<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1996
---------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-19390
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TREADCO, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 7534 and 5531 71-0706271
- ------------------------- ------------------------- ----------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization)
1101 South 21st Street
Fort Smith, Arkansas
72901
(501) 788-6400
- -----------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
Not Applicable
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 1996
--------------------------------- --------------------------------
Common Stock, $.01 par value 5,072,255 shares
<PAGE>
TREADCO, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations --
For the Three and Nine Months Ended
September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows --
For the Nine Months Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements --
September 30, 1996 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30 December 31
1996 1995
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 1,619,901
Accounts receivable:
Trade receivables, less allowances for
doubtful accounts (1996 -- $1,330,951;
1995 -- $1,000,000 ) 21,224,915 18,132,847
Other 7,354,756 6,830,994
Due from affiliates 165,039 247,550
Inventories - Note D 29,077,432 32,986,490
Prepaid expenses 163,574 217,393
Federal and state income taxes 621,457 -
Deferred income taxes 1,579,896 1,579,896
----------- -----------
Total Current Assets 60,187,069 61,615,071
PROPERTY, PLANT AND EQUIPMENT
Land 4,065,127 2,706,417
Structures 12,941,137 9,829,124
Retreading and other equipment 26,884,715 16,411,345
----------- -----------
43,890,979 28,946,886
Less allowances for depreciation (12,122,056) (12,607,866)
----------- -----------
31,768,923 16,339,020
OTHER ASSETS
Goodwill, less amortization
(1996 -- $3,331,317;
1995 -- $2,984,826) 13,271,640 13,618,131
Noncompete agreements, less
amortization (1996 -- $805,521;
1995 -- $609,583) 500,729 696,667
Deferred income taxes 199,791 -
Assets held for sale 1,067,446 -
Other 1,298,092 765,787
----------- -----------
16,337,698 15,080,585
----------- -----------
$108,293,690 $ 93,034,676
=========== ===========
<PAGE>
<CAPTION>
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
September 30 December 31
1996 1995
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 607,011 $ -
Trade accounts payable 18,070,827 8,363,965
Due to affiliate 662,537 477,469
Accrued salaries, wages and
other expenses 7,046,516 6,779,354
Federal and state income taxes - 253,678
Current portion of long-term debt 2,284,113 862,623
----------- -----------
TOTAL CURRENT LIABILITIES 28,671,004 16,737,089
LONG-TERM DEBT, less current portion 15,977,964 10,000,000
OTHER LIABILITIES 68,585 54,366
DEFERRED INCOME TAXES - 225,245
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per
share -- authorized 2,000,000 shares;
none issued - -
Common stock, par value $.01 per share --
authorized 18,000,000 shares; issued and
outstanding 5,072,255 shares 50,723 50,723
Additional paid-in capital 45,623,346 45,623,346
Retained earnings 17,902,068 20,343,907
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 63,576,137 66,017,976
COMMITMENTS AND CONTINGENCIES -- Note E
----------- -----------
$108,293,690 $ 93,034,676
=========== ===========
<FN>
<F1>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
<F2>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
(unaudited)
<S> <C> <C> <C> <C>
SALES
Non-affiliates $39,487,583 $ 40,120,071 $106,605,819 $110,834,137
Affiliates 633,629 576,979 1,763,526 1,770,864
----------- ----------- ----------- -----------
40,121,212 40,697,050 108,369,345 112,605,001
COSTS AND EXPENSES
Materials and cost
of new tires 28,814,207 28,884,499 78,717,067 78,962,452
Salaries and wages 6,231,248 5,456,542 17,031,374 15,137,987
Depreciation and
amortization 1,214,313 848,322 3,076,961 2,376,606
Administrative and
general 4,391,151 3,775,134 12,820,540 10,767,217
Amortization of
goodwill 115,498 115,498 346,492 346,492
----------- ----------- ----------- -----------
40,766,417 39,079,995 111,992,434 107,590,754
----------- ----------- ----------- -----------
OPERATING INCOME
(LOSS) (645,205) 1,617,055 (3,623,089) 5,014,247
OTHER INCOME
Interest income 4,379 7,527 23,490 25,778
Gain on asset sales 1,069,429 13,153 1,206,416 164,306
Other 32,091 23,452 94,246 96,527
----------- ----------- ----------- -----------
1,105,899 44,132 1,324,152 286,611
OTHER EXPENSES
Interest 294,753 182,971 613,206 343,474
Amortization of
deferred financing
cost and non-
compete agreements 65,312 65,312 195,937 195,937
----------- ----------- ----------- -----------
360,065 248,283 809,143 539,411
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 100,629 1,412,904 (3,108,080) 4,761,447
<PAGE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
(unaudited)
<S> <C> <C> <C> <C>
FEDERAL AND STATE
INCOME TAXES
(CREDIT) -- Note C
Current 205,352 665,602 (757,086) 2,178,002
Deferred (254,717) (80,730) (425,036) (223,624)
----------- ----------- ----------- -----------
(49,365) 584,872 (1,182,122) 1,954,378
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 149,994 $ 828,032 $ (1,925,958) $ 2,807,069
=========== =========== =========== ===========
NET INCOME (LOSS)
PER SHARE $ 0.03 $ 0.16 $ (0.38) $ 0.55
=========== =========== =========== ===========
AVERAGE SHARES
OUTSTANDING 5,079,707 5,073,061 5,072,255 5,076,486
=========== =========== =========== ===========
CASH DIVIDENDS PAID
PER COMMON SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.12
=========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30
1996 1995
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,925,958) $ 2,807,069
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,076,961 2,376,606
Amortization of goodwill 346,492 346,492
Amortization of deferred financing
costs and noncompete agreements 195,937 195,937
Provision for losses on accounts
receivable 1,048,041 955,706
Credit for deferred income taxes (425,036) (223,624)
Gain on asset sales (1,206,416) (164,306)
Changes in operating assets and
liabilities:
Receivables (4,663,871) (2,564,084)
Inventories and prepaid expenses 3,962,877 (2,094,776)
Other assets (1,599,750) (135,716)
Trade accounts payable, accrued
expenses and taxes payable 9,098,889 (2,757,538)
Due to/from affiliates 267,579 323,322
Other liabilities 14,219 14,070
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 8,189,964 (920,842)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (8,600,901) (4,059,325)
Proceeds from asset sales 2,179,042 219,873
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (6,421,859) (3,839,452)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 19,410,000 12,975,000
Payments under revolving credit facility (22,610,000) (7,975,000)
Payments of other long-term debt (279,136) -
Dividends paid (515,881) (608,670)
Net increase in cash overdrafts 607,011 -
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (3,388,006) 4,391,330
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,619,901) (368,964)
Cash and cash equivalents at
beginning of period 1,619,901 751,756
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 382,792
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A -- ORGANIZATION
Treadco, Inc. (the "Company") was organized in June 1991 as the successor
to the truck tire retreading and new truck tire sales business previously
conducted and developed by a wholly owned subsidiary of Arkansas Best
Corporation ("ABC"). In September 1991 the Company completed an initial
public offering. At September 30, 1996, ABC owned approximately 46% of the
Company's outstanding shares.
NOTE B -- FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
months ended September 30, 1996, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For
further information, refer to the Company's financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
<PAGE>
NOTE C -- FEDERAL AND STATE INCOME TAXES
<TABLE>
The following amounts and percentages, which relate to pre-tax income,
reflect the items included in income tax expense:
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
($ thousands)
<S> <C> <C> <C> <C>
Income tax (credit) at
regular rates $34,214 $480,387 $ (1,056,747) $1,618,892
Percent 34.0% 34.0% (34.0)% 34.0%
State taxes less
federal benefits 21,422 69,436 (78,980) 227,210
Percent 21.3% 4.9% (2.5)% 4.8%
Amortization of goodwill 35,200 35,201 105,601 105,602
Percent 35.0% 2.5% 3.3% 2.1%
Favorable resolution
of IRS exam (131,986) - (131,986) -
Percent (131.2)% - (4.2)% -
Other items (8,215) (152) (20,010) 2,674
Percent (8.2)% 0.0% (0.6)% 0.1%
--------- --------- ----------- ---------
Income tax expense (49,365) 584,872 (1,182,122) 1,954,378
Percent (49.1)% 41.4% (38.0)% 41.0%
========= ========= ============ =========
</TABLE>
NOTE D -- INVENTORIES
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
New tires and finished retreaded tires $ 23,121,689 $ 25,579,427
Materials and supplies 5,955,743 7,407,063
----------- -----------
$ 29,077,432 $ 32,986,490
=========== ===========
</TABLE>
NOTE E -- LITIGATION
Other than as discussed below, the Company is not a party to any pending
legal proceedings which management believes to be material to the financial
condition of the Company.
<PAGE>
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court
alleging that Bandag and certain of its officers and employees have violated
Arkansas statutory and common law in attempting to solicit the Company's
employees to work for Bandag or its competing franchisees and attempting to
divert customers from the Company. At the Company's request, the Court
entered a Temporary Restraining Order barring Bandag, the Company's former
officers J. J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag
officers Martin G. Carver and William Sweatman from soliciting or hiring the
Company's employees to work for Bandag or any of its franchisees, from
diverting or soliciting the Company's customers to buy from Bandag
franchisees other than Treadco, and from disclosing or using any of the
Company's confidential information.
On November 8, 1995, Bandag and the other named defendants asked the State
Court to stop its proceedings pending a decision by the United States
District Court, Western District of Arkansas, on a Complaint to Compel
Arbitration filed by Bandag in the Federal District Court on November 8,
1995.
The Federal District Court has ruled that under the terms of Treadco's
franchise agreements with Bandag, all of the issues involved in Treadco's
lawsuit against Bandag are to be decided by arbitration. Treadco and Bandag
are conducting discovery in preparation for the arbitration hearing. A date
for the arbitration hearing has not yet been set.
NOTE F -- LONG-TERM DEBT
The Company has a revolving credit agreement with Societe Generale (the
"Credit Agreement") providing for borrowings of up to the lesser of $20
million or the applicable borrowing base. The Credit Agreement expires in
September 1998 unless renewed or extended. Borrowings under the Credit
Agreement bear interest, at the Company's option, at 3/4% above the bank's
LIBOR rate, or at the higher of the bank's prime rate or the "federal funds
rate" plus 1/2%. At September 30, 1996 the average interest rate on the
Credit Agreement was 6.4%. The Company pays a commitment fee of 3/8% on the
unused amount under the Credit Agreement. There was $6.8 million borrowed
under the Credit Agreement as of September 30, 1996.
During 1996, the Company entered into notes payable and capital leases
agreements for equipment purchases totaling $10.9 million, which have 3 to 11
year maturities and interest rates ranging from 5% to 7.5%.
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
In August 1995, Bandag, Incorporated ("Bandag") informed the Company that it
would not renew the Company's eight franchise agreements which expired in the
summer of 1996. The Company subsequently entered into an agreement with
Oliver Rubber Company ("Oliver") to be a supplier of equipment and related
materials for the eight franchised locations and any other Company facility
which ceased being a Bandag franchised location. Bandag subsequently advised
the Company that unless the Company used the Bandag retread process
exclusively, Bandag would not renew any of the Company's franchise agreements
when they expire.
As of September 30, 1996, the Company has converted all of its production
facilities that were operated as Bandag retread franchises to Oliver licensed
facilities. Also, Treadco sells Oliver retreads at an additional 24 sales
locations served by the production facilities.
The conversion has resulted in up to two lost production days during each
change, some short-term operational inefficiencies and time lost as
production employees have familiarized themselves with the new equipment.
Also, management has been required to spend time with the conversion at the
expense of the normal daily operations.
In July, the company expanded its operations in the Los Angeles, CA market
with the purchase of Five Bros., Incorporated's assets in Walnut and Ontario,
CA. The Company purchased these assets for $1.1 million. The Walnut location
gives the company its first tire production facility in the Los Angeles area.
The following table sets forth for the periods indicated a summary of the
Company's operating costs and expenses as a percentage of sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
COSTS AND EXPENSES
Materials and cost of new tires 71.9% 70.9% 72.7% 70.1%
Salaries and wages 15.5 13.4 15.7 13.4
Depreciation and amortization 3.0 2.1 2.8 2.1
Administrative and general 10.9 9.3 11.8 9.6
Amortization of goodwill 0.3 0.3 0.3 0.3
----- ---- ----- ----
101.6% 96.0% 103.3% 95.5%
===== ==== ===== ====
</TABLE>
The Company is affected by seasonal fluctuations, which influence the demand
for retreads and new tires. The Company generally experiences reduced demand
for retreads and new tires in the first quarter due to more difficult driving
and tire maintenance conditions resulting from inclement weather. The Company
is also subject to cyclical national and regional economic conditions.
<PAGE>
Three Months Ended September 30, 1996 as Compared to Three Months
Ended September 30, 1995
Sales (including sales to affiliates) for the three months ended September
30, 1996 decreased 1.4% to $40.1 million from $40.7 million for the three
months ended September 30, 1995. Sales from retreading for the three months
ended September 30, 1996 were $19.2 million, a 10.8% decrease from $21.5
million during the three months ended September 30, 1995. Sales of new tires
for the three months ended September 30, 1996 were $20.9 million, a 9.2%
increase from $19.2 million during the three months ended September 30, 1995.
During the three months ended September 30, 1996, the Company sold
approximately 150,000 retreaded truck tires, a decrease of 12.4% from the
three months ended September 30, 1995 and new tires sold increased 7.3% to
116,000 tires.
The Company faces new competition at many of its locations, which has placed
added pricing pressure in the marketplace. As anticipated, Bandag, Inc.
continues to target the Company's accounts which has caused difficulty in
retaining the national account business and in some cases the business
retained is at lower margins.
Retread sales for the three months ended September 30, 1995 included $218,000
of casing sales from the operations of the Company's subsidiary. The Company
has since discontinued its retail casing business because the operations were
not profitable.
For the three months ended September 30, 1996, "same store" sales decreased
7.8% which was offset in part by a 6.4% increase from "new store" sales.
"Same store" sales include both production locations and sales locations that
have been in existence for the entire periods presented. "New store" sales
resulted from one new production facility and four new sales locations.
Operating costs and expenses were $40.8 million for the three months ended
September 30, 1996 compared to $39.1 million during the three months ended
September 30, 1995. The decrease in sales and increase in operating costs and
expenses resulted in operating loss of $645,000 compared to operating income
of $1.6 million during the three months ended September 30, 1995. The Company
had a net income of $150,000, or $.03 net income per share, compared to net
income of $828,000 or $.16 per share during the three months of September 30,
1995. During the three months ended September 30, 1996, the Company incurred
a $1.1 million gain on the sale of assets related to the conversion from
Bandag to Oliver. Average shares outstanding were 5.1 million for each of the
three months ended September 30, 1996 and 1995.
Operating costs and expenses as a percent of sales were 101.6% for the three
months ended September 30, 1996 compared to 96.0% for the three months ended
September 30, 1995. Materials and cost of new tires as a percent of sales
increased to 71.9% for the three months ended September 30, 1996 from 70.9%
during the three months ended September 30, 1995, resulting primarily from
expenses incurred during the conversion process and because increased pricing
pressures have reduced margins. Salaries and wages as a percent of sales
increased to 15.5 % for the three months ended September 30, 1996 from 13.4%
during the three months ended September 30, 1995 resulting from increased
costs associated with the conversion from Bandag, a smaller revenue base and
from labor costs at new locations which have not reached adequate
productivity levels. Administrative and general expenses as a percent of
sales increased to 10.9% for the three months ended September 30, 1996 from
<PAGE>
9.3% for the three months ended September 30, 1995. The increase resulted
from several factors including costs associated with the conversion from
Bandag, higher insurance costs, expenses associated with employee medical
benefits and increased service expenses.
Interest expense for the three months ended September 30, 1996 was $295,000
compared to $183,000 for the three months ended September 30, 1995. The
increase resulted primarily from the increase in debt outstanding relating to
equipment purchases.
The difference between the effective tax rate for the three months ended
September 30, 1996 and the federal statutory rate resulted primarily from
state income taxes, amortization of goodwill and other nondeductible expenses
(see Note C to the unaudited consolidated financial statements).
Nine Months Ended September 30, 1996 as Compared to Nine Months
Ended September 30, 1995
Sales (including sales to affiliates) for the nine months ended September 30,
1996 decreased 3.8% to $108.4 million from $112.6 million for the nine months
ended September 30, 1995. Sales from retreading for the nine months ended
September 30, 1996 were $54.7 million, a 9.3% decrease from $60.3 million
during the nine months ended September 30, 1995. Sales of new tires for the
nine months ended September 30, 1996 were $53.7 million, a 2.7% increase from
$52.3 million during the nine months ended September 30, 1995. During the
nine months ended September 30, 1996, the Company sold approximately 432,000
retreaded truck tires, a decrease of 9.5% from the nine months ended
September 30, 1995 and new tires sold increased 0.7% to 296,000 tires.
The Company faces new competition at many of its locations, which has placed
added pricing pressure in the marketplace. As anticipated, Bandag, Inc.
continues to target the Company's accounts which has caused difficulty in
retaining the national account business and in some cases the business
retained is at lower margins.
Retread sales for the nine months ended September 30, 1995 included $2.2
million of casing sales from the operations of the Company's subsidiary. The
Company has since discontinued its retail casing business because the
operations were not profitable.
For the nine months ended September 30, 1996, "same store" sales decreased
8.8% which was offset in part by a 5.0% increase from "new store" sales.
"Same store" sales include both production locations and sales locations that
have been in existence for the entire periods presented. "New store" sales
resulted from three new production facilities and four new sales locations.
Operating costs and expenses were $112 million for the nine months ended
September 30, 1996 compared to $107.6 million during the nine months ended
September 30, 1995. The decrease in sales and increase in operating costs and
expenses resulted in an operating loss of $3.6 million compared to operating
income of $5.0 million during the nine months ended September 30, 1995. The
Company had a net loss of $1.9 million, or $.38 loss per share, compared to
net income of $2.8 million, or $.55 per share during the nine months of
September 30, 1995. Average shares outstanding were 5.1 million for each of
the nine months ended September 30, 1996 and 1995.
Operating costs and expenses as a percent of sales were 103.3% for the nine
months ended September 30, 1996 compared to 95.5% for the nine months ended
<PAGE>
September 30, 1995. Materials and cost of new tires as a percent of sales
increased to 72.7% for the nine months ended September 30, 1996 from 70.1%
during the nine months ended September 30, 1995, resulting primarily from
expenses incurred during the conversion process and because increased pricing
pressures have reduced margins. Salaries and wages as a percent of sales
increased to 15.7 % for the nine months ended September 30, 1996 from 13.4%
during the nine months ended September 30, 1995 resulting from increased
costs associated with the conversion from Bandag, a smaller revenue base and
from labor costs at new locations which have not reached adequate
productivity levels. Administrative and general expenses as a percent of
sales increased to 11.8% for the nine months ended September 30, 1996 from
9.6% for the nine months ended September 30, 1995. The increase resulted from
several factors including costs associated with the conversion from Bandag,
higher insurance costs, expenses associated with employee medical benefits,
increased legal fees relating to the Bandag lawsuit and increased service
expenses.
Interest expense for the nine months ended September 30, 1996 was $613,000
compared to $343,000 for the nine months ended September 30, 1995. The
increase resulted primarily from the increase in debt outstanding relating to
equipment purchases and working capital needs.
The difference between the effective tax rate for the nine months ended
September 30, 1996 and the federal statutory rate resulted primarily from
state income taxes, amortization of goodwill and other nondeductible expenses
(see Note C to the unaudited consolidated financial statements).
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 2.10:1 at September
30, 1996, compared to 3.68:1 at December 31, 1995. Net cash provided by
operating activities was $8.2 million for the nine months ended September 30,
1996, compared to net cash used of $921,000 for the nine months ended
September 30, 1995. The increase is due primarily to the changes in
inventories and accounts payable offset in part by the Company's net loss.
The Company is a party to a revolving credit facility with Societe Generale
(the "Credit Agreement") providing for borrowings of up to the lesser of $20
million or the applicable borrowing base. The Company's borrowing base under
the Credit Agreement is equal to 80% of its eligible accounts receivable and
50% of its inventory consisting of tire casings, new tires and finished
retreads. At September 30, 1996, the borrowing base was $29.3 million. The
Credit Agreement expires in September 1998, unless renewed or extended.
Borrowings under the Credit Agreement bear interest, at the Company's option,
at 3/4% above the bank's LIBOR rate, or at the higher of the bank's prime
rate or the "federal funds rate" plus 1/2%. At September 30, 1996, the
average interest rate on the Credit Agreement was 6.4%. The Company pays a
commitment fee of 3/8% on the unused amount under the Credit Agreement. There
was $6.8 million borrowed under the Credit Agreement as of September 30,
1996.
The Credit Agreement contains various covenants which limit, among other
things, dividends, disposition of receivables, indebtedness and investments,
as well as requiring the Company to meet certain financial tests which have
been met.
<PAGE>
Forward Looking Statements
The foregoing management discussion contains forward-looking statements that
are based on current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from current
expectations due to a number of factors, including general economic
conditions; competitive initiatives and pricing pressures; availability and
cost of capital; shifts in market demand; weather conditions; government
regulations; the performance and needs of industries served by Treadco;
actual future costs of operating expenses such as the price of oil; self-
insurance claims and employee wages and benefits; and the timing and amount
of capital expenditures.
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in legal actions,
the majority of which arise out of the normal course of its business. Other
than as discussed below, the Company is not a party to any pending legal
proceeding which the Company's management believes to be material to the
financial condition of the Company. The Company generally maintains liability
insurance against risks arising out of the normal course of its business.
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court
alleging that Bandag and certain of its officers and employees have violated
Arkansas statutory and common law in attempting to solicit the Company's
employees to work for Bandag or its competing franchisees and attempting to
divert customers from Treadco. At the Company's request, the Court entered a
Temporary Restraining Order barring Bandag, Treadco's former officers J. J.
Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin
G. Carver and William Sweatman from soliciting or hiring Treadco's employees
to work for Bandag or any of its franchises, from diverting or soliciting
Treadco's customers to buy from Bandag franchises other than Treadco, and
from disclosing or using any of Treadco's confidential information.
On November 8, 1995, Bandag and the other named defendants asked the State
Court to stop its proceedings pending a decision by the United States
District Court, Western District of Arkansas, on a Complaint to Compel
Arbitration filed by Bandag in the Federal District Court on November 8,
1995.
The Federal District Court has ruled that under the terms of Treadco's
franchise agreements with Bandag, all of the issues involved in Treadco's
lawsuit against Bandag are to be decided by arbitration. Treadco and Bandag
are conducting discovery in preparation for the arbitration hearing. A date
for the arbitration hearing has not yet been set.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TREADCO, INC.
(Registrant)
Date: November 13, 1996 /s/Donald L. Neal
-----------------------------
Donald L. Neal
Senior Vice President - Chief
Financial Officer
and Principal Accounting
Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TREADCO,
INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000876948
<NAME> TREADCO, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,224,915
<ALLOWANCES> 1,330,951
<INVENTORY> 29,077,432
<CURRENT-ASSETS> 60,187,069
<PP&E> 43,890,979
<DEPRECIATION> 12,122,056
<TOTAL-ASSETS> 108,293,690
<CURRENT-LIABILITIES> 28,671,004
<BONDS> 15,977,964
0
0
<COMMON> 50,723
<OTHER-SE> 63,525,414
<TOTAL-LIABILITY-AND-EQUITY> 108,293,690
<SALES> 108,369,345
<TOTAL-REVENUES> 0
<CGS> 78,717,067
<TOTAL-COSTS> 111,992,434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,048,041
<INTEREST-EXPENSE> 613,206
<INCOME-PRETAX> (3,108,080)
<INCOME-TAX> (1,182,122)
<INCOME-CONTINUING> (1,925,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,925,958)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
<PAGE>
</TABLE>
