<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended June 30, 1998
-------------
[] 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
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TREADCO, INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 7534 and 5531 71-0706271
- -------------------------- ---------------------------- --------------------------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification No.)
incorporation or
organization)
</TABLE>
1101 South 21st Street
Fort Smith, Arkansas 72901
(501) 788-6400
-----------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- ---------------------------------- -------------------------------------
Common Stock, $.01 par value 5,072,255 shares
<PAGE> 2
TREADCO, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets --
June 30, 1998 and December 31, 1997...................................... 3
Statements of Operations --
For the Three and Six Months Ended June 30, 1998 and 1997................ 5
Statements of Cash Flows --
For the Six Months Ended June 30, 1998 and 1997.......................... 6
Notes to Financial Statements -- June 30, 1998 .......................... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................................... 14
ITEM 2. Changes in Securities ................................................... 14
ITEM 3. Defaults Upon Senior Securities ......................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders ..................... 15
ITEM 5. Other Information ....................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K ........................................ 15
SIGNATURES............................................................................. 16
EXHIBIT INDEX.......................................................................... 17
</TABLE>
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TREADCO, INC.
BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
--------------------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable:
Trade receivables, less allowance for
doubtful accounts (1998 -- $1,368,143;
1997 -- $1,719,389 ) ...................... $ 23,368,417 $ 19,802,749
Other (primarily national accounts
and volume rebates) ....................... 6,318,844 5,734,366
Due from affiliates ........................... 92,956 90,305
Inventories ................................... 27,714,064 27,326,046
Prepaid expenses .............................. 16,524 3,175
Federal and state income taxes refundable ..... -- 1,221,681
Deferred income taxes ......................... 1,466,469 1,466,469
------------- -------------
TOTAL CURRENT ASSETS ...................... 58,977,274 55,644,791
PROPERTY, PLANT AND EQUIPMENT
Land .......................................... 4,068,877 4,000,877
Structures .................................... 13,504,367 13,273,823
Retreading and other equipment ................ 34,042,763 32,048,910
------------- -------------
51,616,007 49,323,610
Less allowances for depreciation .............. (19,517,211) (17,994,542)
------------- -------------
32,098,796 31,329,068
OTHER ASSETS
Goodwill, less amortization
(1998 -- $4,139,800; 1997 -- $3,908,806) ..... 12,463,159 12,694,153
Noncompete agreements, less amortization
(1998 -- $1,262,708; 1997 -- $1,132,082) ..... 43,542 174,167
Deferred Income Taxes ......................... 61,634 --
Other ......................................... 1,353,733 616,003
------------- -------------
13,922,068 13,484,323
------------- -------------
$ 104,998,138 $ 100,458,182
============= =============
</TABLE>
3
<PAGE> 4
TREADCO, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-----------------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ................................ $ 1,478,826 $ 125,148
Trade accounts payable ........................ 20,397,809 17,144,202
Due to affiliate .............................. 845,531 731,711
Accrued salaries, wages and other expenses .... 8,684,569 8,066,536
Federal and state income taxes ................ 27,085 --
Current portion of long-term debt ............. 2,260,170 2,304,691
------------ ------------
TOTAL CURRENT LIABILITIES ................. 33,693,990 28,372,288
LONG-TERM DEBT, less current portion .............. 12,132,607 12,883,763
OTHER LIABILITIES ................................. 98,571 89,860
DEFERRED INCOME TAXES ............................. -- 277,703
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share --
authorized 2,000,000 shares; none issued .... -- --
Common stock, par value $.01 per share --
authorized 18,000,000 shares; issued and
outstanding 5,072,255 shares ................ 50,723 50,723
Additional paid-in capital .................... 45,623,346 45,623,346
Retained earnings ............................. 13,398,901 13,160,499
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................ 59,072,970 58,834,568
COMMITMENTS AND CONTINGENCIES
------------ ------------
$104,998,138 $100,458,182
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
TREADCO, INC.
STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Non-affiliates ........................... $ 46,559,557 $ 40,492,140 $ 83,588,330 $ 73,125,189
Affiliates ............................... 534,038 643,747 1,010,213 1,222,172
------------ ------------ ------------ ------------
47,093,595 41,135,887 84,598,543 74,347,361
COSTS AND EXPENSES
Materials and cost of new tires .......... 30,523,044 27,794,924 55,199,367 51,055,134
Salaries and wages ....................... 7,841,059 6,616,617 14,851,600 12,826,237
Depreciation and amortization ............ 1,487,097 1,344,365 2,974,898 2,698,176
Administrative and general ............... 5,741,396 5,044,289 10,648,173 9,967,176
------------ ------------ ------------ ------------
45,592,596 40,800,195 83,674,038 76,546,723
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .................... 1,500,999 335,692 924,505 (2,199,362)
OTHER INCOME
Interest income .......................... 10,767 16,870 21,888 19,227
Gain (loss) on asset sales ............... 346,073 (942) 368,798 2,606
Other .................................... -- 91,298 51,139 125,661
------------ ------------ ------------ ------------
356,840 107,226 441,825 147,494
OTHER EXPENSES
Interest ................................. 241,861 335,962 540,871 645,592
Amortization of goodwill ................. 115,497 115,497 230,994 230,994
Amortization of noncompete agreements .... 65,313 65,313 130,625 130,625
------------ ------------ ------------ ------------
422,671 516,772 902,490 1,007,211
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES ............................... 1,435,168 (73,854) 463,840 (3,059,079)
FEDERAL AND STATE INCOME TAXES
(CREDIT)
Current .................................. 860,740 (352,202) 564,775 (1,500,505)
Deferred ................................. (291,440) 332,037 (339,337) 383,898
------------ ------------ ------------ ------------
569,300 (20,165) 225,438 (1,116,607)
------------ ------------ ------------ ------------
NET INCOME (LOSS) .......................... $ 865,868 $ (53,689) $ 238,402 $ (1,942,472)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE ......................... $ 0.17 $ (0.01) $ 0.05 $ (0.38)
============ ============ ============ ============
CASH DIVIDENDS PAID
PER COMMON SHARE ........................... $ -- $ 0.04 $ -- $ 0.08
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
TREADCO, INC.
STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
------------------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................... $ 238,402 $ (1,942,472)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization .................... 2,974,898 2,698,176
Amortization of goodwill ......................... 230,994 230,994
Amortization of noncompete agreements ............ 130,625 130,625
Provision for losses on accounts receivable ...... 760,644 1,236,253
Provision (credit) for deferred income taxes ..... (339,337) 383,898
Gain on asset sales .............................. (368,798) (2,606)
Changes in operating assets and liabilities:
Receivables .................................... (4,285,504) (3,323,255)
Inventories and prepaid expenses ............... (581,935) 778,233
Federal and state income taxes refundable ...... 1,221,681 (1,559,424)
Other assets ................................... (84,532) (247,994)
Trade accounts payable, accrued expenses ....... 3,739,928 4,007,460
Due to/from affiliates .......................... 111,169 (379,581)
Other liabilities ............................... 8,711 8,964
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 3,756,946 2,019,271
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases .......................... (4,987,531) (930,134)
Proceeds from asset sales ........................... 493,450 429,979
Acquisition ......................................... (1,275,759) --
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES .................. (5,769,840) (500,155)
FINANCING ACTIVITIES
Borrowings under revolving credit facility .......... 27,800,000 15,585,000
Payments under revolving credit facility ............ (26,000,000) (15,885,000)
Principal payments on other long-term debt
and capitalized lease obligations ................ (1,140,784) (954,339)
Dividends paid ...................................... -- (405,781)
Net increase in cash overdrafts ..................... 1,353,678 125,200
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ....... 2,012,894 (1,534,920)
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS ................................. -- (15,804)
Cash and cash equivalents at beginning of period .... -- 15,804
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ..................................... $ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
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NOTE A -- ORGANIZATION
Treadco, Inc. (the "Company") was organized in June 1991 as the successor to the
truck tire retreading and new truck tire sales business previously conducted and
developed by a wholly owned subsidiary of Arkansas Best Corporation ("ABC"). In
September 1991, the Company completed an initial public offering. At June 30,
1998, ABC owned approximately 46% of the Company's outstanding shares.
NOTE B -- FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the Company's financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
On March 31, 1998, the Company and Bridgestone/Firestone, Inc. ("Bridgestone")
signed an agreement whereby Bridgestone would take over operations of the
Company's Oncor retreading facility located in Hazelwood, MO. The Company will
continue to market the Oncor retread tires produced at this plant. The book
value of the assets sold to Bridgestone in connection with the transaction was
approximately equal to the related debt obligation to Bridgestone of $1.8
million which was eliminated by the transaction. Accordingly, no gain or loss
was recognized by the Company on the transaction.
NOTE C -- INVENTORIES
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
---------------------------
<S> <C> <C>
New tires and finished retreaded tires .... $22,576,680 $22,391,595
Materials and supplies .................... 5,137,384 4,934,451
----------- -----------
$27,714,064 $27,326,046
=========== ===========
</TABLE>
7
<PAGE> 8
TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- Continued
- --------------------------------------------------------------------------------
NOTE D - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings
per share - income (loss) available for
common stockholders ..................... $ 865,868 $ (53,689) $ 238,402 $(1,942,472)
=========== =========== =========== ===========
DENOMINATOR:
Denominator for basic earnings per share
Weighted-average shares ................. 5,072,255 5,072,255 5,072,255 5,072,255
Effect of dilutive securities:
Employee stock options .................. 33,958 -- 30,823 --
----------- ----------- ----------- -----------
Dilutive potential common shares .......... 33,958 -- 30,823 --
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares
and assumed conversions ................. 5,106,213 5,072,255 5,103,078 5,072,255
=========== =========== =========== ===========
Basic and diluted income (loss) per
common share ............................ $ 0.17 $ (0.01) $ 0.05 $ (0.38)
=========== =========== =========== ===========
</TABLE>
NOTE E -- LITIGATION
Other than as discussed below, the Company is not a party to any pending legal
proceedings which management believes to be material to the 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 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
8
<PAGE> 9
TREADCO, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- Continued
- --------------------------------------------------------------------------------
hearing is scheduled to start September 21, 1998 and the Company cannot be
certain as to the conclusion date of the hearing.
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.
NOTE F -- LONG-TERM DEBT
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 June 30, 1998, the borrowing base was $30.5 million and
the amount advanced under the Credit Agreement was $5.8 million. Credit
Agreement advances bear interest at variable rates determined under the Credit
Agreement. At June 30, 1998, the weighted average interest rate on advances
under the Credit Agreement was 6.94%.
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 June 30, 1998.
NOTE G - RECENT ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. The Statement is effective for the
Company in 2000. The Company is evaluating the impact the Statement will have on
its financial statements and disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of CPA's ("AuSEC") issued Statement of Position ("SOP"), Accounting
for Costs of Computer Software Developed For or Obtained For Internal Use. Under
the SOP, qualifying computer costs incurred during the "application development
stage" are required to be capitalized and amortized to income over the
software's estimated useful life. The SOP will be effective for the Company on
January 1, 1999. The SOP will result in capitalization of costs related to
internal computer software development. All such costs are currently expensed.
The amount of costs capitalized within any period will be dependent on the
nature of software development activities and projects in that period.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. The Statement requires the classification of
components of other comprehensive income by their nature in a financial
statement and display of the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the
financial statements. The Company adopted FASB Statement No. 130 on January 1,
1998, however this statement had no impact on the Company's financial statements
since there are no items that are considered other comprehensive income.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT EVENTS
On March 31, 1998, the Company and Bridgestone/Firestone, Inc. ("Bridgestone")
signed an agreement whereby Bridgestone would take over operations of the
Company's Oncor retreading facility located in Hazelwood, MO. The Company will
continue to market the Oncor retread tires produced at this plant.
On May 8, 1998, the Company acquired substantially all the assets of Commercial
Tire Service, Inc., located in Augusta, Georgia. The Company will operate
Augusta as a sales location.
RESULTS OF OPERATIONS
The Company is affected by seasonal fluctuations, which influence the demand for
retreads and new tires. The Company generally experiences reduced demand for
retreads and new tires in the first quarter due to more difficult driving and
tire maintenance conditions resulting from inclement weather. The Company is
also subject to cyclical national and regional economic conditions.
The following table sets forth for the periods indicated a summary of sales by
category:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------------------------------------------
% %
1998 1997 INCREASE 1998 1997 INCREASE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES
Retread ....... $18,426,787 $16,808,174 9.6% $33,930,676 $30,493,001 11.3%
New Tires ..... 23,668,267 20,619,720 14.8% 41,957,342 37,063,407 13.2%
----------- ----------- ------ ----------- ----------- ----
Service ....... 4,998,541 3,707,993 34.8% 8,710,525 6,790,953 28.3%
$47,093,595 $41,135,887 14.5% $84,598,543 $74,347,361 13.8%
=========== =========== ====== =========== =========== ====
</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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
COSTS AND EXPENSES
Materials and cost of new tires .... 64.8% 67.5% 65.2% 68.7%
Salaries and wages ................. 16.6 16.1 17.6 17.3
Depreciation and amortization ...... 3.2 3.3 3.5 3.6
Administrative and general ......... 12.2 12.3 12.6 13.4
---- ---- ---- -----
96.8% 99.2% 98.9% 103.0%
==== ==== ==== ====
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
Three Months Ended June 30, 1998 as Compared to Three Months Ended June 30, 1997
Sales (including sales to affiliates) for the three months ended June 30, 1998
increased 14.5% to $47.1 million from $41.1 million for the three months ended
June 30, 1997. Retread sales for the 1998 second quarter increased primarily due
to the higher volume of units sold and an overall increase in the sales price
per unit of approximately 1%. New tire sales for the 1998 second quarter were
higher due to increased unit sales offset in part by a lower sales price per
unit and an increase in national account sales. Treadco continues to experience
a shortage of new tire availability with approximately 26,000 units on back
order at June 30, 1998. Service revenues increased due to the Company's
continued emphasis on its service operations. During the three months ended June
30, 1998, the Company sold approximately 183,000 retread truck tires, an
increase of 8.2% from the three months ended June 30, 1997 and new tires sold
increased 17.3% to 132,000 tires.
For the three months ended June 30, 1998, same store sales increased 13.2% and
new store sales accounted for 1.3% of the increase from the 1997 second quarter.
Same store sales include both production locations and sales locations that have
been in existence for the entire periods presented.
New store sales resulted from two new sales locations.
Operating costs and expenses as a percent of sales were 96.8% for the three
months ended June 30, 1998 compared to 99.2% for the three months ended June 30,
1997. Materials and cost of new tires as a percent of sales decreased to 64.8%
for the three months ended June 30, 1998 from 67.5% during the three months
ended June 30, 1997, resulting primarily from lower new tire costs and improved
retread production efficiency. Salaries and wages as a percent of sales
increased to 16.6% for the three months ended June 30, 1998 from 16.1% for the
three months ended June 30, 1997. The increase is due primarily to the
implementation of a gross profit-based commission plan for salesmen effective
January 1, 1998.
Interest expense for the three months ended June 30, 1998 was $242,000 compared
to $336,000 for the three months ended June 30, 1997. The decrease resulted
primarily from a reduction in debt outstanding.
The difference between the effective tax rate for the three months ended June
30, 1998 and the federal statutory rate resulted primarily from state income
taxes and amortization of nondeductible goodwill.
Six Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997
Sales (including sales to affiliates) for the six months ended June 30, 1998
increased 13.8% to $84.6 million from $74.3 million for the six months ended
June 30, 1997. Retread sales for the six months ended June 30, 1998 increased
primarily due to the higher volume of units sold and an overall increase in the
sales price per unit of approximately 1%. New tire sales for the six months
ended June 30, 1998 were higher due to increased unit sales. Treadco continues
to experience a shortage of new tire availability with approximately 26,000
units on back order at June 30, 1998. Service revenues increased due to the
Company's continued emphasis on its service operations. During the six months
ended June 30, 1998, the Company sold
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
approximately 337,000 retread truck tires, an increase of 10.0% from the six
months ended June 30, 1997 and new tires sold increased 14.9% to 234,000 tires.
For the six months ended June 30, 1998, same store sales increased 12.9% and new
store sales accounted for 0.9% of the increase from the six months ended June
30, 1997. Same store sales include both production locations and sales locations
that have been in existence for the entire periods presented. New store sales
resulted from two new sales locations.
Operating costs and expenses as a percent of sales were 98.9% for the six months
ended June 30, 1998 compared to 103.0% for the six months ended June 30, 1997.
Materials and cost of new tires as a percent of sales decreased to 65.2% for the
six months ended June 30, 1998 from 68.7% during the six months ended June 30,
1997, resulting primarily from lower new tire costs and improved retread
production efficiency. Salaries and wages as a percent of sales increased to
17.6% for the six months ended June 30, 1998 from 17.3% for the six months ended
June 30, 1997. The increase is due primarily to the implementation of a gross
profit-based commission plan for salesmen effective January 1, 1998.
Administrative and general expenses as a percent of sales decreased to 12.6% for
the six months ended June 30, 1998 compared to 13.4% for the six months ended
June 30, 1997, primarily due to lower bad debt expense resulting from improved
accounts receivable collections.
Interest expense for the six months ended June 30, 1998 was $541,000 compared to
$646,000 for the six months ended June 30, 1997. The decrease resulted primarily
from a reduction in debt outstanding.
The difference between the effective tax rate for the six months ended June 30,
1998 and the federal statutory rate resulted primarily from state income taxes
and amortization of nondeductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 1.75:1 at June 30, 1998
and 1.96:1 at December 31, 1997. Net cash provided by operating activities was
$3.8 million for the six months ended June 30, 1998, compared to net cash
provided of $2.0 million for the six months ended June 30, 1997. The increase is
due primarily to the improvement in operating results.
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. At June 30, 1998, the
amount borrowed under the Credit Agreement was $5.8 million, and the amount
available for additional borrowings was $14.2 million.
Management believes that, based upon the Company's current levels of operations,
capital resources, borrowings available under the Credit Agreement and cash flow
from operations will be sufficient to finance current and future operations,
including the capital expenditure program, and meet all scheduled debt service
requirements.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Continued
- --------------------------------------------------------------------------------
YEAR 2000
Management of the Company has considered the impact of the Year 2000 on its
business operations. The Company's data processing service provider 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. 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.
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.
13
<PAGE> 14
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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 scheduled to start September 21, 1998 and the Company cannot be
certain as to the conclusion date of the hearing.
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.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on May 6, 1998.
The first proposal considered at the Annual Meeting was to elect two persons to
serve as directors of the Company. The results of the vote on this proposal are
as follows:
<TABLE>
<CAPTION>
DIRECTORS FOR WITHHELD ABSTENTIONS
<S> <C> <C> <C>
Robert A. Young, III 4,286,625 3,071 --
John H. Morris 4,286,625 3,071 --
</TABLE>
The second proposal was to ratify the appointment of Ernst & Young LLP as
independent auditors for fiscal year 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C> <C>
Ernst & Young LLP 4,286,646 2,082 968
</TABLE>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit 27 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TREADCO, INC.
(Registrant)
Date: August 4, 1998 /s/ DAVID E. LOEFFLER
---------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief
Financial Officer
and Principal Accounting Officer
16
<PAGE> 17
EXHIBIT INDEX
ARKANSAS BEST CORPORATION
The following exhibits are filed with this report.
EXHIBIT
NO.
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TREADCO,
INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24,736,560
<ALLOWANCES> 1,368,143
<INVENTORY> 27,714,064
<CURRENT-ASSETS> 58,977,274
<PP&E> 51,616,007
<DEPRECIATION> 19,517,211
<TOTAL-ASSETS> 104,998,138
<CURRENT-LIABILITIES> 33,693,990
<BONDS> 12,132,607
0
0
<COMMON> 50,723
<OTHER-SE> 59,022,247
<TOTAL-LIABILITY-AND-EQUITY> 104,998,138
<SALES> 84,598,543
<TOTAL-REVENUES> 84,598,543
<CGS> 83,674,038
<TOTAL-COSTS> 83,674,038
<OTHER-EXPENSES> (80,206)
<LOSS-PROVISION> 760,644
<INTEREST-EXPENSE> 540,871
<INCOME-PRETAX> 463,840
<INCOME-TAX> 225,438
<INCOME-CONTINUING> 238,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,402
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
