<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended June 30, 1997
----------------------------
[ ] 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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 7534 and 5531 71-0706271
- ------------------------------------ --------------------------------- -----------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
1101 South 21st Street
Fort Smith, Arkansas
72901
(501) 788-6400
---------------------------------
(Address, including zip code,
and telephone number, including
area code, of registrant's
principal executive offices)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at July 15, 1997
- ------------------------------------ -------------------------------
<S> <C>
Common Stock, $.01 par value 5,072,255 shares
</TABLE>
1
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TREADCO, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations --
For the Three and Six Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements --
June 30, 1997 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
------------- -------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................. $ -- $ 15,804
Accounts receivable:
Trade receivables, less allowances for
doubtful accounts (1997 -- $1,178,566;
1996 -- $1,161,266) .................. 21,384,804 18,310,397
Other ................................. 5,023,662 6,011,067
Due from affiliates ....................... 167,195 154,120
Inventories - Note C ...................... 29,371,080 30,043,877
Prepaid expenses .......................... 50,047 155,483
Federal and state income taxes refundable . 3,185,359 1,625,935
Deferred income taxes ..................... 1,512,326 1,512,326
------------- -------------
TOTAL CURRENT ASSETS .................. 60,694,473 57,829,009
PROPERTY, PLANT AND EQUIPMENT
Land ...................................... 4,065,127 4,065,127
Structures ................................ 13,076,448 12,980,600
Retreading and other equipment ............ 31,369,800 29,711,944
------------- -------------
48,511,375 46,757,671
Less allowances for depreciation .......... (16,112,603) (13,571,967)
------------- -------------
32,398,772 33,185,704
OTHER ASSETS
Goodwill, less amortization
(1997 -- $3,677,812; 1996 -- $3,446,815) . 12,925,148 13,156,142
Noncompete agreements, less amortization
(1997 -- $1,001,458; 1996 -- $870,832) ... 304,792 435,417
Deferred income taxes ..................... -- 200,052
Other ..................................... 857,464 609,469
------------- -------------
14,087,404 14,401,080
------------- -------------
$ 107,180,649 $ 105,415,793
============= =============
</TABLE>
3
<PAGE> 4
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ............................. $ 125,200 $ --
Trade accounts payable ..................... 18,261,139 14,546,576
Due to affiliate ........................... 592,668 959,174
Accrued salaries, wages and other expenses . 6,928,070 6,635,173
Current portion of long-term debt .......... 2,036,395 1,645,085
------------ ------------
TOTAL CURRENT LIABILITIES .............. 27,943,472 23,786,008
LONG-TERM DEBT, less current portion ............ 19,373,316 19,610,482
OTHER LIABILITIES ............................... 80,653 71,689
DEFERRED INCOME TAXES ........................... 183,846 --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share --
authorized 2,000,000 shares; none issued . -- --
Common stock, par value $.01 per share --
authorized 18,000,000 shares; issued and
outstanding 5,072,255 shares ............. 50,723 50,723
Additional paid-in capital ................. 45,623,346 45,623,346
Retained earnings .......................... 13,925,293 16,273,545
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............. 59,599,362 61,947,614
COMMITMENTS AND CONTINGENCIES -- Note D
------------ ------------
$107,180,649 $105,415,793
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
4
<PAGE> 5
TREADCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Non-affiliates ...................... $ 41,014,082 $ 35,485,903 $ 73,108,092 $ 67,118,236
Affiliates .......................... 121,805 628,592 1,239,269 1,129,897
41,135,887 36,114,495 74,347,361 68,248,133
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Materials and cost of new tires ..... 27,794,924 26,337,098 51,055,134 49,902,860
Salaries and wages .................. 6,616,617 5,532,265 12,826,237 10,800,126
Depreciation and amortization ....... 1,344,365 1,002,312 2,698,176 1,862,648
Administrative and general .......... 5,044,289 4,448,746 9,967,176 8,429,389
Amortization of goodwill ............ 115,497 115,497 230,994 230,994
------------ ------------ ------------ ------------
40,915,692 37,435,918 76,777,717 71,226,017
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) ................ 220,195 (1,321,423) (2,430,356) (2,977,884)
OTHER INCOME
Interest income ..................... 16,870 3,982 19,227 19,111
Gain (loss) on asset sales .......... (942) 132,504 2,606 136,987
Other ............................... 91,298 37,349 125,661 62,155
------------ ------------ ------------ ------------
107,226 173,835 147,494 218,253
OTHER EXPENSES
Interest ............................ 335,962 157,984 645,592 318,453
Amortization of noncompete agreements 65,313 65,313 130,625 130,625
------------ ------------ ------------ ------------
401,275 223,297 776,217 449,078
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ............... (73,854) (1,370,885) (3,059,079) (3,208,709)
FEDERAL AND STATE INCOME TAXES
(CREDIT)
Current ............................. (352,202) (304,837) (1,500,505) (962,438)
Deferred ............................ 332,037 (171,678) 383,898 (170,319)
------------ ------------ ------------ ------------
(20,165) (476,515) (1,116,607) (1,132,757)
------------ ------------ ------------ ------------
NET LOSS ............................... $ (53,689) $ (894,370) $ (1,942,472) $ (2,075,952)
============ ============ ============ ============
NET LOSS PER SHARE ..................... $ (0.01) $ (0.18) $ (0.38) $ (0.41)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING ............. 5,072,255 5,072,255 5,072,255 5,072,255
============ ============ ============ ============
CASH DIVIDENDS PAID
PER COMMON SHARE ....................... $ 0.04 $ 0.04 $ 0.08 $ 0.08
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
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TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
SIX MONTHS ENDED
JUNE 30
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .......................................... $ (1,942,471) $(2,075,952)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization ................. 2,698,176 1,862,648
Amortization of goodwill ...................... 230,994 230,994
Amortization of deferred financing costs
and noncompete agreements ................... 130,625 130,625
Provision for losses on accounts receivable ... 1,236,253 850,345
Provision (credit) for deferred income taxes .. 383,898 (170,319)
Gain on asset sales ........................... (2,606) (136,987)
Changes in operating assets and liabilities:
Receivables ................................. (3,323,255) (160,762)
Inventories and prepaid expenses ............ 778,233 2,709,174
Federal and state income taxes .............. (1,559,424) --
Other assets ................................ (247,995) (1,528,822)
Trade accounts payable, accrued
expenses and taxes payable ................. 4,007,460 4,226,714
Due to/from affiliates ........................ (379,581) 151,991
Other liabilities ............................. 8,964 9,459
------------ -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................................. 2,019,271 6,099,108
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........ (930,134) (3,948,319)
Proceeds from asset sales ......................... 429,979 171,690
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES .................. (500,155) (3,776,629)
FINANCING ACTIVITIES
Borrowings under revolving credit facility ........ 15,585,000 5,610,000
Payments under revolving credit facility .......... (15,885,000) (9,610,000)
Payments of other long-term debt .................. (954,339) (48,371)
Dividends paid .................................... (405,781) (312,992)
Net increase in cash overdrafts ................... 125,200 418,983
------------ -----------
NET CASH USED IN FINANCING ACTIVITIES .................. (1,534,920) (3,942,380)
------------ -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS ................................. (15,804) (1,619,901)
Cash and cash equivalents at beginning of period .. 15,804 1,619,901
------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ..................................... $ -- $ --
============ ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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NOTE A -- ORGANIZATION
Treadco, Inc. (the "Company") was organized in June 1991 as the successor
to the truck tire retreading and new truck tire sales business previously
conducted and developed by a wholly owned subsidiary of Arkansas Best
Corporation ("ABC"). In September 1991, the Company completed an initial public
offering. At June 30, 1997, ABC owned approximately 46% of the Company's
outstanding shares.
NOTE B -- FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 1997,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the Company's
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
NOTE C -- INVENTORIES
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
-------------- --------------
<S> <C> <C>
New tires and finished retreaded tires ......... $ 23,321,759 $ 23,802,112
Materials and supplies ......................... 6,049,321 6,241,765
-------------- --------------
$ 29,371,080 $ 30,043,877
============== ==============
</TABLE>
7
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TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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NOTE D -- LITIGATION
Other than as discussed below, the Company is not a party to any pending
legal proceedings which management believes to be material to the results of
operations, cash flows or the financial condition of the Company.
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court,
alleging that Bandag, Inc. ("Bandag"), the Company's former retread franchisor,
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
franchisees other than Treadco, and from disclosing or using any of Treadco's
confidential information.
On November 8, 1995, Bandag and the other named defendants asked the State
Court to stop its proceedings pending a decision by the United States District
Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed
by Bandag in the Federal District Court on November 8, 1995.
The Federal District Court has ruled that under the terms of 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. The
arbitration hearing is expected to be held in the first half of 1998.
NOTE E -- LONG-TERM DEBT
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 Credit
Agreement expires in September 1998 unless renewed or extended. The Credit
Agreement was amended in March 1997 to revise certain financial covenants and
the Company's interest rate on LIBOR advances. Borrowings under the Credit
Agreement bear interest, at the Company's option, at 1 1/4% 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 June 30, 1997, the interest rate on the Credit Agreement
was 6.9%. The Company pays a commitment fee of 3/8% on the unused amount under
the Credit Agreement. There was $10 million borrowed under the Credit Agreement
as of June 30, 1997.
8
<PAGE> 9
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- -------------------------------------------------------------------------------
NOTE F -- RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for computing primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of primary earnings per share and fully diluted
earnings per share for these quarters is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income. The Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Statement is effective
for the Company in 1998. The Company does anticipate that adoption of this
Statement will have a material impact on the current presentation of its
financial statements.
9
<PAGE> 10
ITEM 2. 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.
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. The
Company is also subject to cyclical national and regional economic conditions.
The following table sets forth for the periods indicated a summary of
sales by category:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
% %
1997 1996 INCREASE 1997 1996 INCREASE
-------------- ------------- -------- ------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
SALES
Retread ................ $ 16,808,174 $ 15,397,464 9.2% $ 30,493,001 $ 29,882,975 2.0%
New tires .............. 20,619,720 17,772,365 16.0 37,063,407 32,798,800 13.0
Service ................ 3,707,993 2,944,666 25.9 6,790,953 5,566,358 22.0
------------- ------------- ---- ------------- -------------- ----
TOTAL ..................... $ 41,135,887 $ 36,114,495 13.9% $ 74,347,361 $ 68,248,133 8.9%
============= ============= ==== ============= ============== ====
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following table sets forth for the periods indicated a summary of the
Company's operating costs and expenses as a percentage of sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
COSTS AND EXPENSES
Materials and cost of new tires 67.5% 73.0% 68.7% 73.2%
Salaries and wages ............ 16.1 15.3 17.3 15.8
Depreciation and amortization . 3.3 2.8 3.6 2.7
Administrative and general .... 12.3 12.3 13.4 12.4
Amortization of goodwill ...... 0.3 0.3 0.3 0.3
------ ------ ------ ------
99.5% 103.7% 103.3% 104.4%
====== ====== ====== ======
</TABLE>
Three Months Ended June 30, 1997 as Compared to Three Months Ended June 30,
1996
Sales (including sales to affiliates) for the three months ended June 30,
1997 increased 13.9% to $41.1 million from $36.1 million for the three months
ended June 30, 1996. During the three months ended June 30, 1997, the Company
sold approximately 169,000 retreaded truck tires, an increase of 16.1% from the
three months ended June 30, 1996 and new tires sold increased 13.5% to 112,000
tires. The average sale price for retreads has decreased as the Company faces
new competition at many of its locations, which has caused added pressure on
selling prices. As anticipated, Bandag, Inc. continues to target the Company's
accounts which has caused difficulty in retaining the national account business
and in many cases the business retained is at lower margins.
For the three months ended June 30, 1997, "same store" sales increased
6.5% and "new store" sales accounted for 7.4% of the increase from the 1996
second quarter. "Same store" sales include both production locations and sales
locations that have been in existence for the entire periods presented. "New
store" sales resulted from one new production facility and three new sales
locations.
Operating costs and expenses were $40.9 million for the three months ended
June 30, 1997 compared to $37.4 million during the three months ended June 30,
1996. For the three months ended June 30, 1997 the Company had operating income
of $220,000 compared to an operating loss of $1.3 million during the three
months ended June 30, 1996. The Company had a net loss of $54,000, or $.01 net
loss per share, compared to a net loss of $894,000, or $.18 net loss per share
during the three months of June 30, 1996.
Operating costs and expenses as a percent of sales were 99.5% for the
three months ended June 30, 1997 compared to 103.7% for the three months ended
June 30, 1996. Materials and cost of new tires as a percent of sales decreased
to 67.5% for the three months ended June 30, 1997 from 73.0% during the three
months ended June 30, 1996, resulting primarily from lower tread rubber costs
with Oliver and lower new tire costs. Salaries and wages as a percent of sales
increased to 16.1% for the three months ended June 30, 1997 from 15.3% during
the three
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
months ended June 30, 1996. The increase resulted from a greater number of
employees added for new locations, cost-of-living raises, and the lower selling
price per retread tire. Depreciation and amortization expense as a percent of
revenue increased to 3.3% for the three months ended June 30, 1997 from 2.8%
for the three months ended June 30, 1996 primarily as a result of the
acquisition during 1996 of new retread production equipment in connection with
the conversion to Oliver. During 1996, all existing precure retread equipment,
some of which was fully depreciated, was replaced with new Oliver equipment,
resulting in a higher depreciable cost basis.
Interest expense for the three months ended June 30, 1997 was $336,000
compared to $158,000 for the three months ended June 30, 1996. The increase
resulted primarily from the increase in debt outstanding relating to equipment
purchases.
The difference between the effective tax rate for the three months ended
June 30, 1997 and the federal statutory rate resulted primarily from state
income taxes and amortization of nondeductible goodwill.
Average shares outstanding were 5.1 million for each of the three months
ended June 30, 1997 and 1996.
Six months Ended June 30, 1997 as Compared to Six months Ended June 30, 1996
Sales (including sales to affiliates) for the six months ended June 30,
1997 increased 8.9% to $74.3 million from $68.2 million for the six months
ended June 30, 1996. During the six months ended June 30, 1997, the Company
sold approximately 306,000 retreaded truck tires, an increase of 8.6% from the
six months ended June 30, 1996 and new tires sold increased 13.1% to 204,000
tires. The average sale price for retreads has decreased as the Company faces
new competition at many of its locations, which has caused added pressure on
selling prices. As anticipated, Bandag, Inc. continues to target the Company's
accounts which has caused difficulty in retaining the national account business
and in many cases, the business retained is at lower margins.
For the six months ended June 30, 1997, "same store" sales increased 1.2%
and "new store" sales accounted for 7.7% of the increase from last year. "Same
store" sales include both production locations and sales locations that have
been in existence for the entire periods presented.
Operating costs and expenses were $76.8 million for the six months ended
June 30, 1997 compared to $71.2 million during the six months ended June 30,
1996. For the six months ended June 30, 1997 the Company had an operating loss
of $2.4 million compared to an operating loss of $3.0 million during the six
months ended June 30, 1996. The Company had a net loss of $1.9 million, or $.38
net loss per share, compared to a net loss of $2.1 million, or $.41 net loss
per share during the six months ended June 30, 1996.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Operating costs and expenses as a percent of sales were 103.3% for the six
months ended June 30, 1997 compared to 104.4% for the six months ended June 30,
1996. Materials and cost of new tires as a percent of sales decreased to 68.7%
for the six months ended June 30, 1997 from 73.2% during the six months ended
June 30, 1996, resulting primarily from lower tread rubber costs with Oliver.
Salaries and wages as a percent of sales increased to 17.3% for the six months
ended June 30, 1997 from 15.8% during the six months ended June 30, 1996. The
increase resulted from a greater number of employees added for new locations,
cost-of-living raises, and the lower selling price per retread tire.
Depreciation and amortization expense as a percent of revenue increased to 3.6%
for the six months ended June 30, 1997 from 2.7% for the six months ended June
30, 1996, primarily as a result of the acquisition during 1996 of new retread
production equipment in connection with the conversion to Oliver. During 1996,
all existing precure 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
13.4% for the six months ended June 30, 1997 from 12.4% for the six months
ended June 30, 1996. The increase resulted from several factors, including
expenses related to employee insurance costs and bad debt expense.
Interest expense for the six months ended June 30, 1997 was $646,000
compared to $318,000 for the six months ended June 30, 1996. The increase
resulted primarily from the increase in debt outstanding relating to equipment
purchases.
The difference between the effective tax rate for the six months ended
June 30, 1997 and the federal statutory rate resulted primarily from state
income taxes and amortization of nondeductible goodwill.
Average shares outstanding were 5.1 million for each of the six months
ended June 30, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 2.17:1 at June 30,
1997 and 2.43:1 at December 31, 1996. Net cash provided by operating activities
was $2.0 million for the six months ended June 30, 1997, compared to net cash
provided of $6.1 million for the six months ended June 30, 1996. The decrease
is due primarily to the changes in income taxes refundable and trade
receivables offset in part by increased depreciation and amortization.
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 June 30, 1997, the borrowing base was $29.9 million. The Credit
Agreement expires in September 1998, unless renewed or extended.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 March 1997 to revise certain financial covenants and
the Company's interest rate on LIBOR advances. The Company was in compliance
with the revised covenants at June 30, 1997.
Management believes that, based upon the Company's current levels of
operations, capital resources, borrowings available under the Credit Agreement
and cash flow from operations will be sufficient to finance current and future
operations, including the capital expenditure program, and meet all scheduled
debt service requirements.
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.
14
<PAGE> 15
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in legal actions,
the majority of which arise out of the normal course of its business. Other
than as discussed below, the Company is not a party to any pending legal
proceeding which the Company's management believes to be material to the
results of operations, cash flows or the financial condition of the Company.
The Company generally maintains liability insurance against risks arising out
of the normal course of its business.
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court,
alleging that Bandag and certain of its officers and employees 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 franchisees other than Treadco, and from
disclosing or using any of Treadco's confidential information.
On November 8, 1995, Bandag and the other named defendants asked the State
Court to stop its proceedings pending a decision by the United States District
Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed
by Bandag in the Federal District Court on November 8, 1995.
The Federal District Court has ruled that under the terms of 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. The
arbitration hearing is expected to be held in the first half of 1998.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on May 8, 1997.
The first proposal considered at the Annual Meeting was to elect two
persons to serve as directors of the Company. The results of the vote on this
proposal are as follows:
<TABLE>
<CAPTION>
DIRECTORS FOR WITHHELD ABSTENTIONS
<S> <C> <C> <C>
William A. Marquard 4,806,311 3,450 262,494
Robert B. Gilbert 4,806,411 3,350 262,494
</TABLE>
The second proposal was to ratify the appointment of Ernst & Young LLP as
independent auditors for fiscal year 1997.
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTENTIONS
<S> <C> <C> <C> <C>
Ernst & Young 4,807,208 1,250 1,303 262,494
</TABLE>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TREADCO, INC.
(Registrant)
Date:August 1, 1997 /s/ David E. Loeffler
------------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief Financial Officer
and Principal Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TREADCO,
INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000876948
<NAME> TREADCO, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 22,563,370
<ALLOWANCES> 1,178,566
<INVENTORY> 29,371,080
<CURRENT-ASSETS> 60,694,473
<PP&E> 48,511,375
<DEPRECIATION> 16,112,603
<TOTAL-ASSETS> 107,180,649
<CURRENT-LIABILITIES> 27,943,472
<BONDS> 19,373,316
0
0
<COMMON> 50,723
<OTHER-SE> 59,548,639
<TOTAL-LIABILITY-AND-EQUITY> 107,180,649
<SALES> 74,347,361
<TOTAL-REVENUES> 74,347,361
<CGS> 76,777,717
<TOTAL-COSTS> 76,777,717
<OTHER-EXPENSES> 628,723
<LOSS-PROVISION> 1,236,253
<INTEREST-EXPENSE> 645,592
<INCOME-PRETAX> (3,059,079)
<INCOME-TAX> (1,116,607)
<INCOME-CONTINUING> (1,942,472)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,942,472
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
