<PAGE>
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
For the Fiscal Year December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from ------------- to ------------
Commission File Number: 0-19390
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) 785-6000
----------------------------------------------------------------------
(Address, including zip code, and telephone
number, including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
----------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Nasdaq Stock Market / NMS
- ---------------------------- ---------------------------
(Title of each class) (Name of each exchange
on which registered)
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 voting stock held by non-affiliates of the
Registrant as of March 10, 1997, was $26,204,245.
The number of shares of Common Stock, $.01 par value, outstanding as of
March 10, 1997 was 5,072,255.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Treadco, Inc. annual shareholders'
meeting to be held May 7, 1997 are incorporated by reference into Part III.
<PAGE>
TREADCO, INC.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers
of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain
Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 19
Exhibit Index 44
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Corporate Profile
Treadco, Inc. (the "Company") is the nation's largest independent tire
retreader for the trucking industry and the third largest commercial truck
tire dealer. The Company has 54 locations in the United States located
primarily in the South, Southwest, lower Midwest and West.
Organization
The Company was organized in June 1991 as the successor to the truck tire
retreading and new tire sales business (the "Tire Business") conducted and
developed by a wholly owned subsidiary of Arkansas Best Corporation ("ABC").
In September 1991, the Company completed an initial public offering of
2,500,000 shares of common stock at $16 per share. At December 31, 1996, ABC
owned approximately 46% of the Company's outstanding shares.
Background
The Company was initially established in 1958 to retread truck tires for
ABF's fleet from a single location in Little Rock, Arkansas. In 1969, the
Company embarked on an expansion program designed to market precured retreads
to other trucking companies in the region. The Company opened its second
production facility in 1969 in Fort Smith, Arkansas, its third in Pine Bluff,
Arkansas in 1972 and since then has grown steadily to operate 26
production/sales facilities and 28 additional sales locations, primarily in
the South, Southwest, the lower Midwest and West.
In order to fully service its customers, the Company also began to sell new
truck tires in 1972, and currently retails new truck tires manufactured by
Bridgestone, Michelin, General, Dunlop, Kumho, and other manufacturers.
Today, retread tire sales and new tire sales are part of a unified service
that the Company provides principally to its niche market of mid-sized
commercial truck fleet operators that maintain their own in-house truck
operations and rely on the Company's expertise in servicing comprehensive
periodic truck tire replacement and retread management programs.
During the past five years, growth in retreaded units sold has increased at a
compound annual rate of 6.2%, while new tire sales in units grew at a
compound annual rate of 14.4%. In the Company's experience, under the proper
circumstances, a single production facility can generally support one or two
and, in some cases, more sales locations. The Company expects to continue
expanding its business consistent with its historic policy of capitalizing on
growth opportunities while maintaining the same high quality of service to
its customers.
(b) Financial Information about Industry Segments
The response to this portion of Item 1 is included in the Company's
consolidated financial statements for the year ended December 31, 1996, which
is submitted as a separate section of this report.
<PAGE>
(c) Narrative Discussion of Business
Retreading Processes
The Company uses two different processes to retread tires at its 26
production facilities. The precure process is used in 25 locations with the
mold cure process being used at its St. Louis facility.
The initial stages of both processes are similar in that, first, used tires,
or casings, are delivered to a Company production facility where the casing
is inspected for punctures, ruptures or other defects. The casing is
inspected using two inspection methods to detect defects that are not visible
to the human eye. If the casing passes these tests, it is deemed to be
retreadable and is then inflated and the remaining tread is buffed off to
assure a rounded, true running tire. The undertread remains intact, providing
extra protection to underlying belts and plies.
Next in the precure process, a specific tread design is measured from strips
of tread rubber, cut and applied to the casing. A flexible rubber envelope
then seals each tire which is placed in a bonding chamber. Air pressure in
the chamber creates uniform force, applying pressure on all points of the
tire. The tread is bonded to the casing by using a combination of heat and
air pressure to cure the encased tire in the bonding chamber.
In the mold cure process, rubber is extruded onto the prepared casing which
is then placed into the mold. The tread rubber is then cured on the casing by
using heat and tread patterns are molded into the tread rubber during the
curing process.
In both processes, cure times, heat temperatures and pressures are computer-
controlled to bond treads securely while protecting the future retreadability
of the casings.
The mold cure process is more capital intensive because of equipment costs
and, therefore, is better suited to the higher levels of volume found in the
more common tread designs and tire sizes.
The principal raw material in manufacturing retreaded truck tires is
synthetic rubber, which is comprised of styrene and butadiene, both petroleum
derivatives. Thus, the commodity price of oil directly affects the price of
the Company's principal raw materials. However, because retreading uses
roughly one-third of the amount of oil that the manufacture of a new tire
requires, retreads maintain a competitive price advantage in comparison to
new tires, particularly when oil prices increase dramatically.
Supplier Relationships
The Company was granted its first Bandag Incorporated ("Bandag") franchise in
1958 at its Little Rock, Arkansas location and subsequently was granted or
acquired additional Bandag franchises.
During 1994 and in early 1995, the Company's profit margins were adversely
impacted as Bandag implemented three price increases on tread rubber and
supplies which the Company had difficulty in passing along to its customers.
Because of the pressure on margins, limitations on growth imposed by Bandag
and other factors, the Company announced in the first quarter of 1995 that it
would explore alternatives to the Bandag process at two new production
facilities.
<PAGE>
During the second quarter of 1995, the Company opened a precure production
facility in Las Vegas, Nevada which purchases tread rubber and supplies from
sources other than Bandag.
Also, in 1995, the Company commenced construction on its St. Louis, Missouri
mold cure production facility and on February 1, 1996, received Bridgestone
certification to produce and sell the ONCOR remanufactured tires at that
location. This is the first plant in the United States using Bridgestone's
"ONCOR Tread Renewal System." However, the Bridgestone mold cure process has
been used for many years outside the United States, predominately in Japan.
In August 1995, Bandag informed the Company that eight of its franchise
agreements would not be renewed upon expiration in 1996. Bandag subsequently
advised the Company that unless the Company used the Bandag process
exclusively, Bandag would not renew any of the Company's franchise agreements
when they expired. The Company's remaining Bandag franchise agreements had
expiration dates in 1997 and 1998.
In October 1995, the Company signed an agreement with the Oliver Rubber
Company ("Oliver") to be a supplier of equipment and related materials for
all of the Company's facilities which cease being Bandag franchised
locations. In 1996, the Company entered into comprehensive, multi-year
license agreements for the majority of its locations with Oliver. The
conversion to Oliver from Bandag was completed in phases throughout the first
three quarters of 1996, with approximately one-third of its production
facilities converted each quarter. Under the Oliver license agreement, the
Company purchases from Oliver precured tread rubber and bonding cushion gum
and PNEUFLEX tread rubber (collectively "Rubber Products"). The Company's
obligation to purchase Rubber Products from Oliver is subject to (i) Oliver's
continuing to produce Rubber Products of no less quality and durability than
it presently produces, and (ii) Oliver's overall pricing program for the
Company.
Sales and Marketing
The Company's sales and marketing strategy is based on its service strengths,
network of production and sales facilities and strong regional reputation.
The Company targets mid-sized companies that maintain their own in-house
trucking operations, to which it offers (i) weekly service visits, (ii) full
pickup, repair and delivery service, (iii) comprehensive tire retreading and
(iv) new tire availability. In addition to excellent service, the Company
offers broad geographical coverage across the South, Southwest, lower Midwest
and West. This coverage is important for customers because they are able to
establish uniform pricing, utilize national account billing processes of the
major new tire suppliers, and generally reduce the risk of price
fluctuations. In addition, the Company offers customers a history of reliable
service with sound financial and operating practices.
The trucking industry continuously faces rising costs on a number of
different fronts, including government regulations on safety, maintenance and
fuel economy. As a result, trucking companies continually seek ways of
obtaining more mileage out of new tires and less expensive ways of replacing
old tires. Retreading tires is significantly less expensive than buying new
tires (about one-third of the cost) and generally last as long as new tires
used in similar applications. Moreover, most tire casings can be retreaded
one or two times. The Company's average retail charge for retreading a
customer's casing is approximately $82, compared to an average retail selling
price of approximately $236 for a new tire. The Company also sells retreads
including casings not supplied by the customer for approximately $159 per
<PAGE>
tire. The number of retread tires sold to customers supplying their own
casings accounts for about 75% of the total retread tires sold, with the
remainder representing sales of retreaded casings not supplied by the
customer. Since tire expenses are a significant operating cost for the
trucking industry, many truck fleet operators develop comprehensive periodic
tire replacement and retread management programs, which the Company actively
assists its customers in formulating. The Company markets its expertise to
these operators as a retreader and new tire retailer that can fully service
these tire management programs.
There are basically three types of tires on a tractor-trailer combination:
front steering wheels, rear tractor drive wheels and trailer wheels. Industry
practice is to utilize retreads in the drive and trailer positions; new tires
are generally placed on the steering axle. As tires are retreaded, they are
moved back to the drive and trailer positions under the operator's tire
management program. Most retreads have substantially the same life span as a
new tire used in similar applications. In managing a trucking fleet's tire
management program, the Company supplies both new and retread tires to its
customers.
The Company targets a niche market of mid-sized companies that maintain their
own in-house trucking operations, generally consisting of 10 to 75 trucks.
Management believes that this niche market represents more than half of the
total retread market. Tire management programs require periodic tire
replacement and retreading. Accordingly, on its weekly sales routes, the
Company picks up a fleet's casings, retreads those casings and returns them
to the customer the following week, thus providing a continuous supply of
both retreads and new tires as needed.
The Company markets its products through sales personnel located at each of
its 26 production facilities and 28 sales facilities. The Company's sales
people make personal sales calls on existing customers, typically on the same
day each week. They pick up casings to be retreaded and deliver retread and
new tires, as well as call on specifically targeted potential new customers.
The Company locates its plants in close proximity to interstate highways and
operates mobile service trucks in order to provide ready accessibility and
convenience to its customers, particularly fleet owners.
None of the Company's customers for retreads and new tires, including ABC and
ABF Freight System, Inc. ("ABF"), an affiliate, represented more than 2% of
the Company's revenues for 1996. ABF accounted for approximately $2.5 million
(1.8%) of revenue in 1996 and has not accounted for more than 3% of the
Company's revenues in any one of the last ten years.
The following table illustrates the growth of the Company's retread and new
tire business:
<TABLE>
<CAPTION>
Retread New Tire Service Total
Revenues Revenues Revenues Revenues
(in millions)
<S> <C> <C> <C> <C>
1992 $ 49.6 $ 44.7 $ 4.5 $ 98.8
1993 58.1 49.7 5.5 113.3
1994 69.8 63.6 7.3 140.7
1995 70.8 68.7 8.4 147.9
1996 62.0 72.4 9.8 144.2
</TABLE>
<PAGE>
In an effort to fully service its customers, the Company sells new truck
tires manufactured by Bridgestone, Michelin, General, Dunlop, Kumho, and
other manufacturers. The Company enjoys long-term relationships with its
suppliers, having served as a Bridgestone dealer for 24 years and as a
Michelin dealer for 20 years. According to Bridgestone and Dunlop, the
Company is their largest domestic truck tire dealer, and according to
Michelin, the Company is one of its largest domestic truck tire dealers.
These relationships reflect stable, consistent working relationships which
the Company believes provide it with reliable sources of new tires and enable
the Company to price its new tires competitively.
Competitive Factors and Industry Conditions
According to Tire Retreading/Repair Journal (December 1996), the total truck
tire retread production nationally in 1996 was approximately 16.5 million
units. With its 568,000 retreads sold in 1996, the Company represented
approximately 3.4% of the national market. Tire Retreading/Repair Journal
also estimates that the new replacement truck tire market nationally in 1996
was approximately 11.6 million units. With its 399,000 new tires sold in
1996, the Company represented approximately 3.4% of the national market. The
market for both retreads and new tires appears to be stable, although in the
last five years based on information published by Tire Retreading/Repair
Journal, the Company's relative market share of the national retread market
in units has grown from 2.8% to 3.4%, while its share of the national new
replacement truck tire market has grown from 2.0% to 3.4%.
Historically as a Bandag franchisee, the Company competed primarily against
smaller independent dealers in a highly fragmented market. Following the
termination of its Bandag franchise agreements, the Company has seen
increased competition as Bandag has granted additional franchises in some
locations currently being served. The new competition has led to increased
pricing pressures in the marketplace. Also as anticipated, Bandag continues
to target the Company's customers which has caused the loss of a substantial
amount of national account business. In addition, in many cases, the business
retained is at lower profit margins. The Company's ability to offer excellent
service to its niche market customers, competitive pricing, central
administration and purchasing for its production facilities, its ability to
avoid interim warehousing costs, and its multiple facilities covering key
regional trucking routes in its market all combine to appeal to fleet
customers looking for cost-effective, broad geographical coverage and
reliability of service and, in management's opinion, enable the Company to
compete effectively against these dealers.
According to Tire Retreading/Repair Journal (December 1996), there are
currently approximately 1,351 tire retreading production facilities
nationwide and innumerable new tire dealers. No single dealer dominates the
retread or new tire markets. While the Company is the largest independent
truck tire retreader, and second largest overall, Goodyear is the largest
single provider of retread services, which it offers through its dealers who
also sell new Goodyear tires.
The new truck tire business is also highly competitive and includes various
manufacturers, dealers and retailers. Generally, demand for new truck tires
is closely related to the strength of the regional and, ultimately, national
economies. As a low-cost alternative to new tires, demand for retread tires
may be less sensitive to economic downturns than the demand for new tires.
The Company has also experienced reduced demand for retreads and new truck
tires in the winter months due to more difficult driving and tire maintenance
conditions resulting from inclement weather.
<PAGE>
In addition to competing by offering excellent service and competitive
pricing, the Company competes with new tire retailers by offering
substantially the same warranty coverage on retreads as is provided for new
tires, emergency tire assistance programs which provide for 24-hour, year-
round emergency roadside service and convenient sales and retreading
locations.
Environmental and Other Government Regulations
The Company's business is affected by a number of governmental regulations
relating to the development, production and sale of retread and new tires, to
the raw materials used to manufacture such products (including petroleum,
styrene and butadiene), and to environmental, tax and safety matters. In
addition, the retreading process creates rubber particulate, or "dust," which
requires gathering and disposal, and the Company disposes of used and
nonretreadable tire casings, both of which require compliance with
environmental and disposal laws. Laws protecting the environment have become
more stringent. In some situations, the Company could be liable for disposal
problems, even if the situation resulted from previous conduct of the Company
that was lawful at the time or from improper conduct of, or conditions caused
by, persons engaged by the Company to dispose of particulate and discarded
casings. Such cleanup costs or costs associated with compliance with
environmental laws applicable to the tire retreading process could be
substantial and have a materially adverse effect on the Company's financial
condition. Management believes it is in compliance with all laws applicable
to such operations, however, and is not aware of any situation or condition
that it believes is likely to have a material adverse effect on the Company's
financial condition.
Employees
At December 31, 1996, the Company had approximately 880 full-time employees,
284 in production, 172 in service positions, 177 in sales positions and 247
in supervisory, office and administrative positions. A total of 309 of such
employees are salaried, while the remaining employees are paid on an hourly
basis. Twelve employees at one company facility are represented by a union.
The Company's management believes it enjoys a good relationship with its
employees.
ITEM 2. PROPERTIES
The Company currently owns 22 and leases 32 facilities. Twenty-six of these
facilities include space for the Company's production operations, while
remaining space is devoted to the Company's sales operations. The Company
believes that it will be able to renew its existing leases as they expire or
find suitable alternative locations, either of which may involve increased
rental expense. The leases generally provide for a base rental, as well as
charges for real estate taxes, insurance, common area maintenance and various
other items. The Company also owns its general office facility.
ITEM 3. 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. The Company
is not a party to any pending legal proceedings which management believes to
be material to the financial condition of the Company. The Company generally
maintains liability insurance against most risks arising out of the normal
course of its business.
<PAGE>
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court,
alleging that Bandag and certain of its officers and employees 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 terms of the Company's
franchise agreements with Bandag, all of the issues involved in the Company's
lawsuit against Bandag are to be decided by arbitration. The Company and
Bandag are conducting discovery in preparation for the arbitration hearing. A
date for the arbitration hearing has been set for the latter part of 1997.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter
ended December 31, 1996.
<PAGE>
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq Stock Market under the symbol
"TRED." The following table sets forth the high and low sale prices of the
Common Stock as reported by Nasdaq and the dividends declared during the
periods indicated.
<TABLE>
<CAPTION>
Cash
High Low Dividend
----- ---- ---------
<S> <C> <C> <C>
1996
First Quarter $ 7.750 $ 5.625 $ .04
Second Quarter 8.500 6.750 .04
Third Quarter 8.625 7.625 .04
Fourth Quarter 11.500 7.750 .04
1995
First Quarter $ 16.000 $ 15.250 $ .04
Second Quarter 15.500 12.875 .04
Third Quarter 14.000 10.500 .04
Fourth Quarter 11.500 5.250 .04
</TABLE>
At March 10, 1997, there were 5,072,255 shares of the Company's common stock
which were held by 186 stockholders of record and through approximately 800
nominee or street name accounts with brokers.
The declaration, payment and amount of dividends are subject to the
discretion of the Board of Directors and will depend upon the Company's
results of operations, financial condition, capital requirements, future
prospects and other business considerations deemed relevant by the Board of
Directors.
<PAGE>
ITEM 6.SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994 1993 1992
(thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
EARNINGS DATA:
Revenues $ 144,154 $ 147,906 $ 140,678 $ 113,277 $ 98,833
Costs and expenses 149,799 143,382 129,625 103,671 90,417
Operating
income (loss) (5,645) 4,524 11,053 9,606 8,416
Interest expense
(income), net 873 461 236 108 (32)
Other amortization 261 261 275 106 16
Other income 1,427 300 232 271 310
Income (loss)
before income
taxes (5,352) 4,102 10,774 9,663 8,742
Provision (credit)
for income taxes (2,093) 1,711 4,265 3,832 3,471
Net income (loss) $ (3,259) $ 2,391 $ 6,509 $ 5,831 $ 5,271
Net income (loss)
per share $ (.64) $ .47 $ 1.28 $ 1.16 $ 1.05
Average shares
outstanding 5,072 5,074 5,066 5,051 5,004
Cash dividends
paid per share $ .16 $ .16 $ .16 $ .16 $ .16
BALANCE SHEET DATA:
Working capital $ 34,043 $ 44,878 $ 37,364 $ 35,612 $ 29,497
Total assets 105,416 93,035 89,583 81,432 66,521
Current portion
of long-term debt 1,645 863 123 2 -
Long-term debt (less
current portion) 19,610 10,000 3,863 7,000 240
Stockholders' equity 61,948 66,018 64,438 58,488 52,904
</TABLE>
<PAGE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Significant Events
In August 1995, Bandag, Incorporated ("Bandag"), the Company's primary tread
rubber supplier and franchiser, 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 remaining franchise agreements when they
expired.
During 1996, the Company converted all of its production facilities that were
operated as Bandag retread franchises to Oliver licensed facilities. The
conversion was completed in phases throughout the first three quarters of
1996 with approximately one-third of its production facilities converted each
quarter.
The conversion resulted in up to two lost production days during each change,
some short-term operational inefficiencies and time lost as production
employees 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 October 1995, the Company filed a lawsuit in Arkansas State Court alleging
that Bandag and certain of its officers and employees 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. In November 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. Subsequently, the Federal Court has ruled that under terms of the
Company's franchise agreements with Bandag, all of the issues involved in the
Company's lawsuit against Bandag are to be decided by arbitration. The
Company and Bandag are conducting discovery in preparation for the
arbitration hearing. A date for the arbitration hearing has been set for the
latter part of 1997. (See Note J to the Company's consolidated financial
statements.)
In July 1996, 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.
Results of Operations
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.
<PAGE>
The Company is also subject to cyclical national and regional economic
conditions. The Company is a party to a Transition Services Agreement with ABC
whereby ABC provides services in the areas of accounting, data processing,
financial, legal, tax, cash management, human resources, and insurance
activities. The agreement requires the Company to pay a service fee of 1.25%
of the Company's total revenues, subject to certain adjustments as agreed upon
by the Company and ABC for general and administrative services. Certain other
expenses, primarily data processing and computer-related services, are charged
to the Company based on their actual cost to ABC. The Company believes that
these costs are indicative of what the costs would have been on a stand-alone
basis.
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>
Year Ended December 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
COSTS AND EXPENSES
Materials and cost
of new tires 72.0% 70.0% 68.2%
Salaries and wages 16.1 13.7 12.6
Depreciation and
amortization 3.0 2.2 1.9
Administrative
and general 12.5 10.1 9.1
Amortization
of goodwill 0.3 0.3 0.3
Cost of equipment
removal - 0.6 -
------ ------ ------
103.9% 96.9% 92.1%
====== ====== ======
</TABLE>
1996 as Compared to 1995
Sales (including sales to affiliates) for 1996 decreased 2.5% to $144.2
million from $147.9 million for 1995. Sales from retreading for the year were
$62.0 million, a 12.4% decrease from $70.8 million during 1995. Retread sales
and service revenues are reported separately. In previous periods, service
revenues were reported in retread sales. Service revenues for 1996 were $9.8
million, an increase of 15.5%, from $8.4 million in 1995. Sales of new tires
for 1996 were $72.4 million, a 5.4% increase from $68.7 million during 1995.
In 1996, the Company sold approximately 568,000 retreaded truck tires, a
decrease of 10.3% from 1995 and new tires sold increased 1.3% to 399,000
tires.
The Company has seen increased competition as Bandag has granted additional
franchises in some locations currently being served by the Company. The new
competition has led to increased pricing pressures in the marketplace. As
anticipated, Bandag continues to target the Company's customers which has
caused the loss of a substantial amount of national account business. In
addition, in many cases, the business retained is at lower profit margins.
Retread sales for 1995 included $2.4 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.
<PAGE>
For 1996, "same store" sales decreased 9.2%, which was offset in part by a
6.7% increase from "new store" sales. "Same store" sales include both
production facilities and sales locations that have been in existence for the
entire years of 1996 and 1995. "New store" sales resulted from one new
production facility and five new sales locations in 1996 and two new
production facilities and two new sales locations in 1995.
Operating costs and expenses were $149.8 million for 1996 compared to $143.4
million in 1995. The decrease in sales and increase in operating costs and
expenses resulted in operating loss of $5.6 million for 1996 compared to
operating income of $4.5 million in 1995. The Company had a net loss of $3.3
million, or $.64 loss per share, compared to net income of $2.4 million, or
$.47 per share, for 1995. Average shares outstanding were 5.1 million for
1996 and 1995.
Operating costs and expenses as a percent of sales were 103.9% for 1996
compared to 96.9% for 1995. Materials and cost of new tires as a percent of
sales increased to 72.0% from 70.0% during 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 16.1% for 1996 from 13.7% during 1995. The increase resulted
from increased costs associated with the conversion from Bandag, a smaller
revenue base and from labor costs at new locations which have not reached
normal productivity levels. Depreciation and amortization expense as a
percent of revenue increased to 3.0% for 1996 from 2.2% in 1995 primarily as
a result of the conversion to Oliver. All of the existing Bandag retread
equipment, some of which was fully depreciated, was replaced with new Oliver
equipment, resulting in a higher depreciable cost basis. Administrative and
general expenses as a percent of sales increased to 12.5% for 1996 from 10.1%
for 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-related
expenses.
The Company's ability to return to historical profitability levels is
substantially dependent upon replacement of retread volume, which declined
primarily due to national account business which was lost to competitors.
Also, new business frequently has lower margins than established accounts.
These factors, combined with continuing competitive pressures, will likely
result in continuing low margins in the near term.
Interest expense for 1996 was $900,000 compared to $510,000 for 1995. The
increase resulted primarily from the increase in debt outstanding relating to
equipment purchases.
The difference between the effective tax rate for 1996 and the federal
statutory rate resulted primarily from state income taxes, amortization of
goodwill and other nondeductible expenses as well as the successful
conclusion of an IRS examination (see Note E to the consolidated financial
statements).
Deferred tax assets totalled $1,726,738 at December 31, 1996 while deferred
tax liabilities totalled $14,360, resulting in net deferred tax assets of
$1,712,378. The Company believes that such assets will be realized through
reduction of future taxable income. Management has considered appropriate
factors in assessing the probability of realizing these tax assets. These
factors include the existence of substantial taxable income in 1994 and 1995.
Management continues to evaluate the realizability of deferred tax assets on
a quarterly basis by assessing the need for any valuation allowance.
<PAGE>
1995 as Compared to 1994
Sales for 1995 increased 5.1% to $147.9 million from $140.7 million for 1994.
Sales from retreading for the year were $79.2 million, a 2.7% increase from
$77.1 million during 1994. Sales of new tires for 1995 were $68.7 million, an
8.1% increase from $63.6 million during 1994. In 1995, the Company sold
approximately 633,000 retreaded truck tires, an increase of 3.4% from 1994
and new tires sold increased 11.6% to 394,000 tires. For 1995, "same store"
sales increased 2.4% and "new store" sales accounted for 2.7% of the total
increase from 1994. "Same store" sales include both production facilities and
sales locations that have been in existence for the entire years of 1995 and
1994. Although a softer economy during 1995 slowed demand for both new
replacement and retreaded truck tires, "same store" sales increased primarily
as a result of an increase in market share in the areas served. Also, the
Company has seen increased competition as Bandag has granted additional
franchises in some locations currently being served by the Company. "New
store" sales resulted from the addition of production facilities in Las
Vegas, Nevada and St. Louis, Missouri and sales offices in Nashville,
Tennessee and Fontana, California.
Operating costs and expenses were $143.4 million for 1995 compared to $129.6
million in 1994. The change in sales and operating costs and expenses
resulted in operating income of $4.5 million compared to $11.1 million in
1994. Net income was $2.4 million, or $.47 per share, for 1995 compared to
$6.5 million, or $1.28 per share, during 1994. Average shares outstanding
were 5.1 million for 1995 and 1994.
Operating costs and expenses as a percent of sales were 96.9% for 1995
compared to 92.1% for 1994. Materials and cost of new tires as a percent of
sales increased to 70.0% from 68.2% during 1994. Bandag implemented three
price increases on tread rubber and supplies totaling 9.6% during 1994 and
the beginning of 1995, which the Company was unsuccessful in passing on to
its customers. Salaries and wages as a percent of sales increased to 13.7%
for 1995 from 12.6% during 1994. The increase resulted primarily from hiring
additional service personnel at existing locations and employees added for
new locations. Also, salaries and wages increased due to employment contracts
signed with plant managers as an incentive to retain them. Administrative and
general expenses as a percent of sales increased to 10.1% for 1995 from 9.1%
for 1994. The increase resulted primarily from an increase in bad debt
expense, costs associated with employee medical benefits and data processing
costs associated with the installation of a production and inventory control
system. The Company accrued $840,000 for the estimated cost of removing
Bandag equipment at 26 of its locations which were converted to Oliver
licensed facilities in 1996.
Interest expense for 1995 was $510,000 compared to $270,000 for 1994. The
increase resulted primarily from the increase in debt outstanding. Debt was
higher due to working capital requirements and capital expenditures
requirements.
The difference between the effective tax rate for 1995 and the federal
statutory rate resulted primarily from state income taxes, amortization of
goodwill and other nondeductible expenses (see Note E to the consolidated
financial statements).
Deferred tax assets totalled $1,649,231 at December 31, 1995 while deferred
tax liabilities totalled $294,580, resulting in net deferred tax assets of
$1,354,651. The Company believes that such assets will be realized through
reduction of future taxable income.
<PAGE>
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 2.43:1 at December
31, 1996, compared to 3.68:1 at December 31, 1995. Net cash provided by
operating activities was $7.9 million for 1996 compared to net cash used by
operating activities of $1.6 million for 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 December 31, 1996, the borrowing base was $27.5 million. The
Credit Agreement expires in September 1998 unless renewed or extended.
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. The Credit
Agreement was amended in June 1996 to revise certain financial covenants. The
Company was in compliance with the revised covenants at December 31, 1996.
Subsequent to December 31, 1996, the Company and the bank agreed to further
revise certain covenants which are in effect for 1997. The remaining
covenants continue in effect.
The Company incurred approximately $26.0 million, $3.7 million, and $2.9
million in total capital expenditures (net of cash proceeds from the sale of
property, plant and equipment) in 1996, 1995, and 1994, respectively. The
1996 expenditures were spent in acquiring retreading equipment associated
with the conversion process, shop relocations and acquiring delivery trucks
and other equipment. In 1997, the Company anticipates spending approximately
$4.1 million in total capital expenditures, net of proceeds from the sale of
property, plant and equipment. The following table outlines the 1997 capital
expenditures program:
<TABLE>
<CAPTION>
Capital Expenditures Program for 1997
Net of Proceeds from Sales
<S> <C>
Land and building $2,000,000
Trucks 3,000,000
Recapping equipment 1,200,000
Miscellaneous equipment 852,000
----------
$7,052,000
Less operating leases 3,000,000
----------
$4,052,000
==========
</TABLE>
Management believes that, based upon the Company's current levels of
operations, borrowings available under the Credit Agreement and cash flow
from operations will be sufficient to finance current and future operations,
including the capital expenditure programs, and meet all present and future
debt service requirements.
<PAGE>
New Accounting Pronouncements
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement was adopted in the first quarter of 1996. The adoption of the
Standard did not have a material impact on the Company's financial position
or results of operations.
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.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors," "Directors of the Company,"
"Board of Directors and Committees," "Executive Officers of the Company," and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
proxy statement for the annual meeting of stockholders to be held on May 7,
1997, set forth certain information with respect to the directors, nominees
for election as directors and executive officers of the Company and are
incorporated herein by reference.
ITEM 11.EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation," "Aggregated Options/SAR
Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values,"
"Option Grants During 1996 Fiscal Year," "Option Repricings During 1996
Fiscal Year," "Retirement and Savings Plan," "Employment Contracts and
Termination of Employment and Change in Change-in-Control Arrangements," and
the paragraph concerning directors' compensation in the section entitled
"Board of Directors and Committees" in the Company's proxy statement for the
annual meeting of stockholders to be held on May 7, 1997, set forth certain
information with respect to compensation of management of the Company and are
incorporated herein by reference, provided, however, the information
contained in the sections entitled "Report on Executive Compensation by the
Executive Compensation and Development Committee and the Stock Option
Committee" and "Stock Performance Graph" are not incorporated herein by
reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Principal Shareholders and Management Ownership" in the
Company's proxy statement for the annual meeting of stockholders to be held
on May 7, 1997, sets forth certain information with respect to the ownership
of the Company's voting securities and is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions and Relationships" in the
Company's proxy statement for the annual meeting of stockholders to be held
on May 7, 1997, sets forth certain information with respect to relations of
and transactions by management of the Company and is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The response to this portion of Item 14 is submitted as a
separate section of this report.
(a)(2) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report.
(a)(3) Exhibits
The exhibits filed with this report are listed in the
Exhibit Index which is submitted as a separate section of
this report.
(b) There were no reports filed on Form 8-K during the last
quarter of 1996.
(c) See Item 14 (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TREADCO, INC.
By: s/Donald L. Neal
------------------------
Donald L. Neal
Chief Financial Officer
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.
Signature Title Date
---------- ------- -----
s/Robert A. Young, III Chairman of the Board 3/19/97
- ---------------------- -------
Robert A. Young, III
s/John R. Meyers 3/20/97
- ---------------------- -------
John R. Meyers President and Chief
Executive Officer
(Principal Executive Officer)
s/Donald L. Neal 3/19/97
- ---------------------- -------
Donald L. Neal Senior Vice President
- Chief Financial Officer
(Principal Financial and
Accounting Officer)
s/Nicolas M. Georgitsis Director 3/20/97
- ---------------------- -------
Nicolas M. Georgitsis
s/Robert B. Gilbert Director 3/19/97
- ---------------------- -------
Robert B. Gilbert
s/William A. Marquard Director 3/19/97
- ---------------------- -------
William A. Marquard
s/John H. Morris Director 3/19/97
- ---------------------- -------
John H. Morris
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
TREADCO, INC.
FORT SMITH, ARKANSAS
<PAGE>
FORM 10-K -- ITEM 8, ITEM 14 (a)(1) and (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
TREADCO, INC.
The following financial statements of Treadco, Inc. are included in Item 8:
Balance Sheets -- December 31, 1996 and 1995
Statements of Operations -- Years ended December 31, 1996, 1995, and 1994
Statements of Stockholders' Equity -- Years ended December 31, 1996, 1995,
and 1994
Statements of Cash Flows -- Years ended December 31, 1996, 1995, and 1994
The consolidated financial statement schedule of Treadco, Inc. is included in
Item 14(d):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been
omitted.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Treadco, Inc.
We have audited the accompanying consolidated balance sheets of Treadco, Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Treadco, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Little Rock, Arkansas
January 30, 1997
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents -- Note I $ 15,804 $ 1,619,901
Accounts receivable -- Note C:
Trade receivables,
less allowances for doubtful
accounts (1996 -- $1,161,266;
1995 -- $1,163,835) 18,310,397 18,132,847
Other (primarily national accounts
and volume rebates) 6,011,067 6,830,994
Due from affiliates 154,120 247,550
Inventories - Notes B and C 30,043,877 32,986,490
Prepaid expenses 155,483 217,393
Federal and state income taxes
refundable -- Note E 1,625,935 -
Deferred income taxes -- Note E 1,512,326 1,579,896
------------ ------------
TOTAL CURRENT ASSETS 57,829,009 61,615,071
PROPERTY, PLANT AND EQUIPMENT
Land 4,065,127 2,706,417
Structures 12,980,600 9,829,124
Retreading and other equipment 29,711,944 16,411,345
------------ ------------
46,757,671 28,946,886
Less allowances for depreciation (13,571,967) (12,607,866)
------------ ------------
33,185,704 16,339,020
OTHER ASSETS
Goodwill, less amortization
(1996 -- $3,446,815;
1995 -- $2,984,826) 13,156,142 13,618,131
Noncompete agreements, less amortization
(1996 -- $870,832; 1995 -- $609,583) 435,417 696,667
Deferred income taxes -- Note E 200,052 -
Other -- Note F 609,469 765,787
------------ ------------
14,401,080 15,080,585
------------ ------------
$ 105,415,793 $ 93,034,676
============ ============
<PAGE>
<CAPTION>
December 31
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 14,546,576 $ 8,363,965
Due to affiliate 959,174 477,469
Accrued expenses -- Note D 6,635,173 6,779,354
Federal and state income taxes -- Note E - 253,678
Current portion of long-term debt --
Note C 1,645,085 862,623
------------ ------------
TOTAL CURRENT LIABILITIES 23,786,008 16,737,089
LONG-TERM DEBT, less current
portion -- Notes C and I 19,610,482 10,000,000
DEFERRED INCOME TAXES -- Note E - 225,245
OTHER LIABILITIES 71,689 54,366
STOCKHOLDERS' EQUITY -- Notes A and G
Common stock, par value $.01 per
share -- authorized 18,000,000 shares;
issued and outstanding: 1996 and
1995 -- 5,072,255 shares 50,723 50,723
Additional paid-in capital 45,623,346 45,623,346
Retained earnings 16,273,545 20,343,907
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 61,947,614 66,017,976
COMMITMENTS AND CONTINGENCIES --
Notes F, H and J
$ 105,415,793 $ 93,034,676
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
SALES
Non-affiliates $ 141,613,036 $ 145,127,418 $ 138,704,554
Affiliates 2,541,091 2,778,463 1,973,211
------------ ------------ ------------
144,154,127 147,905,881 140,677,765
COSTS AND EXPENSES
Materials and cost of
new tires 103,751,776 103,632,214 96,032,576
Salaries and wages 23,233,814 20,261,701 17,763,617
Depreciation and
amortization 4,389,621 3,222,109 2,623,014
Administrative and
general 17,961,604 14,963,537 12,742,838
Amortization of goodwill 461,989 461,989 462,460
Costs of equipment
removal -- Note A - 840,000 -
------------ ------------ ------------
149,798,804 143,381,550 129,624,505
OPERATING INCOME (LOSS) (5,644,677) 4,524,331 11,053,260
OTHER INCOME
Interest income 26,252 48,344 34,479
Gain on asset sales --
Note A 1,298,215 167,167 102,024
Other 129,265 132,984 130,034
------------ ------------ ------------
1,453,732 348,495 266,537
OTHER EXPENSES
Interest 899,786 509,670 270,485
Amortization of deferred
financing costs and
noncompete agreements 261,250 261,250 275,143
------------ ------------ ------------
1,161,036 770,920 545,628
------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (5,351,981) 4,101,906 10,774,169
FEDERAL AND STATE INCOME
TAXES (CREDIT) -- Note E
Current (1,735,453) 2,360,164 4,518,063
Deferred (357,727) (649,494) (252,879)
------------ ------------ ------------
(2,093,180) 1,710,670 4,265,184
------------ ------------ ------------
NET INCOME (LOSS) $ (3,258,801) $ 2,391,236 $ 6,508,985
============ ============ ============
<PAGE>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
EARNINGS (LOSS) PER SHARE $ (.64) $ .47 $ 1.28
============ ============ ============
AVERAGE SHARES OUTSTANDING 5,072,255 5,074,429 5,066,178
============ ============ ============
CASH DIVIDENDS PAID PER
COMMON SHARE $ .16 $ .16 $ .16
============ ============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Stock Payable
Par Paid-In to Employee Retained
Shares Value Capital Benefit Plan Earnings
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 5,042,868 50,429 $45,123,632 $ 250,000 $13,064,268
Net income - - - - 6,508,985
Cash dividends - - - - (809,022)
Stock issued to employee
benefit plans 13,514 135 249,873 (250,000) -
Stock payable to employee
benefit plans - - - 250,000 -
--------- -------- ----------- ---------- -----------
Balances at December 31, 1994 5,056,382 50,564 45,373,505 250,000 18,764,231
Net income - - - - 2,391,236
Cash dividends - - - - (811,560)
Stock issued to employee
benefit plans 15,873 159 249,841 (250,000) -
--------- -------- ----------- ---------- -----------
Balances at December 31, 1995 5,072,255 50,723 45,623,346 - 20,343,907
Net loss - - - - (3,258,801)
Cash dividends - - - - (811,562)
--------- -------- ----------- ---------- -----------
Balances at December 31, 1996 5,072,255 $ 50,723 $45,623,346 $ - $16,273,545
========= ======== =========== ========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,258,801) $ 2,391,236 $ 6,508,985
Adjustments to reconcile
net income (loss) to net
cash provided (used) by
operating activities:
Depreciation and
amortization 4,389,621 3,222,109 2,623,014
Amortization of goodwill 461,989 461,989 462,460
Amortization of deferred
financing costs and
noncompete agreements 261,250 261,250 275,143
Provision for losses on
accounts receivable 1,645,349 1,341,271 1,033,131
Credit for deferred
income taxes (357,727) (649,494) (252,879)
Gain on asset sales (1,298,215) (167,167) (102,024)
Stock payable to employee
benefits plans - - 250,000
Changes in operating
assets and liabilities:
Receivables (1,002,972) (389,428) (4,221,575)
Inventories and
prepaid expenses 3,004,523 (2,976,028) (3,200,716)
Federal and state
income taxes
refundable (1,625,935) - -
Other assets (706,305) (253,869) (227,755)
Trade accounts
payable, accrued
expenses and
taxes payable 5,784,752 (5,101,116) 5,409,072
Due to/from affiliates 575,135 190,933 55,079
Other liabilities 17,323 18,630 18,358
----------- ----------- -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 7,889,987 (1,649,684) 8,630,293
INVESTING ACTIVITIES
Purchases of plant
facilities and other
property and equipment,
less notes payable (11,433,665) (4,455,924) (3,308,543)
Proceeds from asset sales 3,048,387 785,313 369,616
----------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (8,385,278) (3,670,611) (2,938,927)
<PAGE>
<CAPTION>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
FINANCING ACTIVITIES
Borrowings under revolving
credit facility $ 36,635,000 $ 15,975,000 $ 9,000,000
Payments under revolving
credit facility (36,335,000) (8,975,000) (13,000,000)
Principal payments on other
long-term debt and
capitalized lease
obligations (597,244) - (22,884)
Dividends paid (811,562) (811,560) (809,022)
Net decrease in cash
overdrafts - - (107,704)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (1,108,806) 6,188,440 (4,939,610)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,604,097) 868,145 751,756
Cash and cash equivalents
at beginning of year 1,619,901 751,756 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 15,804 $ 1,619,901 $ 751,756
=========== =========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- ORGANIZATION AND ACCOUNTING POLICIES
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 of 2,500,000 shares of common stock at $16 per share. At
December 31, 1996, ABC owned approximately 46% of the Company's outstanding
shares.
In 1996, the Company entered into comprehensive, multi-year license
agreements for the majority of its locations with Oliver Rubber Company
("Oliver"). Under the license agreements, Oliver will be a supplier of
equipment and related materials for Treadco's truck tire precure retreading
business. These license agreements require that the Company purchase all
rubber materials within the license territory for a one-year period or until
the Company has repaid all debt owed to Oliver. Prior to entering into the
Oliver license agreements, the Company had similar agreements with Bandag
Incorporated ("Bandag") which were terminated in 1996. As of December 31,
1995, $840,000 in costs were accrued to provide for the costs of removal of
Bandag equipment which was required under the Bandag franchise agreements.
The equipment was sold to Bandag at its estimated fair market value,
resulting in a gain of $1,034,372. The actual costs of equipment removal
incurred in 1996 did not differ materially from the $840,000 estimated at
December 31, 1995. The removal of Bandag equipment and the installation of
Oliver equipment was completed in phases throughout the first three quarters
of 1996 with approximately one-third of its production facilities converted
each quarter.
Consolidation: The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Trans-World Casings, Inc. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Business: The Company's operations include truck tire retreading and the sale
of both retreaded and new truck tires.
Cash and Cash Equivalents: Short-term investments which have a maturity of
ninety days or less when purchased are considered cash equivalents.
Concentration of Credit Risk: The Company sells to customers primarily in a
15-state area within the South, Southwest, lower Midwest, and West. The
Company's customers are primarily trucking companies or mid-sized companies
that maintain their own in-house trucking operations. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral.
Inventories: Inventories are carried at the lower of cost (first-in, first-
out method) or market.
<PAGE>
Property, Plant and Equipment: Purchases of property, plant and equipment are
recorded at cost. For financial reporting purposes, the cost of such assets
is depreciated principally by the straight-line method over the estimated
useful life of the related asset ranging from 3 to 15 years.
For tax reporting purposes, accelerated depreciation or cost recovery methods
are used.
Goodwill: Excess cost over fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 15 to 40 years. The carrying value of
goodwill will be reviewed if the facts and circumstances suggest that it may
be impaired. If this review indicates that goodwill will not be recoverable,
as determined based on the undiscounted cash flows over the remaining
amortization period, the Company's carrying value of the goodwill would be
reduced by the estimated shortfall of cash flows. No reductions have been
required.
Income Taxes: Deferred income taxes are accounted for under the liability
method. Deferred income tax assets and liabilities reflect the effects of
temporary differences arising from a 1988 purchase transaction and the timing
of the depreciation and cost recovery deductions and certain accrued
expenses.
Service Fees and Other Related Party Transactions: The Company is a party to
a Transition Services Agreement with ABC whereby ABC provides services in the
areas of accounting, data processing, financial, legal, tax, cash management,
human resources, and insurance activities. The Transition Services Agreement
is effective indefinitely, unless terminated by either party on 90 days'
notice. The Agreement requires the Company to pay a service fee of 1.25% of
the Company's total revenues, subject to certain adjustments as agreed upon
by the Company and ABC, for general and administrative services. Certain
other expenses, primarily data processing and computer-related services, are
charged to the Company based on their actual cost to ABC. Total fees charged
to the Company under this agreement were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service fee $ 1,543,829 $ 1,609,624 $ 1,533,151
Data Processing fee 1,018,213 912,761 637,456
------------ ------------ ------------
$ 2,562,042 $ 2,522,385 $ 2,170,607
============ ============ ============
</TABLE>
In 1995, the Company purchased its corporate office building and adjacent
land and parking lots from a subsidiary of ABC for approximately $400,000.
Earnings Per Share: Earnings per share are based on the average number of
common and common equivalent shares outstanding.
Claims Liabilities: The Company is self-insured up to certain limits for
workers' compensation and certain property damage and liability claims.
Provision has been made for the estimated retained liability for such claims.
Compensation to Employees: Stock-based compensation to employees is accounted
for based on the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25").
<PAGE>
Recent Accounting Pronouncements: In 1995, the Financial Accounting Standards
Board issued Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. This statement was
adopted in the first quarter of 1996. The adoption of the Standard did not
have an impact on the Company's financial position or results of operations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE B-- INVENTORIES
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
New tires and finished retreaded tires $ 23,802,112 $ 25,579,427
Materials and supplies 6,241,765 7,407,063
------------ ------------
$ 30,043,877 $ 32,986,490
============ ============
</TABLE>
NOTE C -- LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Credit Agreement (1) $ 10,300,000 $ 10,000,000
Notes payable (2) 7,174,802 -
Capital lease obligations (3) 3,780,765 -
Other - 862,623
------------ ------------
21,255,567 10,862,623
Less current portion 1,645,085 862,623
------------ ------------
$ 19,610,482 $ 10,000,000
============ ============
</TABLE>
(1) The Company has a revolving credit agreement with Societe Generale,
Southwest Agency, (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. 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 December 31, 1996, the average
interest rate on the Credit Agreement was 6.29%. The Company pays a
commitment fee of 3/8% on the unused amount under the Credit Agreement.
<PAGE>
The Credit Agreement contains various covenants which limit, among other
things, dividends, indebtedness, investments and disposition of receivables,
as well as requiring the Company to meet certain financial tests. The Credit
Agreement was amended in June 1996 to revise certain financial convenants.
The Company was in compliance with the revised covenants at December 31,
1996. Subsequent to December 31, 1996, the Company and the bank agreed to
further revise certain covenants which are in effect for 1997. The remaining
covenants continue in effect.
(2) The Company entered into note agreements totaling approximately $5.2
million with Oliver to finance the purchase of retreading equipment, in
accordance with the franchise agreements entered into in 1996. These notes
payable bear interest at 5% and are payable in monthly installments including
interest through 2001.
On February 1, 1996, the Company also entered into a non-interest bearing
note which was discounted using a 7.5% interest rate to $1.9 million ($2.8
million face value). This note was also to finance the purchase of retreading
equipment. The note has a ten-year term with monthly payments commencing
March 31, 1997.
(3) Capital leases include vehicle leases with terms ranging from 3 to 5
years with an average interest rate of 7.58%. Also included is a lease
relating to a building and land with a term through 2009 and an interest rate
of 7.50%.
Interest paid totaled approximately $900,000 in 1996, $522,000 in 1995, and
$225,000 in 1994.
Annual maturities of long-term debt, excluding capital lease obligations, in
1997 through 2001 are as follows: 1997 - $1,645,085; 1998- $12,106,631; 1999
- - $2,074,884; 2000 - $1,428,016; and 2001 - $1,242,251.
NOTE D -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Accrued salaries, wages and incentive plans $ 1,590,418 $ 1,295,546
Accrued vacation pay 652,706 672,706
Taxes other than income 1,705,726 1,578,447
Loss, injury, damage and workers'
compensation claims reserves 2,457,102 1,604,501
Pension and benefit plan costs 136,160 703,733
Accrued costs of equipment removal --
Note A - 840,000
Other 93,061 84,421
------------ ------------
$ 6,635,173 $ 6,779,354
============ ============
</TABLE>
<PAGE>
NOTE E -- FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Basis differences on property, plant
and equipment $ 14,360 $ 253,380
Prepaid expenses - 41,200
------------ ------------
Total deferred tax liabilities 14,360 294,580
Deferred tax assets:
Accrued expenses 888,809 1,054,877
Allowance for doubtful accounts 433,153 369,903
Uniform capitalization of inventories 188,209 204,172
Postretirement benefit obligations other
than pensions 26,740 20,279
State net operating loss carryovers 189,827 -
------------ ------------
Total deferred tax assets 1,726,738 1,649,231
------------ ------------
Net deferred tax assets $ 1,712,378 $ 1,354,651
============ ============
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ (1,735,453) $ 2,033,111 $ 3,899,522
State 327,053 618,541
------------ ------------ ------------
Total current
tax expense (credit) (1,735,453) 2,360,164 4,518,063
Deferred credit:
Federal (63,724) (548,813) (219,847)
State (294,003) (100,681) (33,032)
------------ ------------ ------------
Total deferred
tax credit (357,727) (649,494) (252,879)
------------ ------------ ------------
Total income tax expense
(credit) $ (2,093,180) $ 1,710,670 $ 4,265,184
============ ============ ============
</TABLE>
<PAGE>
A reconciliation between the effective income tax rate and the statutory
federal income tax rate is presented in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income tax (benefit)
at the statutory
federal rate of 34% $ (1,819,674) $ 1,394,647 $ 3,663,217
Federal income tax
effects of:
State income taxes 99,961 (76,966) (199,073)
Resolution of tax
contingencies (172,922) - -
Amortization of
nondeductible
goodwill 126,115 126,115 131,715
Other (32,657) 40,502 83,816
------------ ----------- -----------
Federal income taxes
(benefit) (1,799,177) 1,484,298 3,679,675
State income
taxes (benefit) (294,003) 226,372 585,509
------------ ----------- -----------
$ (2,093,180) $ 1,710,670 $ 4,265,184
============ ============ ===========
Effective income
tax rate (39.1)% 41.7% 39.6%
============ ============ ============
</TABLE>
No income taxes were paid in 1996, and approximately $2,377,000 and
$4,271,000 were paid in 1995 and 1994, respectively.
NOTE F -- EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Benefits are based on years of service and
employee compensation. Contributions are made based upon at least the minimum
amounts required to be funded under provisions of the Employee Retirement
Income Security Act of 1974, with the maximum amounts not to exceed the
maximum amount deductible under the Internal Revenue Code. The plan's assets
are held in a common bank-administered trust fund and are primarily invested
in equity and government securities.
<PAGE>
A summary of the components of net periodic pension cost for the defined
benefit plan is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost -- benefits
earned during the year $ 388,021 $ 275,961 $ 243,851
Interest cost on projected
benefit obligation 283,726 241,752 200,845
Actual return (gain) loss
on plan assets (327,242) (521,252) 6,624
Net amortization
and deferral 161,387 371,153 (146,302)
---------- ---------- ----------
Net periodic pension cost $ 505,892 $ 367,614 $ 305,018
========== ========== ==========
</TABLE>
Assumptions used in determining net periodic pension cost for the defined
benefit plan were:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Weighted average
discount rate 7.10% 8.73% 7.24%
Annual compensation
increases 3.00% 3.00% 3.00%
Expected long-term rates
of returns on assets 9.00% 9.00% 9.00%
</TABLE>
<PAGE>
The following sets forth the plan's funded status and amounts recognized in
the Company's consolidated balance sheets :
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit obligation $ (2,571,937) $ (2,500,787)
============= ============
Accumulated benefit
obligation $ (3,172,718) $ (3,118,575)
============= ============
Projected benefit obligation $ (3,831,114) $ (3,997,505)
Plan assets at fair value 3,058,407 2,859,494
------------- ------------
Projected benefit obligation
in excess of plan assets (772,707) (1,138,011)
Unrecognized net loss 1,031,951 1,260,228
Prior service cost not yet
recognized in net
periodic pension cost 34,416 37,183
Unrecognized net asset
at January 1, 1987,
net of amortization (2,322) (2,511)
Additional minimum liability (405,649) (415,970)
------------- ------------
Net pension liability $ (114,311) $ (259,081)
============= ============
</TABLE>
The net pension liability of $114,311 as of December 31, 1996, is comprised
of a current liability of $136,160, included in accrued expenses, and $21,849
included in other assets in the accompanying consolidated balance sheets. As
of December 31, 1995, the net pension liability of $259,081 is comprised of a
current liability of $453,733, included in accrued expenses, and $194,652
included in other assets. Also, an intangible pension asset of $405,649 and
$415,970 is included in other assets as of December 31, 1996 and 1995 to
record the minimum liability.
Assumptions used in determining the pension obligation for the defined
benefit plan were:
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Weighted average discount rate 7.50% 7.10%
Annual compensation increases 3.00 3.00
<PAGE>
The Company has an investment plan covering substantially all its employees.
The investment plan permits participants to defer up to 15% of their salary
by salary reduction as provided in Section 401(k) of the Internal Revenue
Code. Up to 4% of a participant's compensation contributed to the plan will
be matched by a Company deposit of 50% of such contribution. The percentage
of the Company match is set annually. The matching contribution charged to
operations totaled approximately $158,000 in 1996, $135,000 in 1995, and
$48,000 in 1994.
The Company also has the Treadco Employee Stock Ownership Plan (the "ESOP")
and a related trust (the "Trust") covering substantially all employees of the
Company. The cost of the ESOP is borne by the Company through annual
contributions to the Trust in amounts determined by the Board of Directors.
Charges to operations for contributions to the ESOP plan totaled $250,000 for
1995 and 1994. No contribution was made for 1996.
NOTE G -- STOCK OPTION PLANS
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Company's Stock Option Plan (the "Option Plan) provides that up to
350,000 shares of common stock are available for awards of incentive and non-
qualified stock options to directors and key employees of the Company. Under
the Option Plan, the exercise price will not be less than fair market value
for incentive options. The options become exercisable ratably over a five-
year or ten-year period for incentive options and non-qualified options,
respectively.
The Company also had a Disinterested Director Stock Option Plan which
provided that each of the directors who were administering the Company's
Option Plan were granted stock options each May to purchase 5,000 shares of
the Company's Common Stock. This plan was terminated in May 1994. The options
previously granted under this plan will continue in effect according to their
terms.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1996 and 1995, respectively: risk-free interest rates of 6.0% and 6.2%;
dividend yields of .01% and .01%; volatility factors of the expected market
price of the Company's Common Stock of .34 and .34; and a weighted-average
expected life of the option of 9.5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
<PAGE>
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1996 1995
Net income (loss) - as reported $(3,258,801) $ 2,391,236
=========== ===========
Net income (loss) - pro forma $(3,442,965) $ 2,372,240
=========== ===========
Income (loss) per share
- as reported $ (.64) $ .47
=========== ===========
Income (loss) per share
- pro forma $ (.68) $ .47
=========== ===========
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 75,000 $ 13.30 105,000 $ 13.39 87,000 $ 13.94
Granted 140,000 7.06 20,000 14.44 20,000 11.25
Exercised - - - - - -
Cancelled - - (50,000) 13.95 (2,000) 15.75
-------- --------- -------- --------- -------- ---------
Outstanding -
end of year 215,000 $ 8.09 75,000 $ 13.30 105,000 $ 13.39
======== ========= ======== ========= ======== =========
Exercisable at
end of year 37,000 $ 10.00 22,000 $ 13.70 33,000 $ 14.80
======== ========= ======== ========= ======== =========
Estimated weighted-
average fair value
per share of
options granted
during the year $ 4.47 $ 5.72
========= =========
</TABLE>
<PAGE>
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$5.75 - $7.13 125,000 9.1 $ 6.72 - $ -
$10 90,000 7.4 10.00 37,000 10.00
-------- ---- --------- ------- ---------
215,000 37,000
======== =======
</TABLE>
In October 1996, all grants issued prior to 1996 were repriced, changing the
exercise price to $10.00. The options were originally priced from $11.25 to
$15.75. The timing and requirements for vesting and life of the options were
not changed.
In October 1995, the Company adopted a performance award program and awarded
30,000 and 15,000 units to the Company's President and Executive Vice
President, respectively. The units are valued equal to the closing price per
share of the Company's common stock on the date awarded. The awards become
100% vested after four years, with the awards increased yearly to the extent
that the Company's return on equity exceeds 8%.
NOTE H -- LEASES AND COMMITMENTS
The future minimum payments under capitalized leases at December 31, 1996 are
as follows:
1997 $ 838,610
1998 838,610
1999 977,009
2000 234,840
2001 234,840
Thereafter 2,137,893
-----------
Total minimum lease payments 5,261,802
Amounts representing interest 1,481,037
------------
Present value of net minimum
lease payments included in
long-term debt $ 3,780,765
============
<PAGE>
Assets held under capitalized leases are included in property, plant, and
equipment at December 31, 1996 as follows:
Equipment $ 1,736,773
Land and buildings 2,043,992
------------
3,780,765
Less accumulated depreciation 316,396
------------
$ 3,464,369
============
Rental expense for various production facilities and sales locations amounted
to approximately $1,751,000 in 1996, $1,408,000 in 1995, and $1,166,000 in
1994.
The future minimum rental commitments as of December 31, 1996, for all
noncancellable operating leases are as follows:
1997 $ 1,644,585
1998 1,365,337
1999 899,152
2000 571,612
2001 379,284
Thereafter 1,197,882
------------
$ 6,057,852
============
Certain of the leases are renewable for substantially the same rentals for
varying periods.
NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Long-term debt: The carrying amounts of the Company's borrowings under its
revolving credit agreement approximates its fair value since the interest
rate under this agreement is variable. The fair value of the Company's notes
payable arrangements are estimated using current market rates.
The fair value of the Company's financial instruments and related carrying
value as of December 31, 1996 is reflected as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
<S> <C> <C>
Cash and cash equivalents $ 15,804 $ 15,804
Short-term debt 1,073,039 1,036,634
Long-term debt 16,401,763 16,395,413
</TABLE>
<PAGE>
NOTE J -- LITIGATION
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court
alleging that Bandag and certain of its officers and employees 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 the Company, 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 ruled that under terms of the Company's franchise
agreements with Bandag, all of the issues involved in the Company's lawsuit
against Bandag are to be decided by arbitration. The Company and Bandag are
conducting discovery in preparation for the arbitration hearing. A date for
the arbitration hearing has been set for the latter part of 1997.
The Company is not a party to any other pending legal proceedings which
management believes to be material to the financial position or results of
operations of the Company.
<PAGE>
NOTE K -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below present unaudited quarterly financial information for 1996 and
1995:
<TABLE>
<CAPTION>
1996
Three Months Ended
March 31 June 30 September 30 December 31
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sales $ 32,133,638 $ 36,114,495 $ 40,121,212 $ 35,784,782
Costs and expenses 33,790,099 37,435,918 40,766,417 37,806,370 [a]
------------- ------------- ------------- -------------
Operating (loss) (1,656,461) (1,321,423) (645,205) (2,021,588)
Other expense
(income) -- net 181,363 49,462 (745,834) 222,313
Income taxes
(credit) (656,242) (476,515) (49,365) (911,058)
------------- ------------- ------------- -------------
Net income (loss) $ (1,181,582) $ (894,370) $ 149,994 $ (1,332,843)
============= ============= ============= =============
Net income (loss)
per share $ (0.23) $ (0.18) $ .03 $ (0.26)
============= ============= ============= =============
Average shares
outstanding 5,072,255 5,072,255 5,079,707 5,072,255
============= ============= ============= =============
<FN>
<F1>
[a] Costs and expenses for the fourth quarter of 1996 includes a provision for
$875,000 to increase self-insurance reserves.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
Three Months Ended
March 31 June 30 September 30 December 31
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sales $ 33,850,014 $ 38,057,937 $ 40,697,050 $ 35,300,880
Costs and expenses 32,268,813 36,241,946 39,079,995 35,790,796 [a]
------------- ------------- ------------- -------------
Operating income
(loss) 1,581,201 1,815,991 1,617,055 (489,916)
Other expense
(income) -- net 48,716 (67) 204,151 169,625
Income taxes
(credit) 631,163 738,343 584,872 (243,708)
------------- ------------- ------------- -------------
Net income (loss) $ 901,322 $ 1,077,715 $ 828,032 $ (415,833)
============= ============= ============= =============
Net income (loss)
per share $ .18 $ .21 $ .16 $ (.08)
============= ============= ============= =============
Average shares
outstanding 5,077,933 5,078,465 5,073,061 5,072,255
============= ============= ============= =============
<FN>
<F1>
[a] Costs and expenses for the fourth quarter of 1995 includes an $840,000
charge for estimated costs of equipment removal incurred in 1996 at its
Bandag franchise locations.
</FN>
</TABLE>
<PAGE>
<TABLE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TREADCO, INC.
<CAPTION>
Column A Column B Column C Column D Column E
Additions
(1) (2)
Balance at Charged to Charged to
beginning costs and other accounts Deductions - Balance at
Description of period expenses describe describe end of period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Deducted from
asset accounts:
Allowance for doubtful
accounts receivable $ 1,163,835 $ 1,645,349 $ 341,359(A) $ 2,037,220(B) $ 1,161,266
47,943(C)
=========== ============ =========== =========== ============
Year Ended December 31, 1995:
Deducted from asset
accounts:
Allowance for doubtful
accounts receivable $ 1,000,000 $ 1,341,271 $ 254,776(A) $ 1,432,209(B) $ 1,163,835
=========== ============ =========== =========== ===========
Year Ended December 31, 1994:
Deducted from asset
accounts :
Allowance for doubtful
accounts receivable $ 1,000,000 $ 1,033,132 $ 241,778(A) $ 1,274,910(B) $ 1,000,000
=========== ============ =========== =========== ===========
<FN>
<F1>
Note A - Recoveries of amounts previously written off.
<F2>
Note B - Uncollectible accounts written off.
<F3>
Note C - The allowance for doubtful accounts of Five Bros., Inc. as of date of
acquisition.
</FN>
</TABLE>
<PAGE>
FORM 10-K -- ITEM 14 (c)
EXHIBIT INDEX
TREADCO, INC.
The following exhibits are filed with this report or are incorporated by
reference to previously filed material.
Exhibit No.
3.1* Certificate of Incorporation of the Company (previously
filed as Exhibit 3.1 to the Company's Form S-1 Registration
Statement under the Securities Act of 1933 dated July 3, 1991,
Commission File No. 33-41605, and incorporated herein by
reference).
3.2* Bylaws of the Company (previously filed as Exhibit 3.2 to
the Company's Form S-1 Registration Statement under the
Securities Act of 1933 dated July 3, 1991, Commission File No.
33-41605, and incorporated herein by reference).
10.1* Credit Agreement entered into between the Company and
Societe Generale, Southwest Agency dated as of August 16, 1991
(previously filed as Exhibit 10.13 to the Company's Amendment
No. 2 to Form S-1 Registration Statement under the Securities
Act of 1933 dated September 11, 1991, Commission File No. 33-
41605, and incorporated herein by reference).
10.2* Form of Transition Services Agreement entered into
between the Company and Arkansas Best Corporation (previously
filed as Exhibit 10.8 to the Company's Form S-1 Registration
Statement under the Securities Act of 1933 dated July 3, 1991,
Commission File No. 33-41605, and incorporated herein by
reference).
10.3* Form of Agreement entered into between the Company and
Oliver Rubber Company dated September 29, 1995 (previously filed
as Exhibit 10 to the Company's Form 10-Q Quarterly Report under
the Securities Exchange Act of 1934 for the quarter ended
September 30, 1995, Commission File No. 0-19390, and
incorporated herein by reference).
10.4*# Treadco, Inc. Performance Award Unit Program effective
January 1, 1996 (previously filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, Commission File No. 0-19390, and incorporate
herein by reference).
23 Consent of Ernst & Young LLP.
- ---------------
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
# Designates a compensation plan for Directors or Executive Officers.
<PAGE>
EXHIBIT 23
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-66696) pertaining to the Treadco, Inc. Stock Option Plan and
Treadco, Inc. Disinterested Director Stockholder Plan of our report dated
January 30, 1997, with respect to the consolidated financial statements and
schedule of Treadco, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1996.
ERNST & YOUNG LLP
Little Rock, Arkansas
March 21, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TREADCO,
INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000876948
<NAME> TREADCO, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,804
<SECURITIES> 0
<RECEIVABLES> 18,310,397
<ALLOWANCES> 1,161,266
<INVENTORY> 30,043,877
<CURRENT-ASSETS> 57,829,009
<PP&E> 46,757,671
<DEPRECIATION> 13,571,967
<TOTAL-ASSETS> 105,415,793
<CURRENT-LIABILITIES> 23,786,008
<BONDS> 19,610,482
0
0
<COMMON> 50,723
<OTHER-SE> 61,896,891
<TOTAL-LIABILITY-AND-EQUITY> 105,415,793
<SALES> 144,154,127
<TOTAL-REVENUES> 144,154,127
<CGS> 103,751,776
<TOTAL-COSTS> 149,798,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,645,349
<INTEREST-EXPENSE> 899,786
<INCOME-PRETAX> (5,351,981)
<INCOME-TAX> (2,093,180)
<INCOME-CONTINUING> (3,258,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,258,801)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
<PAGE>
</TABLE>
