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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, 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 7534 and 5531 71-0706271
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
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1101 South 21st Street
Fort Smith, Arkansas 72901
(501) 785-6000
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(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
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 Par Value Nasdaq Stock Market / NMS
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(Title of each class) (Name of each exchange
on which registered)
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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, 1998, was $21,090,000.
The number of shares of Common Stock, $.01 par value, outstanding as of March
10, 1998 was 5,072,255.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Treadco, Inc. annual shareholders'
meeting to be held May 6, 1998 are incorporated by reference into Part III.
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TREADCO, INC.
FORM 10-K
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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PART I
Item 1. Business ............................................................................... 3
Item 2. Properties ............................................................................. 10
Item 3. Legal Proceedings ...................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .................................... 10
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............................................. 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 20
Item 11. Executive Compensation ................................................................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 20
Item 13. Certain Relationships and Related Transactions ......................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 21
Exhibit Index ........................................................................................ 47
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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 fourth largest commercial truck tire dealer.
The Company has 55 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 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, 1997, ABC owned approximately 46% of the Company's
outstanding shares.
BACKGROUND
The Company was initially established in 1958 to retread truck tires for ABF
Freight System, Inc. ("ABF"), another subsidiary of ABC, 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 29 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, Dunlop, General, 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, the Company has grown at a compound annual rate of
10.3%, consisting of growth in retread sales of 5.7%, new tire sales of 12.6%
and service revenues of 27.3%. 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.
During 1996, the Company converted all of its production facilities from a
previous tread rubber and materials supplier to Oliver Rubber Company ("Oliver")
as a supplier. The conversion was completed in phases throughout the first three
quarters of 1996 with approximately one-third of its production facilities
converted each quarter. (See "Narrative Discussion of Business - Supplier
Relationships").
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ITEM 1. BUSINESS -- Continued
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(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, 1997, which is submitted as
a separate section of this report.
(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.
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ITEM 1. BUSINESS -- Continued
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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.
During the second quarter of 1995, the Company opened a precure production
facility in Las Vegas, Nevada which purchased 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 ceased 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,
its network of production and sales facilities and its 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 major
new tire
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ITEM 1. BUSINESS -- Continued
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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 Company markets its products through sales personnel located at each of its
26 production facilities and 29 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.
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 $79, compared to an average retail selling price of approximately
$230 for a new tire. The Company also sells retreads including casings not
supplied by the customer for approximately $160 per tire. The number of retread
tires sold to customers supplying their own casings accounts for about 74% 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 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 following table illustrates the growth of the Company's retread and new tire
business:
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RETREAD NEW TIRE SERVICE TOTAL
REVENUES REVENUES REVENUES REVENUES
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(IN MILLIONS)
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1993 .......................... $ 58.1 $ 49.7 $ 5.5 $ 113.3
1994 .......................... 69.8 63.6 7.3 140.7
1995 .......................... 69.2 68.8 9.9 147.9
1996 .......................... 59.8 72.4 12.0 144.2
1997 .......................... 65.3 81.0 15.0 161.3
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ITEM 1. BUSINESS -- Continued
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None of the Company's customers represented more than 3% of the Company's sales
for 1997. ABF accounted for approximately $2.4 million (1.5%) of sales in 1997
and has not accounted for more than 3% of the Company's revenues in any one of
the last ten years.
In an effort to fully service its customers, the Company sells new truck tires
manufactured by Bridgestone, Michelin, Dunlop, General, Kumho, and other
manufacturers. The Company enjoys long-term relationships with its suppliers,
having served as a Bridgestone dealer for 25 years and as a Michelin dealer for
21 years. According to Dunlop, the Company is their largest domestic truck tire
dealer, and according to Bridgestone and Michelin, the Company is one of their
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 1997), the total truck
tire retread production nationally in 1997 was approximately 17.3 million units.
With its 622,000 retreads sold in 1997, the Company represented approximately
3.6% of the national market. Tire Retreading/Repair Journal also estimates that
the new replacement truck tire market nationally in 1997 was approximately 12.5
million units. With its 445,000 new tires sold in 1997, the Company represented
approximately 3.6% of the national market. During the last five years, the
Company's relative market share of the national retread market in units has
grown slightly from 3.5% to 3.6%, while its share of the national new
replacement truck tire market has grown from 2.4% to 3.6%.
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 in 1996, the Company experienced
increased competition as Bandag granted additional franchises in some locations
it served. The new competition led to increased pricing pressures in the
marketplace. Also as anticipated, Bandag targeted the Company's customers which
resulted in the loss of a substantial amount of national account business in
1996. In addition, in many cases, business retained was 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.
In September 1997, Michelin Retreading Technologies Inc., an affiliate of
Michelin North America, announced that it would enter the truck tire retreading
business by offering franchises to selected Michelin tire dealers throughout
North America. It is unknown what impact Michelin's entry into the truck tire
retreading business will have on the Company's existing markets.
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ITEM 1. BUSINESS -- Continued
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During the fourth quarter of 1997, Bandag announced that it had acquired five of
its franchisees. The Company competes directly in certain markets with some of
these franchisees. It is unknown what impact the acquisition of these
franchisees by Bandag will have on these markets.
According to Tire Retreading/Repair Journal (December 1997), there were
approximately 1,326 tire retreading production facilities nationwide (an
estimated 1,100 produce truck retreads) 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.
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, 1997, the Company had approximately 907 full-time employees; 282
in production; 191 in service positions; 202 in sales positions; 58 in warehouse
and delivery positions; and 174 in managerial, office and administration. A
total of 312 of such employees are salaried, while the remaining employees are
paid on an hourly basis. The Company's management believes it enjoys a good
relationship with its employees.
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ITEM 2. PROPERTIES
The Company currently owns 22 and leases 33 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 headquarters 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.
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 during 1998.
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, 1997.
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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.
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CASH
HIGH LOW DIVIDEND
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1997
First Quarter .............................................. $ 10.500 $ 8.625 $ .04
Second Quarter ............................................. 10.500 8.125 .04
Third Quarter .............................................. 12.750 9.375 .04
Fourth Quarter ............................................. 13.500 9.125 -
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
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At February 28, 1998, there were 5,072,255 shares of the Company's common stock
which were held by 175 stockholders of record and through approximately 700
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.
The Board of Directors suspended the quarterly dividend for the fourth quarter
of 1997 to provide additional funds for growth opportunities as they arise. The
Board will review quarterly whether to reinstate the cash dividend on the
Company's common stock.
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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.
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YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
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(THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF EARNINGS DATA:
Revenues ................................. $ 161,276 $ 144,154 $ 147,906 $ 140,678 $ 113,277
Costs and expenses ....................... 163,785 149,337 142,920 129,162 103,259
Operating income (loss) .................. (2,509) (5,183) 4,986 11,516 10,018
Interest expense, net .................... (1,213) (873) (461) (236) (108)
Amortization expense ..................... (723) (723) (723) (738) (518)
Other income ............................. 567 1,427 300 232 271
Income (loss) before income taxes ........ (3,878) (5,352) 4,102 10,774 9,663
Provision (credit) for income taxes ...... (1,374) (2,093) 1,711 4,265 3,832
Net income (loss) ........................ $ (2,504) $ (3,259) $ 2,391 $ 6,509 $ 5,831
Net income (loss) per share: (1)
Basic ................................. $ (.49) $ (.64) $ .47 $ 1.29 $ 1.16
Diluted ............................... $ (.49) $ (.64) $ .47 $ 1.28 $ 1.16
Average shares outstanding:
Basic ................................. 5,072 5,072 5,072 5,055 5,020
Diluted ............................... 5,072 5,072 5,074 5,066 5,023
Cash dividends paid per share ............ .12 $ .16 $ .16 $ .16 $ .16
BALANCE SHEET DATA:
Working capital .......................... $ 27,273 $ 34,043 $ 44,878 $ 37,364 $ 35,612
Total assets ............................. 100,458 105,416 93,035 89,583 81,432
Current portion of long-term debt ........ 2,305 1,645 863 123 2
Long-term debt (less current portion) .... 12,884 19,610 10,000 3,863 7,000
Stockholders' equity ..................... 58,835 61,948 66,018 64,438 58,488
</TABLE>
(1) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share. For further discussion of earnings per share
and the impact of Statement No. 128, see Note E to the Consolidated
Financial Statements.
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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 was 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. 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. The arbitration hearing is expected to be held during
1998.
The Company will as a part of the arbitration process submit a substantial claim
against Bandag. Due to the uncertainties inherent in the arbitration process,
the Company has not recorded any claim recovery in the accompanying financial
statements. (See Note K 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
gave the Company its first retread tire production facility in the Los Angeles
area.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
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 Company is a party to a Transition Services Agreement with ABC whereby ABC
provides services in the areas of accounting, data processing, finance, 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
based on the value and cost of services provided for general and administrative
services. Certain other expenses, primarily data processing and programming
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 sales by
category. Retread sales consists of the sale of customer retreads, stock casings
and retreads, and used tires. New tire sales consist of the sale of new tires
and commissions on the sale of new tires to new tire manufacturer national
accounts. Service consists of the sale of wheels and accessories and fees
charged to customers for services provided.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C>
SALES
Retread ........................................... $ 65,325,556 $ 59,762,514 $ 69,236,497
New tire........................................... 81,008,925 72,402,695 68,764,813
Service............................................ 14,941,730 11,988,918 9,904,571
- ------------------------------------------------------------------------------------------------------------------------------
161,276,211 144,154,127 $ 147,905,881
==============================================================================================================================
</TABLE>
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
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
COSTS AND EXPENSES
Materials and cost of new tires......................................... 68.1% 72.0% 70.0%
Salaries and wages...................................................... 17.1 16.1 13.7
Depreciation and amortization........................................... 3.5 3.0 2.2
Administrative and general.............................................. 12.9 12.5 10.1
Cost of equipment removal .............................................. - - 0.6
- ------------------------------------------------------------------------------------------------------------------------------
101.6% 103.6% 96.6%
==============================================================================================================================
</TABLE>
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Competitive Factors and Industry Conditions
In September 1997, Michelin Retreading Technologies Inc., an affiliate of
Michelin North America, announced that it would enter the truck tire retreading
business by offering franchises to selected Michelin tire dealers throughout
North America. It is unknown what impact Michelin's entry into the truck tire
retreading business will have on the Company's existing markets.
During the fourth quarter of 1997, Bandag announced that it had acquired five of
its franchisees. The Company competes directly in certain markets with some of
these franchisees. It is unknown what impact the acquisition of these
franchisees by Bandag will have on these markets.
1997 as Compared to 1996
Sales (including sales to affiliates) for 1997 increased 11.9% to $161.3 million
from $144.2 million for 1996. Sales from retreading for the year were $65.3
million, a 9.3% increase from $59.8 million during 1996. In 1997, retreaded
truck tires sold increased 9.5% to approximately 622,000 tires. The average
sales price for retreads has decreased as the Company faces new competition at
many locations, which has caused added pressure on selling prices. Sales of new
tires for 1997 were $81.0 million, an 11.9% increase from $72.4 million during
1996. Although there was a lack of availability late in 1997, new tires sold
increased 11.5% to 445,000 tires (including 107,000 new tires sold to national
account customers). The average sales price of new tires sold decreased
approximately 2.5% from 1996. Commissions on national account sales also
increased by 9.1%. Service revenues for 1997 were $15.0 million, an increase of
24.6%, from $12.0 million in 1996.
For 1997, "same store" sales increased 6.0% and "new store" sales accounted for
5.9% of the total increase from 1996. "Same store" sales include both production
facilities and sales locations in existence for the entire years of 1997 and
1996. "New store" sales resulted from one new sales location in 1997 and one new
production facility and five new sales locations in 1996.
Operating costs and expenses were $163.8 million for 1997 compared to $149.3
million in 1996. The Company had an operating loss of $2.5 million for 1997
compared to an operating loss of $5.2 million in 1996. The Company had a net
loss of $2.5 million, or a $0.49 loss per share, compared to a net loss of $3.3
million, or a $0.64 loss per share, for 1996.
Average shares outstanding were 5.1 million for 1997 and 1996.
Operating costs and expenses as a percent of sales were 101.6% for 1997 compared
to 103.6% for 1996. Materials and cost of new tires as a percent of sales
decreased to 68.1% from 72.0% during 1996, resulting primarily from lower tread
rubber costs from Oliver compared to Bandag. Salaries and wages as a percent of
sales increased to 17.1% for 1997 from 16.1% during 1996. The increase resulted
primarily from cost-of-living increases, new service employees and labor costs
at new locations which have not reached normal productivity levels. Depreciation
and amortization expense as a percent of revenue increased to 3.5% for 1997 from
3.0% in 1996 primarily as a result of the conversion to Oliver. During 1996, 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
12.9% for 1997 from 12.5% for 1996. The increase resulted from several factors
including expenses related to employee insurance costs and bad debt expense.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
The Company's ability to return to historical profitability levels is
substantially dependent upon improved pricing and 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 due to increased competition in the Company's markets.
Interest expense (net of interest income) for 1997 was $1,213,000 compared to
$874,000 for 1996. The increase resulted primarily from the increase in debt
outstanding relating to equipment purchases.
The difference between the effective tax rate for 1997 and the federal statutory
rate resulted primarily from state income taxes, amortization of goodwill and
other nondeductible expenses (see Note F to the consolidated financial
statements).
Deferred tax assets totaled $1,937,856 at December 31, 1997 while deferred tax
liabilities totaled $749,090, resulting in net deferred tax assets of
$1,188,766. 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 Company's historical profitability, the impact on 1996 and
1997 operating results of the conversion to Oliver and the substantial
improvement in 1997 operating income compared to 1996. Approximately $3.2
million of pre-tax income would result in the realization of net deferred tax
assets. Management expects that improved operating results will result in
sufficient taxable income to realize the portion of the deferred tax assets
dependent on future income. Management will continually evaluate the
realizability of deferred tax assets on a quarterly basis by assessing the need
for any valuation allowance.
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 $59.8
million, a 13.7% decrease from $69.2 million during 1995. Sales of new tires for
1996 were $72.4 million, a 5.4% increase from $68.8 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. Service
revenues for 1996 were $12.0 million, an increase of 21.0% from $9.9 million in
1995.
The Company experienced increased competition in 1996 as Bandag granted
additional franchises in some locations served by the Company. The new
competition led to increased pricing pressures in the marketplace. As
anticipated, Bandag targeted the Company's customers which resulted in the loss
of a substantial amount of national account business. In addition, in many
cases, 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.
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 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.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Operating costs and expenses were $149.3 million for 1996 compared to $142.9
million in 1995. The decrease in sales and increase in operating costs and
expenses resulted in operating loss of $5.2 million for 1996 compared to
operating income of $5.0 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 103.6% for 1996 compared
to 96.6% 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 that 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.
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 F to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 1.96:1 at December 31,
1997, compared to 2.43:1 at December 31, 1996. Net cash provided by operating
activities was $10.0 million for 1997 compared to net cash provided by operating
activities of $7.9 million in 1996. The increase is due primarily to the
improvement in operating results net of non-cash charges offset in part by
changes in working capital.
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, 1997, the borrowing base was $27.4 million. The amount available
under the Credit Agreement at December 31, 1997 was $16 million.
The Credit Agreement was amended and restated in September 1997, primarily to
extend the termination date until September 30, 2001, to revise certain
financial covenants and to revise the Company's interest rate on advances.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
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 Company was in
compliance with the revised covenants at December 31, 1997. The Credit Agreement
limitations on dividends would not restrict the Company's historical dividend
policies.
The Company has no derivatives outstanding at December 31, 1997 or 1996.
The Company incurred approximately $3.5 million, $26.0 million and $3.7 million
in total capital expenditures (net of cash proceeds from the sale of property,
plant and equipment) in 1997, 1996, and 1995, respectively. The 1997
expenditures were spent in acquiring retreading equipment and acquiring service
trucks and other equipment. The 1996 capital expenditures include the cost of
replacing Bandag retreading equipment with Oliver equipment at 24 locations. In
1998, the Company anticipates spending approximately $9.2 million in total
capital expenditures, net of proceeds from the sale of property, plant and
equipment. The following table outlines the 1998 capital expenditures program:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES PROGRAM FOR 1998
NET OF PROCEEDS FROM SALES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Land and buildings .................................................................................... $ 4,900,000
Trucks ................................................................................................ 3,031,000
Recapping equipment.................................................................................... 500,000
Miscellaneous equipment................................................................................ 800,000
- ---------------------------------------------------------------------------------------------------------------------------
$ 9,231,000
===========================================================================================================================
</TABLE>
Management believes that, based upon the Company's current levels of operations,
borrowings available under the Credit Agreement and other financing
arrangements, and cash flow from operations will be sufficient to finance
current and future operations, including the capital expenditure program, and
meet all present and future debt service requirements.
YEAR 2000
Management of the Company has considered the impact of the Year 2000 on its
business operations. All computer systems which are affected by the rollover to
the Year 2000 have been identified, including the general office operations and
tire management systems. The Company's vulnerability to third-party systems
(i.e., for vendors and major customers) has been evaluated and is expected to be
minimal. The majority of the Company's systems are developed and maintained
in-house. The Company has addressed its exposure to third-party systems by
contacting them for Year 2000 compliant upgrades for systems the Company expects
to retain.
The Company plans to modify its in-house systems for the rollover to the Year
2000 using internal resources. The Company may see some reduction in internal
research and development projects because of the resources devoted to the Year
2000 rollover, but with the current plan to distribute the
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
Year 2000 rollover workload among several personnel, the impact on research and
development projects is expected to be minimal.
The Company undertook the Year 2000 conversion in 1996 and is at various stages
of completion. The most significant project is the revision of the mainframe
system. This project has completed the renovation phase and will be tested
during 1998, with a planned completion date of December 31, 1998.
Because the Year 2000 project is being performed with existing staff, during the
normal course of maintenance on the Company's systems, the funds associated with
the Year 2000 rollover will be paid partially in 1998 and continually each year,
until the Year 2000. The impact on the Company's financial condition and cash
flows is expected to be immaterial for all years. The Company has not identified
any significant risks or uncertainties associated with the Year 2000 rollover.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128"). Under the new
requirements for computing basic earnings per share, the dilutive effect of
stock options is excluded. The dilutive effect of common stock equivalents is
included in the calculation of diluted earnings per share under SFAS No. 128.
The new statement has been applied retroactively. The effect of the adoption is
not material.
In June 1997, the FASB 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 not anticipate that adoption of this Statement will have a material
impact on the current presentation of its financial statements.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement superseded FASB Statement No.
14 on segments. The Company does not believe the Statement will result in a
change in the Company's present practice of reporting one business segment.
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.
18
<PAGE> 19
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.
19
<PAGE> 20
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 6, 1998, 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,"
"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 6, 1998, 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 6, 1998, 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 6,
1998, sets forth certain information with respect to relations of and
transactions by management of the Company and is incorporated herein by
reference.
20
<PAGE> 21
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
1998.
(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.
21
<PAGE> 22
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/ David E. Loeffler
----------------------------------------
David E. Loeffler
Vice President - Chief Financial Officer
and Treasurer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Young, III Chairman of the Board 3/24/98
- ------------------------------------- -----------------------
Robert A. Young, III
/s/ John R. Meyers President and Chief Executive Officer 3/24/98
- ------------------------------------- (Principal Executive Officer) -----------------------
John R. Meyers
/s/ David E. Loeffler Vice President - Chief Financial Officer 3/24/98
- ------------------------------------- and Treasurer -----------------------
David E. Loeffler (Principal Financial and Accounting Officer)
Director
- ------------------------------------- -----------------------
Nicolas M. Georgitsis
/s/ Robert B. Gilbert Director 3/13/98
- ------------------------------------- -----------------------
Robert B. Gilbert
/s/ William A. Marquard Director 3/16/98
- ------------------------------------- -----------------------
William A. Marquard
/s/ John H. Morris Director 3/16/98
- ------------------------------------- -----------------------
John H. Morris
</TABLE>
22
<PAGE> 23
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
TREADCO, INC.
FORT SMITH, ARKANSAS
23
<PAGE> 24
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, 1997 and 1996
STATEMENTS OF OPERATIONS -- Years ended December 31, 1997, 1996, and 1995
STATEMENTS OF STOCKHOLDERS' EQUITY -- Years ended December 31, 1997, 1996,
and 1995
STATEMENTS OF CASH FLOWS -- Years ended December 31, 1997, 1996, and 1995
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.
24
<PAGE> 25
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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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 28, 1998
25
<PAGE> 26
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................................. $ -- $ 15,804
Accounts receivable:
Trade receivables, less allowances for
doubtful accounts (1997 -- $1,719,389;
1996 -- $1,161,266) ............................................... 19,802,749 18,310,397
Other (primarily national accounts
and volume rebates) ............................................... 5,734,366 6,011,067
Due from affiliates .................................................... 90,305 154,120
Inventories ............................................................ 27,326,046 30,043,877
Prepaid expenses ....................................................... 3,175 155,483
Federal and state income taxes refundable .............................. 1,221,681 1,625,935
Deferred income taxes .................................................. 1,466,469 1,512,326
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ............................................... 55,644,791 57,829,009
PROPERTY, PLANT AND EQUIPMENT
Land ................................................................... 4,000,877 4,065,127
Structures ............................................................. 13,273,823 12,980,600
Retreading and other equipment ......................................... 32,048,910 29,711,944
- ---------------------------------------------------------------------------------------------------------------------------
49,323,610 46,757,671
Less allowances for depreciation ....................................... (17,994,542) (13,571,967)
- ---------------------------------------------------------------------------------------------------------------------------
31,329,068 33,185,704
OTHER ASSETS
Goodwill, less amortization (1997 -- $3,908,804;
1996 -- $3,446,815) ................................................... 12,694,153 13,156,142
Noncompete agreements, less amortization
(1997 -- $1,132,082; 1996 -- $870,832) ................................ 174,167 435,417
Deferred income taxes .................................................. -- 200,052
Other .................................................................. 616,003 609,46
- ---------------------------------------------------------------------------------------------------------------------------
13,484,323 14,401,080
- ---------------------------------------------------------------------------------------------------------------------------
$ 100,458,182 $ 105,415,793
===========================================================================================================================
</TABLE>
26
<PAGE> 27
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft............................................................ $ 125,148 $ --
Trade accounts payable ................................................... 17,144,202 14,546,576
Due to affiliate ......................................................... 731,711 959,174
Accrued expenses ......................................................... 8,066,536 6,635,173
Current portion of long-term debt ........................................ 2,304,691 1,645,085
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES .......................................... 28,372,288 23,786,008
LONG-TERM DEBT, less current portion ........................................ 12,883,763 19,610,482
DEFERRED INCOME TAXES ....................................................... 277,703 --
OTHER LIABILITIES ........................................................... 89,860 71,689
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: 1997 and 1996 -- 5,072,255 shares ....................... 50,723 50,723
Additional paid-in capital ............................................... 45,623,346 45,623,346
Retained earnings ........................................................ 13,160,499 16,273,545
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY ......................................... 58,834,568 61,947,614
COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------------------------------------------------------------------------
$ 100,458,182 $105,415,793
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
TREADCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
SALES
Non-affiliates .................................... $ 158,912,429 $ 141,613,036 $ 145,127,418
Affiliates ........................................ 2,363,782 2,541,091 2,778,463
- ---------------------------------------------------------------------------------------------------------------------------
161,276,211 144,154,127 147,905,881
COSTS AND EXPENSES
Materials and cost of new tires ................... 109,821,411 103,751,776 103,632,214
Salaries and wages ................................ 27,551,473 23,233,814 20,261,701
Depreciation and amortization ..................... 5,610,647 4,389,621 3,222,109
Administrative and general ........................ 20,801,826 17,961,604 14,963,537
Costs of equipment removal ........................ - - 840,000
- ---------------------------------------------------------------------------------------------------------------------------
163,785,357 149,336,815 142,919,561
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) ................................ (2,509,146) (5,182,688) 4,986,320
OTHER INCOME
Interest income ................................... 43,682 26,252 48,344
Gain on asset sales ............................... 276,570 1,298,215 167,167
Other ............................................. 290,649 129,265 132,984
- ---------------------------------------------------------------------------------------------------------------------------
610,901 1,453,732 348,495
OTHER EXPENSES
Interest .......................................... 1,256,452 899,786 509,670
Amortization of goodwill .......................... 461,989 461,989 461,989
Amortization of noncompete agreements ............. 261,250 261,250 261,250
- ---------------------------------------------------------------------------------------------------------------------------
1,979,691 1,623,025 1,232,909
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE
INCOME TAXES .......................................... (3,877,936) (5,351,981) 4,101,906
FEDERAL AND STATE INCOME
TAXES (CREDIT)
Current ........................................... (1,897,172) (1,735,453) 2,360,164
Deferred .......................................... 523,612 (357,727) (649,494)
- ---------------------------------------------------------------------------------------------------------------------------
(1,373,560) (2,093,180) 1,710,670
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ...................................... $ (2,504,376) $ (3,258,801) $ 2,391,236
===========================================================================================================================
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE .............................. $ (.49) $ (.64) $ .47
===========================================================================================================================
CASH DIVIDENDS PAID PER
COMMON SHARE .......................................... $ .12 $ .16 $ .16
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
TREADCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK PAYABLE
PAR PAID-IN TO EMPLOYEE RETAINED
SHARES VALUE CAPITAL BENEFIT PLAN EARNINGS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995......................... 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................................. -- -- -- -- (811,561)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996....................... 5,072,255 50,723 45,623,346 -- 16,273,545
Net loss....................................... -- -- -- (2,504,376)
Cash dividends................................. -- -- -- -- (608,670)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997....................... 5,072,255 $50,723 $ 45,623,346 $ -- $13,160,499
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ..................................... $ (2,504,376) $ (3,258,801) $ 2,391,236
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization ..................... 5,610,647 4,389,621 3,222,109
Amortization of goodwill .......................... 461,989 461,989 461,989
Amortization of noncompete agreements ............. 261,250 261,250 261,250
Provision for losses on accounts receivable ....... 2,340,630 1,645,349 1,341,271
Provision (credit) for deferred income taxes ...... 523,612 (357,727) (649,494)
Gain on asset sales ............................... (276,570) (1,298,215) (167,167)
Changes in operating assets and liabilities:
Receivables .................................... (3,556,281) (1,002,972) (389,428)
Inventories and prepaid expenses ............... 2,870,139 3,004,523 (2,976,028)
Federal and state income taxes refundable ...... 404,254 (1,625,935) -
Other assets ................................... (6,534) (706,306) (253,869)
Trade accounts payable, accrued expenses
and taxes payable............................ 4,028,989 5,784,752 (5,101,116)
Due to/from affiliates.......................... (163,648) 575,135 190,933
Other liabilities............................... 18,171 17,323 18,630
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES ................................... 10,012,272 7,889,986 (1,649,684)
INVESTING ACTIVITIES
Purchases of plant facilities and other property
and equipment, less notes payable ................... (2,015,325) (11,433,665) (4,455,924)
Proceeds from asset sales ............................. 856,129 3,048,387 785,313
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ...................... (1,159,196) (8,385,278) (3,670,611)
FINANCING ACTIVITIES
Borrowings under revolving credit facility ............ 33,885,000 36,635,000 15,975,000
Payments under revolving credit facility .............. (40,185,000) (36,335,000) (8,975,000)
Principal payments on other long-term
debt and capitalized lease obligations .............. (2,085,358) (597,244) --
Dividends paid ........................................ (608,670) (811,561) (811,560)
Net increase in cash overdrafts ....................... 125,148 -- --
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ...................................... (8,868,880) (1,108,805) 6,188,440
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................................... (15,804) (1,604,097) 868,145
Cash and cash equivalents at beginning of year ........ 15,804 1,619,901 751,756
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR ............................................ $ -- $ 15,804 $ 1,619,901
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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,
1997, 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 in 1996 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 were completed in phases throughout the first
three quarters of 1996 with approximately one-third of the Company's production
facilities converted each quarter.
Consolidation: In May 1997, the Company's wholly owned subsidiary, Trans-World
Casings, Inc. was merged into the Company. Prior to that date, the consolidated
financial statements included the accounts of the Company and Trans-World
Casings, Inc. All significant intercompany accounts and transactions were
eliminated in consolidation.
Business: The Company's operations include truck tire retreading and the sale of
both retreaded and new truck tires as well as related services.
Cash and Cash Equivalents: Short-term investments having 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.
31
<PAGE> 32
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
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 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 for general and
administrative services based on the value and cost of services provided.
Certain other expenses, primarily data processing and programming 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>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Service fee............................................ $ 1,400,021 $ 1,543,829 $ 1,609,624
Data processing services .............................. 1,225,298 1,018,213 912,761
- ---------------------------------------------------------------------------------------------------------------------------
$ 2,625,319 $ 2,562,042 $ 2,522,385
===========================================================================================================================
</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.
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").
32
<PAGE> 33
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform to the current year's presentation.
Revenue Recognition: Sales are recognized when goods are delivered or services
performed.
Recent Accounting Pronouncements: In December 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
No. 128"). Under the new requirements for computing basic earnings per share,
the dilutive effect of stock options is excluded. The dilutive effect of common
stock equivalents is included in the calculation of diluted earnings per share
under SFAS No. 128. The new statement has been applied retroactively. The effect
of the adoption is not material.
In June 1997, the FASB 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 not anticipate that adoption of this Statement will have a material
impact on the current presentation of its financial statements.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement superseded FASB Statement No.
14 on segments. The Company does not believe the Statement will result in a
change in the Company's present practice of reporting one business segment.
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
1997 1996
-----------------------------------------
<S> <C> <C>
New tires and finished retreaded tires....................................... $ 22,391,595 $ 23,802,112
Materials and supplies....................................................... 4,934,451 6,241,765
- ---------------------------------------------------------------------------------------------------------------------------
$ 27,326,046 $ 30,043,877
===========================================================================================================================
</TABLE>
33
<PAGE> 34
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE C -- LONG-TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------------------
<S> <C> <C>
Credit Agreement (1)......................................................... $ 4,000,000 $ 10,300,000
Notes payable (2) ........................................................... 6,115,683 7,174,802
Capital lease obligations (3) ............................................... 5,072,771 3,780,765
- ---------------------------------------------------------------------------------------------------------------------------
15,188,454 21,255,567
Less current portion......................................................... 2,304,691 1,645,085
- ---------------------------------------------------------------------------------------------------------------------------
$ 12,883,763 $ 19,610,482
===========================================================================================================================
</TABLE>
(1) The Company is a party to a revolving credit facility 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. At December
31, 1997, the borrowing base was $27.4 million. The Credit Agreement was
amended and restated on September 30, 1997, primarily to extend the
termination date until September 30, 2001, to revise certain financial
covenants and to revise the Company's interest rate on advances. Credit
Agreement advances bear interest at variable rates determined under the
Credit Agreement. At December 31, 1997, the weighted average interest rate
on advances under the Credit Agreement was 7.9%. The Company pays a
commitment fee on the unused portion of the Credit Agreement at variable
rates determined under the Credit Agreement. At December 31, 1997, the
commitment fee was .375%. 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 Company was in compliance with the covenants
at December 31, 1997. The Credit Agreement limitations on dividends would
not restrict the Company's historical dividend policies.
(2) In 1996, the Company entered into note agreements totaling approximately
$5.2 million with Oliver to finance the purchase of retreading equipment,
in accordance with the license agreements. 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
of $23,333.
34
<PAGE> 35
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
(3) Capital leases include vehicle leases with terms ranging from 3 to 5 years
with an average interest rate of 7.64%. 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 $1,318,000 in 1997, $900,000 in 1996, and
$522,000 in 1995.
Annual maturities of long-term debt, excluding capital lease obligations, in
1998 through 2002 are as follows: 1998 - $1,183,877; 1999- $1,248,312; 2000 -
$1,316,344; 2001 - $5,122,070; and 2002 - $245,771.
NOTE D -- ACCRUED EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------------
<S> <C> <C>
Accrued salaries, wages and incentive plans.................................. $ 1,791,428 $ 1,590,418
Accrued vacation pay......................................................... 722,706 652,706
Taxes other than income...................................................... 2,168,205 1,705,726
Loss, injury, damage and workers'
compensation claims reserves................................................ 2,580,469 2,457,102
Pension and benefit plan costs............................................... 158,361 136,160
Other .................................................................... 645,367 93,061
- ---------------------------------------------------------------------------------------------------------------------------
$ 8,066,536 $ 6,635,173
===========================================================================================================================
</TABLE>
35
<PAGE> 36
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE E -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
per share -- income (loss) available to
common stockholders.................................... $ (2,504,376) $ (3,258,801) $ 2,391,236
===========================================================================================================================
Denominator:
Denominator for basic earnings per
share -- weighted-average shares ...................... 5,072,255 5,072,255 5,070,018
Effect of dilutive securities:
Employee stock options ................................ -- -- 4,411
- ---------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares ........................ -- -- 4,411
- ---------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions.......................... 5,072,255 5,072,255 5,074,429
===========================================================================================================================
Basic earnings (loss) per common share ..................... $ (0.49) $ (0.64) $ 0.47
===========================================================================================================================
Diluted earnings (loss) per common share ................... $ (0.49) $ (0.64) $ 0.47
===========================================================================================================================
</TABLE>
36
<PAGE> 37
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE F -- 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
1997 1996
------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Basis differences on property, plant and equipment...................... $ 730,672 $ 14,360
Allowance for doubtful accounts......................................... 18,418 -
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities...................................... 749,090 14,360
Deferred tax assets:
Accrued expenses........................................................ 1,316,699 888,809
Allowance for doubtful accounts ........................................ - 433,153
Uniform capitalization of inventories................................... 175,313 188,209
Postretirement benefit obligations other
than pensions......................................................... 33,518 26,740
State net operating loss carryovers .................................... 412,326 189,827
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets........................................... 1,937,856 1,726,738
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets...................................................... $ 1,188,766 $ 1,712,378
===========================================================================================================================
</TABLE>
Significant components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (credit):
Federal............................................ $ (1,897,172) $ (1,735,453) $ 2,033,111
State.............................................. - - 327,053
- ---------------------------------------------------------------------------------------------------------------------------
Total current tax expense (credit) ............ (1,897,172) (1,735,453) 2,360,164
Deferred tax expense (credit):
Federal............................................ 727,885 (63,724) (548,813)
State.............................................. (204,273) (294,003) (100,681)
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax expense (credit) ........... 523,612 (357,727) (649,494)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (credit) ...................... $ (1,373,560) $ (2,093,180) $ 1,710,670
===========================================================================================================================
</TABLE>
37
<PAGE> 38
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
A reconciliation between the effective income tax rate and the statutory federal
income tax rate is presented in the following table:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) at the statutory
federal rate of 34% ..................................... $ (1,318,498) $ (1,819,674) $ 1,394,647
Federal income tax effects of:
State income taxes .................................. 69,453 99,961 (76,966)
Resolution of tax contingencies ..................... (81,195) (172,922) -
Amortization of nondeductible
goodwill .......................................... 126,115 126,115 126,115
Other ............................................... 34,838 (32,657) 40,502
- ---------------------------------------------------------------------------------------------------------------------------
Federal income taxes (benefit) ........................... (1,169,287) (1,799,177) 1,484,298
State income taxes (benefit) ............................. (204,273) (294,003) 226,372
- ---------------------------------------------------------------------------------------------------------------------------
$ (1,373,560) $ (2,093,180) $ 1,710,670
===========================================================================================================================
Effective income tax rate ................................ (35.4)% (39.1)% 41.7%
===========================================================================================================================
</TABLE>
As of December 31, 1997, the Company had state operating loss carryovers of
approximately $11,200,000. State net operating carryovers expire generally in
five to fifteen years.
No income taxes were paid in 1997 or 1996, and approximately $2,377,000 was paid
in 1995. Income tax refunds amounted to $2,374,000 in 1997.
NOTE G -- 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.
A summary of the components of net periodic pension cost for the defined benefit
plan is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the year ..................... $ 394,382 $ 388,021 $ 275,961
Interest cost on projected benefit obligation ....................... 263,914 283,726 241,752
Actual return (gain) on plan assets ................................. (691,514) (327,242) (521,252)
Net amortization and deferral ....................................... 510,925 161,387 371,153
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost ........................................... $ 477,707 $ 505,892 $ 367,614
===========================================================================================================================
</TABLE>
38
<PAGE> 39
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Assumptions used in determining net periodic pension cost for the defined
benefit plan were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Weighted average discount rate..................................... 7.50% 7.10% 8.73%
Annual compensation increases...................................... 4.00% 3.00% 3.00%
Expected long-term rates of returns on assets...................... 9.40% 9.00% 9.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the plan's funded status and amounts recognized in the
Company's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................................... $ (2,444,027) $ (2,571,937)
====================================================================================================================
Accumulated benefit obligation...................................... $ (3,099,752) $ (3,172,718)
====================================================================================================================
Projected benefit obligation............................................. $ (3,685,313) $ (3,831,114)
Plan assets at fair value................................................ 3,589,447 3,058,407
- --------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets.................... (95,866) (772,707)
Unrecognized net loss.................................................... 305,631 1,031,951
Prior service cost not yet recognized in net
periodic pension cost................................................... 31,649 34,416
Unrecognized net asset at January 1, 1987,
net of amortization..................................................... (2,133) (2,322)
Additional minimum liability ............................................ -- (405,649)
- --------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) ........................................... $ 239,281 $ (114,311)
====================================================================================================================
</TABLE>
The net pension asset of $239,281 as of December 31, 1997, is comprised of a
current liability of $158,361 included in accrued expenses and $397,642 included
in other assets in the accompanying consolidated balance sheets. As of December
31, 1996, the net pension liability of $114,311 is comprised of a current
liability of $136,160 included in accrued expenses and $21,849 included in other
assets. Also, an intangible pension asset of $405,649 is included in other
assets as of December 31, 1996, to record the minimum liability.
Assumptions used in determining the pension obligation for the defined benefit
plan were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Weighted average discount rate................................................... 7.03% 7.50%
Annual compensation increases.................................................... 4.00% 3.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
The Company has an investment plan (the "401-k Plan") covering substantially all
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 was
matched by a Company deposit of 50% of such contribution. The percentage of the
Company match is set annually. During 1998, up to 6% of a participant's
compensation contributed to the plan will be matched by a Company deposit of 50%
of such contribution. The matching contribution charged to operations totaled
approximately $121,000 in 1997, $135,000 in 1996, and $135,000 in 1995.
Effective in November 1997, the Company merged the Treadco Employee Stock
Ownership Plan (the "ESOP") into the 401-k Plan. Previously the ESOP and a
related trust (the "Trust") covered substantially all employees of the Company.
The cost of the ESOP was 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. No contribution
was made for 1997 or 1996.
NOTE H -- STOCK OPTION PLANS
The Company follows 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 the 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 1997,
1996 and 1995, respectively: risk-free interest rates of 6.2%, 6.0% and 6.2%;
dividend yields of .01%, .01% and .01%; volatility factors of the expected
market price of the Company's Common Stock of .35, .34 and .34; and a
weighted-average expected life of the option of 9.5 years.
40
<PAGE> 41
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
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 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:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported ................................. $ (2,504,376) $ (3,258,801) $ 2,391,236
===========================================================================================================================
Net income (loss) - pro forma .................................. $ (2,789,488) $ (3,442,965) $ 2,372,240
===========================================================================================================================
Income (loss) per share - as reported ........................... $ (0.49) $ (0.64) $ 0.47
===========================================================================================================================
Income (loss) per share - pro forma ............................. $ (0.55) $ (0.68) $ 0.47
===========================================================================================================================
</TABLE>
The following table summarizes the Company's stock option activity, and related
information for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
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 ................ 215,000 $ 8.09 75,000 $ 13.30 105,000 $ 13.39
Granted ............................. 55,000 10.49 140,000 7.06 20,000 14.44
Exercised .......................... -- -- -- -- -- --
Cancelled ........................... -- -- -- -- (50,000) 13.95
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year ........... 270,000 $ 8.58 215,000 $ 8.09 75,000 $ 13.30
===========================================================================================================================
Exercisable at end of year .......... 78,000 $ 8.95 37,000 $ 10.00 22,000 $ 13.70
===========================================================================================================================
Estimated weighted-average
fair value per share of options
granted during the year............ $ 6.21 $ 4.47 $ 5.72
===========================================================================================================================
</TABLE>
41
<PAGE> 42
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
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 8.1 $ 6.72 25,000 $ 6.72
$10.00 - $10.75 145,000 7.3 10.19 53,000 10.00
- ---------------------------------------------------------------------------------------------------------------------------
270,000 78,000
===========================================================================================================================
</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 the 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 based on the closing price per share of the
Company's common stock. 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%. The Company recorded expense of $134,000 and $200,000 in 1997 and
1996, respectively, under the plan.
NOTE I -- LEASES AND COMMITMENTS
The future minimum payments under capitalized leases at December 31, 1997, are
as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 1,466,922
1999.................................................................. 1,605,322
2000.................................................................. 1,080,466
2001.................................................................. 234,840
2002.................................................................. 234,840
Thereafter............................................................ 1,903,053
-----------------------------------------------------------------------------------------
Total minimum lease payments.......................................... 6,525,443
Amounts representing interest......................................... 1,452,672
------------------------------------------------------------------------------------------
Present value of net minimum lease payments
included in long-term debt ........................................ $ 5,072,771
==========================================================================================
</TABLE>
42
<PAGE> 43
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
Assets held under capitalized leases are included in property, plant, and
equipment at December 31 as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
<S> <C> <C>
Equipment .................................................................... $ 4,126,428 $ 1,736,773
Land and buildings ........................................................... 2,081,293 2,043,992
- ---------------------------------------------------------------------------------------------------------------------------
6,207,721 3,780,765
Less accumulated depreciation ................................................ 1,136,116 316,396
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,071,605 $ 3,464,369
===========================================================================================================================
</TABLE>
Lease amortization is included in depreciation expense. Capital lease
obligations of $2,318,000 and $3,781,000 were incurred for the years ended
December 31, 1997 and 1996, respectively.
Rental expense for various production facilities and sales locations amounted to
approximately $1,765,000 in 1997, $1,751,000 in 1996, and $1,408,000 in 1995.
The future minimum rental commitments as of December 31, 1997, for all
noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1998 .......................................................... $ 1,399,177
1999 .......................................................... 957,309
2000 .......................................................... 594,497
2001 .......................................................... 385,659
2002........................................................... 259,482
Thereafter .................................................... 938,400
----------------------------------------------------------------------------------
$ 4,534,524
==================================================================================
</TABLE>
Certain of the leases are renewable for substantially the same rentals for
varying periods. Future minimum rentals to be received under noncancellable
subleases totaled approximately $561,000 at December 31, 1997.
NOTE J -- 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 values of the Company's
notes payable arrangements are estimated using current market rates.
43
<PAGE> 44
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
The fair values of the Company's financial instruments and related carrying
value as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .............. $ -- $ -- $ 15,804 $ 15,804
Short-term debt ........................ 1,175,315 1,083,121 1,073,039 1,036,634
Long-term debt ......................... 8,940,368 8,777,395 16,401,763 16,395,413
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE K -- 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
franchisees, 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 during 1998.
The Company will as a part of the arbitration process submit a substantial claim
against Bandag. Due to the uncertainties inherent in the arbitration process,
the Company has not recorded any claim recovery in the accompanying financial
statements.
44
<PAGE> 45
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below present unaudited quarterly financial information for 1997 and
1996. The impact of SFAS 128 on quarterly information for 1997 and 1996 was
considered and no restatement of earnings per share was required.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales .................................. $ 33,211,474 $ 41,135,887 $ 46,769,038 $ 40,159,812
Costs and expenses...................... 35,746,528 40,800,195 45,831,309 41,407,325
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss)................. (2,535,054) 335,692 937,729 (1,247,513)
Other expense -- net.................... 450,171 409,546 222,667 286,406
Income taxes (credit) .................. (1,096,442) (20,165) 294,247 (551,200)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)....................... $ (1,888,783) $ (53,689) $ 420,815 $ (982,719)
===========================================================================================================================
Basic and diluted net income
(loss) per common share............... $ (0.37) $ (0.01) $ 0.08 $ (0.19)
===========================================================================================================================
</TABLE>
<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...................... 33,674,602 37,320,421 40,650,919 37,690,873 [a]
- ---------------------------------------------------------------------------------------------------------------------------
Operating (loss)........................ (1,540,964) (1,205,926) (529,707) (1,906,091)
Other expense (income) -- net........... 296,860 164,959 (630,336) 337,810
Income taxes (credit) .................. (656,242) (476,515) (49,365) (911,058)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)....................... $ (1,181,582) $ (894,370) $ 149,994 $ (1,332,843)
===========================================================================================================================
Basic and diluted net income
(loss) per common share............... $ (0.23) $ (0.18) $ 0.03 $ (0.26)
===========================================================================================================================
</TABLE>
[a] Costs and expenses for the fourth quarter of 1996 includes a provision for
$875,000 to increase self-insurance and other reserves.
45
<PAGE> 46
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TREADCO, INC.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS & OTHER ACCOUNTS DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year Ended December 31, 1997:
Deducted from asset accounts :
Allowance for doubtful accounts receivable $ 1,161,266 $ 2,340,630 $ 382,607(A) $ 2,165,114(B) $1,719,389
===================================================================================================================================
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) $ 1,432,212(B) $1,163,835
===================================================================================================================================
</TABLE>
Note A - Recoveries of amounts previously written off.
Note B - Uncollectible accounts written off.
Note C - The allowance for doubtful accounts of Five Bros., Inc. as of date of
acquisition.
46
<PAGE> 47
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.
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
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* Amended and Restated Credit Agreement entered into between the
Company and Societe Generale, Southwest Agency dated as of
September 30, 1997 (previously filed as Exhibit 10 to the
Company's Form 10-Q Quarterly Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the quarter
ended September 30, 1997, Commission File No. 0-19390, 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., Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
# Designates a compensation plan for Directors or Executive Officers.
47
<PAGE> 1
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 and the Registration
Statement (Form S-8 No. 33-43393) pertaining to the Treadco, Inc. Employees'
Investment Plan of our report dated January 28, 1998, 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, 1997.
Ernst & Young LLP
Little Rock, Arkansas
March 27, 1998
<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 YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,522,138
<ALLOWANCES> 1,719,389
<INVENTORY> 27,326,046
<CURRENT-ASSETS> 55,644,791
<PP&E> 49,323,610
<DEPRECIATION> 17,994,542
<TOTAL-ASSETS> 100,458,182
<CURRENT-LIABILITIES> 28,372,288
<BONDS> 12,883,763
0
0
<COMMON> 50,723
<OTHER-SE> 58,783,845
<TOTAL-LIABILITY-AND-EQUITY> 100,458,182
<SALES> 161,276,211
<TOTAL-REVENUES> 161,276,211
<CGS> 163,785,357
<TOTAL-COSTS> 163,785,357
<OTHER-EXPENSES> 1,368,790
<LOSS-PROVISION> 2,340,630
<INTEREST-EXPENSE> 1,256,452
<INCOME-PRETAX> (3,877,936)
<INCOME-TAX> (1,373,560)
<INCOME-CONTINUING> (2,504,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,504,376)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
