licensees, its success depends on the retail success of its
Franchisees and Canadian Licensees. Both the tire aftermarket and under-
car service businesses are highly competitive. Through the Retail Stores
and Canadian Licensees, the Company competes with major tire manufacturers
who have retail tire stores, national and regional tire chains, traditional
department stores, independent merchants, and general, full range, discount
and warehouse club stores. Many of the Company's competitors are larger in
terms of sales volume, have access to greater capital and management
resources, and have been operating longer in particular geographic areas.
Management believes that price competition in the geographical markets
served by the Company continues to intensify.
Retail competition comes in the form of price, service, warranty, product
performance, product innovation, location or differing variations of each
of these issues. Although competition varies by geographic area, the
Company believes that it generally has a favorable competitive position in
terms of price, product line, value, merchandising, warranty and customer
service. With the implementation of the Company's Cost-U-LessTM program
and the continuation of the Premium Tire Service Policy and the Limited
Warranty for Free Replacement, the Company believes that its marketing
programs are equal to or exceed any such programs offered by its
competitors.
Franchise sales are also highly competitive as the Company competes with
other franchisors, some of which are larger, have better name recognition
and access to larger capital resources and have been operating longer than
the Company. Management believes that the competition for the sale of
franchises has increased and will intensify due, in part, to the entry of
new franchisors and the growth of existing franchisors.
The competitive conditions for real estate development differ substantially
from those the Company faces in the retail tire and franchise markets. The
success of the Company's real estate development lies in obtaining sites
that can be developed into store facilities that meet Franchisees'
requirements at reasonable rental rates or sales prices. Since the prime
customers for the Company's real estate development are its Franchisees,
development of real estate can affect the growth of Retail Stores.
Competition for real estate development comes from many sources, including
other retail tire companies, other franchisors, e.g., fast food restaurants
and gas stations, other retailers, and other businesses.
(xi) RESEARCH AND DEVELOPMENT.
The Company does not engage in any significant research and development
activities, and no material amount was spent by the Company on research and
development activities.
(xii) ENVIRONMENTAL REGULATIONS.
The Company is subject to the ever expanding purview of federal, state and
local environmental laws relating to spillage, noise, air quality and
disposal of waste products. The Company believes it is in general
compliance with all applicable environmental laws and has adopted a policy
of requiring Phase I
11
environmental studies associated with any new real estate projects or
the acquisition of any existing locations before such transactions are
consummated. The Company is not aware of any requirements to develop
environmental control facilities and has not made any material capital
expenditures for such facilities and does not anticipate doing so at
this time. The Company has periodically been involved with minor
clean-ups associated with certain Retail Stores in which the Company
has been a tenant or subtenant. Generally, the costs of these
clean-ups have not been material. Many states have enacted specific
tire disposal laws that, among other requirements, assess fees for
each tire disposed and designate specific locations for tire disposal.
This impacts the Company, its Franchisees and the retail customers as
such costs are usually passed on to the customers.
(xiii) EMPLOYEES.
At March 22, 1996, the Company employed 210 persons on a full-time basis
and 32 persons on a part-time basis.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Sales to Canadian Licensees totaled $85,000, $72,000 and $994,000, which
resulted in gross profits of $17,000, $8,000 and $97,000 in 1995, 1994 and
1993, respectively. In November 1995, the Company began distributing its Big O
branded product through its Boise, Idaho RSC, such product was previously being
distributed by a subsidiary of The Goodyear Tire & Rubber Company. While
distributing Big O branded product through a subsidiary of The Goodyear Tire &
Rubber Company, the Company did not recognize sales to its Canadian Licensees.
The Company has not maintained any identifiable assets in Canada.
ITEM 2. PROPERTIES
MORTGAGE
AMOUNT # OF STORES
SQUARE OWNED/ (IF ANY) AT SERVED
DESCRIPTION/LOCATION FOOTAGE LEASED 3/22/96 AT 3/22/96
-------------------- ------- ------ ----------- ----------
Boise, Idaho RSC(1)(4) 100,000 Owned $ - 0 - 117(2)
New Albany, Indiana RSC(3) 80,000 Owned $1,350,000 37
Las Vegas, Nevada RSC(4)(5) 300,000 Owned $ - 0 - 270
(1) The Company owns, in fee simple, approximately seven acres of land
immediately adjacent to this RSC. Of those seven acres, 6.24 acres are
under contract to be sold in 1996, leaving approximately .76 acres for
expansion.
(2) Includes distribution to 37 Canadian Licensees.
(3) The New Albany, Indiana, RSC is servicing the Retail Stores located in
Indiana, Kentucky and North Carolina. The cost of land acquisition and
construction of this facility was $1,985,000.
(4) The Boise, Idaho and Las Vegas, Nevada, properties serve as collateral for
$8 million of senior, secured notes sold by the Company in April 1994. The
proceeds from these notes were used to pay the previous mortgage on the
Boise, Idaho RSC, to pay a term loan with the Company's previous lender,
and the balance (approximately $4.2 million) to provide financing for the
acquisition of the Las Vegas RSC.
(5) The Las Vegas RSC contains approximately 294,000 square feet of warehouse
space and 6,000 square feet of office space. It services the Retail Stores
which had been serviced by the Denver, Colorado, and Ontario and
Vacaville, California RSCs. The Company continues to own in fee simple,
approximately five acres of land immediately adjacent to the Vacaville
warehouse facility. In March 1995, the Company closed its RSC in Denver,
Colorado, and consolidated its operations into the newly opened Las Vegas
RSC. Ontario RSC operations were fully converted to the Las Vegas RSC in
May 1995. While the Company is obligated under the lease for the Ontario
warehouse through May 1998, it sublet this property in June 1995 to an
unrelated third party for the remainder of the lease term.
12
The Company also has a lease for a 35,000 square foot warehouse and general
office space in Santa Ana, California, which was assigned to a joint venture
in which a subsidiary of the Company was a 50% joint venture partner. The
initial term of this lease expires in October 1996. In 1993, the subsidiary
of the Company agreed to sell its 50% interest in the joint venture to the
other joint venturer which assumed all obligations under this lease through
1996. Thus the Company will remain contingently liable for this lease
obligation through October 1996.
As of March 15, 1996, the Company is also responsible for leases on
approximately sixty-one (61) Retail Store locations, of which thirty-four
(34) locations are subleased to Franchisees or third parties, six (6)
locations are operated as Company owned or joint venture Retail Stores and
the leases for fifteen (15) Retail Stores are guaranteed by the Company. The
Company, in accordance with lease guaranty provisions, is also responsible
for the lease obligations on six (6) closed Retail Store locations.
ITEM 3. LEGAL PROCEEDINGS
As a franchisor and wholesale distributer, the Company licenses the use of
its trade names, service marks and trademarks to the Company's Franchisees
and other licensees and distributes tire products manufactured by the
Company's suppliers ("Suppliers") under the Company's trade names and
trademarks. As a result, the Company has been named as a defendant in a
number of lawsuits alleging negligent acts and/or omissions by the Company's
Franchisees or alleged defective workmanship and/or materials of the products
produced by the Suppliers. As of December 31, 1995, there were forty-two
such lawsuits pending in which the Company was named as a defendant. Of
those forty-two lawsuits, only five directly involve the Company. The other
thirty seven involve Franchisees of the Company or alleged tire failures of
the Company's Suppliers. In most of the forty-two lawsuits in which the
Company is named as a defendant, the claims for damages are not specific.
The Company believes that it is reasonably possible that a judgment may be
rendered against the Company in one or more of these lawsuits but the Company
is unable to estimate the amount of any such possible judgments. Over the
past five years, the judgments that have been rendered against the Company
and settlements made by the Company in lawsuits similar to the forty-two
lawsuits have not resulted in material losses to the Company. Therefore,
based upon such history, the Company does not believe that the Company will
suffer any material loss as a result of the forty-two lawsuits pending
against the Company as of December 31, 1995.
The Company requires that both the Company's Franchisees and Suppliers
indemnify and protect the Company against claims resulting from the alleged
negligent acts and/or omissions of the Franchisees and the alleged defects in
workmanship and/or materials of its Suppliers. In addition, the Company
carries its own insurance. The forty-two lawsuits referred to above are
being defended by attorneys who have been retained by the applicable
insurance companies and the Company is not actively involved in the defense
thereof. Historically, the Company has been able to rely upon its
Franchisees and Suppliers and their insurance carriers to defend, protect and
indemnify the Company against such types of lawsuits. Accordingly, even if a
judgment is rendered against the Company in any of these lawsuits, because of
the insurance and indemnities described above, management does not believe
that the Company will incur any material loss as a result of any such
judgment.
The Company is also a defendant in three additional lawsuits which are
incidental to the Company's business and for which the Company does not
believe it is liable, but which are not covered by insurance. Thus the
Company is directly and actively involved in its own defense and has
sufficient information to form a judgment on the likely outcome and exposure
of such cases. Based on this analysis, the Company believes that the
ultimate outcome of these cases will not have a material adverse effect on
the Company's financial statements.
As described in the Company's Annual Report on Form 10-K, for the year ended
December 31, 1994, in December 1994, the Company and its nine directors were
named in two proposed stockholder class action lawsuits (Knopf vs. Big O
Tires, Inc., et al. and Zucker, et al. vs. Big O Tires, Inc.,et al., Second
Judicial District Court of the State of Nevada, County of Washoe). By motion
filed by plaintiff's counsel, both actions were dismissed without prejudice
by the Court on March 31, 1995.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, the Company did not submit any matters to
a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is reported on the NASDAQ National Market System.
The principal market for the stock is the over-the-counter market.
The quotations in the table below were obtained from NASDAQ and reflect high
and low bid prices of the Company's Common Stock. The prices reflect
inter-dealer prices without retail mark-up, mark-down or commission. The
prices have been rounded to the nearest eighth and may not necessarily
represent actual transactions.
PERIOD HIGH LOW
------ ---- ---
01/01/94--03/31/94 16 3/4 12 3/4
04/01/94--06/30/94 16 3/4 13 1/8
07/01/94--09/30/94 16 3/4 14 1/2
10/01/94--12/31/94 17 7/8 15 1/4
01/01/95--03/31/95 16 1/4 12 7/8
04/01/95--06/30/95 15 1/4 12 1/2
07/01/95--09/30/95 15 1/4 12 3/4
10/01/95--12/31/95 15 1/8 12
________________
(b) HOLDERS
As of March 22, 1996, the Company had 702 shareholders of record as
indicated on the Company's transfer records.
(c) DIVIDENDS
The Company has not declared cash dividends on its Common Stock during the
last two fiscal years and there is no present intent to pay a cash dividend.
Certain covenants contained in the credit agreements with the Company's
primary lender preclude the general declaration or payment of cash dividends
and preclude the general purchase, redemption, retirement or other
acquisition of the Company's capital stock, or the return of capital or
distribution of assets to its shareholders, without the prior written consent
of the lender.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data concerning the Company,
which should be read in conjunction with the financial statements appearing
elsewhere herein. Amounts are in thousands (000's) except per share data.
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Sales $142,122 $127,678 $122,960 $119,799 $113,836
Net income 1,543 2,691 1,595 2,783 1,751
Earnings per share(1) .46 .80 .47 .80 .50
Cash dividends per share .00 .00 .00 .00 .00
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Working capital(2) $22,041 $26,836 $11,885 $17,333 $20,661
Total assets(3) 63,394 61,968 56,607 57,679 57,111
Non-current portion of
long-term debt, obligations
under capital leases and
guarantee of ESOP obligation 14,052 16,355 12,012 10,636 16,305
(1) Adjusted to reflect the 1 for 5 reverse split of the Company's $0.10 par
value common stock that was effective June 15, 1992.
(2) Working capital for 1994 has been restated to reflect the reclassification
of retail stores under development.
(3) Total assets for years prior to 1992 have been restated to reflect the
reclassification of vendor receivables to accounts payable.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
SALES. Sales in 1995 were $142.1 million which represented an increase of
$14.4 million (or 11.3%) over 1994. This increase in sales was primarily due
to higher sales of Big O brand tires which resulted from the Company's
"Cost-U-LessTM" marketing program that was implemented on July 1, 1994, and
$5.5 million of real estate sales. Cost-U-LessTM provided a significant
reduction in the cost of Big O brand tires to the Company's Franchisees (with
a small reduction in cost from the Company's primary supplier). This allowed
the Franchisees to offer Big O brand products to their customers at lower
retail pricing which generally enabled the Franchisees to be more price
competitive in their markets.
Wholesale sales of Big O brand tires increased by approximately 160,000 units
(11.4%) in 1995. This unit increase, combined with an increase in the
average selling price of $.75 per unit (1.3%), increased revenues by $10.4
million in 1995. The sale of other new tires decreased by approximately
58,000 units or 9.0% as compared to 1994, resulting in decreased sales of
$2.2 million. The sale of wheels, shocks, and other accessories decreased by
approximately 131,000 units or 9.8% which was offset by an increase in the
average selling price of accessories of $1.62 per unit, thereby increasing
revenues by $.4 million in 1995.
15
During 1995, the Company continued its efforts to improve the operations of
its existing Retail Stores and add new stores to its distribution system.
During the year, 21 new Retail Stores were reopened or added, but 12 existing
Retail Stores were closed. Accordingly, sales to newly opened franchised
Retail Stores increased by $5.9 million, sales to previously existing
franchised retail stores increased by $3.4 million, and the higher retail
sales generated a $.3 million increase in royalty fees. Offsetting these
sales increases were reductions in sales of $.3 million at Company-owned
Retail Stores, $1.1 million from the closure of nine (9) franchised Retail
Stores, and $.3 million from a decrease in other wholesale sales.
The Company also receives royalties from the Extra Care service program at
Retail Stores which consists of alignment, brake work, front-end repair,
shock absorber and strut replacement, lubrication and oil changes. Extra
Care service program royalty fees in 1995 were $2.07 million, up $.07 million
or 4.6% from 1994. While these fees continued to increase, they are growing
at a slower rate than the Company's overall revenues.
The Company's revenues are dependent on sales to its network of Retail
Stores. The continuation of these franchises during the ten year term of each
Franchise Agreement is extremely important to the Company as is the renewal
of these franchises upon their expiration period. In 1995, six (6) Franchise
Agreements expired; two (2) of these were renewed and four (4) were
transferred between franchisees resulting in new franchise agreements being
executed. During 1996, one (1) Franchise Agreement is due to expire. In
1997, four (4) Franchise Agreements are due to expire.
The Company's Franchisees are independent business operators who are entitled
to establish their own policies within certain guidelines established by the
Company and who are directly responsible for supervision of their employees.
Of the 382 franchised Retail Stores at December 31, 1995, three (3) are owned
by partnerships in which a subsidiary of the Company owns a 50% interest but
has no managerial control over day-to-day operations. The Company prescribes
certain operating procedures in business and ethical standards; however,
Franchisees are responsible for complying with these procedures and standards
as well as all applicable laws and regulations.
GROSS PROFIT. Cost of goods sold consists primarily of the cost of products and
equipment sold and the cost of real estate projects sold. Gross profit in 1995
was $30.7 million, an increase of $.5 million or 1.8% over 1994. Gross profit
derived from the sale of real estate projects generated an increase of $18,000.
Product and franchising gross profit increased by $.5 million or 1.7% over that
of 1994. Increased sales volumes generated an increase in gross profit of $2
million, which was offset by a decrease in gross profit of $1.5 million due to
the decrease in gross margin.
The product and franchising gross margin was 22.4% in 1995 as compared to 23.6%
in 1994. This decrease in gross margin was primarily due to the increased
warranty expenses in 1995 over 1994 and a decrease in margin related to the
Company's "Cost-U-LessTM" marketing program. The increase in warranty expense in
1995 appears to have primarily been the result of a higher ratio of road hazard
type failures in the current product lines as a percent of production, than was
experienced with previous product lines. This higher percent of failure,
coupled with increased Big O brand product sales, resulted in a greater number
of tires replaced under warranty than was anticipated, resulting in increased
warranty expenses in 1995 over 1994.
EXPENSES. Expenses increased by $2.5 million, or 9.6%, to $27.9 million in
1995. An increase in expenses of $1.1 million was associated with the
implementation of the shareholder proposal, and increased expenses of $.3
million resulted from costs incurred to consolidate the Company's Colorado and
California warehouse operations into a single facility near Las Vegas, Nevada.
Expenses decreased $.6 million due to a smaller loss associated with the sale or
closure of Retail Stores.
Expenses also increased by $.8 million in product delivery expense which
primarily resulted from the additional freight costs associated with the
Company's consolidation of its warehouse operations, $.9 million which resulted
from an increase in the provision for uncollectible receivables, and $.8 million
increased from payroll costs. These increases were partially offset by
decreases in financing costs, legal fees and travel and entertainment expenses.
16
Expenses excluding offering costs, warehouse consolidation costs, shareholder
proposal expense, and loss on sale or closure of retail stores ("Operating
Expense") in 1995 were 17.8% of net sales, down from 18.6% in 1994. The Company
anticipates that Operating Expense in 1996 will decrease due to the
consolidation of the Colorado and California warehouse operations into a new
distribution facility near Las Vegas, Nevada, which began operations in March
1995. However, increased ownership of Retail Stores may add significantly to
the growth of Operating Expense as each store can add as much as $.6 million of
Operating Expense annually. While the Company's current strategic plan does not
contemplate the operation of additional Company-owned Retail Stores, beyond the
five (5) Retail Stores presently in operation, the Company recognizes that it
will generally operate some Company-owned Retail Stores until such stores can be
sold to Franchisees. In 1994, five (5) Company-owned Retail Stores were sold to
Franchisees which resulted in a pretax loss of $.1 million; none were sold in
1995.
The Company's primary growth strategy is to significantly increase the number of
franchised Retail Stores. This will cause expenditures for advertising and
locating and developing new franchised locations. However, the Company believes
that development of these new stores, especially based on its fixed overhead
structure, could increase profitability and margins as these fixed costs are
spread over more units sold due to increased outlets. To the extent that new
store openings do not materialize, these additional expenses may reduce overall
profitability and reduce the Company's return on assets.
Interest expense decreased slightly (1.6%) in 1995 to $1.4 million. This
decrease resulted primarily from the elimination of the Denver Regional Sales
and Service Center (RSC) mortgage loan, which was assumed by the buyer in
December 1994. This decrease was offset somewhat by increased borrowings under
the Company's line of credit during 1995 and higher interest rates in 1995
compared to 1994.
1994 COMPARED TO 1993
SALES. Sales in 1994 were $127.7 million which represented an increase of $4.7
million (or 3.8%) over 1993. This increase in sales was primarily due to higher
sales of Big O brand tires which resulted from the Company's "Cost-U-Less-TM-"
marketing program that was implemented on July 1, 1994. Sales to new franchised
Retail Stores increased by $5.3 million, sales to existing franchised retail
stores increased by $4.1 million, and higher retail sales generated a $.7
million increase in royalty fees. Offsetting these sales increases were
reductions in sales of $2.1 million at Company-owned Retail Stores, $1.2 million
from the closure of nine (9) franchised Retail Stores, $.9 million from
decreased sales to the Canadian licensees, and $1.1 million from a decrease in
other wholesale sales. Royalties from the Extra Care service program in 1994
were $2 million, up $.2 million or 10.6% from 1993.
GROSS PROFIT. Gross profit in 1994 was $30.1 million, an increase of $2.5
million or 9.0% over 1993. Gross profit increased $1.1 million due to increased
sales volumes, and increased $1.4 million due to the 1.1% increase in gross
margin. Also contributing to this 1.1% increase in gross margin was an increase
in continuing royalties, additional cash discounts earned, and increased profits
associated with price changes. Partially offsetting these increases were
additional purchasing incentives provided to Franchisees and a decrease in
promotional funds provided by the Company's suppliers.
The gross margin was 23.6% in 1994 as compared to 22.5% in 1993. An increase of
.8% in the gross margin was attributable to the increase in sales of Big O brand
tires which carry higher gross margins than other tire products.
Warranty adjustment expense decreased by 3.2% in 1994 to $4.7 million. The
product quality produced by the Company's present supplier has continued to
reduce the Company's financial exposure for workmanship and material warranty
claims. In addition, products that have shown excessive adjustments have been
discontinued and on-hand inventories have been returned to suppliers for
liquidation outside existing market areas or distribution channels.
EXPENSES. Expenses increased by $1.1 million or 4.7% to $25.5 million in 1994.
An increase in expenses of $.7 million was associated with the implementation of
the shareholder proposal, and increased expenses of $.7 million resulted from an
increased loss on the sale or closure of Retail Stores.
17
Expenses also increased by $.6 million in product delivery expense which
primarily resulted from the additional freight costs associated with the
Company's consolidation of its warehouse operations in California, $.8 million
which resulted from increased promotional expense in connection with the
Company's new marketing program, and $.8 million which resulted from the
operation of Company-owned Retail Stores. However, these increases were
partially offset by a decrease of $1.9 million in expenses related to Company-
owned Retail Stores which were sold, and a reduction of $.1 million in the
provision for uncollectible receivables. In 1994, five (5) Company-owned Retail
Stores were sold to Franchisees which resulted in a pretax loss of $.1 million.
Interest expense increased by 20.2% in 1994 to $1.5 million. Although interest
expense decreased due to reduced borrowings resulting from lower working capital
requirements, this reduction was offset by an increase in interest expense
attributable to an increase in the "prime" rate and, therefore, in the Company's
borrowing rate, and the sale of 8.71% Senior Secured Notes in the aggregate
principal amount of $8 million in April 1994.
LIQUIDITY AND CAPITAL RESOURCES
SHAREHOLDER PROPOSAL. In June 1994, the Company's shareholders adopted a
proposal requesting that the Board of Directors engage an investment banker to
evaluate alternatives to enhance the value of the Company. The Board of
Directors established the Investment Committee and retained PaineWebber,
Incorporated (PaineWebber) to fulfill this shareholder request. The Company has
received three offers to acquire the Company, none of which have been completed
as of March 22, 1996. The Company is currently negotiating with TBC Corporation
(TBC) pursuant to a letter of intent dated March 13, 1996. In the event that
TBC acquires the Company, then the Company's liquidity and need for capital
resources may change dramatically, although the exact extent and nature of such
changes cannot be predicted at this time. In the event that a transaction is
not consummated with TBC, then it is presently expected that the Company will
continue its current operations, but accelerate operations to achieve more rapid
growth in order to enhance the value of the Company. The Board of Directors is
aware of the limited capital resources available while developing strategies and
growth plans pursuant to this alternative.
WORKING CAPITAL. The Company's working capital (defined as current assets less
current liabilities) decreased by approximately $4.8 million in 1995, finishing
the year at $22.0 million. Sources of working capital included earnings,
payments received on and sale of notes receivable, and sales of property. Uses
of working capital included purchases of property and equipment (most notably
the Las Vegas RSC) and principal payments on long-term debt.
Significant changes in the components of working capital consisted of the
following:
i. Trade accounts receivable, net of allowances, increased by $1.09
million. This increase was primarily attributable to the addition of
franchise retail stores, increased sales, and slower collections from
the Company's customers.
ii. Other receivables decreased by $2.66 million in 1995, primarily as a
result of the change in payment structure and rebates for annual
volume bonuses (AVB's) from the Company's primary supplier. This
resulted in lower net pricing to the Company, with a corresponding
decrease in the AVB.
iii. Inventories decreased by $.97 million during 1995. A portion of this
was attributable to reduced wheel inventories, primarily resulting
from the cooperative marketing arrangements with one of the Company's
wheel suppliers. In addition, the Company continues its development
of ordering systems providing for reduced inventories, but relying
more heavily on production commitments from the Company's suppliers.
iv. Retail Stores under development increased by $2.69 million in 1995,
primarily as a result of the real estate development program described
below.
v. Accounts payable increased by approximately $1.23 million. This
increase was primarily attributable to the above mentioned change in
the AVB rebate from the Company's primary supplier.
18
vi. The Company's warranty reserve increased by $.5 million. This
resulted from the recognition of future warranty obligations on
additional sales volumes.
The Company anticipates that it will meet its 1996 working capital needs through
internal generation of funds from operations and from financing available from
its primary lender (see EXISTING CREDIT FACILITIES). Financing for the
Company's real estate development programs is planned to come from the Company's
existing credit facilities and proceeds from sales of real estate generally
financed by Small Business Administration (SBA) guaranteed loans (see REAL
ESTATE DEVELOPMENT).
The Company transferred $.77 million of accounts receivable to long-term notes
receivable in 1995. Such refinancings have been generally successful in
assisting financially distressed Franchisees. Nevertheless, this program limits
the Company's access to cash that would have been generated from earlier
collection of these receivables. The Company sold approximately $1.01 million
of notes receivable in 1995. No plans presently exist for the sale of
additional notes.
REAL ESTATE DEVELOPMENT. In 1995, the Company moved forward with its Real
Estate Development Program. This program was developed to provide store growth
while minimizing the need for Company-provided guarantees, particularly as they
relate to real estate leases. Required performance under prior real estate
guarantees, or leases, resulted in the recognition of $.55 million expense in
1995, which is reported as a component of loss on sale or closure of retail
stores.
Under the Company's Real Estate Development Program, the Company secures
approved sites, develops such sites with a retail store, and generally, during
the development process, secures a Franchisee for ownership of the real estate
and business. Generally, such sales are financed through SBA guaranteed loans.
In certain instances, the Company has provided, and may continue to provide,
subordinated notes in an amount not to exceed $50,000 to the Franchisee to
qualify for this SBA guaranteed funding. In addition, certain providers of the
SBA funding may require the Company to guarantee the first 12-18 monthly
payments pursuant to such loans. The Company executed 6 of these guarantees in
1995, obligating the Company to $.7 million of additional financial guarantees.
At December 31, 1995, the Company's real estate subsidiary had $4.86 million
invested in retail stores under development for fourteen (14) sites. These
sites were primarily financed from the sale of notes receivable in 1994 and 1995
and the Company's revolving line of credit (Revolver). This program carries
considerable developmental risk as the Company will be required to hold these
assets, and related liabilities, if the properties cannot be sold.
The Board of Directors has established certain financial limitations for these
developmental activities. Accordingly, future development is limited to the
extent that funding can be obtained, developed retail store sites sold, and
generally, the criteria established by the Board of Directors met.
In 1995, 25 projects were terminated as a result of the Agreement and Plan of
Merger dated July 24, 1995 (Merger Agreement). The Company incurred charges
totaling $.27 million in 1995 as a result of the termination of these projects.
In addition, the Company's commitment for financing from AT&T Capital
Corporation (AT&T) was terminated in August 1995. As a result, projects that
are retained by the Company are now financed through the Revolver.
The Company sold ten (10) retail store and development sites during 1995. Two
(2) existing retail stores sites were sold for $.8 million, resulting in a net
income of $.09 million. Two (2) land sites were sold for $.5 million, resulting
in a net loss of $.21 million. The remaining six (6) sites were developed and
sold to franchisees. Gross sales on these sites were $4.2 million, resulting in
a net income of $.14 million.
19
EXISTING CREDIT FACILITIES. The Company's operations are primarily financed
through the Revolver with the First National Bank of Chicago (First Chicago).
First Chicago provides a $20 million Revolver, which was initiated in January
1995. This loan matures in January 1998. In 1995, the Revolver had a sublimit
of $6 million which could be used for construction and permanent financing
pursuant to the Real Estate Development Program described above. In 1996, this
sublimit was increased to $8 million, and will increase to $10 million for 1997.
As noted above, the real estate and retail store joint venture financing program
previously provided by AT&T was terminated in August 1995. Certain prepayments
are associated with existing loans maintained under this program, unless an SBA
guaranteed loan is placed with AT&T's Small Business Lending Unit. At December
31, 1995, $4.9 million was outstanding under this AT&T facility. $.4 million
was included as a liability on the Company's books, with the remaining $4.5
million being a contingent liability of the Company.
Advances from First Chicago are limited to a portion of eligible collateral as
defined in the Revolving Credit Agreement and are further reduced by the amount
of any outstanding letters of credit issued on behalf of the Company. The
Company anticipates that short-term cash needs can be met through this credit
facility as well as limited real estate development costs. However, financing
through this facility is subject to a formula borrowing base and certain
covenant limitations. Financing beyond these needs, principally for capital
expenditures, will need to be obtained through other credit facilities.
The Company sold $8 million of senior, secured notes in April 1994, which
provide for quarterly interest only payments through July 1998 and then equal
principal payments of $333,000, plus interest, per quarter with the unpaid
balance due May 2004.
The Company is financing the Indiana RSC with a permanent loan obtained in 1994.
This loan amortizes in monthly installments over seven years.
In 1993, the Company borrowed $6 million from Kelly-Springfield to finance the
acquisition and retirement of certain common stock and warrants of the Company
previously held by General. Payments under this note extend through November
1997 and are based on scheduled principal reductions.
Management's discretion with respect to certain business matters is limited by
financial and other covenants contained in the Revolver, loan agreements with
AT&T, the senior note holders, and Kelly-Springfield. These covenants, among
other things, limit or prohibit the Company from (i) paying dividends on its
capital stock, (ii) incurring additional indebtedness, (iii) creating liens on
or selling certain assets, (iv) making certain loans, investments, or
guarantees, (v) violating certain financial ratios, (vi) repurchasing shares of
its common stock, or (vii) making certain capital expenditures. At December 31,
1995, the Company was in compliance with all of these covenants.
PROPOSED FINANCING. Due to the uncertain circumstances resulting from the
shareholder proposal, other than SBA guaranteed financing, the Company is
currently not pursuing any financing proposals to provide additional financing
for the Company's Franchisees.
FINANCIAL COMMITMENTS. The Company has provided financial guarantees on behalf
of certain franchised retail stores, which, at December 31, 1995, approximated
$8.1 million. The Company has also guaranteed approximately 50% of the balance
of notes sold since 1994. At December 31, 1995, this amounted to an additional
$2.2 million. Lease guarantees provided to landlords approximated $4.9 million
at December 31, 1995.
The Company guaranteed a promissory note on behalf of the Big O Tires, Inc.
Employee Stock Ownership Plan (ESOP) in November 1993. The last annual payment
under this note is due April 1996, in the amount of $180,000 plus accrued
interest. The Company is required to make contributions to the ESOP in an
amount equal to such principal and interest payments. The current year
contribution is sufficient to meet this debt service requirement.
20
In 1994, the Company sold its Denver RSC for a down payment, certain rent
concessions, and the assignment of the Company's promissory note and mortgage on
the facility. The continuing financial obligations under this mortgage were not
released, resulting in the Company's continued obligation of $2.7 million. The
Company will use a portion of this space for its corporate offices, pursuant to
the aforementioned rent concessions, through June 1998.
LAS VEGAS RSC CONVERSION. During the second quarter 1995, the Company completed
its announced plan to consolidate three of its RSCs (Vacaville, California,
Ontario, California, and Denver, Colorado) into a 300,000 square foot facility
located near Las Vegas, Nevada.
In May 1994, the Company closed the Vacaville RSC and consolidated operations
into the Ontario RSC. The Vacaville warehouse was leased to an unrelated third
party. In July 1995, the land, warehouse, and lease were sold to the tenant.
Proceeds from the sale were used to reduce the outstanding loan balance with
First Chicago. The Denver RSC operations were converted to the Las Vegas RSC in
the first quarter 1995. As noted above, the Denver land and warehouse were sold
in December 1994. The operations of the Ontario RSC were converted to the Las
Vegas RSC in the second quarter 1995. While the Company is obligated under this
warehouse lease until May 1998, the space was sublet to an unrelated third
party. This lease commenced June 1995.
CAPITAL EXPENDITURES. In February 1995, the Company acquired the Las Vegas RSC
at a total cost of approximately $7.7 million. Additional equipment, computer
hardware, and software to operate this facility on a more efficient basis
resulted in $1.3 million of capital expenditures in 1995.
Additional capital expenditures are anticipated in connection with real estate
development activities as described above. Presently, the proposed expansion of
the Boise RSC has been deferred. Management anticipates that significant
investments in new computer hardware, software, and other technologies will be
required. The Company's 1996 capital budget for this expenditure amounts to $.8
million although it is expected that significant additions in capital
expenditures will be required for these and other projects in future years.
ADDITIONAL ISSUES THAT COULD IMPACT LIQUIDITY. Expenses associated with the
warranty program offered by the Company have had a significant impact on
profitability. Negotiated programs with suppliers have assisted the Company in
reducing the financial impact of this warranty program, however many of these
agreements with the Company's previous supplier have expired or are limited as
to future application. The Company now has 97% of its private brand product
produced by Kelly-Springfield and it is anticipated that this percentage will
remain over 95% through 1996.
A significant portion of the Company's customers are located in California. The
Company continues to add Franchisees in this significant market, but it is also
looking to expand retail store development into other states. In 1993, the
Company and its Franchisees experienced adverse publicity in the state of
California, which may have had an impact on retail sales during 1994 and 1995.
Retail sales, and the ability to franchise new locations within California, may
be impacted in the future, although the exact extent, if any, cannot be forecast
at this time.
Given the continued competitive pressures and the economic environment, most
notably in California, the Company has noticed a weakness in collections from
its customers. Continued competitive pressures and weak sales environments
could cause continued deterioration of collections from its customers, although
the exact extent of such problems cannot be predicted.
The Company experienced one environmental issue in 1995, which was settled at a
cost of approximately $50,000. The Company has periodically been involved with
minor clean-ups associated with certain retail stores in which the Company has
been a tenant, subtenant, or guarantor. Generally, the cost of these clean-ups
has been less than $10,000, although two situations, including the 1995 clean-
up, have each been approximately $50,000. There is no assurance that such
environmental remediations can be limited to this amount in the future, if any
occur. As a result of environmental concerns, the Company's real estate
development strategy requires that all new sites have Phase One environmental
studies conducted before the project is approved and the location acquired.
21
Market risks associated with changes in interest rates could have an impact on
the Company's profitability due to the significant amounts of financing tied to
variable interest rates. Increases in consumer interest rates could have an
adverse effect on the sale of the Company's product to its Retail Stores, since
such Retail Stores sell a portion of their products and services to the consumer
on credit. The previous credit card system offered through American General
Finance, Inc. has been terminated. The Company is recommending to its
Franchisees that they work with Norwest Financial as an alternative for such
credit sales. There is no assurance that this finance company, or any finance
company, will continue to offer an acceptable financing program to the
Franchisees.
Lease guarantees and obligations can have a significant financial impact on the
Company's operations and cash flows. Over the past two years, the Company has
accrued for lease guarantees that have been expensed; however, the cash flow
requirements from these leases will continue until each lease has expired.
Further, the failure of any Retail Store for which the Company is currently a
tenant, subtenant, or guarantor, will result in reduced financial performance
and the resulting impact on future cash flows.
SEASONALITY
The Retail Stores experienced some seasonal variation of product sales because
tire sales are generally greater during the summer than in the winter months.
The Company generally experiences some degree of seasonality, although not to
the same extent that Retail Stores do, as the Company maintains sales to certain
Retail Stores that offset this trend on a national basis through the sale of
such products as snow tires and chains. The Company has historically generated
operating losses or lower profits during the first quarter of each fiscal year
because of lower sales volumes and higher expenses as a percentage of sales.
INFLATION AND PRICE CHANGES
As a matter of past industry practice, most tire distributors adjust the selling
price of inventories when prices increase (decrease) which results in gross
profit increases (decreases) associated with the sale of existing inventories at
these higher (lower) prices. Management notes that certain "discount"
distributors may defer this price increase on their existing inventory in an
effort to increase market share. Management has also noted increased price
competition among distributors, wherein price increases are not passed onto
customers, nor accepted from suppliers.
Price increases contributed approximately $450,000, $360,000 and $90,000 to the
Company's gross profits for 1995, 1994 and 1993, respectively. The Company
received an approximate 3% price increase from its suppliers on tires and other
products in 1995. The Company has received notice of a possible 1996 price
increase from its suppliers of tires and other products. Management is unsure
as to whether this price increase, if implemented, will be supported by the
industry. Since price increases are initiated by manufacturers and are then
subject to competitive pressures, management cannot predict any future
increases.
ACCOUNTING STANDARDS
ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standard (FAS) No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, effective January 1, 1995.
The adoption of this FAS did not have a material effect on the Company's
financial position or results of operations for the year ended December 31,
1995.
The Financial Accounting Standards Board (FASB) has issued FAS No. 119,
DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS, which is required to be implemented for the Company's fiscal year
ending December 31, 1996. At December 31, 1995, the Company did not hold any
derivative financial instruments for trading or other purposes, and the Company
did not purchase any such instruments during the year then ended. Accordingly,
the earlier adoption of this FAS would not have materially affected the
Company's financial position or results of operations for the year ended
December 31, 1995.
22
The FASB has also issued Statement of Financial Accounting Standard No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, which is required to be implemented for the Company's fiscal
year ending December 31, 1996. The earlier adoption of this FAS would not have
materially affected the Company's financial position or results of operations
for the year ended December 31, 1995.
The FASB has also issued FAS No. 123 ACCOUNTING FOR STOCK BASED COMPENSATION,
which is required to be implemented for the Company's fiscal year ending
December 31, 1996. The Company is continuing to evaluate the provisions of FAS
No. 123 and, as such, has not yet determined the effect the earlier adoption of
this FAS would have on the Company's financial position or results of operations
for the year ended December 31, 1995.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All Financial Statements and Financial Statement Schedules required to be filed
hereunder are listed under Item 14 and are attached hereto following the
signature page.
(a) Selected Quarterly Financial Data (unaudited) (in thousands except per
share data):
1995
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Net Sales $ 29,153 $ 37,777 $ 40,742 $ 34,450
Gross Profit 6,740 8,243 7,952 7,731
Income Tax 209 466 372 134
Net Income 289 645 511 98
Net Income Per
Common Share .09 .19 .15 .03
1994
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Net Sales $ 26,393 $31,087 $ 36,652 $ 33,546
Gross Profit 6,285 8,083 7,561 8,202
Income Tax 152 479 421 898
Net Income 205 650 599 1,237
Net Income Per
Common Share .06 .19 .18 .37
_________________
(b) Information about Oil and Gas Producing Activities
Not applicable.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
PART III
Items 10 through 13 of this Form 10-K are omitted by the Company and will either
be filed as an amendment to this Annual Report on Form 10-K or will be
incorporated by reference to the Company's definitive Proxy Statement for the
Company's 1996 Annual Meeting of Shareholders which will be filed with the
United States Securities and Exchange Commission not later than 120 days after
the close of the Company's fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) LIST OF FINANCIAL STATEMENTS
The following is a list of financial statements which, along with the auditors'
report, accompany this Form 10-K:
- Independent Auditors' Report - Deloitte & Touche LLP
- Consolidated Balance Sheets
December 31, 1995 and 1994
- Consolidated Statements of Income
Years Ended December 31, 1995, 1994, and 1993
- Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
- Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994, and 1993
- Notes to Consolidated Financial Statements
(a) (2) LIST OF SCHEDULES REQUIRED BY ITEM 8 AND ITEM 14 (D)
None.
(a) (3) LIST OF EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
EXHIBIT
NUMBER
(3.1) Certificate of Amendment to Restated Articles of Incorporation of
Big O Tires, Inc. dated June 10, 1992 and Restated Articles of
Incorporation of Big O Tires, Inc. dated August 17, 1987
(incorporated by reference to Exhibit 3 to Quarterly Report on
Form 10-Q for quarter ended June 30, 1992).
(3.2) Third Amendment and Restated Bylaws of Big O Tires, Inc. dated
December 5, 1995.
(4.1) Rights Agreement dated as of August 26, 1994, between Big O
Tires, Inc. and Interwest Co., Inc., as Rights Agent
(incorporated by reference to Exhibit 1 to Current Report on Form
8-K dated August 26, 1994).
(4.2) Amendment to Rights Agreement dated as of July 24, 1995, is between
Big O Tires, Inc., a Nevada corporation, and Interwest Co., Inc.,
a Utah corporation (incorporated by reference to Exhibit 10.2 to
Big O Tires, Inc.'s Current Report on Form 8-K dated July 25,
1995).
(10.1) 1994 Restatement of Employee Stock Ownership Plan and Trust Agreement
of Big O Tires, Inc. (incorporated by reference to Exhibit 10.3
to Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994).
(10.2) Big O Tires, Inc. Director and Employee Stock Option Plan
(incorporated by reference to Exhibit 10.11 to Big O Tires,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
24
(10.3) First Amendment to the Big O Tires, Inc. Director and Employee Stock
Option Plan (incorporated by reference to Exhibit 10.10 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1989).
(10.4) Amendment No. 2 to the Big O Tires, Inc. Director and Employee Stock
Option Plan (incorporated by reference to Exhibit 10.16 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
(10.5) Ultimate Net Loss Agreement between Big O Tires, Inc. and FBS Business
Finance Corporation dated January 13, 1989 (incorporated by
reference to Exhibit 10.34 to Big O Tires, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1988).
(10.6) Purchase Agreement effective June 30, 1987, and related documents
including Promissory Notes, Modification Agreements, Security
Agreements, Guaranty Agreement, and Subleases in connection with
a purchase by C.S.B. Partnership and three individuals including
Ronald D. Asher, of three Big O Franchise Retail Stores in
California from Security/Cal, Inc., a wholly-owned subsidiary of
the Company, and H.R.I., Inc., a wholly-owned subsidiary of
Security/Cal, Inc. (incorporated by reference to Exhibit 10.63 to
Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1987).
(10.7) Purchase Agreement effective November 1, 1987, and related documents
including Promissory Notes, Security Agreements, Guaranty
Agreements, Subleases, and Franchise Agreements in connection
with a purchase by C.S.B. Partnership and its three general
partners, including Ronald D. Asher, of two Big O Franchise
Retail Stores in California from Security/Cal, Inc. and H.R.I.,
Inc. (Seller) (incorporated by reference to Exhibit 10.45 to Big
O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1988).
(10.8) Purchase Agreements effective July 5, 1988, October 1, 1988, and
November 14, 1988, and related documents including Promissory
Notes, Security Agreements, Guaranty Agreements, and Subleases in
connection with a purchase by C.S.B. Partnership and three
individuals including Ronald D. Asher of three Big O Franchise
Retail Stores in California from Big O Tires, Inc., Security/Cal,
Inc., a wholly-owned subsidiary of the Company, and H.R.I., Inc.,
a wholly-owned subsidiary of Security/Cal, Inc. (incorporated by
reference to Exhibit 10.46 to Big O Tires, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1988).
(10.9) Agreement and Release dated October 31, 1989, and related documents
including Promissory Note, related Subleases, Assignment of Lease
Rights, and Performance Guarantee in connection with the purchase
by C.S.B. Partnership and its general partners, including Ronald
D. Asher, of two (2) Big O franchise Retail Stores in California,
owned by GEM Tire, Inc. from the Company (incorporated by
reference to Exhibit 10.57 to Big O Tires, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1989).
(10.10) Ultimate Net Loss Agreement, dated as of December 1, 1990, by and
between Big O Tires, Inc. and Northcross Financial Services,
Inc., ICON Capital Corp., in its individual capacity and on
behalf of ICON Cash Flow Partners, L.P., Series A, ICON Cash Flow
Partners, L.P., Series B and any future partnerships on which it
may be the general partner and/or manager (incorporated by
reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1990).
(10.11) Agreement of Joint Venture of Big O/C.S.B. Joint Venture dated as of
June 1, 1992, by and between Big O Retail Enterprises, Inc., a
wholly-owned subsidiary of Big O Tires, Inc., and C.S.B.
Partnership, a California general partnership (incorporated by
reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1991).
(10.12) 1995 Incentive Bonus Plans (incorporated by reference to Exhibit 10.71
to Big O Tires, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
25
(10.13) Purchase Agreement for Private Brand Name Tires between Big O Tires,
Inc. and The Kelly-Springfield Tire Co., dated August 16, 1992
(incorporated by reference to Exhibit 10.71 to Big O Tires,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1991).
(10.14) Big O Tires, Inc. Long Term Incentive Plan (incorporated by reference
to Exhibit 55 to Big O Tires, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
(10.15) Amendment No. 1 to Big O Tires, Inc. Long Term Incentive Plan
(incorporated by reference to Exhibit 56 to Big O Tires, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1992).
(10.16) Amendment No. 2 to Big O Tires, Inc. Long Term Incentive Plan
(incorporated by reference to Exhibit 57 to Big O Tires, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1992).
(10.17) Agreement of Joint Venture of Big O/S.A.N.D.S. Joint Venture
(incorporated by reference to Exhibit 58 to Big O Tires, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1992).
(10.18) Commitment Letters dated July 22, 1992, from AT&T Capital Corporation
(incorporated by reference to Exhibit 64 to Big O Tires, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1992).
(10.19) Agreement dated as of November 15, 1992, among Peerless Trading
Company, Limited, Delaware Liquidators, Inc. dba Trade Center
Imports, and Big O Tires, Inc.; Purchase Money Non-Negotiable
Promissory Note dated as of November 15, 1992, from Peerless
Trading Company, Limited to Big O Tires, Inc.; and amendment
dated January 19, 1993 to the Agreement dated November 15, 1992
(incorporated by reference to Exhibit 66 to Big O Tires, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1992).
(10.20) Marketing Agreement for Private Brand Tires between Big O
Tires, Inc. and General Tire, Inc., dated May 14, 1993
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated April 30, 1993).
(10.21) Inventory Financing Agreement between The Kelly-Springfield Tire
Company and Big O Tires, Inc. and/or Big O Tire of Idaho, Inc.
and/or Big O Retail Enterprises, Inc., dated May 14, 1993
(incorporated by reference to Exhibit 10.4 to Big O Tires, Inc.'s
Current Report on Form 8-K dated April 30, 1993).
(10.22) Demand Note in the original principal amount of $6,000,338.67
with The Kelly-Springfield Tire Col. as Holder and Big O Tires,
Inc., Big O Retail Enterprises, Inc. and Big O Tire of Idaho,
Inc. as Maker (incorporated by reference to Exhibit 10.50 to Big
O Tires, Inc.'s Annual Report on Form 10-K dated April 30, 1993).
(10.23) Consolidation and Modification Agreement among Big O Tires, Inc.
(successor in interest to H.R.I., Inc. and Security/Cal, Inc.)
and Big O Retail Enterprises, Inc. and C.S.B. Partnership
(incorporated by reference to Exhibit 10.51 to Big O Tires,
Inc.'s Registration Statement No. 33-65852).
(10.24) Modification of Consolidation and Modification Agreement by and
between C.S.B. Partnership and Big O Tires, Inc. (incorporated by
reference to Big O Tires, Inc.'s Form 10-K for the year ended
December 31, 1993).
(10.25) Registration Rights Agreement dated June 28, 1993, between the
Selling Shareholder and Big O Tires, Inc. (incorporated by
reference to Exhibit 10.52 to Big O Tires, Inc.'s Registration
Statement No. 33-65852).
26
(10.26) Loan Agreement and Promissory Note in the original principal
amount of $155,000.00 with C.S.B. Partnership as Maker
(incorporated by reference to Exhibit 10.44 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.27) Loan Agreement and Promissory Note in the original principal
amount of $70,000.00 with Big O/C.S.B Joint Venture as Maker
(incorporated by reference to Exhibit 10.45 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.28) Loan Agreement and Promissory Note in the original principal
amount of $75,000.00 with Big O/S.A.N.D.S. Joint Venture as Maker
(incorporated by reference to Exhibit 10.46 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.29) Commercial Note and Loan Agreement, Commercial Mortgage and
Environmental Certificate between Big O Development, Inc. and
National City Bank, Kentucky, and Guaranty Agreement of Big O
Tires, Inc. guaranteeing the obligations of Big O Development,
Inc. to National City Bank, Kentucky in connection with the
borrowing of $1,500,000 for construction of the Company's
Regional Sales and Service Center in New Albany, Indiana
(incorporated by reference to Exhibit 10.47 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.30) Construction Agreement between Big O Development, Inc. and
Koetter Construction, Inc. to construct the Regional Sales and
Service Center in Floyd, County, Indiana (incorporated by
reference to Exhibit 10.48 to Big O Tires, Inc.'s Form 10-K for
the fiscal year ended December 31, 1993).
(10.31) Letter dated January 26, 1994 from General Tire, Inc. to the Company
terminating the Marketing Agreement for Private Brand Name Tires
between Big O Tires, Inc. and General Tire, Inc. dated May 14,
1993 (incorporated by reference to Exhibit 10.52 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.32) Purchase Agreement by and between Caps Tire Limited Liability
Company and Intermountain Big O Realty for the Big O Tires Retail
Store located at 8151 East Arapahoe Road, Englewood, Colorado
incorporated by reference to Exhibit 10.53 to Big O Tires, Inc.'s
Form 10-K for the fiscal year ended December 31, 1993).
(10.33) Third and Fourth Amendments to Loan and Security Agreement by and
between Big O Tires, Inc. and its primary lender (incorporated by
reference to Exhibit 10.54 to Big O Tires, Inc.'s Form 10-K for
the fiscal year ended December 31, 1993).
(10.34) Limited Partnership Agreement by and between Donald J. Horton,
General Partner, Thomas L. Staker, General Partner, and Big O
Tires, Inc., Limited Partner, dated as of December 31, 1993
(incorporated by reference to Exhibit 10.56 to Big O Tires,
Inc.'s Form 10-K for the fiscal year ended December 31, 1993).
(10.35) Loan Agreement and Guaranty, Promissory Note and Security
Agreement with Big O Tires, Inc. Employee Stock Ownership Plan
("ESOP") as Borrower, Big O Tires, Inc., as Guarantor, and Key
Bank of Wyoming, as Lender, in connection with the refinancing of
the ESOP debt in the amount of $960,000 (incorporated by
reference to Exhibit 10.57 to Big O Tires, Inc.'s Form 10-K for
the fiscal year ended December 31, 1993).
(10.36) Amendment to Partnership Agreement dated August 25, 1994, by and
between Big O Development, Inc., a Colorado corporation, a
wholly-owned subsidiary of Big O Tires, Inc. and Mill Creek
Associates, Ltd., a Colorado limited partnership (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994).
(10.37) Agreement dated July 1, 1994, by and between General Tire, Inc.,
an Ohio corporation and Big O Tires, Inc. (incorporated by
reference to Exhibit 10.4 to Big O Tires, Inc.'s Quarterly Report
on Form 10-Q dated September 30, 1994).
27
(10.38) Consulting Agreement by and between Big O Tires, Inc., and Horst
K. Mehlfeldt (incorporated by reference to Exhibit 10.5 to Big O
Tires, Inc.'s Quarterly Report on Form 10-Q dated September 30,
1994).
(10.39) Letter Agreement dated January 10, 1995, amending the Consulting
Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt
(incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s
Current Report on Form 8-K dated January 10, 1995).
(10.40) Letter Agreement dated July 12, 1994, by and between Big O Tires,
Inc. and PaineWebber Incorporated (incorporated by reference to
Exhibit 10.6 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q
dated September 30, 1994).
(10.41) Letter Agreement dated March 23, 1994, by and between Big O
Tires, Inc. and The CIT Group/Equipment Financing, Inc., a New
York corporation (incorporated by reference to Exhibit 10.7 to
Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated September
30, 1994).
(10.42) Ultimate Net Loss Agreement dated October 21, 1994, by and
between Big O Tires, Inc. and The CIT Group/Equipment Financing,
Inc., a New York corporation (incorporated by reference to
Exhibit 10.8 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q
dated September 30, 1994).
(10.43) Fifth Amendment to Loan and Security Agreement by and between Big
O Tires, Inc. and its former lender dated April 29, 1994
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated September 30, 1994).
(10.44) Agreement by the Investment Committee of the Board of Directors
and the Management/Dealer participants dated December 22, 1994
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated December 6, 1994).
(10.45) Letter dated December 13, 1994, to the Investment Committee of
Big O Tires, Inc. and the Management participants and Dealer
representatives (incorporated by reference to Exhibit 10.2 to Big
O Tires, Inc.'s Current Report on Form 8-K dated December 6,
1994).
(10.46) Letter dated February 7, 1995, from the Dealer/Management Group
to the Company's Board Chairman (incorporated by reference to
Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K
dated January 10, 1995).
(10.47) Agreement between the Company and the Management/Dealer
participants dated January 20, 1995 (incorporated by reference to
Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K
(10.48) Multi-Tenant Lease NNN dated December 1, 1994 between Botac VI
Leasing L.L.C., a Utah Limited Liability Company and Big O
Development, Inc. (incorporated by reference to Exhibit 10.62 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.49) Assignment and Assumption Agreement dated December 2, 1994 by Big
O Development, Inc., Big O Tires, Inc. and Botac VI Leasing,
L.L.C. and Allstate Life Insurance Company (incorporated by
reference to Exhibit 10.63 to Big O Tires, Inc.'s Annual Report
on Form 10-K for fiscal year ended December 31, 1994).
(10.50) Guarantee Agreement dated December 2, 1994 by Big O Tires, Inc.,
Big O Development, Inc. and Allstate Life Insurance Company
(incorporated by reference to Exhibit 10.64 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.51) Closing Agreement dated December 2, 1994 by Big O Development,
Inc., Big O Tires, Inc., Botac VI Leasing, L.L.C., and Allstate
Life Insurance Company (incorporated by reference to Exhibit
10.65 to Big O Tires, Inc.'s Annual Report on Form 10-K for
fiscal year ended December 31, 1994).
28
(10.52) Commercial Contract to Buy and Sell Real Estate dated March 17,
1994 between Bailey's Moving and Storage and Big O Tires, Inc.
(incorporated by reference to Exhibit 10.66 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.53) Confidentiality Agreement dated September, 1994 between Big O
Tires, Inc. and Kenneth W. Pavia, Sr. (incorporated by reference
to Exhibit 10.67 to Big O Tires, Inc.'s Annual Report on Form
10-K for fiscal year ended December 31, 1994).
(10.54) Amendment No. 1 to the Big O Tires, Inc. Employee Stock Ownership
Plan and Trust Agreement dated September 12, 1994 (incorporated
by reference to Exhibit 10.68 to Big O Tires, Inc.'s Annual
Report on Form 10-K for fiscal year ended December 31, 1994).
(10.55) Development Management Agreement dated September, 1994 between
Ross Development Management Group, Inc. and Big O Development,
Inc. and Big O Tires, Inc. (incorporated by reference to Exhibit
10.69 to Big O Tires, Inc.'s Annual Report on Form 10-K for
fiscal year ended December 31, 1994).
(10.56) Letter Agreement dated February 20, 1995 terminating the
Consulting Agreement between Big O Tires, Inc. and Horst K.
Mehlfeldt (incorporated by reference to Exhibit 10.70 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended
December 31, 1994).
(10.57) Commitment Letter dated February 16, 1994 between Big O Tires,
Inc. and AT&T Commercial Finance Corporation for real estate
financing (incorporated by reference to Exhibit 10.72 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended
December 31, 1994).
(10.58) Commitment Letter dated February 16, 1994 between Big O Tires,
Inc. and AT&T Commercial Finance Corporation for equipment
financing (incorporated by reference to Exhibit 10.73 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended
December 31, 1994).
(10.59) Extension letter dated December 9, 1994 between Big O Tires, Inc.
and AT&T Commercial Finance Corporation to extend existing lines
of credit through December 31, 1995 (incorporated by reference to
Exhibit 10.74 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.60) Resignation letter dated February 27, 1995 from Robert L. Puckett
(incorporated by reference to Exhibit 10.75 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.61) Resignation letter dated February 24, 1995 from David W. Dwyer
(incorporated by reference to Exhibit 10.76 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.62) Revolving Credit Agreement dated January 23, 1995 between Big O
Tires, Inc. and The First National Bank of Chicago (incorporated
by reference to Exhibit 10.77 to Big O Tires, Inc.'s Annual
Report on Form 10-K for fiscal year ended December 31, 1994).
(10.63)
Consent, Acknowledgement and Access Agreement dated January 23,
1995 between The Bank of Cherry Creek, N.A., Kenneth B. Buckius
and The First National Bank of Chicago (incorporated by reference
to Exhibit 10.78 to Big O Tires, Inc.'s Annual Report on Form
10-K for fiscal year ended December 31, 1994).
(10.64) Note Purchase Agreement dated April 27, 1994 between Big O Tires,
Inc. and USG Annuity & Life Company and Republic Western
Insurance Company (incorporated by reference to Exhibit 10.79 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.65) Franchise Agreement dated October 7, 1994 between Big O Tires,
Inc. and OK Tires, Inc. for the Retail Store located at 2830 West
3500 South, West Valley City, Utah 84119 (incorporated by
reference to Exhibit 10.80 to Big O Tires, Inc.'s Annual Report
on Form 10-K for fiscal year ended December 31, 1994).
29
(10.66) Franchise Agreement dated November 26, 1993 between Big O Tires,
Inc and CAPS Tire Limited Liability Company for the Retail Store
located at 8151 East Arapahoe Road, Englewood, Colorado 80112
(incorporated by reference to Exhibit 10.81 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.67) Form of Confidentiality Agreement signed by dealers dated October
19, 1994 (incorporated by reference to Exhibit 10.82 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year ended
December 31, 1994).
(10.68) Ultimate Net Loss Agreement dated November 30, 1994, by and
between Big O Tires, Inc. and The CIT Group/Equipment Financing,
Inc., a New York corporation (incorporated by reference to
Exhibit 10.83 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.69) Inventory Financing Agreement together with a Demand Note dated
September 30, 1994, by and between The Kelly-Springfield Tire
Company and Big O Tires, Inc., Big O Retail Enterprises, Inc. and
Big O Tire of Idaho, Inc. (incorporated by reference to Exhibit
10.84 to Big O Tires, Inc.'s Annual Report on Form 10-K for
fiscal year ended December 31, 1994).
(10.70) Supplemental Executive Retirement Plan dated December 7, 1994, by
Big O Tires, Inc., effective January 1, 1994 (incorporated by
reference to Exhibit 10.85 to Big O Tires, Inc.'s Annual Report
on Form 10-K for fiscal year ended December 31, 1994).
(10.71) Forms of Stock Appreciation Rights Agreement dated February 15,
1995, between Big O Tires, Inc. and the Members of the Chief
Executive Office (incorporated by reference to Exhibit 10.86 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.72) Letter Agreement dated March 24, 1995, regarding severance
package, between Big O Tires, Inc. and John E. Siipola
(incorporated by reference to Exhibit 10.87 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.73) Letter Agreement dated March 24, 1995, regarding severance
package, between Big O Tires, Inc. and Horst K. Mehlfeldt
(incorporated by reference to Exhibit 10.88 to Big O Tires,
Inc.'s Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.74) Letter dated February 7, 1995, from the Dealer-Management Group
to the Company's Board Chairman (incorporated by reference to
Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K
dated January 10, 1995).
(10.75) Agreement between the Company and the Management Dealer
Participants dated January 20, 1995 (incorporated by reference to
Exhibit 10.2 to Big O Tires, Inc.'s Current Report on Form 8-K
dated January 10, 1995).
(10.76) Letter Agreement dated January 10, 1995, amending the Consulting
Agreement by and between Big O Tires, Inc. and Horst K. Mehlfeldt
(incorporated by reference to Exhibit 10.3 to Big O Tires, Inc.'s
Current Report on Form 8-K dated January 10, 1995).
(10.77) Purchase Agreement dated March 22, 1995 effective March 31, 1995
by and between Tire Marketers Association, a division of Big O
Tires, Inc. and Carr's Tire Service, Inc., a Virginia corporation
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated March 31, 1995).
(10.78) Acquisition Proposal to the Investment Committee of the Board of
Directors from certain member of management and a representative
of certain Big O Tires, Inc.'s franchisees dated April 6, 1995
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated April 6, 1995).
30
(10.79) Acquisition Proposal to the Investment Committee of the Board of
Directors from certain member of management and a representative
of certain Big O Tires, Inc.'s franchisees dated June 2, 1995
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated June 5, 1995).
(10.80) Acquisition Proposal to the Investment Committee of the Board of
Directors from certain members of management and a representative
of Big O Tire Dealers of America dated June 2, 1995, and signed
by the Company on June 7, 1995 (incorporated by reference to
Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K
dated June 9, 1995).
(10.81) Letter Agreement and Indemnification Agreement dated January 20,
1995, between Big O Tires, Inc. and PaineWebber Incorporated.
Acquisition Proposal to the Investment Committee of the Board of
Directors from certain member of management and a representative
of certain Big O Tires, Inc.'s franchisees dated April 6, 1995
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated June 30, 1995).
(10.82) Three memos from PaineWebber Incorporated to the Company amending
certain fees dated June 9, 1995, June 16, 1995 and June 30, 1995
(incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated June 30, 1995).
(10.83) Letter Agreement between Big O Tires, Inc. and John E. Siipola
dated July 21, 1995, pertaining to new severance package terms
and terminating the March 24, 1995 Letter Agreement regarding
severance (incorporated by reference to Exhibit 10.3 to Big O
Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995).
(10.84) Letter Agreement between Big O Tires, Inc. and Horst K. Mehlfeldt
dated July 21, 1995, pertaining to new severance package terms
and terminating the March 24, 1995 Letter Agreement regarding
severance (incorporated by reference to Exhibit 10.4 to Big O
Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30, 1995).
(10.85) Letter Agreement between Big O Tires, Inc. and Steven P. Cloward
dated July 21, 1995, regarding a modification to Mr. Cloward's
severance package (incorporated by reference to Exhibit 10.5 to
Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated June 30,
1995).
(10.86) Agreement and Plan of Merger dated July 24, 1995, between BOTI
Holdings, Inc., a Nevada corporation, BOTI Acquisition Corp., a
Nevada corporation and a wholly owned subsidiary of BOTI
Holdings, Inc., and Big O Tires, Inc. (incorporated by reference
to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on Form 8-K
dated July 25, 1995).
(10.87) Letter Agreement dated August 31, 1995, by and among Big O Tires,
Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated September 5, 1995).
(10.88) Agreement for Purchase and Sale of Joint Venture Interest;
Dissolution of Joint Venture; and Continuation of Business by
Acquiring Joint Ventures dated effective October 1, 1994, by and
between Big O Retail Enterprises, Inc., a Colorado corporation
("Seller") and C.S.B. Partnership, a California general
partnership ("Purchaser") (incorporated by reference to Exhibit
10.1 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q dated
September 30, 1995).
(10.89) Letter Agreement dated October 2, 1995, by and among Big O Tires,
Inc., BOTI Acquisition Corp., and BOTI Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated October 4, 1995).
(10.90) Letter dated October 15, 1995, from BOTI Acquisition Corp. and
BOTI Holdings, Inc., to Big O Tires, Inc. (incorporated by
reference to Exhibit 10.1 to Big O Tires, Inc.'s Current Report
on Form 8-K dated October 18, 1995).
31
(10.91) Second Amendment to Employee Stock Ownership Plan and Trust
Agreement of Big O Tires, Inc., dated ___ November, 1995
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated November 17, 1995).
(10.92) Amendment to Agreement and Plan of Merger dated as of November
14, 1995, between BOTI Holdings, Inc., a Nevada corporation (the
"Parent"), BOTI Acquisition Corp., a Nevada corporation and a
wholly owned subsidiary of the Parent (the"Purchaser"), and Big O
Tires, Inc., a Nevada corporation (the "Company"), and amends the
Agreement and Plan of Merger dated as of July 24, 1995
(incorporated by reference to Exhibit 10.2 to Big O Tires, Inc.'s
Current Report on Form 8-K dated November 17, 1995).
(10.93) Second Amendment to Employee Stock Ownership Plan and Trust
Agreement of Big O Tires, Inc., dated November 14, 1995
(incorporated by reference to Exhibit 10.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated December 15, 1995).
(10.94) 1996 Incentive Bonus Plans.
(10.95) Form of Franchise Agreement currently in use.
(10.96) Promissory Note in the original principal amount of $250,000.00
with C.S.B Partnership as Maker and related security documents.
(20.1) Opinion Letter from PaineWebber Incorporated to the
Board of Directors of Big O Tires, Inc. dated November 14, 1995
(incorporated by reference to Exhibit 20.1 to Big O Tires, Inc.'s
Current Report on Form 8-K dated November 17, 1995).
(21.1) Big O Tires, Inc. Subsidiaries
(23.1) Consent of Deloitte & Touche
(25.1) Powers of Attorney executed by the Directors of Big O
Tires, Inc.
(27.1) Big O Tires, Inc.'s Financial Data Schedule.
__________
* All executive compensation plans and arrangements required to be filed as
exhibits to the Form 10-K pursuant to Item 601.
32
(b) Reports on Form 8-K
1. On October 4, 1995, the Company filed a Current Report on Form 8-K dated
October 4, 1995 announcing under Item 5 that the Company had agreed to a
requested extension of the Merger Agreement. The Company also filed under
Item 7 the Letter Agreement dated October 2, 1995 by and among the Company,
BOTI Acquisition Corp., and BOTI Holding, Inc.
2. On October 18, 1995, the Company filed a Current Report on Form 8-K
dated October 18, 1995, announcing under Item 5 that the Company received
notice from the Purchaser that the Purchaser elected to waive the Dealer
Participation Contingency. The Company also filed under Item 7 the letter
dated October 15, 1995 from BOTI Acquisition Corp. and BOTI Holding, Inc.
3. On November 17, 1995, the Company filed a Current Report on Form 8-K
dated November 17, 1995, announcing under Item 5 that the Company received
a written opinion from PaineWebber Incorporated stating that as of the date
of the opinion, the merger consideration of $16.50 per share was fair from
a financial point of view to holders of the Company's common stock. The
Company also announced that the Board approval of various amendments to the
Company's Stock Ownership Plan and Trust Agreement. The Company also filed
under Item 7 the Second Amendment to Employee Stock Plan and Trust
Agreement, the Amendment to Agreement and Plan of Merger dated as of
November 14, 1995, between BOTI Holdings, Inc. and BOTI Acquisition Corp.,
and the Company, and the Opinion Letter from PaineWebber Incorporated dated
November 15, 1995.
4. On December 15, 1995, the Company filed a Current Report on Form 8-K/A
dated December 15, 1995, amending the Company's Current Report on Form 8-K
dated November 17, 1995 for the purpose of filing a corrected version of
the Second Amendment to Employee Stock Ownership Plan and Trust Agreement.
(c) EXHIBITS
Exhibits required by Item 601 of Regulation S-K are listed above under (a) (3)
of this Item 14.
(D) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules are listed above under (a) (2) of this Item 14.
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 29, 1996
BIG O TIRES, INC., a Nevada corporation
By: /s/ JOHN E. SIIPOLA
----------------------------------
John E. Siipola
Member of the Office of the
Chief Executive and Chairman
By: /s/ HORST K. MEHLFELDT
----------------------------------
Horst K. Mehlfeldt
Member of the Office of the
Chief Executive and Vice-Chairman
By: /s/ STEVEN P. CLOWARD
----------------------------------
Steven P. Cloward
Member of the Office of the
Chief Executive and President
By: /s/ JOHN B. ADAMS
----------------------------------
John B. Adams
Principal Accounting Officer
34
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
DATE NAME AND TITLE SIGNATURE
- -------------------------------------------------------------------------------------
March 29, 1996 John E. Siipola JOHN E. SIIPOLA
Director, Member of the Office of the
Chief Executive and Chairman of the Board
Horst K. Mehlfeldt HORST K. MEHLFELDT
Director, Member of the Office of the
Chief Executive and Vice-Chairman of the Board
Steven P. Cloward STEVEN P. CLOWARD
Director, Member of the Office of the
Chief Executive and President
John B. Adams JOHN B. ADAMS
Director and Principal
Financial Officer
Ronald D. Asher RONALD D. ASHER
Director
Frank L. Carney FRANK L. CARNEY
Director
Everett H. Johnston EVERETT H. JOHNSTON
Director
Robert K. Lallatin ROBERT K. LALLATIN
Director
Ralph J. Weiger RALPH J. WEIGER
Director
C. Thomas Wernholm C. THOMAS WERNHOLM
Director
March 29, 1996
By: /s/ JOHN B. ADAMS
-------------------------
John B. Adams
Attorney-in-Fact
35
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Big O Tires, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Big O Tires,
Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/Deloitte & Touche
Denver, Colorado
March 14, 1996
BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(000S EXCEPT FOR SHARE AMOUNTS)
ASSETS 1995 1994
- ------ ------- -------
CURRENT ASSETS:
Cash and cash equivalents $ 1,094 $ 4,882
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,421 in 1995 and $835 in 1994 9,255 8,165
Other receivables 242 2,905
Current portion of notes receivable 515 733
Inventories 13,249 14,219
Retail stores under development 4,861 2,169
Deferred income taxes 2,654 2,126
Other current assets 769 688
------ -------
Total current assets 32,639 35,887
------ -------
NOTES RECEIVABLE,
net of current portion 2,656 3,193
------ -------
PROPERTY, PLANT AND EQUIPMENT:
Furniture and equipment 7,427 6,021
Buildings and leasehold improvements 11,194 7,413
Land and land improvements 2,971 1,574
------ -------
21,592 15,008
Less accumulated depreciation and amortization (5,266) (5,146)
------ -------
16,326 9,862
------ -------
INTANGIBLE AND OTHER ASSETS:
Distribution rights, net of accumulated amortiza-
tion of $2,094 in 1995 and $1,816 in 1994 8,799 9,077
Equity in joint ventures and unconsolidated subsidiaries 877 1,129
Other 2,097 2,820
------ -------
11,773 13,026
------ -------
TOTAL ASSETS $63,394 $61,968
------ -------
------ -------
See notes to consolidated financial statements
BIG O TIRES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(000S EXCEPT FOR SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
- ------------------------------------ ------ -------
CURRENT LIABILITIES:
Accounts payable $1,882 $ 650
Accrued payroll and benefits 1,408 1,130
Other accrued expenses 1,283 1,355
Warranty reserve 4,350 3,850
Current portion of long-term debt 1,639 2,033
Current portion of capital lease obligations 36 33
------ -------
Total current liabilities 10,598 9,051
------ -------
LONG-TERM DEBT,
net of current portion 13,729 15,739
------ -------
CAPITAL LEASE OBLIGATIONS,
net of current portion 131 167
------ -------
OTHER LONG-TERM LIABILITIES 1,337 1,433
------ -------
EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATIONS 192 449
------ -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock: $ .10 par value
100,000,000 shares authorized,
shares issued: 3,349,100 in 1995
and 3,339,300 in 1994 335 334
Capital contributed in excess of par 15,544 15,418
Retained earnings 21,962 20,419
------ -------
37,841 36,171
Less: Employee stock ownership plan obligations (192) (449)
Deferred stock grant compensation (121) (472)
Treasury stock, at cost, 31,300 shares (121) (121)
------ -------
37,407 35,129
------ -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,394 $61,968
------ -------
------ -------
See notes to consolidated financial statements
BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000S EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
1995 1994 1993
-------- -------- --------
SALES:
Product and franchising $136,633 $127,678 $122,960
Real estate 5,489 -- --
--------- --------- ---------
142,122 127,678 122,960
COST OF SALES:
Product and franchising 105,985 97,547 95,329
Real estate 5,471 -- --
--------- --------- ---------
111,456 97,547 95,329
GROSS PROFIT 30,666 30,131 27,631
--------- --------- ---------
EXPENSES:
Selling and administrative 19,868 19,132 19,316
Product delivery expense 3,954 3,113 2,499
Interest expense 1,441 1,465 1,219
Loss on sale or closure of retail stores 547 1,106 429
Shareholder proposal expense 1,812 674 --
Offering costs -- -- 281
Warehouse consolidation costs 320 -- 607
--------- --------- ---------
27,942 25,490 24,351
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,724 4,641 3,280
--------- --------- ---------
PROVISION FOR INCOME TAXES:
Current 1,709 2,311 1,979
Deferred (528) (361) (579)
--------- --------- ---------
1,181 1,950 1,400
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,543 2,691 1,880
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- (285)
--------- --------- ---------
NET INCOME $1,543 $ 2,691 $1,595
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Income before cumulative effect
of change in accounting principle $ .46 $ .80 $ .55
Cumulative effect of change in
accounting principle -- -- (.08)
--------- --------- ---------
Net income $ .46 $ .80 $ .47
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 3,377,429 3,347,892 3,409,962
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements
BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
($ ONLY IN 000S)
EMPLOYEE
COMMON STOCK CAPITAL STOCK TREASURY STOCK
------------- CONTRIBUTED OWNERSHIP DEFERRED ----------------
NUMBER OF IN EXCESS RETAINED PLAN STOCK GRANT NUMBER OF
SHARES AMOUNT OF PAR EARNINGS OBLIGATIONS COMPENSATION SHARES AMOUNT
--------- ------- ------- -------- ----------- ------------ ------ ------
BALANCE DECEMBER 31, 1992 3,542,700 $354 $19,099 $16,133 $(1,277) $ - 31,000 $ (119)
Net Income for 1993 1,595
Sale of Common Stock 93,300 9 1,097
Stock Issued as Compensation 1,500 19
Stock Options and Warrants Exercised 37,400 4 284
Deferred Compensation under
Discounted Stock Option Plan 90
Purchase and Retirement of
Treasury Stock and Warrants (400,000) (40) (6,060)
Treasury Stock Purchased 300 (2)
Employee Stock Ownership
Plan Obligation 302
--------- ------ ------- ------- ------- ------ ------ ------
BALANCE DECEMBER 31, 1993 3,274,900 327 14,529 17,728 (975) - 31,300 (121)
Net Income for 1994 2,691
Stock Issued as Compensation 33,700 4 516 (472)
Stock Options Exercised 30,700 3 229
Deferred Compensation under
Discounted Stock Option Plan 144
Employee Stock Ownership
Plan Obligation 526
--------- ------ ------- ------- ------- ------ ------ ------
BALANCE DECEMBER 31, 1994 3,339,300 334 15,418 20,419 (449) $(472) 31,300 (121)
Net Income for 1995 1,543
Stock Options Exercised 15,000 2 138
Restricted Stock Grants Cancelled (5,200) (1) (80) 81
Deferred Compensation Recognized 270
Deferred Compensation under
Discounted Stock Option Plan 68
Employee Stock Ownership
Plan Obligation 257
--------- ------ ------- ------- ------- ------ ------ ------
BALANCE DECEMBER 31, 1995 3,349,100 $ 335 $15,544 $21,962 $ (192) $(121) 31,300 $(121)
--------- ------ ------- ------- ------- ------ ------ ------
--------- ------ ------- ------- ------- ------ ------ ------
See notes to consolidated financial statements
BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000s)
1995 1994 1993
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,543 $2,691 $1,595
------ ------ ------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,240 1,215 1,168
Amortization of intangibles 395 453 390
Provision for losses on accounts and
notes receivable 1,272 356 556
(Gain)/loss on sales and retirements
of property and equipment (481) 37 40
Loss on sale or closure of retail stores 315 1,106 150
Equity in losses of affiliates 40 250 350
Deferred compensation under stock option plan
and restricted stock grants 338 224 90
Deferred gain recognized (22) (47) (35)
Deferred income taxes (528) (361) (579)
Cumulative effect of change in accounting principle -- -- 285
Other -- -- 104
Changes in assets and liabilities:
Increase in receivables (167) (4,446) (1,206)
(Increase) decrease in inventories 993 (2,253) 3,356
Increase in retail stores under development (2,392) (456) --
(Increase) decrease in other current assets (81) 161 (329)
(Increase) decrease in other assets (3) 9 (40)
Increase (decrease) in accounts payable 1,232 (2,987) 4,528
Increase in accrued expenses 100 25 278
Increase in warranty reserve 500 596 600
Decrease in other liabilities (283) (258) --
------ ------ ------
Total adjustments 2,468 (6,376) 9,706
------ ------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 4,011 (3,685) 11,301
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (139) (650) (400)
Payments received on notes receivable 647 1,170 1,184
Proceeds from sales of notes receivable 1,014 2,962 --
Equity investment in affiliates (87) (187) (673)
Acquisition of interest in joint ventures -- -- (266)
Acquisition of other assets -- -- (1,005)
Contingent payments related to business combination -- -- (788)
Net cash provided by sales of retail stores -- 204 77
Purchase of retail stores (141) (410) (435)
Purchases of property and equipment (10,114) (1,440) (1,039)
Proceeds from sales of property and equipment 3,649 1,183 42
------ ------ ------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,171) 2,832 (3,303)
------ ------ ------
BIG O TIRES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000s)
1995 1994 1993
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $2,650 $10,735 $ 560
Principal payments on long-term debt (5,385) (6,106) (4,055)
Principal payments on capital
lease obligations (33) (239) (274)
Proceeds from sale of common stock and
stock options and warrants exercised, net 140 232 1,394
Purchase and retirement of treasury stock
and warrants -- -- (6,100)
------ ------ ------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (2,628) 4,622 (8,475)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,788) 3,769 (477)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,882 1,113 1,590
------ ------ ------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $1,094 $4,882 $1,113
------ ------ ------
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $1,740 $1,446 $1,240
Income taxes 1,186 2,373 2,116
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accounts receivable transferred to long-
term notes receivable and other assets $ 767 $ 478 $1,912
Employee stock ownership plan obligations 257 526 302
Non-cash equity investments in affiliates -- -- 108
Accounts payable transferred to long-term debt -- -- 6,000
Non-cash acquisition of company-owned retail stores -- -- 187
Inventories received in satisfaction of long-term
notes receivables -- 454 --
Common stock issued as unearned compensation -- 520 --
Property and equipment purchased by issuance of
long-term debt 300 2,767 --
Sale of assets through assumption of related debt -- 4,078 --
See notes to consolidated financial statements
BIG O TIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS:
The primary business of the Company is to franchise Big O tire retail stores
("Franchisees") and supply those Franchisees with tires, wheels and related
replacement automotive parts. As a franchisor, the Company is active in
promoting certain programs and sales techniques to its Franchisees. On a
limited basis, the Company also engages in site selection and real estate
development for franchised retail stores, and also owns and operates a limited
number of retail stores. Franchisees are located primarily in the Midwest and
Western United States.
Under a Franchise Agreement, the Company grants the right to operate a retail
tire store using the Big O trademarks, service marks and associated logos and
symbols in exclusive marketing territories. Depending on certain
qualifications, the initial franchise fee ranges from $7,000 to a maximum of
$21,000. Assignment or transfer of a Franchise Agreement provides a transfer
fee of up to $21,000. 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. Franchisees also pay the Company a
continuing royalty fee of 2% of the Franchisees' monthly gross sales as that
term is defined in the Franchise Agreement. Continuing royalty fees are
recognized when the fees are earned and become receivable from the Franchisee.
The initial franchise and royalty fees included in sales were $7,068,000,
$6,772,000 and $6,116,000 for 1995, 1994 and 1993, respectively. The Franchise
Agreement also allows for the Company to collect a 1% fee to be used for
national advertising; however, this fee is currently limited to $.10 for each
Big O brand tire purchased from the Company.
One member of the Company's Board of Directors had ownership of or interests in
twenty-eight (28) Big O Retail Stores in 1995 and thirty-one (31) Big O Retail
Stores during 1994 and 1993. One officer had ownership interests in two (2) Big
O Retail Stores in 1995 and 1994 and two officers each had an ownership interest
in a Big O Retail Store in 1995, 1994 and 1993. Sales to these stores were
approximately $6,948,000, $9,372,000, and $8,122,000 during 1995, 1994 and 1993,
respectively. These sales were made under the same terms and conditions as those
with unrelated parties. As of December 31, 1995 and 1994, outstanding accounts
and notes receivable from these stores totalled $959,000 and $803,000,
respectively. The Company has also provided equipment lease guarantees to
certain of these stores totalling $327,000 at December 31, 1995. During 1993,
an officer of the Company purchased real property from a joint venture in which
the Company holds a 50% interest. The sale resulted in a pretax gain of $38,000
for the joint venture.
SIGNIFICANT ACCOUNTING POLICIES:
Consolidation and Reclassifications -
All significant majority-owned subsidiaries are consolidated and all significant
intercompany transactions are eliminated. Certain reclassifications have been
made to 1994 and 1993 financial information to make the presentation consistent
with that of the current year. These reclassifications had no impact on net
income.
Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates used by
management in the preparation of these financial statements include, but are not
limited to, the valuation of accounts receivable, the carrying value of
inventories, the useful lives and recoverability of property, plant and
equipment, the valuation of distribution rights and future warranty costs.
43
Cash -
Cash and cash equivalents include time deposits, certificates of deposit and
marketable securities with original maturities of three months or less.
At December 31, 1994 cash in the amount of $4,228,000 was restricted for use by
the Company for the acquisition of the Las Vegas distribution center which was
under construction. The distribution center was completed in February 1995.
Inventories -
Inventories consist of finished goods only. New and recapped tire inventories
of Big O Tire of Idaho, Inc. ("Idaho"), a subsidiary of the Company, and the
inventories purchased pursuant to the November 1988 Louisville, Kentucky merger
(see Note 2), are valued at the lower of last-in, first-out ("LIFO") cost or
market. All other inventories are valued at the lower of first-in, first-out
("FIFO") cost or market. Inventories of $4,472,000 and $4,657,000 at December
31, 1995 and 1994, respectively, are valued at LIFO. Under the FIFO method of
inventory valuation, these inventories would have been approximately $9,000 and
$44,000 higher at December 31, 1995 and 1994, respectively.
Retail Stores Under Development -
Costs associated with developing real estate into retail stores are capitalized
and carried at the lower of each project's capitalized cost or its net
realizable value.
Property, Plant and Equipment -
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line and double declining balance methods over estimated
useful lives of the assets ranging from three to 40 years.
Ordinary maintenance and repairs are charged to operations, while expenditures
which extend the physical or economic life of property and equipment are
capitalized. Gains and losses on disposition of property and equipment are
recognized in operations in the year of disposition and the related asset and
accumulated depreciation accounts are adjusted accordingly.
Intangible Assets -
Distribution rights, which represent the excess purchase cost over the fair
market value of net assets acquired in certain mergers and acquisitions (see
Note 2) are capitalized and are being amortized by charges to operations on a
straight line basis over 40 years. On a quarterly basis, management reviews the
carrying value of the Company's intangible assets for impairment and adjusts the
carrying value and/or amortization periods of such assets whenever events or
circumstances warrant.
Warranty Reserve -
The Company maintains a reserve for future warranty claims on Big O brand tires
based on historical experience.
Earnings Per Share -
Earnings per share is computed using the weighted-average number of outstanding
shares during each period presented. Inclusion of common stock equivalents
would not have a material effect on the computation.
2. ACQUISITIONS AND MERGERS:
In November 1988 the Company acquired Big O Tire of Louisville, Inc.
("Louisville") at a cost of $3,031,000. Louisville had the distribution rights
to the Kentucky and Indiana market of 24 Big O Retail Stores. The Company
issued 204,200 shares of its common stock and paid $1,443,000 in cash for this
acquisition. The stock was valued
44
at $7.70 per share which approximated management's estimate of the market
value of such unregistered shares as of the date of the transaction. In
accordance with the purchase method of accounting, the purchase price was
allocated to the net assets acquired based on fair values at the date of
acquisition with $1,114,000 being assigned to distribution rights and
$600,000 to a non-compete agreement. In connection with this acquisition,
the Company also had an obligation to provide additional securities, or
obtain the return of a portion of those securities, based upon the trading
price of the Company's common stock at specified dates through November 1994.
In August 1990 the Company modified the agreement with the former
shareholders of Louisville whereby the Company guaranteed that the former
shareholders would receive, under certain circumstances, a value of $25.00
per share (subject to adjustment depending on when payment is received) from
the sale of the Big O common stock issued to them in connection with the
acquisition of Louisville, and the former shareholders provided the Company
with an option of paying cash in lieu of issuing additional securities
pursuant to this obligation. In 1993 and 1992, cash payments of $788,000
and $501,000, respectively, were made to the former shareholders of
Louisville under the terms of this obligation which were capitalized as
additional costs of distribution rights. In June 1993, the Company completed
an equity offering which included the sale of 81,667 shares of Big O common
stock held by the former shareholders of Louisville. With the sale of this
stock and the cash payment of $788,000, the Company's obligation to the
former shareholders was fully satisfied.
3. JOINT VENTURES:
In August 1992 the Company sold its interest in a joint venture involving a
wholly owned subsidiary, Big O Distributors, Inc. ("Distributors") and received
a five-year promissory note for $231,000 in exchange for its interest. The
Company incurred a loss of approximately $73,000 on the sale. Although the
buyer, Aspen Enterprises, Inc., is now primarily responsible for obligations
under the building lease, Distributors remains contingently liable through 1996
for up to $131,000 in future rentals if the joint venture defaults. These
future rents are not included in the future minimum rental payments disclosed in
Note 8.
Prior to 1992 the Company and one of its subsidiaries, Big O Development, Inc.
("Development"), entered into three separate joint venture agreements with
independent parties for the purpose of developing real estate sites for Big O
Retail Stores. The Company accounts for its 50% investment in these joint
ventures using the equity method. During 1993, the Company acquired the
remaining 50% interest in one of the joint ventures at a cost of $266,000. The
joint venture was then liquidated and the net assets were transferred to
Development. At December 31, 1995 and 1994, $499,000 and $573,000,
respectively, were recorded as investments in these joint ventures including
$45,000 in pretax loss for 1995 and $ 9,000 and $10,000 in net pretax income for
1994, and 1993, respectively.
In 1993 and 1992, the Company and one of its subsidiaries, Big O Retail
Enterprises, Inc., entered into separate joint venture agreements with five of
its franchisees to operate retail stores in Arizona, California, Colorado, and
Wyoming. Generally, the Company contributed inventories in the amount of
$55,000 and guaranteed certain financing arrangements in exchange for a 50%
interest in each joint venture.
4. SALES AND CLOSURES OF RETAIL STORES:
The Company accrued $547,000, $1,106,000 and $429,000 in 1995, 1994 and 1993,
respectively, to cover estimated closing and future lease costs associated with
the sale or closure of company-owned retail stores and the closure of Franchisee
retail stores. Three, four and one franchisee retail stores were closed in
1995, 1994 and 1993, respectively, in which the Company had guaranteed the
franchisees' lease agreements. Five company-owned retail stores were either
closed or sold in each of 1994 and 1993. No company-owned retail stores were
sold or closed in 1995.
45
5. NOTES RECEIVABLE:
Notes receivable at December 31, 1995 and 1994, consisted of the following:
1995 1994
---------- ---------
(in thousands)
6.0% to 12.0% notes receivable from
franchisees from the sale of Company-owned
retail stores, substantially all of which
are collateralized by inventories,
equipment, receivables and franchise
rights, due in monthly installments
plus interest (see Note 4). $ 579 $1,432
8.0% to 11.25% notes receivable from
franchisees, for inventories and equipment,
substantially all of which are also collateral,
due in monthly installments plus
interest. 2,075 1,599
6% note receivable due from a vendor for
returned inventories, which are also
collateral, due in monthly installments
plus interest. -- 187
9.25% to 10% notes receivable from sale of real
properties, collateralized by said properties,
due in monthly installments plus interest. 293 494
Other - primarily 8% to 11% notes
receivable from various entities, majority
are without collateral, maturing at
various dates. 224 214
------ ------
3,171 3,926
Less current portion 515 733
------ ------
Long-term portion $2,656 $3,193
------ ------
------ ------
46
6. LONG-TERM DEBT:
Long-term debt at December 31, 1995 and 1994, consisted of the following:
1995 1994
-------- --------
(in thousands)
Prime rate (8.5% at December 31, 1995) revolving
credit agreement, collaterized by receivables and inventories,
with a maximum borrowing of up to $20,000,000
(limited to a portion of eligible collateral and further
reduced by the amount of any outstanding letters of credit
issued by the lender on behalf of the Company). (a) $ 2,650 $ --
Prime rate plus 1/2% revolving credit loan,
with an annual facility fee of $19,000,
replaced by a new credit facility on January 23, 1995. -- 2,985
8.71% senior loan, collateralized by certain real estate,
interest only due in quarterly installments through July 1998,
then principal due in quarterly installments of $333,000 plus
interest through May 2004. 8,000 8,000
Prime rate credit loan, without collateral, due in
monthly principal installments of $125,000 plus
interest through September 1996, and $135,000
plus interest through October 1997, balance due
November 1997. (b) 2,945 4,355
Prime rate mortgage loan, collateralized by deed of trust,
due in monthly installments of $8,000 including interest
through September 2001. 1,367 1,475
Prime plus 2.25% mortgage loan, collateralized by
a deed of trust, due in monthly installments of
$4,000 through July 2004. 406 412
8.0% mortgage loan, paid in January 1995. -- 312
8.0% mortgage loan, paid in April 1995. -- 200
Other -- 33
------- -------
15,368 17,772
Less current portion 1,639 2,033
------- -------
Long-term portion $13,729 $15,739
------- -------
------- -------
(a) The amount of borrowing availability for the revolving credit agreement is
determined by application of a predefined formula to the collateral base on a
monthly basis. The range of permitted borrowings for 1995 was $12,119,000 to
$19,500,000.
(b) Interest rate reductions of up to 2.5% may be earned by meeting certain
purchase requirements defined in the lending agreement.
47
Management's discretion with respect to certain business matters is limited by
financial and other covenants contained in the revolving credit agreement and
other loan agreements described above. These covenants, among other things,
limit or prohibit the Company from (i) paying dividends on its capital stock,
(ii) incurring additional indebtedness, (iii) creating liens or selling certain
assets, (iv) making certain loans, investments, or guarantees, (v) violating
certain financial ratios, (vi) repurchasing shares of its common stock, or (vii)
making certain capital expenditures. At December 31, 1995, the Company was in
compliance with all of these covenants.
The annual maturities of long-term debt for succeeding years are as follows (in
thousands):
1996 $ 1,639
1997 1,524
1998 2,760
1999 778
2000 1,446
Due thereafter 7,221
-------
$15,368
-------
-------
7. CAPITAL LEASES:
The Company leases certain equipment and a building under capital lease
arrangements. Leased assets under these arrangements at December 31, 1995
and 1994 were as follows (in thousands):
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ ---
1995:
Building and leasehold
improvements $ 125 $ 76 $ 49
Equipment 144 116 28
-------- -------- ------
$ 269 $ 192 $ 77
-------- -------- ------
-------- -------- ------
1994:
Building and leasehold
improvements $ 125 $ 70 $ 55
Equipment 144 89 55
-------- -------- ------
$ 269 $ 159 $ 110
-------- -------- ------
-------- -------- ------
48
At December 31, 1995, future minimum lease commitments under these leases for
succeeding years were as follows (in thousands):
1996 $ 70
1997 58
1998 34
1999 34
2000 34
Due thereafter 92
-----
Total minimum lease payments 322
Less amount representing interest 155
-----
Present value of net minimum
lease payments 167
Less current portion 36
-----
Long-term portion $ 131
-----
-----
8. OPERATING LEASES:
The Company's operating leases are primarily for real property. Rental expense
for the years ended December 31, 1995, 1994 and 1993 was $968,000, $1,218,000
and $1,253,000, respectively, after deducting sublease income of $1,740,000 for
1995, $1,571,000 for 1994 and $1,448,000 for 1993.
Future minimum rental payments required under these leases for succeeding years
are as follows (in thousands):
1996 $ 3,613
1997 3,295
1998 2,893
1999 2,337
2000 1,999
Due thereafter 5,920
-------
20,057
Less sublease income 10,100
-------
$ 9,957
-------
-------
The Company is contingently liable for future rentals on a building lease
currently occupied by a former joint venture partner (See Note 3). In the
event of a default, the Company remains liable for up to $131,000 in future
rentals. These future rents are not included in the future minimum rental
payments above.
Certain lease agreements provide the Company with the option to purchase the
leased property at its fair market value at the end of the lease term.
Additionally, certain lease agreements contain renewal options ranging from
five to fifteen years with terms similar to the original lease agreements.
In November 1988 the Company received a distribution of its interest in the
Ontario, California distribution center from the limited partnership and
subsequently sold its interest to an unrelated third party. As part of this
transaction, the distribution center's ten year lease was also transferred,
resulting in a sale-leaseback. The Company's share of the gain on the sale
of the property is being deferred and amortized over the remaining lease term.
49
9. INCOME TAXES:
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109) as of January 1, 1993. SFAS No.
109 is an asset and liability approach that, among other provisions, requires
the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences,
SFAS No. 109 generally considers all expected future events other than
enactments or changes in the law or rules.
The total cumulative effect of adopting SFAS No. 109 was an increase in
deferred tax liabilities of $285,000 at January 1, 1993 and has been reported
as a charge against income in the 1993 consolidated statement of income.
The tax effects of temporary differences which give rise to the deferred tax
assets and liabilities as of December 31, 1995 and 1994 are as follows (in
thousands):
1995 1994
------- -------
Deferred Tax Assets:
Allowance for doubtful accounts
not currently deductible $ 548 $ 325
Inventory reserves not currently
deductible -- 198
Inventory basis differences 76 44
Accruals not currently deductible 334 208
Warranty reserves not currently
deductible 1,678 1,499
Other reserves not currently
deductible 347 474
Compensation under stock option
plan not currently deductible 266 207
Differences between book and tax
recognition of gain on sales
of property 48 93
Property and equipment basis
differences 7 --
Investment basis differences 45 106
------- --------
$ 3,349 $ 3,154
------- --------
------- --------
Deferred Tax Liabilities:
Prepaid expenses deductible
for tax purposes $ 196 $ 216
Accelerated tax depreciation
and amortization 314 604
Property and equipment basis
differences 156 43
Intangible assets not currently
deductible -- 165
Inventory basis differences 29 --
------- --------
$ 695 $ 1,028
------- --------
------- --------
Net deferred tax asset $ 2,654 $ 2,126
Non-current deferred tax
liability -- --
------- --------
Current deferred tax asset $ 2,654 $ 2,126
------- --------
------- --------
50
The following is a summary of the income tax provision for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993
------- ------- -------
Currently payable $ 1,677 $ 2,197 $ 1,921
Deferred expense (528) (361) (579)
Tax benefit of exercise of
stock options 32 114 58
------- ------- -------
Total income tax provision $ 1,181 $ 1,950 $ 1,400
------- ------- -------
------- ------- -------
A reconciliation of the provision for income taxes to the statutory Federal tax
rate of 34% on income before income taxes is as follows (in thousands):
1995 1994 1993
------- ------- -------
Tax at statutory rate $ 926 $ 1,578 $ 1,115
State taxes, net of Federal
tax benefit 141 248 177
Depreciation and amortization not
deductible for tax purposes 91 91 87
Other 23 33 21
------- ------- -------
$ 1,181 $ 1,950 $ 1,400
------- ------- -------
------- ------- -------
10. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an employee stock ownership plan ("ESOP") in which all
non-retail employees, 18 years of age or older and having 1,000 hours of
service in a fiscal year, are eligible to participate. The ESOP generally
provides for 20% vesting after three years of service with an additional 20%
each year of service thereafter, until a participant is 100% vested. Annual
contributions are at the discretion of the Board of Directors, subject to the
ESOP provision that the Company is required to make contributions equal to
principal and interest payments on debt issued by the ESOP to acquire
securities. Contributions recorded in 1995, 1994 and 1993 were $255,000,
$357,000 and $697,000, respectively.
In 1991, the ESOP purchased 461,008 shares of the Company's $.10 par value
common stock from four of the Company's shareholders at market value in
exchange for cash and notes. In 1993, the ESOP refinanced the remaining
three notes with a new note payable in five annual installments of principal
and interest fixed at 9.0%. The Company's financial statements at December
31, 1995 and 1994 reflect the ESOP's obligations as a liability and a
corresponding reduction of shareholders' equity.
11. SHAREHOLDERS' EQUITY:
SHAREHOLDER RIGHTS PLAN -
In August 1994, the Board of Directors adopted a shareholder rights plan and
declared a dividend of one right for each outstanding share of the Company's
common stock. Each right entitles the shareholder to purchase from the
Company one share of the Company's common stock at a discounted price (which
varies depending upon the circumstances, determined according to the plan).
The rights are not and will not become exercisable unless certain change of
control events occur. None of the rights are exercisable as of December 31,
1995.
STOCK OPTION PLANS -
In August 1988 the Company adopted the Big O Tires, Inc. Director and
Employee Stock Option Plan (the "Option Plan") which allows the Company's
directors and employees to forego a portion of their compensation in order to
acquire options for the purchase of the Company's common stock in accordance
with the provisions of the Option Plan. Options are granted to the
participants on January 1 of each year, in an amount equal to the foregone
51
compensation divided by 90% of the fair market value of the Company's $0.10
par value common stock. The remaining 10% of the fair market value then
becomes the exercise price of the options. The options are exercisable one
year after the grant date and expire ten years after grant. The Option Plan
was terminated by the Board of Directors at a meeting held in December 1995.
Options previously granted pursuant to the Option Plan remain exercisable
until exercised or forfeited. No new options will be granted pursuant to the
Option Plan after 1995.
In June 1991 the Company adopted the Big O Tires, Inc. Long Term Incentive
Plan (the "Incentive Plan") which allows the Company to make long-term awards
of stock options and restricted stock grants to selected officers and
employees of the Company and to make long-term awards of stock options to
selected directors of the Company. The stock options are generally not
exercisable for at least three years following their award date and awards of
restricted common stock are subject to vesting requirements. The fair market
value of the shares of stock at the grant date ($472,000) was recorded as
deferred compensation and is included as a deduction from shareholders'
equity. This amount is amortized as compensation expense as the shares vest
to the recipients.
Stock option transactions for the years ended December 31, 1995, 1994 and
1993 are as follows:
1995 1994 1993
------------------------ ------------------------ ------------------------
Exercise Price Options Exercise Price Options Exercise Price Options
-------------- ------- -------------- ------- -------------- -------
Options outstanding at $.32 - 15.44 226,347 $.32 -12.25 203,974 $.32 - 5.16 150,223
beginning of year
Granted 1.63 4,943 1.48 -15.44 53,213 1.35 - 12.25 71,336
Exercised .32 - 12.25 (14,982) .32 -12.25 (30,735) .32 - 5.16 (17,348)
Expired -- 1.06 (105) .84 - 1.06 (237)
------- ------- -------
Options outstanding at end
of year .32 - 15.44 216,308 .32 -15.44 226,347 .32 - 12.25 203,974
------- -------
------- -------
Options exercisable at end
of year .32 - 5.16 116,894 .32 -12.25 77,025 .32 - 1.06 65,848
12. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:
Effective January 1, 1994, the Company adopted a supplemental executive
retirement plan ("SERP") which is maintained for the purpose of providing
deferred compensation for a select group of highly compensated employees.
The 1994 contribution to the SERP was $11,000 and was determined by
multiplying the Board approved ESOP contribution rate by the ESOP qualified
compensation exceeding $150,000. This plan is unfunded and the contribution
was made only for 1994. No contribution was made for 1995.
13. COMMITMENTS AND CONTINGENCIES:
During 1992, the Company entered into an agreement with a lender to provide
equipment, inventory and real estate financing to various joint ventures in
which the Company was a 50% joint venture partner. The agreement required
the Company and the other joint venture partners to guarantee repayment of
the loans. This agreement was terminated in August 1995.
The Company previously entered into two separate equipment leasing programs
for its franchisees with two equipment leasing companies. The Company
entered into agreements with these leasing companies which require the
Company to pay up to $1,000,000 and $500,000, respectively, under certain
franchisee contract defaults. These commitments are collateralized by the
leased equipment. In addition, the Company entered into a similar leasing
program with another equipment leasing company which does not require a
financial guarantee, but does require the Company to assist in the
re-marketing of the leased equipment, if necessary.
52
In December 1989 the Company also entered into an agreement with an independent
franchise finance company to provide financing to its Franchisees for
inventories and equipment. This agreement requires the Company to guarantee
payment of up to $750,000 under certain franchisee contract defaults. This
commitment is collateralized by the inventories and equipment which have been
financed and franchise rights.
In 1995 and 1994, the Company sold certain notes receivable which had
remaining principal balances of $1,014,000 and $2,962,000, respectively, plus
accrued interest, to an investor. In connection with the sale of these
notes, the Company executed an Ultimate Net Loss Agreement which limits the
Company's guarantee for payment of these notes to fifty percent of the
aggregate unpaid balance of the purchased notes at the end of each prior
year. No gain or loss was recorded in connection with the sale of these
notes.
At December 31, 1995 and 1994, the Company had no post-retirement or
post-employment benefits which would require recognition or disclosure under
the provisions of SFAS No. 106 and No. 112, respectively.
14. FINANCIAL GUARANTEES AND CREDIT RISK:
The Company has provided financial guarantees associated with franchisee
financing and real estate leases for its Franchisees. The guarantees were
issued in the normal course of business to meet the financing needs of the
Company and its Franchisees. However, these financial guarantees represent
additional credit risk in excess of the amounts which are already reflected
in the balance sheet as of December 31, 1995.
The Company's maximum exposure to credit loss in the event of nonperformance
by the beneficiaries of the financial guarantees at December 31, 1995 is
represented by the contractual amount of the guarantees as indicated below
(in thousands):
Mortgage loan guarantees $ 2,730
Franchisee financing guarantees 8,097
Franchisee real estate lease guarantees 4,874
-------
Total $15,701
-------
-------
The financing and lease guarantees are conditional commitments issued by the
Company to guarantee the repayment of amounts which are owed to third parties
by certain of its Franchisees and joint ventures. Most of the financing and
lease guarantees extend for more than five years and expire in decreasing
amounts through 2002.
The credit risk associated with these guarantees is essentially the same as
that involved in extending loans to the Company's Franchisees or partners.
The Company evaluates each Franchisee's creditworthiness on an individual
basis, and it is the Company's policy to require that sufficient collateral
(primarily inventories and equipment) and security interests be obtained by
the third parties in connection with the financing and lease obligations
(except for real estate obligations) for which the guarantees are issued.
There are no cash requirements associated with these guarantees except in the
event that an actual financial loss is subsequently incurred by the Company
in connection with these guarantees.
15. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
Although the Company has franchised and Company-owned retail stores located
in 18 states, approximately 38% of these stores are located in the State of
California, and nearly 28% of the Company's sales were made to the California
retail stores. In addition, all of the Company's operations and identifiable
assets are attributable to the wholesale and retail marketing of tires and
other automotive aftermarket products primarily to franchised, Company-owned
and Canadian licensed retail stores. Accordingly, the Company's receivables
and its guarantees of obligations are concentrated within a single industry
segment and a significant portion of its credit risk is also concentrated
within a single state.
At December 31, 1995, the Company had receivables and financial guarantees
associated with six of its Franchisees totalling $7,320,000. Of that total,
approximately $3,960,000 was associated with one of its Franchisees.
53
16. AGREEMENTS WITH CONTINENTAL GENERAL TIRE, INC.:
In September 1989, the Company entered into a Master Loan Agreement and a
Stock and Warrants Purchase Agreement with Continental General Tire, Inc.
("General"), a related party through May 1993. Under the Master Loan
Agreement, General provided the Company with a revolving line of credit of up
to $7,500,000 which was collateralized by receivables, inventories and
equipment. Under the Stock and Warrants Purchase Agreement, General acquired
400,000 shares of the Company's common stock (approximately 11.4% of the then
outstanding shares), and acquired warrants to purchase an additional
1,000,000 shares.
In May 1993, the Company and General entered into an agreement which
terminated the 1989 agreements, and which resulted in the Company's
repurchase of the 400,000 shares of its common stock which had been owned by
General, the repurchase and cancellation of the warrants held by General for
the purchase of an additional 1,000,000 shares, and the repayment of the
outstanding balance of the revolving line of credit in the amount of
$1,764,000.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of the Company's
financial instruments is made in accordance with the requirements of SFAS
107, "Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data in order to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
(IN THOUSANDS)
Assets:
Cash and cash equivalents $ 1,094 $ 1,094
Receivables 12,668 12,668
Liabilities:
Long-term debt $15,368 $15,564
Other long-term liabilities 1,337 1,292
The estimation methodologies utilized by the Company in determining fair
value are summarized below:
CASH AND CASH EQUIVALENTS: The carrying amount is a reasonable estimate of
fair value.
RECEIVABLES: The carrying amount is a reasonable estimate of fair value.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated
by discounting the estimated future cash payments using the Company's
incremental borrowing rate at December 31, 1995.
OTHER LONG-TERM DEBT: The fair value of the Company's other long-term
liabilities is estimated by discounting the estimated future cash payments
using the Company's incremental borrowing rate at December 31, 1995.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
18. LITIGATION:
As a franchisor and wholesale distributor, the Company licenses the use of
its trade names, service marks and trademarks to the Company's Franchisees
and other licensees and distributes tire products manufactured by the
54
Company's suppliers ("Suppliers") under the Company's trade names and
trademarks. As a result, the Company has been named as a defendant in a
number of lawsuits alleging negligent acts and/or omissions by the Company's
Franchisees or alleged defective workmanship and/or materials of the products
produced by the Suppliers. As of December 31, 1995, there were forty-two
such lawsuits pending in which the Company was named as a defendant. Of
those forty-two lawsuits, only five directly involve the Company. The other
thirty seven involve Franchisees of the Company or alleged tire failures of
the Company's Suppliers. In most of the forty-two lawsuits in which the
Company is named as a defendant, the claims for damages are not specific.
The Company believes that it is reasonably possible that a judgment may be
rendered against the Company in one or more of these lawsuits but the Company
is unable to estimate the amount of any such possible judgments. Over the
past five years, the judgments that have been rendered against the Company
and settlements made by the Company in lawsuits similar to the forty-two
lawsuits have not resulted in material losses to the Company. Therefore,
based upon such history, the Company does not believe that it will suffer any
material loss as a result of the forty-two lawsuits pending against the
Company as of December 31, 1995.
The Company requires that both its Franchisees and Suppliers indemnify and
protect the Company against claims resulting from the alleged negligent acts
and/or omissions of the Franchisees and the alleged defects in workmanship
and/or material of its Suppliers. In addition, the Company carries its own
insurance. The forty-two lawsuits referred to above are being defended by
attorneys who have been retained by the applicable insurance companies and
the Company is not actively involved in the defense thereof. Historically,
the Company has been able to rely upon its Franchisees and Suppliers and
their insurance carriers to defend, protect and indemnify the Company against
such types of lawsuits. Accordingly, even if a judgment is rendered against
the Company in any of these lawsuits, because of the insurance and
indemnities described above, management does not believe that the Company
will incur any loss as a result of any such judgment.
The Company is also a defendant in three additional lawsuits which are
incidental to the Company's business and for which the Company does not
believe it is liable, but which are not covered by insurance. Thus the
Company is directly and actively involved in its own defense and has
sufficient information to form a judgment on the likely outcome and exposure
of such cases. Based on this analysis, the Company believes that the
ultimate outcome of these cases will not have a material adverse effect on
the Company's financial statements.
The Company previously reported the pendency of two class action lawsuits
naming the Company and its nine directors as defendants (Knopf vs. Big O
Tires, Inc., et al. and Zucker, et al. vs. Big O Tires, Inc., et al., Second
Judicial District Court of the State of Nevada, County of Washoe). By motion
filed by plaintiffs' counsel, both actions were dismissed without prejudice
by the Court on March 31, 1995.
19. SUBSEQUENT EVENT:
The Company entered into a letter of intent dated March 13, 1996 with TBC
Corporation ("TBC"), a Tennessee based marketer and distributor of tires and
other aftermarket automotive parts, under which TBC will acquire all of the
outstanding shares of the Company's common stock for $16.50 per share,
subject to possible reductions based on a final tabulation of transaction
costs and other expenses, which the Company does not believe will result in
material adjustments, if any. The consummation of the transaction is subject
to certain conditions including the execution of a Definitive Merger Agreement
by April 15, 1996, unless extended; the Company and TBC complying with any
required regulatory filings; the execution of employment agreements between
TBC and certain officers of the Company; TBC obtaining financing for the
transaction; extensions of certain franchise agreements expiring prior to
2001; and the approval of the merger by the Company's shareholders.
55
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- --------
(3.1) Certificate of Amendment to Restated Articles of N/A
Incorporation of Big O Tires, Inc. dated June 10, 1992
and Restated Articles of Incorporation of Big O Tires,
Inc. dated August 17, 1987 (incorporated by reference to
Exhibit 3 to Quarterly Report on Form 10-Q for quarter
ended June 30, 1992).
(3.2) Third Amendment and Restated Bylaws of Big O Tires, Inc. 67
dated December 5, 1995.
(4.1) Rights Agreement dated as of August 26, 1994, between Big N/A
O Tires, Inc. and Interwest Co., Inc., as Rights Agent
(incorporated by reference to Exhibit 1 to Current Report
on Form 8-K dated August 26, 1994).
(4.2) Amendment to Rights Agreement dated as of July 24, 1995, N/A
is between Big O Tires, Inc., a Nevada corporation, and
Interwest Co., Inc., a Utah corporation (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Current
Report on Form 8-K dated July 25, 1995).
(10.1) 1994 Restatement of Employee Stock Ownership Plan and N/A
Trust Agreement of Big O Tires, Inc. (incorporated by
reference to Exhibit 10.3 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
(10.2) Big O Tires, Inc. Director and Employee Stock Option Plan N/A
(incorporated by reference to Exhibit 10.11 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1988).
(10.3) First Amendment to the Big O Tires, Inc. Director and
Employee Stock Option Plan (incorporated by reference to
Exhibit 10.10 to Big O Tires, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1989). N/A
(10.4) Amendment No. 2 to the Big O Tires, Inc. Director and N/A
Employee Stock Option Plan (incorporated by reference to
Exhibit 10.16 to Big O Tires, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1992).
(10.5) Ultimate Net Loss Agreement between Big O Tires, Inc. and N/A
FBS Business Finance Corporation dated January 13, 1989
(incorporated by reference to Exhibit 10.34 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1988).
(10.6) Purchase Agreement effective June 30, 1987, and related N/A
documents including Promissory Notes, Modification
Agreements, Security Agreements, Guaranty Agreement, and
Subleases in connection with a purchase by C.S.B.
Partnership and three individuals including Ronald D.
Asher, of three Big O Franchise Retail Stores in
California from Security/Cal, Inc., a wholly-owned
subsidiary of the Company, and H.R.I., Inc., a
wholly-owned subsidiary of Security/Cal, Inc.
(incorporated by reference to Exhibit 10.63 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1987).
(10.7) Purchase Agreement effective November 1, 1987, and N/A
related documents including Promissory Notes, Security
Agreements, Guaranty Agreements, Subleases, and Franchise
Agreements in connection with a purchase by C.S.B.
Partnership and its three general partners, including
Ronald D. Asher, of two Big O Franchise Retail Stores in
California from Security/Cal, Inc. and H.R.I., Inc.
(Seller) (incorporated by reference to Exhibit 10.45 to
Big O Tires, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1988).
(10.8) Purchase Agreements effective July 5, 1988, October 1, N/A
1988, and November 14, 1988, and related documents
including Promissory Notes, Security Agreements, Guaranty
Agreements, and Subleases in connection with a purchase
by C.S.B. Partnership and three individuals including
Ronald D. Asher of three Big O Franchise Retail Stores in
California from Big O Tires, Inc., Security/Cal, Inc., a
wholly-owned subsidiary of the Company, and H.R.I., Inc.,
a wholly-owned subsidiary of Security/Cal, Inc.
(incorporated by reference to Exhibit 10.46 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1988).
(10.9) Agreement and Release dated October 31, 1989, and related N/A
documents including Promissory Note, related Subleases,
Assignment of Lease Rights, and Performance Guarantee in
connection with the purchase by C.S.B. Partnership and
its general partners, including Ronald D. Asher, of two
(2) Big O franchise Retail Stores in California, owned by
GEM Tire, Inc. from the Company (incorporated by
reference to Exhibit 10.57 to Big O Tires, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1989).
(10.10) Ultimate Net Loss Agreement, dated as of December 1, N/A
1990, by and between Big O Tires, Inc. and Northcross
Financial Services, Inc., ICON Capital Corp., in its
individual capacity and on behalf of ICON Cash Flow
Partners, L.P., Series A, ICON Cash Flow Partners, L.P.,
Series B and any future partnerships on which it may be
the general partner and/or manager (incorporated by
reference to Exhibit 10.70 to Big O Tires, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1990).
(10.11) Agreement of Joint Venture of Big O/C.S.B. Joint Venture N/A
dated as of June 1, 1992, by and between Big O Retail
Enterprises, Inc., a wholly-owned subsidiary of Big O
Tires, Inc., and C.S.B. Partnership, a California general
partnership (incorporated by reference to Exhibit 10.70
to Big O Tires, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1991).
(10.12) 1995 Incentive Bonus Plans (incorporated by reference to N/A
Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(10.13) Purchase Agreement for Private Brand Name Tires between N/A
Big O Tires, Inc. and The Kelly-Springfield Tire Co.,
dated August 16, 1992 (incorporated by reference to
Exhibit 10.71 to Big O Tires, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1991).
(10.14) Big O Tires, Inc. Long Term Incentive Plan (incorporated N/A
by reference to Exhibit 55 to Big O Tires, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1992).
(10.15) Amendment No. 1 to Big O Tires, Inc. Long Term Incentive N/A
Plan (incorporated by reference to Exhibit 56 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
(10.16) Amendment No. 2 to Big O Tires, Inc. Long Term Incentive N/A
Plan (incorporated by reference to Exhibit 57 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
(10.17) Agreement of Joint Venture of Big O/S.A.N.D.S. Joint N/A
Venture (incorporated by reference to Exhibit 58 to Big O
Tires, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
(10.18) Commitment Letters dated July 22, 1992, from AT&T Capital N/A
Corporation (incorporated by reference to Exhibit 64 to
Big O Tires, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1992).
(10.19) Agreement dated as of November 15, 1992, among Peerless N/A
Trading Company, Limited, Delaware Liquidators, Inc. dba
Trade Center Imports, and Big O Tires, Inc.; Purchase
Money Non-Negotiable Promissory Note dated as of November
15, 1992, from Peerless Trading Company, Limited to Big O
Tires, Inc.; and amendment dated January 19, 1993 to the
Agreement dated November 15, 1992 (incorporated by
reference to Exhibit 66 to Big O Tires, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1992).
(10.20) Marketing Agreement for Private Brand Tires between Big O N/A
Tires, Inc. and General Tire, Inc., dated May 14, 1993
(incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated April 30,
1993).
(10.21) Inventory Financing Agreement between The N/A
Kelly-Springfield Tire Company and Big O Tires, Inc.
and/or Big O Tire of Idaho, Inc. and/or Big O Retail
Enterprises, Inc., dated May 14, 1993 (incorporated by
reference to Exhibit 10.4 to Big O Tires, Inc.'s Current
Report on Form 8-K dated April 30, 1993).
(10.22) Demand Note in the original principal amount of N/A
$6,000,338.67 with The Kelly-Springfield Tire Col. as
Holder and Big O Tires, Inc., Big O Retail Enterprises,
Inc. and Big O Tire of Idaho, Inc. as Maker (incorporated
by reference to Exhibit 10.50 to Big O Tires, Inc.'s
Annual Report on Form 10-K dated April 30, 1993).
(10.23) Consolidation and Modification Agreement among Big O N/A
Tires, Inc. (successor in interest to H.R.I., Inc. and
Security/Cal, Inc.) and Big O Retail Enterprises, Inc.
and C.S.B. Partnership (incorporated by reference to
Exhibit 10.51 to Big O Tires, Inc.'s Registration
Statement No. 33-65852).
(10.24) Modification of Consolidation and Modification Agreement N/A
by and between C.S.B. Partnership and Big O Tires, Inc.
(incorporated by reference to Big O Tires, Inc.'s Form
10-K for the year ended December 31, 1993).
(10.25) Registration Rights Agreement dated June 28, 1993, N/A
between the Selling Shareholder and Big O Tires, Inc.
(incorporated by reference to Exhibit 10.52 to Big O
Tires, Inc.'s Registration Statement No. 33-65852).
(10.26) Loan Agreement and Promissory Note in the original N/A
principal amount of $155,000.00 with C.S.B. Partnership
as Maker (incorporated by reference to Exhibit 10.44 to
Big O Tires, Inc.'s Form 10-K for the fiscal year ended
December 31, 1993).
(10.27) Loan Agreement and Promissory Note in the original N/A
principal amount of $70,000.00 with Big O/C.S.B Joint
Venture as Maker (incorporated by reference to Exhibit
10.45 to Big O Tires, Inc.'s Form 10-K for the fiscal
year ended December 31, 1993).
(10.28) Loan Agreement and Promissory Note in the original N/A
principal amount of $75,000.00 with Big O/S.A.N.D.S.
Joint Venture as Maker (incorporated by reference to
Exhibit 10.46 to Big O Tires, Inc.'s Form 10-K for the
fiscal year ended December 31, 1993).
(10.29) Commercial Note and Loan Agreement, Commercial Mortgage N/A
and Environmental Certificate between Big O Development,
Inc. and National City Bank, Kentucky, and Guaranty
Agreement of Big O Tires, Inc. guaranteeing the
obligations of Big O Development, Inc. to National City
Bank, Kentucky in connection with the borrowing of
$1,500,000 for construction of the Company's Regional
Sales and Service Center in New Albany, Indiana
(incorporated by reference to Exhibit 10.47 to Big O
Tires, Inc.'s Form 10-K for the fiscal year ended
December 31, 1993).
(10.30) Construction Agreement between Big O Development, Inc. N/A
and Koetter Construction, Inc. to construct the Regional
Sales and Service Center in Floyd, County, Indiana
(incorporated by reference to Exhibit 10.48 to Big O
Tires, Inc.'s Form 10-K for the fiscal year ended
December 31, 1993).
(10.31) Letter dated January 26, 1994 from General Tire, Inc. to N/A
the Company terminating the Marketing Agreement for
Private Brand Name Tires between Big O Tires, Inc. and
General Tire, Inc. dated May 14, 1993 (incorporated by
reference to Exhibit 10.52 to Big O Tires, Inc.'s Form
10-K for the fiscal year ended December 31, 1993).
(10.32) Purchase Agreement by and between Caps Tire Limited N/A
Liability Company and Intermountain Big O Realty for the
Big O Tires Retail Store located at 8151 East Arapahoe
Road, Englewood, Colorado incorporated by reference to
Exhibit 10.53 to Big O Tires, Inc.'s Form 10-K for the
fiscal year ended December 31, 1993).
(10.33) Third and Fourth Amendments to Loan and Security N/A
Agreement by and between Big O Tires, Inc. and its
primary lender (incorporated by reference to Exhibit
10.54 to Big O Tires, Inc.'s Form 10-K for the fiscal
year ended December 31, 1993).
(10.34) Limited Partnership Agreement by and between Donald J. N/A
Horton, General Partner, Thomas L. Staker, General
Partner, and Big O Tires, Inc., Limited Partner, dated as
of December 31, 1993 (incorporated by reference to
Exhibit 10.56 to Big O Tires, Inc.'s Form 10-K for the
fiscal year ended December 31, 1993).
(10.35) Loan Agreement and Guaranty, Promissory Note and Security N/A
Agreement with Big O Tires, Inc. Employee Stock
Ownership Plan ("ESOP") as Borrower, Big O Tires, Inc.,
as Guarantor, and Key Bank of Wyoming, as Lender, in
connection with the refinancing of the ESOP debt in the
amount of $960,000 (incorporated by reference to Exhibit
10.57 to Big O Tires, Inc.'s Form 10-K for the fiscal
year ended December 31, 1993).
(10.36) Amendment to Partnership Agreement dated August 25, 1994, N/A
by and between Big O Development, Inc., a Colorado
corporation, a wholly-owned subsidiary of Big O Tires,
Inc. and Mill Creek Associates, Ltd., a Colorado limited
partnership (incorporated by reference to Exhibit 10.2 to
Big O Tires, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994).
(10.37) Agreement dated July 1, 1994, by and between General N/A
Tire, Inc., an Ohio corporation and Big O Tires, Inc.
(incorporated by reference to Exhibit 10.4 to Big O
Tires, Inc.'s Quarterly Report on Form 10-Q dated
September 30, 1994).
(10.38) Consulting Agreement by and between Big O Tires, Inc., N/A
and Horst K. Mehlfeldt (incorporated by reference to
Exhibit 10.5 to Big O Tires, Inc.'s Quarterly Report on
Form 10-Q dated September 30, 1994).
(10.39) Letter Agreement dated January 10, 1995, amending the N/A
Consulting Agreement by and between Big O Tires, Inc. and
Horst K. Mehlfeldt (incorporated by reference to Exhibit
10.3 to Big O Tires, Inc.'s Current Report on Form 8-K
dated January 10, 1995).
(10.40) Letter Agreement dated July 12, 1994, by and between Big N/A
O Tires, Inc. and PaineWebber Incorporated (incorporated
by reference to Exhibit 10.6 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated September 30, 1994).
(10.41) Letter Agreement dated March 23, 1994, by and between Big N/A
O Tires, Inc. and The CIT Group/Equipment Financing,
Inc., a New York corporation (incorporated by reference
to Exhibit 10.7 to Big O Tires, Inc.'s Quarterly Report
on Form 10-Q dated September 30, 1994).
(10.42) Ultimate Net Loss Agreement dated October 21, 1994, by N/A
and between Big O Tires, Inc. and The CIT Group/Equipment
Financing, Inc., a New York corporation (incorporated by
reference to Exhibit 10.8 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated September 30, 1994).
(10.43) Fifth Amendment to Loan and Security Agreement by and N/A
between Big O Tires, Inc. and its former lender dated
April 29, 1994 (incorporated by reference to Exhibit 10.1
to Big O Tires, Inc.'s Quarterly Report on Form 10-Q
dated September 30, 1994).
(10.44) Agreement by the Investment Committee of the Board of N/A
Directors and the Management/Dealer participants dated
December 22, 1994 (incorporated by reference to Exhibit
10.1 to Big O Tires, Inc.'s Current Report on Form 8-K
dated December 6, 1994).
(10.45) Letter dated December 13, 1994, to the Investment N/A
Committee of Big O Tires, Inc. and the Management
participants and Dealer representatives (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Current
Report on Form 8-K dated December 6, 1994).
(10.46) Letter dated February 7, 1995, from the Dealer/Management N/A
Group to the Company's Board Chairman (incorporated by
reference to Exhibit 10.1 to Big O Tires, Inc.'s Current
Report on Form 8-K dated January 10, 1995).
(10.47) Agreement between the Company and the Management/Dealer N/A
participants dated January 20, 1995 (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Current
Report on Form 8-K
(10.48) Multi-Tenant Lease NNN dated December 1, 1994 between N/A
Botac VI Leasing L.L.C., a Utah Limited Liability Company
and Big O Development, Inc. (incorporated by reference to
Exhibit 10.62 to Big O Tires, Inc.'s Annual Report on
Form 10-K for fiscal year ended December 31, 1994).
(10.49) Assignment and Assumption Agreement dated December 2, N/A
1994 by Big O Development, Inc., Big O Tires, Inc. and
Botac VI Leasing, L.L.C. and Allstate Life Insurance
Company (incorporated by reference to Exhibit 10.63 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.50) Guarantee Agreement dated December 2, 1994 by Big O N/A
Tires, Inc., Big O Development, Inc. and Allstate Life
Insurance Company (incorporated by reference to Exhibit
10.64 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.51) Closing Agreement dated December 2, 1994 by Big O N/A
Development, Inc., Big O Tires, Inc., Botac VI Leasing,
L.L.C., and Allstate Life Insurance Company (incorporated
by reference to Exhibit 10.65 to Big O Tires, Inc.'s
Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.52) Commercial Contract to Buy and Sell Real Estate dated N/A
March 17, 1994 between Bailey's Moving and Storage and
Big O Tires, Inc. (incorporated by reference to Exhibit
10.66 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.53) Confidentiality Agreement dated September, 1994 between N/A
Big O Tires, Inc. and Kenneth W. Pavia, Sr. (incorporated
by reference to Exhibit 10.67 to Big O Tires, Inc.'s
Annual Report on Form 10-K for fiscal year ended December
31, 1994).
(10.54) Amendment No. 1 to the Big O Tires, Inc. Employee Stock N/A
Ownership Plan and Trust Agreement dated September 12,
1994 (incorporated by reference to Exhibit 10.68 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.55) Development Management Agreement dated September, 1994 N/A
between Ross Development Management Group, Inc. and Big O
Development, Inc. and Big O Tires, Inc. (incorporated by
reference to Exhibit 10.69 to Big O Tires, Inc.'s Annual
Report on Form 10-K for fiscal year ended December 31,
1994).
(10.56) Letter Agreement dated February 20, 1995 terminating the N/A
Consulting Agreement between Big O Tires, Inc. and Horst
K. Mehlfeldt (incorporated by reference to Exhibit 10.70
to Big O Tires, Inc.'s Annual Report on Form 10-K for
fiscal year ended December 31, 1994).
(10.57) Commitment Letter dated February 16, 1994 between Big O N/A
Tires, Inc. and AT&T Commercial Finance Corporation for
real estate financing (incorporated by reference to
Exhibit 10.72 to Big O Tires, Inc.'s Annual Report on
Form 10-K for fiscal year ended December 31, 1994).
(10.58) Commitment Letter dated February 16, 1994 between Big O N/A
Tires, Inc. and AT&T Commercial Finance Corporation for
equipment financing (incorporated by reference to Exhibit
10.73 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.59) Extension letter dated December 9, 1994 between Big O N/A
Tires, Inc. and AT&T Commercial Finance Corporation to
extend existing lines of credit through December 31, 1995
(incorporated by reference to Exhibit 10.74 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.60) Resignation letter dated February 27, 1995 from Robert L. N/A
Puckett (incorporated by reference to Exhibit 10.75 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.61) Resignation letter dated February 24, 1995 from David W. N/A
Dwyer (incorporated by reference to Exhibit 10.76 to Big
O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.62) Revolving Credit Agreement dated January 23, 1995 between N/A
Big O Tires, Inc. and The First National Bank of Chicago
(incorporated by reference to Exhibit 10.77 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.63) Consent, Acknowledgement and Access Agreement dated N/A
January 23, 1995 between The Bank of Cherry Creek, N.A.,
Kenneth B. Buckius and The First National Bank of Chicago
(incorporated by reference to Exhibit 10.78 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.64) Note Purchase Agreement dated April 27, 1994 between Big N/A
O Tires, Inc. and USG Annuity & Life Company and Republic
Western Insurance Company (incorporated by reference to
Exhibit 10.79 to Big O Tires, Inc.'s Annual Report on
Form 10-K for fiscal year ended December 31, 1994).
(10.65) Franchise Agreement dated October 7, 1994 between Big O N/A
Tires, Inc. and OK Tires, Inc. for the Retail Store
located at 2830 West 3500 South, West Valley City, Utah
84119 (incorporated by reference to Exhibit 10.80 to Big
O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.66) Franchise Agreement dated November 26, 1993 between Big O N/A
Tires, Inc and CAPS Tire Limited Liability Company for
the Retail Store located at 8151 East Arapahoe Road,
Englewood, Colorado 80112 (incorporated by reference to
Exhibit 10.81 to Big O Tires, Inc.'s Annual Report on
Form 10-K for fiscal year ended December 31, 1994).
(10.67) Form of Confidentiality Agreement signed by dealers dated N/A
October 19, 1994 (incorporated by reference to Exhibit
10.82 to Big O Tires, Inc.'s Annual Report on Form 10-K
for fiscal year ended December 31, 1994).
(10.68) Ultimate Net Loss Agreement dated November 30, 1994, by N/A
and between Big O Tires, Inc. and The CIT Group/Equipment
Financing, Inc., a New York corporation (incorporated by
reference to Exhibit 10.83 to Big O Tires, Inc.'s Annual
Report on Form 10-K for fiscal year ended December 31,
1994).
(10.69) Inventory Financing Agreement together with a Demand Note N/A
dated September 30, 1994, by and between The
Kelly-Springfield Tire Company and Big O Tires, Inc., Big
O Retail Enterprises, Inc. and Big O Tire of Idaho, Inc.
(incorporated by reference to Exhibit 10.84 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.70) Supplemental Executive Retirement Plan dated December 7, N/A
1994, by Big O Tires, Inc., effective January 1, 1994
(incorporated by reference to Exhibit 10.85 to Big O
Tires, Inc.'s Annual Report on Form 10-K for fiscal year
ended December 31, 1994).
(10.71) Forms of Stock Appreciation Rights Agreement dated N/A
February 15, 1995, between Big O Tires, Inc. and the
Members of the Chief Executive Office (incorporated by
reference to Exhibit 10.86 to Big O Tires, Inc.'s Annual
Report on Form 10-K for fiscal year ended December 31,
1994).
(10.72) Letter Agreement dated March 24, 1995, regarding N/A
severance package, between Big O Tires, Inc. and John E.
Siipola (incorporated by reference to Exhibit 10.87 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.73) Letter Agreement dated March 24, 1995, regarding N/A
severance package, between Big O Tires, Inc. and Horst K.
Mehlfeldt (incorporated by reference to Exhibit 10.88 to
Big O Tires, Inc.'s Annual Report on Form 10-K for fiscal
year ended December 31, 1994).
(10.74) Letter dated February 7, 1995, from the Dealer-Management N/A
Group to the Company's Board Chairman (incorporated by
reference to Exhibit 10.1 to Big O Tires, Inc.'s Current
Report on Form 8-K dated January 10, 1995).
(10.75) Agreement between the Company and the Management Dealer N/A
Participants dated January 20, 1995 (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Current
Report on Form 8-K dated January 10, 1995).
(10.76) Letter Agreement dated January 10, 1995, amending the N/A
Consulting Agreement by and between Big O Tires, Inc. and
Horst K. Mehlfeldt (incorporated by reference to Exhibit
10.3 to Big O Tires, Inc.'s Current Report on Form 8-K
dated January 10, 1995).
(10.77) Purchase Agreement dated March 22, 1995 effective March N/A
31, 1995 by and between Tire Marketers Association, a
division of Big O Tires, Inc. and Carr's Tire Service,
Inc., a Virginia corporation (incorporated by reference
to Exhibit 10.1 to Big O Tires, Inc.'s Quarterly Report
on Form 10-Q dated March 31, 1995).
(10.78) Acquisition Proposal to the Investment Committee of the N/A
Board of Directors from certain member of management and
a representative of certain Big O Tires, Inc.'s
franchisees dated April 6, 1995 (incorporated by
reference to Exhibit 10.1 to Big O Tires, Inc.'s Current
Report on Form 8-K dated April 6, 1995).
(10.79) Acquisition Proposal to the Investment Committee of the N/A
Board of Directors from certain member of management and
a representative of certain Big O Tires, Inc.'s
franchisees dated June 2, 1995 (incorporated by reference
to Exhibit 10.1 to Big O Tires, Inc.'s Current Report on
Form 8-K dated June 5, 1995).
(10.80) Acquisition Proposal to the Investment Committee of the N/A
Board of Directors from certain members of management and
a representative of Big O Tire Dealers of America dated
June 2, 1995, and signed by the Company on June 7, 1995
(incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated June 9,
1995).
(10.81) Letter Agreement and Indemnification Agreement dated N/A
January 20, 1995, between Big O Tires, Inc. and
PaineWebber Incorporated. Acquisition Proposal to the
Investment Committee of the Board of Directors from
certain member of management and a representative of
certain Big O Tires, Inc.'s franchisees dated April 6,
1995 (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Quarterly Report on Form 10-Q dated June
30, 1995).
(10.82) Three memos from PaineWebber Incorporated to the Company N/A
amending certain fees dated June 9, 1995, June 16, 1995
and June 30, 1995 (incorporated by reference to Exhibit
10.2 to Big O Tires, Inc.'s Quarterly Report on Form 10-Q
dated June 30, 1995).
(10.83) Letter Agreement between Big O Tires, Inc. and John E. N/A
Siipola dated July 21, 1995, pertaining to new severance
package terms and terminating the March 24, 1995 Letter
Agreement regarding severance (incorporated by reference
to Exhibit 10.3 to Big O Tires, Inc.'s Quarterly Report
on Form 10-Q dated June 30, 1995).
(10.84) Letter Agreement between Big O Tires, Inc. and Horst K. N/A
Mehlfeldt dated July 21, 1995, pertaining to new
severance package terms and terminating the March 24,
1995 Letter Agreement regarding severance (incorporated
by reference to Exhibit 10.4 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated June 30, 1995).
(10.85) Letter Agreement between Big O Tires, Inc. and Steven P. N/A
Cloward dated July 21, 1995, regarding a modification to
Mr. Cloward's severance package (incorporated by
reference to Exhibit 10.5 to Big O Tires, Inc.'s
Quarterly Report on Form 10-Q dated June 30, 1995).
(10.86) Agreement and Plan of Merger dated July 24, 1995, between N/A
BOTI Holdings, Inc., a Nevada corporation, BOTI
Acquisition Corp., a Nevada corporation and a wholly
owned subsidiary of BOTI Holdings, Inc., and Big O Tires,
Inc. (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated July 25,
1995).
(10.87) Letter Agreement dated August 31, 1995, by and among Big N/A
O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated September
5, 1995).
(10.88) Agreement for Purchase and Sale of Joint Venture N/A
Interest; Dissolution of Joint Venture; and Continuation
of Business by Acquiring Joint Ventures dated effective
October 1, 1994, by and between Big O Retail Enterprises,
Inc., a Colorado corporation ("Seller") and C.S.B.
Partnership, a California general partnership
("Purchaser") (incorporated by reference to Exhibit 10.1
to Big O Tires, Inc.'s Quarterly Report on Form 10-Q
dated September 30, 1995).
(10.89) Letter Agreement dated October 2, 1995, by and among Big N/A
O Tires, Inc., BOTI Acquisition Corp., and BOTI Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated October 4,
1995).
(10.90) Letter dated October 15, 1995, from BOTI Acquisition N/A
Corp. and BOTI Holdings, Inc., to Big O Tires, Inc.
(incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated October
18, 1995).
(10.91) Second Amendment to Employee Stock Ownership Plan and N/A
Trust Agreement of Big O Tires, Inc., dated ___ November,
1995 (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated November
17, 1995).
(10.92) Amendment to Agreement and Plan of Merger dated as of N/A
November 14, 1995, between BOTI Holdings, Inc., a Nevada
corporation (the "Parent"), BOTI Acquisition Corp., a
Nevada corporation and a wholly owned subsidiary of the
Parent (the"Purchaser"), and Big O Tires, Inc., a Nevada
corporation (the "Company"), and amends the Agreement and
Plan of Merger dated as of July 24, 1995 (incorporated by
reference to Exhibit 10.2 to Big O Tires, Inc.'s Current
Report on Form 8-K dated November 17, 1995).
(10.93) Second Amendment to Employee Stock Ownership Plan and N/A
Trust Agreement of Big O Tires, Inc., dated November 14,
1995 (incorporated by reference to Exhibit 10.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated December
15, 1995).
(10.94) 1996 Incentive Bonus Plans. 91
(10.95) Form of Franchise Agreement currently in use. 111
(10.96) Promissory Note in the original principal amount of 168
$250,000.00 with C.S.B Partnership as Maker and related
security documents.
(20.1) Opinion Letter from PaineWebber Incorporated to the Board N/A
of Directors of Big O Tires, Inc. dated November 14, 1995
(incorporated by reference to Exhibit 20.1 to Big O
Tires, Inc.'s Current Report on Form 8-K dated November
17, 1995).
(21.1) Big O Tires, Inc. Subsidiaries 201
(23.1) Consent of Deloitte & Touche 202
(25.1) Powers of Attorney executed by the Directors of Big O 203
Tires, Inc.
(27.1) Big O Tires, Inc.'s Financial Data Schedule. 213