What does the audit of Big O Tires entail regarding internal controls?

. The mechanics of the audit at the Big O level of the various components of the Big O Program Product Prices are set forth below. References to audits by the Franchisee Audit Committee refer to audits conducted by the Franchisee Audit Committee and/or an independent third party as approved by the Franchisee Audit Committee and paid for by the Franchise Advisory Council. The results of the audit shall not be final and binding on Big O and the Business Format Franchises except if certain conditions are met as defined by Big O in the Manual from time to time.

• 1. For the Acquisition Cost component of the tire price, including Manufacturers Rebates, a Franchisee Audit Committee, with the assistance of Big O management, will audit the Acquisition Cost for tires component of a number of sales transactions to be agreed upon between Big O and the franchisees. In the event the results of that audit show that the Acquisition Cost component of the tire price has been included according to the "Rules" (that is, the definitions set forth in the Franchise Agreement and the rules set forth in this Schedule 10), then the audit of that portion of the tire price will be deemed complete, and there will be no Acquisition Cost amount included in the End of Year Pricing Adjustment. In the event the results of that audit show that the Acquisition Cost component of the tire price has not been included according to the Rules, then Big O will calculate the impact, positive or negative, of the Acquisition Cost component not being included according to the Rules, based on the specific error identified and the time period that the error related to, and review the amount with the Franchisee Audit Committee. The Acquisition Cost pricing error impact will be included in the calculation, discussed below, of the End of Year Pricing Adjustment.
• 1. At the end of the year, Big O will calculate the total amount of Mold Depreciation Cost to be allocated to Big O I Tires that were sold to Business Format Franchises, based on the Big O I Tire units sold to Business Format Franchise Stores as a percent of the total Big O I Tire units sold, and that amount will be compared to the total Mold Depreciation Cost actually included in the tire price for Big O I Tire units that were sold to Business Format Franchise Stores. Any difference, positive or negative, will be included in the End of Year Pricing Adjustment discussed below.
• 1. For the Rebill Charge, the Franchisee Audit Committee, with the assistance of Big O management, will audit the proper inclusion or exclusion of the Rebill Charge component in each of the sales transactions to be audited during the Acquisition Cost for tires audit discussed above. In the event the results of that audit show that the Rebill Charge component has been included according to the Rules, then the audit of that portion of the tire price will be deemed complete, and there will be no amount included in the End of Year Pricing Adjustment. In the event the results of that audit show that the Rebill Charge component has not been included according to the Rules, then Big O will calculate the impact, positive or negative, of the Rebill Charge component not being correctly included, based on the specific error identified and the time period that the error related to, and review the amount with the Franchisee Audit Committee. The Rebill Charge component pricing error impact will be included in the calculation, discussed below, of the End of Year Pricing Adjustment.
• 1. For DCPU, the Franchisee Audit Committee, with the assistance of Big O management, will audit the proper inclusion or exclusion of the correct DCPU factor in each of the sales transactions to be audited during the Acquisition Cost audit of tires discussed above. In the event the results of that audit show that the DCPU factor has been included according to the Rules, then the audit of that portion of the tire price will be deemed complete, and there will be no amount included in the End of Year Pricing Adjustment. In the event the results of that audit show that the DCPU factor has not been included according

to the Rules, then Big O will calculate the impact, positive or negative, of the DCPU factor not being correctly included, based on the specific error identified and the time period that the error related to, and review the amount with the Franchisee Audit Committee. The DCPU pricing error impact will be included in the calculation, discussed below, of the End of Year Pricing Adjustment.

• 1. For the Big O I Tires warranty expense, the Franchisee Audit Committee, with the assistance of Big O management, will audit the proper inclusion or exclusion of the Big O I Tires warranty expense factor in each of the sales transactions to be audited during the Acquisition Cost of tires audit discussed above. In the event the results of that audit show that the Big O I Tires warranty expense factor has been included according to the Rules, the audit of that portion of the tire price will be deemed complete, and there will be no amount included in the End of Year Pricing Adjustment. In the event the results of that audit show that the Big O I Tires warranty expense factor has not been included according to the Rules, then Big O will calculate the impact, positive or negative, of the Big O I Tires warranty expense factor not being correctly included, based on the specific error identified and the time period that the error related to, and review the amount with the Franchisee Audit Committee. The Big O I Tires warranty expense factor pricing error impact will be included in the calculation, discussed below, of the End of Year Pricing Adjustment.
• 1. At the end of the year, Big O will calculate the total amount of other warranty expense to be allocated to the total units that were sold to Business Format Franchise Stores based on the tire units sold to Business Format Franchise Stores as a percent of the total tire units sold, and that amount will be compared to the total other warranty expense actually included in tire price for tire units that were sold to Business Format Franchise Stores. Any difference, positive or negative, will be included in the End of Year Pricing Adjustment discussed below.
• 1. Big O franchisees may, under certain circumstances, wish to engage an auditor to perform the audit work that is discussed above as being performed by the Franchisee Audit Committee. The cost of any such audit will be borne entirely by the franchisees and allocated to the franchisees as they may agree, provided however that should the audits find that Big O has overcharged the Business Format Franchise Stores by an amount that exceeds 2% of the total amount charged to Business Format Franchise Stores for the year under audit, adjusted by any overcharges that may result from the Franchisee Audit Committee procedures discussed above, then the audit fee will be reimbursed by Big O, subject to a maximum reimbursement of $100,000.

H. End of Year Pricing Adjustment.

Source: Item 23 — RECEIPTS (FDD pages 102–535)