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 ended December 31, 1998;
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-7007
BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2905 North Highway 61, Muscatine, Iowa 52761-5886
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319/262-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
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Common Stock - $1 Par Value New York Stock Exchange and
Class A Common Stock - $1 Par Value Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock - $1 Par Value
(Title of class)
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 periods 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 12, 1999: Common Stock, $196,126,948; Class A Common
Stock (non-voting), $164,774,426; Class B Common Stock, $857,108.
The number of shares outstanding of the issuer's classes of common stock as of
March 12, 1999: Common Stock, 9,085,551 shares; Class A Common Stock, 10,787,194
shares; Class B Common Stock, 2,046,043 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of the
Shareholders to be held May 4, 1999 are incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
All references herein to the "Company" or "Bandag" refer to Bandag,
Incorporated and its subsidiaries unless the context indicates otherwise.
The Company is engaged in two business segments: the manufacture and
sale of precured tread rubber, equipment and supplies for retreading tires (the
"Traditional Business") and the sale and maintenance of new and retread tires to
principally commercial and industrial customers ("TDS").
As a result of a recapitalization of the Company approved by the
Company's shareholders on December 30, 1986, and substantially completed in
February 1987, the Carver Family (as hereinafter defined) obtained absolute
voting control of the Company. As of March 12, 1999, the Carver Family
beneficially owned shares of Common Stock and Class B Common Stock constituting
76% of the votes entitled to be cast in the election of directors and other
corporate matters. The "Carver Family" is composed of (i) Lucille A. Carver, a
director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J.
Carver and their spouses, and (iii) certain trusts and other entitles for the
benefit of the Carver Family members.
Effective as of November 1, 1997, the Company acquired five franchised
dealerships through its wholly owned subsidiary, Tire Distribution Systems, Inc.
The aggregate purchase price of the transactions was approximately $158.6
million, which includes the fair market value of 10,000 shares of the Company's
Class A Common Stock. TDS acquired five additional smaller dealerships in 1998.
TDS is operated through Tire Distribution Systems, Inc. See "TDS" herein.
On February 5, 1999, Tire Management Solutions, Inc. ("TMS"), a
wholly-owned subsidiary of the Company, entered into its first tire management
outsourcing contract. The contract is with Roadway Express. Pursuant to the
contract, the entire fleet tire management program of Roadway Express was
outsourced to TMS. TMS, in turn, subcontracts with over 70 Bandag dealers across
the country to provide the outsourced tire services. TMS anticipates that
additional tire management outsourcing contracts will be obtained in the future.
Traditional Business
(a) General
The Traditional Business is engaged primarily in the production and
sale of precured tread rubber and equipment used by its franchisees for the
retreading of tires for trucks, buses, light commercial trucks, industrial
equipment, off-the-road equipment and passenger cars. Bandag specializes in a
patented cold-bonding retreading process which it introduced to the United
States in 1957 (the "Bandag Method"). The Bandag Method separates the process of
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vulcanizing the tread rubber from the process of bonding the tread rubber to the
tire casing, allowing for optimization of temperature and pressure levels at
each stage of the retreading process.
The Company and its licensees have 1,372 franchisees worldwide, with
32% located in the United States and 68% internationally. The majority of
Bandag's franchisees are independent operators of full service tire
distributorships. The Traditional Business' revenues primarily come from the
sale of retread material and equipment to its franchisees. The Traditional
Business' products compete with new tire sales, as well as retreads produced
using other retread processes. The Company concentrates its marketing efforts on
existing franchisees and on expanding their respective market penetration. Due
to its strong distribution systems, marketing efforts and leading technology,
Bandag, through its independent franchisee network, has been able to maintain
the largest market presence in the retreading industry.
The Traditional Business competes primarily in the light and heavy
truck tire replacement market. Both new tire manufacturers and tread rubber
suppliers compete in this market. While the Company has independent franchisees
in over 118 countries, and competes in all of these geographic markets, its
largest market is the United States. Truck tires retreaded by the Company's
franchisees make up approximately 15% of the U.S. light and heavy truck tire
replacement market. The Company's primary competitors are new tire manufacturers
such as The Goodyear Tire & Rubber Company, Bridgestone Corporation and Groupe
Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as
a tread rubber supplier to a combination of company owned and independent
retreaders and Groupe Michelin has also recently entered the retread market in
the United States.
The Traditional Business consists of the franchising of a patented
process for the retreading of tires primarily for trucks, buses, light
commercial trucks, and the production and sale of precured tread rubber and
related products used in connection with this process.
The Traditional Business can be divided into two main areas: (i)
manufacturing the tread rubber and (ii) bonding the tread to a tire casing.
Bandag manufactures over 500 separate tread designs and sizes, treads
specifically designed for various applications, allowing fleet managers to
fine-tune their tire programs. Bandag tread rubber is vulcanized prior to
shipment to its independent franchisees. The Bandag franchisee prepares the tire
casing for retreading and performs the retreading process of bonding the cured
tread to the prepared tire casing. This two-step process allows utilization of
the optimum temperature and pressure levels at each step. Lower temperature
levels during the bonding process result in a more consistent, higher quality
finished retread with less damage to the casing. Bandag has developed a totally
integrated retreading system with the materials, bonding process and
manufacturing equipment specifically designed to work together as a whole.
(b) Markets and Distribution
The principal market categories for the Traditional Business are truck
and bus, with more than 90% of the tread rubber sold by the Company used in the
retreading of these tires.
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Additionally, the Company markets tread rubber for the retreading of
off-the-road equipment, industrial and light commercial vehicle and passenger
car tires; however, historically, sales of tread rubber for these applications
have not contributed materially to the Company's results of operations.
Trucks and Buses Tread rubber, equipment, and supplies for retreading
and repairing truck and bus tires are sold primarily to independent franchisees
by the Company who use the Bandag Method for that purpose. Bandag has 1,372
franchisees throughout North America, Central America, South America, Europe,
Africa, Far East, Australia and New Zealand. These franchisees are owned and
operated by independent franchisees, some with multiple franchises and/or
locations. Of these franchisees, 441 are located in the United States. One
hundred thirty-eight (138) of Bandag's foreign franchisees are franchised by a
licensee of the Company in Australia, and joint ventures in India and Sri Lanka.
A limited number of franchisees are trucking companies, which operate retread
shops primarily for their own needs. A few franchisees also offer "hot-cap"
retreading and most sell one or more lines of new tires.
The current franchise agreement offered by the Company grants the
franchisee the non-exclusive retread manufacturing rights to use the Bandag
Method for one or more applications and the Bandag trademarks in connection
therewith within a specified territory, but the franchisee is free to market
Bandag retreads outside the territory. No initial franchise fee is paid by a
franchisee for its franchise.
Direct Sales to Transportation Fleets The Company has entered into
contracts with companies pursuant to which Bandag agrees to sell retread tires
directly to transportation fleets of such companies and provide maintenance and
service for the retread tires (the "Direct Sales Contracts"). Bandag
subcontracts the sales, maintenance, and service components of the Direct Sales
Contracts to its independent franchisees.
Other Applications The Company continues to manufacture and supply to
its franchisees a limited amount of tread for off-the-road (OTR) tires,
industrial tires, including solid and pneumatic, passenger car tires and light
commercial tires for light trucks and recreational vehicles.
(c) Competition
The Company faces strong competition in the market for replacement
truck and bus tires, the principal retreading market, which it serves. The
competition comes not only from the major manufacturers of new tires, but also
from manufacturers of retreading materials. Competitors include producers of
"camelback," "strip stock," and "slab stock" for "hot-cap" retreading, as well
as a number of producers of precured tread rubber. Various methods for bonding
precured tread rubber to tire casings are used by competitors.
Bandag retreads are often sold at a higher price than tires retreaded
by the "hot-cap" process as well as retreads sold using competitive precured
systems. The Company believes that the superior quality and greater mileage of
Bandag retreads and expanded service programs to franchisees and end-users
outweigh any price differential.
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Bandag franchisees compete with many new-tire dealers and retreading
operators of varying sizes, which include shops operated by the major new-tire
manufacturers, large independent retread companies, retreading operations of
large trucking companies, and smaller commercial tire dealers.
For additional information on competition faced by the Traditional
Business see the foregoing discussion in "Markets and Distribution" herein.
(d) Sources of Supply
The Company manufactures the precured tread rubber, cushion gum, and
related supplies in Company-owned and leased manufacturing plants in the United
States, Canada, Brazil, Belgium, South Africa, Mexico, Malaysia and Venezuela.
The Company has entered into joint venture agreements in India and Sri Lanka.
The Company also manufactures pressure chambers, tire casing analyzers, buffers,
tire builders, tire-handling systems, and other items of equipment used in the
Bandag retreading method. Curing rims, chucks, spreaders, rollers, certain
miscellaneous equipment, and various retreading supplies, such as repair patches
sold by the Company, are purchased from others.
The Company purchases rubber and other materials for the production of
tread rubber and other rubber products from a number of suppliers. The rubber
for tread is primarily synthetic and obtained principally from sources, which
most conveniently serve the respective areas in which the Company's plants are
located. Although synthetic rubber and other petrochemical products have
periodically been in short supply and significant cost fluctuations have been
experienced in previous years, the Company to date has not experienced any
significant difficulty in obtaining an adequate supply of such materials.
However, the effect on operations of future shortages will depend upon their
duration and severity and cannot presently be forecast.
The principal source of natural rubber, used for the Company's cushion
gum, is the Far East. The supply of natural rubber has historically been
adequate for the Company's purposes. Natural rubber is a commodity subject to
wide price fluctuations as a result of the forces of supply and demand.
Synthetic prices historically have been related to the cost of petrochemical
feedstocks, which were relatively stable prior to 1995. A relationship between
natural rubber and synthetic rubber prices exists, but it is by no means exact.
(e) Patents
The Company owns or has licenses for the use of a number of United
States and foreign patents covering various elements of the Bandag Method. The
Company has patents covering improved features, some of which started expiring
in 1995 and others that will continue to expire through the year 2011, and the
Company has applications pending for additional patents.
The Company's patent counsel has advised the Company that the United
States patents are by law presumed valid and that the Company does not infringe
upon the patent rights of
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others. While the outcome of litigation can never be predicted with certainty,
such counsel has advised the Company that, in its opinion, in the event of
litigation placing the validity of such patents at issue, the Company's United
States patent position should remain adequate.
The protection afforded the Bandag Method by foreign patents owned by
the Company, as well as those under which it is licensed, varies among different
countries depending mainly upon the extent to which the elements of the Bandag
Method are covered, the strength of the patent laws and the degree to which
patent rights are upheld by the courts. Patent counsel for the Company is of the
opinion that its patent position in the foreign countries in which its principal
sales are made is adequate and does not infringe upon the rights of others. The
Company has, however, extended its foreign market penetration to some countries
where little or no patent protection exists.
The Company does not consider that patent protection is the primary
factor in its successful retreading operation, but rather, that its proprietary
technical "know-how," product quality, franchisee support programs and effective
marketing programs are more important to its success.
The Company has secured registrations for its trademark and service
mark BANDAG, as well as other trademarks and service marks, in the United States
and most of the other important commercial countries.
TDS
(a) General
The five dealerships that were acquired in November 1997 by Tire
Distribution Systems, Inc. ("TDS"), an indirect wholly-owned subsidiary of the
Company, were: Universal Tire, Inc. (Nashville, TN); Southern Tire Mart, Inc.
(Columbia, MS); J.W. Brewer Tire Co., Inc. (Wheat Ridge, CO): Joe Esco Tire Co.
(Oklahoma City, OK); and Sound Tire, Inc. (Auburn, WA). The Company acquired
five additional dealerships in 1998. As of December 31, 1998, all of the
acquired dealerships were merged into TDS. TDS, which provides new and retread
tire products and tire management services to national, regional and local fleet
transportation companies, operates 42 Bandag franchise and manufacturing
locations and 100 commercial, retail and wholesale outlets in 17 states.
(b) Markets and Distribution
TDS offers complete tire management services including: the complete
line of Bandag retreads, new tires (commercial, retail and off-the-road),
24-hour road service and alignment. The tire management services are provided
over a broad geographic area including the northwest and all across the south.
This geographic coverage allows TDS to provide consistent, cost-effective
programs, information, products, and services to local, regional and national
fleets.
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A cost effective tire management service continues to grow in
importance for fleets of all sizes. The trucking industry continues to
consolidate. Trucking fleets are under intense pressure to be cost competitive
and reliable in their services. Tire related costs are one of the top operating
expenses for trucking fleets. Bandag and its dealer alliance network (including
TDS) are able to provide trucking companies comprehensive tire management
services which result in lower tire operating costs for the trucking company
while at the same time helping the trucking company increase its service
reliability through the same tire management programs.
TDS markets its products through sales personnel located at each of its
commercial locations, retread production facilities and retail facilities. TDS'
sales people make personal sales calls on existing customers to ensure
satisfaction and loyalty. TDS facilities are generally located near major
highway arteries, industrial centers, and customer locations. TDS commercial
locations operate as points of sale for retread tires, new tires and services.
In addition, the commercial locations operate as a home base for mobile service
trucks which must be able to provide customers with reliable and timely
emergency service as well as regularly scheduled maintenance service.
In an effort to fully service its customers, TDS sells new truck tires
manufactured by Bridgestone/Firestone, Continental/General, Kelley Tires,
Yokahama, Cooper, and other manufacturers except for Goodyear and Michelin.
(c) Competition
TDS competitors are other tire dealers, which offer competing retread
applications, as well as those which are Bandag franchised dealers. In addition,
such tire dealers typically sell and service new tires produced by new tire
manufacturers and service providers such as The Goodyear Tire & Rubber Company,
Bridgestone Corporation and Groupe Michelin. The Goodyear Tire & Rubber Company
also competes in the U.S. market as a tread rubber supplier to a combination of
company owned and independent retreaders. Groupe Michelin has also recently
entered the retread market in the U.S.
(d) Sources of Supply
TDS purchases retread rubber and most of its retreading equipment and
supplies from Bandag and purchases new tires from new tire companies including
Bridgestone/Firestone, Yokahama, Continental/General, Cooper and Kelley. Groupe
Michelin and The Goodyear Tire and Rubber Company have terminated their dealer
relationships with TDS dealers and have announced that they will not sell new
tires to TDS dealers. Thus far, TDS has not experienced any material adverse
effects from such terminations and has been successful in obtaining and
utilizing new tires from other tire manufacturers in its business.
Regulations
Various federal and state authorities have adopted safety and other
regulations with respect to motor vehicles and components, including tires, and
various states and the Federal Trade Commission enforce statutes or regulations
imposing obligations on franchisors,
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primarily a duty to disclose material facts concerning a franchise to
prospective franchisees. Management is unaware of any present or proposed
regulations or statutes which would have a material adverse effect upon its
businesses, but cannot predict what other regulations or statutes might be
adopted or what their effect on the Company's businesses might be.
Other Information
The Company conducts research and development of new products,
primarily in the Traditional Business, and the improvement of materials,
equipment, and retreading processes. The cost of this research and development
program was approximately $15,909,000 in 1996, $21,113,000 in 1997 and
$18,807,000 in 1998.
The Company's business has seasonal characteristics, which are tied not
only to the overall performance of the economy, but more specifically to the
level of activity in the trucking industry. Tire demand does, however, lag the
seasonality of the trucking industry. The Company's third and fourth quarters
have historically been the strongest in terms of sales volume and earnings.
The Company has sought to comply with all statutory and administrative
requirements concerning environmental quality. The Company has made and will
continue to make necessary capital expenditures for environmental protection. It
is not anticipated that such expenditures will materially affect the Company's
earnings or competitive position.
As of December 31, 1998, the Company had approximately 4,791 employees.
Financial Information about Business Segments and Foreign and Domestic
Operations and Revenues of Principal Product Groups
Financial Statement "Operations in Different Segments and Different
Geographic Areas and Sales by Principal Products" follows on page 9.
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Operations in Different Segments and Different Geographic Areas and Sales by
Principal Products:
The Company has two operating segments: the manufacture of precured tread
rubber, equipment and supplies for retreading tires (Traditional Business) and
the sales and maintenance of new and retread tires to principally commercial and
industrial customers (TDS).
Information concerning operations for the Company's two operating segments and
in different geographic areas and sales by principal products follows (see Note
K to Notes to Consolidated Financial Statements):
<TABLE>
<CAPTION>
Traditional Business
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North America (4) Europe Latin America (4)
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(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
Net sales to
unaffiliated
customers (1)(2) $422.0 $483.4 $470.9 $110.9 $123.0 $129.5 $122.2 $118.1 $108.9 $ 28.0
Transfers between
segments 65.7 24.1 13.7 1.0 0.5 1.1
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Segment area totals $487.7 $507.5 $484.6 $111.9 $123.5 $130.6 $122.2 $118.1 $108.9 $ 28.0
Eliminations
(deduction)
Total Net Sales
Gross Profit $219.1 $217.9 $202.1 $ 49.6 $ 53.8 $ 59.6 $ 43.8 $ 41.4 $ 37.1 $ 9.1
Intangible Amortization 0.6 1.0 1.0
Depreciation Expense 19.8 19.5 20.1 6.1 6.7 7.2 5.9 5.1 4.4 1.1
Earnings (Expense)
Operating earnings
(loss)(3) $ 93.1 $ 87.9 $ 96.7 $ 5.3 $ 8.8 $ 17.2 $ 15.5 $ 18.9 $ 13.1 $ (0.7)
Gain on sale of
stock
Interest revenue 1.9 0.8 1.6
Interest expense (0.4) (0.7)
Corporate expense
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Earnings Before
Income Taxes $ 93.1 $ 87.9 $ 96.7 $ 5.3 $ 8.8 $ 17.2 $ 17.0 $ 19.0 $ 14.7 $ (0.7)
Total Assets at
December 31 $321.8 $312.6 $302.2 $ 67.1 $ 73.9 $ 79.7 $ 80.4 $ 74.4 $ 63.8 $ 15.1
Expenditures for
long-lived assets 33.3 15.8 19.1 4.3 7.5 7.6 10.0 15.1 5.7 1.3
Additions to long-
lived assets 0.9
Long-lived assets 90.8 86.6 88.9 15.2 16.3 18.3 43.6 40.4 30.7 3.2
Sales by principal
product:
Retread products $404.5 $462.5 $436.5 $ 104.4 $110.5 $120.4 $117.0 $111.4 $104.3 $ 15.4
New tires 4.8
Retread tires 5.9
Other $ 17.5 $ 20.9 $ 34.4 $ 6.5 $ 12.5 $ 9.1 $ 5.2 $ 6.7 $ 4.6 $ 1.9
<CAPTION>
Asia (4) TDS Corporate Consolidated
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1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
Net sales to
unaffiliated
customers (1)(2) $ 42.7 $ 47.6 $376.6 $ 55.3 $1,059.7 $822.5 $756.9
Transfers between
segments 66.7 24.6 14.8
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Segment area totals $ 42.7 $ 47.6 $376.6 $ 55.3 $1,126.4 $847.1 $771.7
Eliminations
(deduction) (66.7) (24.6) (14.8)
Total Net Sales $1,059.7 $822.5 $756.9
Gross Profit $ 13.0 $ 16.0 $ 89.7 $ 14.0 $ 411.3 $340.1 $314.8
Intangible Amortization 8.0 1.3 8.6 2.3 1.0
Depreciation Expense 1.4 1.5 9.4 1.5 0.5 0.4 0.4 42.8 34.6 33.6
Earnings (Expense)
Operating earnings
(loss)(3) $ 3.2 $ 6.8 $ 2.5 $ (2.0) $ 115.7 $116.8 $133.8
Gain on sale of
stock $ 95.1 95.1
Interest revenue 7.1 6.7 5.7 9.0 7.5 7.3
Interest expense (10.4) ( 2.6) (1.2) (10.8) ( 3.3) (1.2)
Corporate expense (14.4) (13.2) (9.1) (14.4) (13.2) (9.1)
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Earnings Before
Income Taxes $ 3.2 $ 6.8 $ 2.5 $ (2.0) $(17.7) $ 86.0 $ (4.6) $ 99.5 $202.9 $130.8
Total Assets at
December 31 $ 21.2 $ 28.4 $217.2 $217.9 $ 54.1 $199.9 $114.2 $755.7 $899.9 $588.3
Expenditures for
long-lived assets 1.0 1.6 15.6 1.0 0.9 1.8 0.4 65.4 42.2 34.4
Additions to long-
lived assets 12.9 125.1 13.8 125.1
Long-lived assets 5.1 7.6 133.9 123.2 1.9 1.6 1.4 288.6 273.2 146.9
Sales by principal
product:
Retread products $ 24.2 $ 26.9 $ - $ - $641.3 $708.6 $688.1
New tires 8.2 8.9 214.1 36.5 218.9 44.7 8.9
Retread tires 7.5 9.1 86.6 11.6 92.5 19.1 9.1
Other $ 2.8 $ 2.7 $ 75.9 $ 7.2 $107.0 $ 50.1 $ 50.8
(1) No customer accounted for 10% or more of the Company's sales to unaffiliated
customers in 1998, 1997, or 1996.
(2) Export sales from North America were less than 10% of sales to unaffiliated
customers in each of the years 1998, 1997, and 1996
(3) Aggregate foreign exchange gains (losses) included in determining net
earnings amounted to approximately ($3,200,000), $1,500,000 and $1,236,000
in 1998, 1997, and 1996 respectively.
(4) For segment reporting purposes, Mexico and South Africa operations are
included in the Latin America segment and New Zealand and Australia
operations are included in the Asia segment, consistent with Management's
grouping for internal purposes.
</TABLE>
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Executive Officers of the Company
The following table sets forth the names and ages of all executive
officers of the Company as of March 12, 1999, the period of service of each with
the Company, positions and offices with the Company presently held by each, and
the period during which each officer has served in his present office:
<TABLE>
<CAPTION>
Period of Period in
Service Present Position Present
Name Age with Company or Office Office
<S> <C> <C> <C> <C>
Martin G. Carver* 50 20 Yrs. Chairman of the Board, Chief 18 Yrs.
Executive Officer and President
Lucille A. Carver* 81 41 Yrs. Treasurer 40 Yrs.
Nathaniel L. Derby II 56 28 Yrs. Vice President, Manufacturing Design 2 Yrs.
Sam Ferrise II 42 18 Yrs. Executive Vice President, Chief 1 Yr.
Operating Officer
Warren W. Heidbreder 52 17 Yrs. Vice President, Chief Financial 2 Yrs.
Officer and Secretary
Frederico U. Kopittke 55 4 Yrs. Vice President, Latin America 8 Mos.
and South America
John C. McErlane 45 14 Yrs. Vice President, Marketing and Sales 1 Yr.
* Denotes that officer is also a director of the Company.
</TABLE>
Mr. Martin G. Carver was elected Chairman of the Board effective June
23, 1981, Chief Executive Officer effective May 18, 1982, and President
effective May 25, 1983. Prior to his present position, Mr. Carver was also Vice
Chairman of the Board from January 5, 1981 to June 23, 1981.
Mrs. Carver has, for more than five years, served as a Director and
Treasurer of the Company.
Mr. Derby joined Bandag in 1971. In December 1985, he was promoted to
Vice President, Engineering and served in that position until August 1996 when
he was elected to the office of Vice President, Engineering. He served in that
office until May 1997, when he was elected to his current office of Vice
President, Manufacturing Design effective April 28, 1997.
Mr. Ferrise joined Bandag in 1981. In November 1995, he was elected to
the office of Vice President, Marketing. In February 1997, he was elected to the
office of Vice President, Sales and Marketing effective January 20, 1997 and
served in that position until March 1998
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when he was elected to his current office of Executive Vice President and Chief
Operating Officer effective February 16, 1998.
Mr. Heidbreder joined Bandag in 1982. In 1986 he was elected to the
office of Vice President, Legal and Tax Administration, and Secretary. In
November 1996, he was elected to his current office of Vice President, Chief
Financial Officer, and Secretary effective as of January 1, 1997.
Mr. Kopittke joined Bandag in July 1994 as Company Manager of Bandag do
Brasil Ltda. He served in that position until March 1998 when he was elected to
the office of Vice President, Latin America. In August 1998, he was elected to
his current office of Vice President Latin America and South Africa, effective
July 13, 1998. Before joining Bandag, Mr. Kopittke was employed for more than 16
years by Nalco Chemical Company in South America.
Mr. McErlane joined Bandag in 1985. From 1985 through 1995, he held
several managerial positions with the Company. In 1996, he was promoted to the
position of Director, Marketing. In January 1997, he was promoted to the office
of Vice President, Marketing and served in that position until March 1998, when
he was elected to his current office of Vice President, Marketing and Sales
effective February 16, 1998.
All of the above-named executive officers have been elected by the
Board of Directors and serve at the pleasure of the Board of Directors.
ITEM 2. PROPERTIES
Traditional Business
The general offices of the Company are located in a Company-owned
56,000 square foot office building in Muscatine, Iowa.
The tread rubber manufacturing plants of the Company are located to
service principal markets. The Company operates thirteen of such plants, five of
which are located in the United States, and the remainder in Canada, Belgium,
South Africa, Brazil (two plants), Mexico, Malaysia, and Venezuela. The plants
vary in size from 9,600 square feet to 194,000 square feet with the first plant
being placed into production during 1959. All of the plants are owned in fee
except for the plants located in Malaysia and Venezuela, which are under
standard lease contracts.
Retreading equipment is manufactured at Company-owned plants located in
Muscatine, Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet
and 10,000 square feet, respectively. In addition, the Company owns a research
and development center in Muscatine of approximately 58,400 square feet and a
26,000 square foot facility used primarily for training franchisees and
franchisee personnel. Similar training facilities are located in Brazil, Mexico
(leased facility), South Africa and Europe. The Company also owns a 26,000
square foot office and machining facility in Muscatine.
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Construction of a new 83,000 square foot training and conference center
was completed in early 1999 in Muscatine, Iowa.
In addition, the Company mixes rubber and produces cushion gum and
envelopes at a Company-owned 168,000 square foot plant in California. The
Company owns its European headquarters facility in Belgium and a 129,000 square
foot warehouse in the Netherlands.
TDS Business
TDS currently owns 45 and leases 87 facilities. Forty-two contain space
for TDS' retread production and 116 contain space for commercial, retail and
wholesale operations. The Company believes that it will be able to renew its
existing leases as they expire or find suitable alternative locations. The
leases generally provide for a base rental, as well as charges for real estate
taxes, insurance, maintenance and various other items.
In the opinion of the Company, its properties are maintained in good
operating condition and the production capacity of its plants is adequate for
the near future. Because of the nature of the activities conducted, necessary
additions can be made within a reasonable period of time.
ITEM 3. LEGAL PROCEEDINGS
None, except for legal actions in the ordinary course of the Company's
business, none of which the Company considers material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information concerning cash dividends declared and market prices of the
Company's Common Stock and Class A Common Stock for the last three fiscal years
is as follows:
<TABLE>
<CAPTION>
1998 % Change 1997 % Change 1996
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Cash Dividends Per
Share-Declared
First Quarter $ 0.2750 $ 0.2500 $ 0.2250
Second Quarter 0.2750 0.2500 0.2250
Third Quarter 0.2750 0.2500 0.2250
Fourth Quarter 0.2850 0.2750 0.2500
--------------- --------------- ----------------- -------------- ----------------
Total Year 1.1100 8.3 $ 1.0250 10.8 $ 0.9250
Stock Price Comparison (1)
Common Stock
First Quarter $53.31 - 59.13 $45.00 - 51.88 $50.25 - 55.88
Second Quarter 39.00 - 59.75 46.38 - 51.75 47.38 - 52.75
Third Quarter 29.88 - 42.06 47.94 - 54.13 44.50 - 49.50
Fourth Quarter 28.31 - 39.94 48.38 - 55.75 46.13 - 49.38
Year-end Closing Price 39.94 53.44 47.38
Class A Common Stock
First Quarter $48.00 - 54.38 $45.25 - 50.38 $48.75 - 54.00
Second Quarter 34.50 - 54.00 45.00 - 49.50 46.63 - 51.50
Third Quarter 28.44 - 39.50 47.50 - 53.44 43.50 - 48.00
Fourth Quarter 27.38 - 35.13 46.38 - 52.00 45.25 - 47.88
Year-end Closing Price 34.88 47.88 45.75
(1) High and low composite prices in trading on the New York and Chicago
Stock Exchanges (ticker symbol BDG for Common Stock and BDGA for Class
A Common Stock) as reported in The Wall Street Journal.
</TABLE>
The approximate number of record holders of the Company's Common Stock
as of March 12, 1999, was 2,319, the number of holders of Class A Common Stock
was 1,268 and the number of holders of Class B Common Stock was 246. The Common
Stock and Class A Common Stock are traded on the New York Stock Exchange and the
Chicago Stock Exchange. There is no established trading market for the Class B
Common Stock.
Sale of Unregistered Securities
On November 9, 1998, the Company issued 20,000 shares of Common Stock
and 20,000 shares of Class A Common Stock to Martin G. Carver pursuant to his
exercise of stock options for an aggregate consideration of $925,000. No
underwriters were engaged in connection with the foregoing sale. The issuance of
the foregoing securities was exempt from
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<PAGE>
registration under the Securities Act of 1933 pursuant to Section 4(2) as a
transaction not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain Selected Financial Data for the
periods and as of the dates indicated:
<TABLE>
<CAPTION>
1998(2) 1997 (2) 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Net Sales $1,059,669 $822,523 $756,925 $740,363 $650,567
Net Earnings(1) 59,319 121,994 81,604 97,027 93,994
------------------------------------------------------------------------
Total Assets $755,729 $899,904 $588,342 $554,159 $582,146
Long-term Debt and Other Obligations 109,757 123,195 10,125 11,857 12,252
Net Earnings Per Share:
Basic Earnings Per Share $2.64 $5.35 $3.46 $3.84 $3.53
Diluted Earnings Per Share $2.63 $5.33 $3.44 $3.82 $3.51
Cash Dividends Per Share-Declared $1.1100 $1.0250 $0.9250 $0.8250 $0.7250
(1) Includes in 1998 the effect of non-recurring charges of $4,205,000
pretax, $1,174,000 after tax, or $.05 per diluted share, related to
costs associated with the closure of foreign manufacturing facilities
and other restructuring costs.
Includes in 1997 the effect of a non-recurring gain on the sale of
marketable equity securities of $95,087,000 pre-tax, $55,800,000 after
tax, or $2.44 per diluted share, and non-recurring charges of
$16,500,000 pre-tax, $9,900,000 after tax, or $.43 per diluted share,
related to the closing of a manufacturing facility and exit cost from a
rubber recycling venture.
(2) During 1997 the Company's subsidiary, Tire Distribution Systems, Inc.,
acquired five tire dealerships whose operations are included in the
consolidated financial statements from November 1, 1997, the effective
date of the acquisitions. In addition, Tire Distribution Systems, Inc.,
acquired five other tire dealerships in 1998 whose results of
operations are included in the 1998 consolidated financial statements
from the date of each acquisition.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
GENERAL
Results include both the Company's Traditional Business and Tire Distribution
Systems, Inc. (TDS). The comparability of operating results between years is
affected by TDS, which commenced operations effective November 1, 1997, with the
acquisition of five tire dealerships and which acquired several additional
dealerships throughout 1998, and also by certain non-recurring items.
Consolidated net sales in 1998 increased 29% from 1997. This increase was solely
attributable to the TDS operations, as Traditional Business net sales were 5%
below the prior year. Of this
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<PAGE>
5% decrease, approximately 2 percentage points were a result of lower translated
value of the Company's foreign-currency-denominated sales. The remaining
3-percentage-point decrease resulted from lower equipment sales. The Company's
seasonal sales pattern, which is tied to trucking activity, was similar to
previous years with the third and fourth quarters being the strongest for both
sales and earnings. Both business segments were similarly affected.
Gross profit margin for the Company's Traditional Business increased by 1.7
percentage points due to lower raw material costs in the U.S. and Mexico. Gross
profit margins in Europe, Brazil and South Africa remained steady. Inclusion of
the TDS operations, which operate at a lower gross margin, decreased
consolidated gross margin by 2.6 percentage points.
Consolidated operating and other expenses in 1998 increased 32% from 1997. A
full year of TDS operating and other expenses accounted for 29 percentage points
of this increase. The remaining 3-percentage-point increase in operating and
other expenses was attributable to continued business development, and the
rationalization of unnecessary infrastructure to improve profitability. The
additional business development spending was to improve capabilities to further
build the dealer alliance and to prepare the Company for the introduction of
tire management outsourcing in early 1999. The lower Traditional Business sales
and the higher operating expenses resulted in a net earnings decline of 20% in
1998 before non-recurring items. The Company's consolidated effective income tax
rate of 40.4% was higher than the previous year's rate of 39.9% principally due
to the impact of a full year of nondeductible TDS goodwill amortization.
Diluted earnings per share were $2.63 in 1998 compared to $5.33 in 1997. The
prior year included the effect of a non-recurring gain on the sale of marketable
equity securities of $55,800,000 after tax, or $2.44 per diluted share, and
non-recurring charges of $9,900,000, net of tax benefits, or $.43 per diluted
share, related to the closing of a manufacturing facility and exit costs from a
rubber recycling venture. Fourth quarter and full year 1998 diluted earnings per
share benefited by $.12 per diluted share as a result of a lower effective tax
rate in the fourth quarter compared to the prior year. Refer to Note B of the
notes to the consolidated financial statements for discussion of 1998
non-recurring items.
TRADITIONAL BUSINESS
The Company's Traditional Business operations located in the United States and
Canada are integrated and managed as one unit, which is referred to internally
as North America. Net sales in North America were 4% below the prior year due to
1% lower retread material unit volume, 2% from the absence of sales from the
rubber recycling venture, and 1% attributable to product mix. Gross profit
margin improved 2 percentage points because average raw material costs were
lower than 1997's average. As a result of the higher gross profit margin and
lower expenses, earnings before income taxes in 1998 increased 6% from the prior
year.
The Company's operations located in Europe principally service markets in
European countries, but also export to certain other countries in the Middle
East and Northern and Central Africa. This collection of countries is under one
management group and is referred to internally as Europe. Net sales in Europe
declined 9% from 1997, despite a slight increase in
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retread material unit volume. Four percentage points of the decline were due to
the lower translated value of the Belgian franc. The remaining
5-percentage-point decline resulted mainly from lower equipment sales. Gross
profit margin in 1998 increased 1% from 1997, with the lower sales offset by
decreased lower-margin equipment sales and lower per unit capacity costs due to
higher production. Operating expenses decreased 1% from the prior year due to
the lower translated value of the Belgian franc. In local currency, 1998
operating expenses were 2% over 1997 due to restructuring costs and additional
bad debt expense. Principally as a result of the lower sales, earnings before
income taxes declined by 40% over the previous year.
The Company's exports from North America to markets in the Caribbean, Central
America and South America, along with operations in Brazil, Mexico, Venezuela
and South Africa are combined under one management group referred to internally
as Latin America. Latin America exceeded prior year retread material unit volume
by 11%, but net sales increased only 3% due to lower equipment sales in Brazil,
Mexico, the Andean area and South Africa, and the lower translated value of
foreign currencies. Gross profit margin increased by 1 percentage point over the
previous year mainly due to lower raw material costs and higher production in
Mexico. The other areas were basically even with the prior year. The volume
growth in Brazil and Mexico drove a 29% increase over the prior year in
operating expenses. Also contributing to the operating expense increase were
severance and higher staffing expense. Principally because of the higher
operating expenses, earnings before income taxes were 11% below last year.
The Company's exports from North America to markets in Asian countries, along
with operations in New Zealand, Indonesia and Malaysia and a licensee in
Australia are combined under one management group referred to internally as
Asia. Net sales declined 34% in Asia as a result of a 17% decline in retread
material unit volume, lower equipment sales in Malaysia, reduced new tire sales
in New Zealand and the devaluation of currencies throughout Asia. Gross profit
margin increased 2 percentage points from 1997 due to the absence of
lower-margin equipment sales in Malaysia, increased higher-margin export sales
from Malaysia and higher production in Indonesia. Operating expenses declined 8%
from the prior year due to the devalued local currencies. Principally because of
the significant drop in net sales, earnings before income taxes were 123% below
the previous year.
TIRE DISTRIBUTION SYSTEMS, INC.
TDS operating results reflect a full year for 1998. Net sales and earnings
before income taxes and interest for TDS were $376,557,000 and $2,517,000,
respectively. TDS had to replace two major new tire brands during the year, but
same store sales were down only slightly on a full-year pro forma basis. From an
operating perspective, TDS continued to make progress in integrating the
acquired dealerships. The TDS integration strategy calls for the sale of
acquired retail or manufacturing locations in markets more appropriately served
by other independent Bandag dealers. For this reason, during 1998 several
locations were sold to independent Bandag dealers. In addition, a wholesale
business was closed and several retail locations were consolidated.
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<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
GENERAL
Consolidated results included the operations of both the Company's Traditional
Business and, beginning effective November 1, 1997, TDS, which acquired five
tire dealerships as of that date.
Consolidated net sales in 1997 increased 9% from 1996. TDS accounted for
approximately 7% of consolidated net sales or approximately 78% of the increase.
The remaining 2% increase was 4% lower than the corresponding increase in
retread material unit volume because of 3% lower translated value of the
Company's foreign-currency-denominated sales (primarily the Belgium franc),
coupled with 1% lower equipment sales. The Company's seasonal sales pattern,
which is tied to trucking industry activity, was similar to previous years with
the third and fourth quarters being the strongest for both sales and earnings.
Gross profit margin for the Company's Traditional Business increased by .7
percentage points due to higher production to support increased sales and
manufacturing efficiencies. Raw material costs, on average, remained relatively
flat. Inclusion of the TDS operations, which operate at a lower gross margin,
decreased consolidated gross margin by .2 percentage points.
Consolidated operating and other expenses in 1997 increased 16% from 1996. TDS
accounted for 8% of these expenses or one-half of the total increase. The
remaining 8% increase in operating and other expenses was related to increased
spending for Sales & Marketing staffing and programs, employee training, and
higher R&D for the Traditional Business segment. This 8% increase resulted in a
net earnings decline for the Traditional Business in 1997 of 3% before
non-recurring items. The Company's consolidated effective income tax rate of
39.9% was higher than the 1996 rate of 37.6% principally due to higher state
income taxes.
Diluted earnings per share were $5.33 in 1997 compared to $3.44 in 1996.
Non-recurring items included a net gain of approximately $55,800,000 after
taxes, related to the sale of marketable equity securities. This non-recurring
gain was partially offset by non-recurring charges which included provisions of
$2,100,000, net of tax benefits, for the closing of a manufacturing facility and
$7,800,000, net of tax benefits, to cover exit costs from a rubber recycling
venture.
TRADITIONAL BUSINESS
Net sales in North America were 5% higher than 1996 primarily due to a higher
volume of retread rubber partially offset by a lower volume of equipment sales.
Average raw material costs for 1997 were approximately flat compared to the 1996
average but higher production to support higher sales resulted in better
absorption of fixed manufacturing costs. As a result, gross profit margin
increased by 1 percentage point compared to the margin in 1996. North American
1997 earnings before income taxes declined 9% from 1996 due to increased
operating expenses in support of marketing programs and building capabilities
within the
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<PAGE>
organization, as part of the Company's commitment to building an alliance with
its dealers and end-users.
In Europe, net sales declined 5% from 1996. The decline occurred because of the
unfavorable impact of a stronger U.S. dollar on the translated value of the
Company's foreign-currency-denominated sales, offset by an increase in unit
volume. Gross profit margin in 1997 decreased approximately 2 percentage points
compared to 1996 due to higher per unit manufacturing costs. Earnings before
income taxes declined by 49% over 1996.
Latin America exceeded retread material unit volume in 1997 by 11% over 1996,
but net sales increased by only 8% in 1997 compared to 1996 due to the delay in
U.S. dollar price increases versus the devalued currencies in South Africa and
Brazil. To remain competitive with local competitors, who are not affected by
exchange rate fluctuations, the Company must absorb the gap between inflation
and devaluation. Gross margin increased 1 percentage point from 1996 due to
higher volumes, resulting in improved production efficiencies. Operating
expenses increased 18% over 1996 due to the volume increase and higher personnel
costs and professional fees. As a result of the higher volume and gross profit
margin, earnings before income taxes increased 31% over 1996.
Asia net sales declined 10% in direct proportion to retread material unit
volume. Gross profit margin dropped 3 percentage points due to lower margins on
equipment sales and low margin from the Company's start-up operation in
Indonesia. Operating expenses increased 36% over 1996 because of expenses in
Indonesia and increased spending to build marketing capabilities in the region.
Due to the reasons stated above, earnings before income taxes were 53% below
1996.
TIRE DISTRIBUTION SYSTEMS, INC.
TDS results were included for the two-month period since the acquisition of the
five tire dealerships through December 31, 1997. Net sales and net loss for TDS
were $55,304,000 and $1,976,000, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
It has generally been the Company's practice to adjust its selling prices and
sales allowances to reflect changes in production and raw material costs in
order to maintain its gross profit margin. In the past three years costs have
remained relatively constant and the Company has not found it necessary to
implement general price increases.
Replacement of fixed assets requires a greater investment than the original
asset cost due to the impact of the general price level increases over the
useful lives of plant and equipment. This increased capital investment would
result in higher depreciation charges affecting both inventories and cost of
products sold.
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<PAGE>
IMPACT OF CHANGING FOREIGN CURRENCIES
1998 sales and net earnings before income tax from the Company's Brazilian
operations were 7% and 15%, respectively, of total consolidated results. In
January 1999, Brazil experienced a major devaluation of its currency, the real.
Except for approximately $4,000,000 in intercompany debt denominated in U.S.
dollars, assets and liabilities of the Company's operations are denominated in
local currency. In local currencies, the loss on revaluation of the intercompany
debt was offset by gains on short-term investments which were indexed to U.S.
dollars. Because the real is the functional currency, except for the
intercompany borrowing and the indexed short-term investments, the Company's
operations should not be significantly impacted from a transactional standpoint.
The extent of the adverse impact in U.S. dollars from translating local
operating results into U.S. dollars depends upon the Company's ability to
increase prices to recover the lost value, which is uncertain as of this
writing. Similarly, the adverse effect of the real devaluation on operating
results cannot be established at this time.
CAPITAL RESOURCES AND LIQUIDITY
At the end of 1998, current assets exceeded current liabilities by $264,215,000.
Cash and cash equivalents totaled $37,912,000 at December 31, 1998, decreasing
by $158,488,000 during the year. The Company invests excess funds over various
terms, but only instruments with an original maturity date of over 90 days are
classified as investments. These investments increased by $8,146,000 from the
prior year.
The only changes in working capital requirements are for normal business growth.
The Company funds its capital expenditures from the cash flow it generates from
operations. During 1998, the Company spent $65,375,000 for capital expenditures,
of which approximately $8,900,000 was related to the Bandag, Incorporated
Learning Center in Muscatine, Iowa. The Company believes that spending in recent
years is representative of future capital spending needs. In addition, the
Company made $17,542,000 in cash payments for 1998 acquisitions of TDS
businesses.
As of December 31, 1998, the Company had available uncommitted lines of credit
totaling $71,000,000 in the United States for working capital purposes. Also,
the Company's foreign subsidiaries had approximately $32,000,000 in credit and
overdraft facilities available to them. From time to time during 1998, the
Company borrowed funds to supplement operational cash flow needs or to settle
intercompany transactions. The Company's long-term liabilities totaled
$109,757,000 at December 31, 1998, which is approximately 19% of the combined
total of long-term liabilities and stockholders' equity; this is a decrease of
$13,438,000 from December 31, 1997.
During the year, the Company purchased 918,000 shares of its outstanding Common
Stock and Class A Common Stock for $29,353,000 at prevailing market prices and
paid cash dividends amounting to $24,867,000. The Company generally funds its
dividends and stock repurchases from the cash flow generated from its
operations. Historically the Company has utilized excess funds to purchase its
own shares.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
The Company is exposed to market risk from changes in interest rates, foreign
exchange rates, and commodity prices. To mitigate such risks, the Company enters
into various hedging transactions. All hedging transactions are authorized and
executed pursuant to clearly defined Company Treasury policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
Analytical techniques and selective hedging instruments are applied to manage
and monitor such market exposures.
Foreign Currency Exposure
Foreign currency exposures arising from cash flow transactions include firm
commitments and anticipatory transactions. Translation exposure is also part of
the overall foreign exchange risk. The Company's exposure to foreign currency
risks exists primarily with the Brazilian real, Canadian dollar, Mexican peso,
Japanese yen and major European currencies. The Company regularly enters into
foreign currency contracts primarily using foreign exchange forward contracts
and options to hedge most of its firm commitment exposures. The Company also
employs foreign exchange forward contracts as well as option contracts to hedge
approximately 40% - 60% of its anticipated future cash flow transactions over a
period of one year. The notional amount of these contracts at December 31, 1998,
was $4,800,000. The Company also limits its exposure to foreign currency
fluctuations by entering into offsetting asset or liability positions and by
establishing and monitoring limits on unmatched positions. The Company's pretax
earnings from foreign subsidiaries and affiliates translated into U.S. dollars
using a weighted average exchange rate was $30,172,000 for the year ending
December 31, 1998. On that basis, the potential loss in the value of the
Company's pretax earnings from foreign subsidiaries resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates would
amount to $2,500,000.
Interest Rate Exposure
In order to mitigate the impact of fluctuations in the general level of interest
rates, the Company generally maintains a large portion of its debt as fixed rate
in nature by borrowing on a long-term basis. At December 31, 1998, while the
total outstanding short-term debt of the Company was $2,091,000, the total
outstanding long-term debt for the same period was $100,000,000. At year-end,
the fair value of the Company's long-term debt was $105,656,000. In addition, at
December 31, 1998, the fair value of securities held for investment was
$21,236,000. The fair value of the Company's total long-term debt and its
securities held for investment would not be materially affected by a
hypothetical 10% adverse change in interest rates. Therefore, the effects of
interest rates changes in the fair value of the Company's financial instruments
are limited.
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<PAGE>
Commodities Exposure
Due to the nature of its business, the Company procures almost all of its
synthetic rubber used in manufacturing tire tread at quarterly fixed rates using
contracts with the Company's main suppliers. Based on 1998 results, a
hypothetical 10% change in synthetic rubber prices could result in a maximum
$15,000,000 change to cost of goods sold.
IMPACT OF YEAR 2000
The Company operates with a combination of purchased and internally-developed
software systems. Many of the older computer systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations. The Company will be required
to modify or replace software that is not Year 2000 compliant so that its
computer systems will function properly with respect to dates related to the
Year 2000.
Purchased software systems account for a significant portion of the Company's
global software environment, especially for date-sensitive applications such as
payroll and accounts receivable. The Company has performed inventories in recent
years to identify clearly non-compliant software systems and to initiate
replacement activities.
The Company has assessed the Year 2000 issue in North America and that process
has now been completed, except for desktop hardware, which is still underway.
The Company now anticipates finishing its global Year 2000 remediation process
for mission critical mainframe and mid-range applications by fourth quarter
1999, although work to address cosmetic changes for non-failure date usage could
extend into first quarter 2000. Plans call for client-server technology to be
compliant by third quarter 1999, communication and network-technology to be
compliant by third quarter 1999 and desktop technology to be compliant by
year-end 1999. Required changes outside of the Information Systems area should
not be significant.
The installed base for the Company's software outside of North America consists
primarily of purchased commercial software, or applications written after 1990
which were written Year 2000 compliant. The assessment process has been
completed for non-software items and plans call for compliance issues in this
area to be addressed mid-year 1999.
The Company is shifting new software development efforts to the client-server
platform, and has so far been able to obtain sufficient resources in this area,
but mainframe development resources remain in short supply and this will affect
development on this platform into the Year 2000. This delay has not, to this
point, significantly affected the Company's business initiatives.
The costs related to the Year 2000 issue are expected to total approximately
$14,400,000, which represents an increase of $1,700,000 from the Company's
previous published estimate. To date, $5,400,000 of this amount has been spent
and contracts and purchase orders have been executed for an additional
$3,400,000. The Company expects approximately 50% of total costs, which are
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<PAGE>
for contracted services, to be recorded as current expense and the remaining
half of the costs, which are to replace hardware and software and upgrade
existing hardware, to be capitalized.
The Company presently believes that with a combination of actions, including
modification of existing software, conversion to newer versions of purchased
software and replacement with new systems, the Year 2000 issue will not pose
significant operational problems for its computer systems. On the other hand, if
such modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue could have a material impact on the operations of the
Company. In addition to remediation actions, the Company's contingency plans
will be reviewed and updated to address Year 2000 risks.
During 1999, the Company will continue to have formal communications with its
significant suppliers and large customers to determine the extent to which the
Company's activities would be impacted by those third parties' failure to
remediate their own Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company relies will be corrected on
a timely basis and therefore have no adverse effect on the Company.
The Company has assessed its own products to determine if it has exposure to
contingencies related to the Year 2000 issue and it believes any such exposure
will not be material.
EURO CONVERSION
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing currencies ("legal currencies")
and one common currency, the Euro. The Euro is now trading on currency exchanges
and may be used in certain transactions such as electronic payments. Beginning
in January 2002, new Euro-denominated notes and coins will be issued, and legal
currencies will be withdrawn from circulation. The conversion to the Euro has
eliminated currency exchange rate risk for transactions between the member
countries, which for the Company primarily consists of sales to certain
customers and payments to certain suppliers. The Company is currently addressing
the issues involved with the new currency, which include converting information
technology systems, recalculating currency risk, and revising processes for
preparing accounting and taxation records. Based on the work completed so far,
the Company does not believe the Euro conversion will have a significant impact
on the results of its operations or cash flows.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. These
forward-looking statements can be identified as such because the context of the
statement includes phrases such as "believes," "could," "anticipates," "should,"
"would," "expects," and "are expected," or other words of similar import.
Similarly, statements that describe future plans or strategies are also
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
currently anticipated. Factors which could affect actual results include the
effect of currency exchange rates; the devaluation of foreign currencies,
particularly the Brazilian real; the effectiveness of the Company's hedging
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<PAGE>
techniques; the actual Year 2000 expenses; and the timely remediation of Year
2000 problems by the Company, its suppliers and its customers. These factors
should be considered in evaluating the forward-looking statements, and undue
reliance should not be placed on such statements. The forward-looking statements
included herein are made as of the date hereof and Bandag, Incorporated
undertakes no obligation to update publicly such statements to reflect
subsequent events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
See the discussion under the caption "Quantitative and Qualitative
Disclosures About Market Risk" in Item 7 of this Form 10-K, "Management's
Discussion and Analysis of Operations and Financial Condition," which is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Auditors 24
Consolidated Balance Sheets as of
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Earnings for
the Years Ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 27
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31,
1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 30
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<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Bandag, Incorporated
We have audited the accompanying consolidated balance sheets of Bandag,
Incorporated and subsidiaries as of December 31, 1998, 1997 and 1996, and the
related consolidated statements of earnings, cash flows and changes in
stockholders' equity for the years then ended. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bandag,
Incorporated and subsidiaries at December 31, 1998, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended 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.
/s/ Ernst & Young LLP
Chicago, Illinois
January 29, 1999
-24-
<PAGE>
<TABLE>
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
December 31
-------------------------------------------------
(In thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 37,912 $ 196,400 $ 31,453
Investments - Note D 9,721 1,575 2,089
Accounts receivable, less allowance
(1998 - $18,724; 1997 - $12,707;
1996 - $13,320) 217,299 231,648 206,732
Inventories:
Finished products 96,889 90,228 44,704
Material and work in process 14,845 17,295 14,228
-------------- --------------- --------------
111,734 107,523 58,932
Deferred income tax assets 48,097 41,505 29,138
Prepaid expenses and other current assets 14,361 20,343 13,356
-------------- --------------- --------------
Total Current Assets 439,124 598,994 341,700
Property, Plant, and Equipment, on the
basis of cost:
Land 12,444 8,494 3,671
Buildings and improvements 107,240 98,769 85,445
Machinery and equipment 351,949 326,632 292,956
Construction and equipment installation
in progress 32,112 25,551 12,520
-------------- --------------- --------------
503,745 459,446 394,592
Less allowances for depreciation and amortization (290,699) (261,846) (249,457)
-------------- --------------- --------------
213,046 197,600 145,135
Marketable Equity Securities - Note D 79,035
Intangible Assets, less accumulated amortization
(1998 - $14,157; 1997 - $5,516; 1996 - $3,235) 75,539 75,627 1,753
Other Assets 28,020 27,683 20,719
-------------- --------------- --------------
Total Assets $ 755,729 $ 899,904 $ 588,342
============== =============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 38,286 $ 52,100 $ 28,744
Accrued employee compensation and benefits 27,498 28,874 23,532
Accrued marketing expenses 37,044 32,608 32,872
Other accrued expenses 40,623 66,921 34,076
Dividends payable 6,257 6,274 5,731
Income taxes payable 13,704 20,039 12,254
Short-term notes payable and current portion
of other obligations 11,497 99,726 2,005
-------------- --------------- --------------
Total Current Liabilities 174,909 306,542 139,214
Long-term Debt and Other Obligations - Note E 109,757 123,195 10,125
Deferred Income Tax Liabilities 3,766 6,753 28,136
Stockholders' Equity - Note H
Common Stock; $1.00 par value; authorized - 21,500,000
shares; Issued and outstanding - 9,083,797 shares
in 1998; 9,751,063 shares In 1997; 9,842,861
shares in 1996 9,084 9,751 9,843
Class A Common Stock; $1.00 par value; authorized -
50,000,000 shares; Issued and outstanding -
10,824,974 shares in 1998; 11,013,561 shares
In 1997; 11,027,759 shares in 1996 10,825 11,014 11,028
Class B Common Stock; $1.00 par value; authorized -
8,500,000 shares; Issued and outstanding -
2,046,577 shares in 1998; 2,048,785 shares
In 1997; 2,051,984 shares in 1996 2,047 2,049 2,052
Additional paid-in capital 7,287 6,052 4,069
Retained earnings 452,274 445,887 355,663
Accumulated other comprehensive income:
Unrealized gain on securities available-for-sale,
net of related tax effect (1996 - $20,765) 33,854
Equity adjustment from foreign currency translation (14,220) (11,339) (5,642)
-------------- --------------- --------------
Total Stockholders' Equity 467,297 463,414 410,867
-------------- --------------- --------------
Total Liabilities and Stockholders' Equity $ 755,729 $ 899,904 $ 588,342
============== =============== ==============
</TABLE>
See notes to consolidated financial statements.
-25-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
BANDAG, INCORPORATED AND SUBSIDIARIES ---------------------------------------------------
Consolidated Statements of Earnings
(In thousands, except per share data) 1998 1997 1996
---------------------------------------------------
Income
<S> <C> <C> <C>
Net sales $ 1,059,669 $ 822,523 $ 756,925
Gain on sale of marketable equity
securities - Note D 95,087
Other income 19,829 14,092 12,074
------------- ------------- -------------
1,079,498 931,702 768,999
Costs and expenses
Cost of products sold 648,366 482,387 442,149
Engineering, selling, administrative
and other expenses 316,642 226,560 194,834
Non-recurring charges - Note B 4,205 16,500
Interest 10,772 3,339 1,236
------------- ------------- -------------
979,985 728,786 638,219
------------- ------------- -------------
Earnings Before Income Taxes 99,513 202,916 130,780
Income Taxes - Note F 40,194 80,922 49,176
------------- ------------- -------------
Net Earnings $ 59,319 $ 121,994 $ 81,604
============= ============= =============
Net Earnings Per Share - Note G:
Basic $ 2.64 $ 5.35 $ 3.46
------------- -------------
-------------
Diluted $ 2.63 $ 5.33 $ 3.44
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
BANDAG, INCORPORATED AND SUBSIDIARIES Year Ended December 31
-------------------------------------------------
Consolidated Statements of Cash Flows
(In thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 59,319 $ 121,994 $ 81,604
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provisions for depreciation and amortization 51,410 36,857 34,595
Change in deferred income taxes (9,758) (13,375) 1,367
Gain on sale of marketable equity securities (95,087)
Other (2,306) (9,680) (5,883)
Change in operating assets and liabilities, net of
effects from acquisitions
of businesses:
Accounts receivable 16,964 11,863 (9,959)
Inventories (1,378) 847 (7,401)
Prepaid expenses and other current assets 4,771 (6,824) (1,921)
Accounts payable and other accrued expenses (26,246) 16,577 19,063
Income taxes payable (6,168) 8,130 2,582
------------ ------------- ------------
Net Cash Provided by Operating Activities 86,608 71,302 114,047
Investing Activities
Additions to property, plant and equipment (65,375) (42,223) (34,388)
Proceeds from dispositions of property, plant, and equipment 4,128 4,117 506
Purchases of investments (20,941) (3,645) (18,205)
Maturities of investments 12,795 4,159 25,889
Payments for acquisitions of businesses (17,542) (47,659)
Sale of marketable equity securities 119,558
------------ ------------- ------------
Net Cash Provided by (Used in) Investing Activities (86,935) 34,307 (26,198)
Financing Activities
Proceeds from short-term notes payables 48,590 11,491 42,902
Proceeds from issuance of long-term debt 100,000
Principal payments on short-term notes payable and long-term (151,328) (18,422) (45,246)
obligations
Cash dividends (24,867) (23,395) (21,785)
Purchases of Common Stock and Class A Common Stock (29,353) (8,643) (61,691)
------------ ------------- ------------
Net Cash Provided by (Used in) Financing Activities (156,958) 61,031 (85,820)
Effect of exchange rate changes on cash and cash equivalents (1,203) (1,693) (1,593)
------------ ------------- ------------
Increase (Decrease) in Cash and Cash Equivalents (158,488) 164,947 436
Cash and cash equivalents at beginning of year 196,400 31,453 31,017
------------ ------------- ------------
Cash and Cash Equivalents at End of Year $ 37,912 $ 196,400 $ 31,453
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Issued Class A Common Stock Class B Common Additional
and Outstanding Issued and Stock Issued and Paid-In
Outstanding Outstanding Capital
IN THOUSANDS, EXCEPT SHARE DATA Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 10,112,164 $10,112 11,711,344 $11,711 2,355,352 $2,355 $2,493
Net earnings for the year
Other comprehensive income,
net of tax:
Unrealized gain on securities
available-for-sale,
net of deferred income
taxes of $9,065
Adjustment from foreign
currency translation
Other comprehensive income
for the year
Comprehensive income
for the year
Cash Dividends - $.9250
per share
Conversion of Class B
Common Stock to
Common Stock - Note H 303,368 303 (303,368) (303)
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H 7,610 8 7,610 8 698
Forfeitures of Common Stock
and Class A Common
Stock under Restricted
Stock Grant Plan - Note H (110) 0 (110) 0 (10)
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H 2,636 3 2,638 2 262
Common Stock and Class A
Common Stock issued
under Defined Contribution
Plan- Note I 10,450 10 10,738 11 1,050
Purchases of Common Stock
and Class A Common Stock (593,257) (593) (704,461) (704) (424)
---------------------------------------------------------------------------
Balance at December 31, 1996 9,842,861 $9,843 11,027,759 $11,028 2,051,984 $2,052 $4,069
Net earnings for the year
Other comprehensive income,
net of tax:
Unrealized gain on securities
available-for-sale
Adjustment from foreign
currency translation
Other comprehensive income
for the year
Comprehensive income
for the year
Cash Dividends - $1.0250
per share
Conversion of Class B
Common Stock to
Common Stock - Note H 3,199 3 (3,199) (3)
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H 6,840 6 6,840 7 662
Forfeitures of Common
Stock and Class A Common
Stock under Restricted
Stock Grant Plan - Note H (2,145) (2) (1,765) (2) (193)
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H 2,708 3 2,708 3 245
Purchases of Common Stock
and Class A Common Stock (122,400) (122) (51,981) (52) (93)
Stock options exercised 20,000 20 20,000 20 885
Stock issued in acquisition
of businesses - Note C 10,000 10 477
---------------------------------------------------------------------------
Balance at December 31, 1997 9,751,063 $9,751 11,013,561 $11,014 2,048,785 $2,049 $6,052
<CAPTION>
Retained Accumulated
Earnings Other
Comprehensive Comprehensive
Income Income
-----------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 $355,814 $17,494
Net earnings for the year 81,604 $ 81,604
Other comprehensive income,
net of tax:
Unrealized gain on securities
available-for-sale,
net of deferred income
taxes of $9,065 14,286 14,286
Adjustment from foreign
currency translation (3,568) (3,568)
--------
Other comprehensive income
for the year 10,718
--------
Comprehensive income
for the year $ 92,322
========
Cash Dividends - $.9250
per share (21,785)
Conversion of Class B
Common Stock to
Common Stock - Note H
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H
Forfeitures of Common Stock
and Class A Common
Stock under Restricted
Stock Grant Plan - Note H
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H
Common Stock and Class A
Common Stock issued
under Defined Contribution
Plan- Note I
Purchases of Common Stock
and Class A Common Stock (59,970)
Balance at December 31, 1996 $355,663 $28,212
Net earnings for the year 121,994 $121,994
Other comprehensive income,
net of tax:
Unrealized gain on securities
available-for-sale (33,854) (33,854)
Adjustment from foreign
currency translation (5,697) (5,697)
--------
Other comprehensive income
for the year (39,551)
--------
Comprehensive income
for the year $ 82,443
========
Cash Dividends - $1.0250
per share (23,395)
Conversion of Class B
Common Stock to
Common Stock - Note H
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H
Forfeitures of Common
Stock and Class A Common
Stock under Restricted
Stock Grant Plan - Note H
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H
Purchases of Common Stock
and Class A Common Stock (8,375)
Stock options exercised
Stock issued in acquisition
of businesses - Note C
Balance at December 31, 1997 $445,887 $(11,339)
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
BANDAG INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders' Equity (continued)
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings for the year
Other comprehensive income,
net of tax:
Adjustment from foreign
currency translation
Comprehensive income
for the year
Cash Dividends - $1.1100
per share
Conversion of Class B
Common Stock to
Common Stock - Note H 2,208 2 (2,208) (2)
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H 10,635 11 10,635 10 753
Forfeitures of Common
Stock and Class A Common
Stock under Restricted
Stock Grant Plan - Note H (3,865) (4) (2,685) (3) (331)
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H 2,838 3 2,838 3 297
Purchases of Common Stock
and Class A Common Stock (699,082) (699) (219,375) (219) (369)
Stock options exercised 20,000 20 20,000 20 885
--------------------------------------------------------------------------
Balance at December 31, 1998 9,083,797 $9,084 10,824,974 $10,825 2,046,577 $2,047 $7,287
==========================================================================
<CAPTION>
<S> <C> <C> <C>
Net earnings for the year 59,319 $ 59,319
Other comprehensive income,
net of tax:
Adjustment from foreign
currency translation (2,881) (2,881)
--------
Comprehensive income
for the year $ 56,438
========
Cash Dividends - $1.1100
per share (24,867)
Conversion of Class B
Common Stock to
Common Stock - Note H
Common Stock and Class A
Common Stock issued
under Restricted Stock
Grant Plan - Note H
Forfeitures of Common
Stock and Class A Common
Stock under Restricted
Stock Grant Plan - Note H
Common Stock and Class A
Common Stock issued
under Stock Award Program
Plan- Note H
Purchases of Common Stock
and Class A Common Stock (28,065)
Stock options exercised
-------- -------
Balance at December 31, 1998 $452,274 $(14,220)
======== =======
</TABLE>
See notes to consolidated financial statements.
-29-
<PAGE>
Notes to Consolidated Financial Statements
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts and transactions of
all subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount
reported in the consolidated balance sheet for cash and cash equivalents
approximates its fair value.
Accounts Receivable and Concentrations of Credit Risk:
Concentrations of credit risk with respect to accounts receivable are limited
due to the number of customers the Company has and their geographic dispersion.
The Company maintains close working relationships with these customers and
performs ongoing credit evaluations of their financial condition. No one
customer is large enough to pose a significant financial risk to the Company.
The Company maintains an allowance for losses based upon the expected
collectibility of accounts receivable. Credit losses have been within
management's expectations.
Inventories:
Inventories are valued at the lower of cost or market. Approximately 47% and 52%
of year-end inventory amounts at December 31, 1998 and 1997, respectively, were
determined by the last in, first out (LlFO) method and on the first in, first
out method for the remainder. At December 31, 1996, cost was determined by the
LIFO method for all inventories.
The excess of current cost over the amount stated for inventories valued by the
LIFO method amounted to approximately $21,932,000, $22,635,000, and $23,111,000,
at December 31, 1998, 1997, and 1996, respectively.
Property, Plant, and Equipment:
Provisions for depreciation of plant and equipment is computed using
straight-line and declining-balance methods, over the following estimated useful
lives:
Buildings 5 to 50 years
Building Improvements 5 to 39 years
Machinery and Equipment 3 to 11 years
-30-
<PAGE>
Depreciation expense approximated $42,769,000, $34,576,000, and $33,597,000 in
1998, 1997, and 1996 respectively.
Intangible Assets:
Intangible assets, which principally represent the cost in excess of the fair
value of the net assets acquired in acquisitions of businesses, are amortized
using the straight-line method over 10 years. At December 31, 1998, 1997, and
1996 goodwill amounted to $72,161,000, $74,600,000, and $1,128,000,
respectively. Amortization expense approximated $8,641,000, $2,281,000, and
$998,000 in 1998, 1997, and 1996, respectively.
Foreign Currency Translation:
Assets and liabilities of foreign subsidiaries are translated at the current
exchange rate and items of income and expense are translated at the average
exchange rate for the year. Exchange gains and losses arising from translations
denominated in a currency other than the functional currency of the foreign
subsidiary and translation adjustments in countries with highly inflationary
economies or in which operations are directly and integrally linked to the
Company's U.S. operations are included in income.
Long Lived Assets:
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", when indicators of impairment are present, the Company
evaluates the carrying value of property, plant, and equipment and intangibles,
including goodwill, in relation to the operating performance and future
undiscounted cash flows of the underlying businesses. The Company adjusts the
net book value of the underlying assets if the sum of the expected future cash
flows is less than book value.
Research and Development:
Expenditures for research and development, which are expensed as incurred,
approximated $18,807,000, $21,113,000, and $15,909,000 in 1998, 1997, and 1996,
respectively.
Revenue Recognition:
Sales and associated costs are recognized at the time of delivery of products or
performance of services.
Segment Disclosures:
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect the results of operations or financial position of the Company,
but did affect the disclosure of segment information (see Note K).
-31-
<PAGE>
Derivative Instruments and Hedging Activities:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement January 1, 2000. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS No. 133 will be on
the earnings and the financial position of the Company.
Computer Software Developed For or Obtained For Internal Use:
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use." The Company plans to adopt
the SOP effective January 1, 1999. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently expenses such
costs as incurred. The Company has not yet determined the impact of adopting
this SOP.
Reclassification:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE B. NONRECURRING CHARGES
During 1998, the Company recorded net non-recurring charges totaling $4,205,000
or $1,174,000 net of tax benefits. The net non-recurring charges include a
provision of $7,502,000 ($4,471,000 net of tax benefits) for facility closures,
personnel reductions, and other exit costs. Additionally, the net non-recurring
charges include a gain of $3,297,000 consisting of the non-taxable recognition
of accumulated translation gains due to the exit of operations in Indonesia.
Included in the non-recurring charges is $4,845,000 related to personnel
reductions (117 individuals). As of December 31, 1998, the Company had paid
$1,035,000 related to the termination of 13 employees.
During the fourth quarter 1997, the Company recorded non-recurring charges
totaling $16,500,000 or $9,900,000 net of tax benefits. The non-recurring
charges include a provision of $13,000,000 to adjust the asset carrying amounts
of $9,733,000 and to cover exit costs from a rubber recycling venture. During
1998, the Company completed the sale of its investment in the rubber recycling
venture. There were no significant adjustments related to the sale. During 1997,
$3,500,000 was recorded for the 1998 closing of a domestic manufacturing
-32-
<PAGE>
facility, including attendant personnel reductions. As of December 31, 1998, the
Company had paid $2,270,000 related to the closure of the domestic manufacturing
facility with the remainder of the original charge to be paid in 1999. The net
sales and results of operations of the rubber recycling venture included in the
Company's consolidated statement of earnings were not significant during any of
the years presented.
NOTE C. ACQUISITIONS
During 1998, the Company acquired five tire dealerships and two retread tire
facilities that are a part of Tire Distribution Systems, Inc. (TDS), the
Company's wholly-owned subsidiary. The dealerships were acquired for a total of
$20.5 million in cash and short-term payables. Also, during the fourth quarter
1997, TDS acquired five tire dealerships. The five dealerships were acquired for
a total of $158.6 million in cash, short-term notes payable and 10,000 shares of
Bandag Class A Common Stock. These dealerships were Bandag franchisees at the
time of acquisition and are in the business of selling and servicing new and
retread tires, primarily for commercial and industrial vehicles.
The acquisitions were accounted for using the purchase method of accounting.
Accordingly, the purchase price for each acquisition was allocated to the
respective assets and liabilities based on their estimated fair values as of the
date of acquisition. The purchase price allocations for the 1998 acquisitions
have been completed on a preliminary basis. The accounts and transactions of the
acquired businesses have been included in the consolidated financial statements
from the respective effective dates of the acquisitions.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and the acquired businesses as if all the
acquisitions had occurred as of January 1, 1997. The pro forma information is
presented for informational purposes only and includes certain adjustments, such
as additional depreciation expense as a result of the write-up to fair value of
fixed assets, amortization of goodwill, and increased interest expense on
acquisition related debt. They do not purport to be indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated as of January 1, 1997.
Year Ended December 31
(In thousands, except per share data) 1998 1997
----------------------------------- ------------------------------
Net sales $1,087,000 $1,156,100
Cost of products sold 667,800 713,600
Net earnings $58,000 $121,100
Earnings per share:
Basic $2.58 $5.31
Diluted $2.57 $5.29
-33-
<PAGE>
The following unaudited pro forma information presents the results of TDS as a
stand-alone entity as if the acquisitions had occurred as of January 1, 1997:
Year ended December 31
(In thousands) 1998 1997
------------ -----------------------------
Net sales $408,200 $435,500
Costs of products sold 310,600 320,500
Goodwill amortization 9,100 9,100
Earnings before interest and taxes $1,700 $ 7,000
Certain supplemental non-cash information related to the Company's acquisitions
of businesses in 1998 and 1997 is as follows:
(In thousands) 1998 1997
------------ ---- ----
Assets acquired $22,187 $248,724
Less liabilities (1) (4,630) (177,387)
Less stock issued (2) - (487)
---------- -----------
Cash paid 17,557 70,850
Less cash acquired 15 23,191
--------- ----------
Net cash paid for acquisitions $17,542 $47,659
======= =======
(1) Includes short-term payables to sellers of $2,960,000 and $87,224,000
in 1998 and 1997, respectively.
(2) Represents fair market value of Class A common stock issued to sellers.
NOTE D. INVESTMENTS
Debt securities are classified as held-to-maturity based upon the positive
intent and ability of the Company to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion is included in investment income. Interest on
securities classified as held-to-maturity is included in investment income.
Marketable equity securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value with the unrealized
gains, net of tax, reported as a component of accumulated other comprehensive
income in stockholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. During the fourth quarter 1997, the Company sold its
investment in marketable equity securities. As a result, a realized gain of
$95,087,000 was included in the Consolidated Statements of Earnings for the year
ended December 31, 1997. Dividends on securities classified as
available-for-sale are included in investment income.
-34-
<PAGE>
The following is a summary of securities held-to-maturity and available-for-
sale:
Gross Estimated
Unrealized Fair
(In thousands) Cost Gains Value
December 31, 1998
Securities Held-to-Maturity
Obligations of states and
political subdivisions $21,221 $15 $21,236
===========================================
December 31, 1997
Securities Held-to-Maturity
Obligations of states and
political subdivisions $38,561 $- $38,561
Investment in Eurodollar
time deposits 2,600 - 2,600
-------------------------------------------
$41,161 $- $41,161
===========================================
December 31, 1996
Securities Held-to-Maturity
Obligations of states and
political subdivisions $10,694 $5 $10,699
Short-term corporate debt 3,350 - 3,350
Investment in Eurodollar
time deposits 3,000 - 3,000
--------------------------------------------
$17,044 $5 $17,049
===========================================
Securities Available-for-Sale
Marketable equity securities $24,416 $54,619 $79,035
==========================================
At December 31, 1998, 1997 and 1996, securities held-to-maturity are due in one
year or less and include $11,500,000, $39,586,000 and $14,955,000, respectively,
reported as cash equivalents.
NOTE E. FINANCING ARRANGEMENTS
The following summarizes information concerning the Company's short-term notes
payable:
December 31
(In thousands) 1998 1997 1996
------------ ---------------------------------------
Total short-term notes payable at
year end $ 2,091 $90,628 $ 43
Weighted average interest rate at
year end 3.6% 6.4% 6.0%
Weighted average interest rate
for the year 5.0% 6.0% 5.8%
At December 31, 1997, short-term notes payable includes $87,224,000 related to
the businesses acquired in 1997 (See Note C).
-35-
<PAGE>
The following is a summary of the Company's long-term debt and other obligations
as of December 31:
<TABLE>
<CAPTION>
Interest
(In thousands): Rates 1998 1997 1996
- --------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Senior Unsecured Notes Payable,
maturing 2002 6.41% $ 60,000 $ 60,000 $ -
Senior Unsecured Notes Payable,
maturing 2007 6.50% 40,000 40,000 -
------ ------
Total long-term debt 100,000 100,000 -
Other obligations 9,757 23,195 10,125
----------------------------------
Total long-term debt and
other obligations $109,757 $123,195 $10,125
===================================
</TABLE>
The aggregate amount of scheduled annual maturities of long-term debt and other
obligations for each of the next five years is: $9,406,000 in 1999, $1,260,000
in 2000, $6,283,000 in 2001, $66,489,000 in 2002, $5,810,000 in 2003, and
$29,915,000 thereafter.
Cash payments for interest on debt were $10,869,000, $3,143,000, and $1,764,000
in 1998, 1997, and 1996, respectively.
The fair values of the Company's financing arrangements were estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1998 and 1997, the fair value of the Company's outstanding long-term debt was
approximately $105,656,000 and $100,673,000 respectively.
Total available funds under unused lines of credit at December 31, 1998 amounted
to $103,000,000.
-36-
<PAGE>
NOTE F. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
reflecting the net tax effects of temporary differences are summarized as
follows:
December 31
(In thousands) 1998 1997 1996
- -------------- -----------------------------
Employee benefits $4,698 $2,749 $2,488
Marketing programs 24,916 15,174 14,611
Accounts receivable
valuation allowances 3,746 3,111 2,660
Unremitted earnings of
foreign subsidiaries (6,776) (5,625) (3,488)
Excess pension funding (6,297) (4,482) (4,123)
Purchased tax benefits - (445) (1,025)
Unrealized holding gain on
marketable equity securities (20,765)
Cost to exit rubber recycling
venture 766 4,980 -
Basis difference in fixed assets 523 (1,527) (633)
Other nondeductible reserves 4,984 4,583 1,312
Obsolescence and valuation
reserves 2,820 2,824 4,712
Insurance and legal reserves 2,647 3,387 1,800
Foreign tax credits and net
operating loss carryforwards 3,126 - -
Equipment and plant reserves 496 2,707 -
Other, net 8,682 7,316 3,453
---------------------------------
Net deferred tax assets $44,331 $34,752 $1,002
=================================
The components of earnings before income taxes are summarized as follows:
Year Ended December 31
(In thousands) 1998 1997 1996
- -------------- ----------------------------------------
Domestic $69,341 $167,126 $90,679
Foreign 30,172 35,790 40,101
------------------------------------------
$99,513 $202,916 $130,780
==========================================
-37-
<PAGE>
Significant components of the provision for income tax expense (credit) are
summarized as follows:
Year Ended December 31
(In thousands) 1998 1997 1996
------------ ------------------------------------
Current:
Federal $38,071 $70,354 $39,570
State 4,526 14,667 4,900
Foreign 7,176 8,886 11,353
Deferred:
Federal (8,844) (11,619) (4,354)
State (486)
Foreign (290) (786) (1,301)
Equivalent credit relating to
purchased income tax
benefits (445) (580) (506)
---------------------------------------
$40,194 $80,922 $49,176
=======================================
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
Year Ended December 31
1998 1997 1996
Computed at the expected
statutory rate 35.0% 35.0% 35.0%
State income tax-net of
federal tax benefit 2.9% 4.7% 2.4%
Amortization of goodwill
not deductible 2.5% - -
Other - 0.2% 0.2%
---------------------------------------
Income tax at the effective rate 40.4% 39.9% 37.6%
========================================
Undistributed earnings of subsidiaries on which deferred income taxes have not
been provided are not significant.
Income taxes paid amounted to $56,108,000, $86,122,000, and $52,992,000 in 1998,
1997, and 1996, respectively.
NOTE G. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of shares of
Common Stock, Class A Common Stock, Class B Common Stock and dilutive potential
common shares (non-vested restricted stock and stock options) outstanding during
the year.
-38-
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share amounts) 1998 1997 1996
-------------------------------------- ---- ---- ----
Numerator:
Net Earnings $59,319 $121,994 $81,604
Denominator:
Weighted-average shares - Basic 22,471 22,786 23,613
Effect of dilutive:
Non-vested restricted stock 34 36 28
Stock options 54 86 105
--------------------------------
88 122 133
Weighted-average shares - Diluted 22,559 22,908 23,746
=================================
Net Earnings Per Share:
Basic $2.64 $5.35 $3.46
===============================
Diluted $2.63 $5.33 $3.44
===============================
NOTE H. STOCKHOLDERS' EQUITY
Class A Common Stock and Class B Common Stock has the same rights regarding
dividends and distributions upon liquidation as Common Stock. However, Class A
Common Stockholders are not entitled to vote, Class B Common Stockholders are
entitled to ten votes for each share held and Common Stockholders are entitled
to one vote for each share held. Transfer of shares of Class B Common Stock is
substantially restricted and must be converted to Common Stock prior to sale. In
certain instances, outstanding shares of Class B Common Stock will be
automatically converted to shares of Common Stock. Unless extended for an
additional period of five years by the Board of Directors, all then-outstanding
shares of Class B Common Stock will be converted to shares of Common Stock on
January 16, 2002.
Under the terms of the Bandag, Incorporated Restricted Stock Grant Plan, the
Company is authorized to grant up to an aggregate of 100,000 shares of Common
Stock and 100,000 shares of Class A Common Stock to certain key employees. The
shares granted under the Plan will entitle the grantee to all dividends and
voting rights; however, such shares will not vest until seven years after the
date of grant. If a grantee's employment is terminated prior to the end of the
seven-year period for any reason other than death, disability or termination of
employment after age 60, the shares will be forfeited and made available for
future grants. A grantee who has attained age 60 and whose employment is then
terminated prior to the end of the seven-year vesting period does not forfeit
the non-vested shares. During the years ended December 31, 1998, 1997, and 1996,
10,635 shares, 6,840 shares and 7,610 shares of Common Stock, respectively, were
granted under the Plan. During the years ended December 31, 1998, 1997 and 1996,
10,635 shares, 6,840 shares and 7,610 shares of Class A Common Stock,
respectively, were also granted under the Plan. The resulting charge to earnings
amounted to
-39-
<PAGE>
$1,300,000, $1,177,000, and $1,245,000, in 1998, 1997, and 1996, respectively.
During the year ended December 31, 1998, 3,865 shares of Common Stock and 2,685
shares of Class A Common Stock were forfeited. During the year ended December
31, 1997, 2,145 shares of Common Stock and 1,765 shares of Class A Common Stock
were forfeited. During the year ended December 31, 1996, 110 shares of Common
Stock and 110 shares of Class A Common Stock were forfeited. The credit to 1998,
1997 and 1996 earnings related to the shares forfeited was approximately
$337,000, $197,000 and $12,000, respectively. At December 31, 1998, 30,690
shares of Common Stock and 38,900 shares of Class A Common Stock are available
for grant under the Plan.
Under the terms of the Bandag, Incorporated Nonqualified Stock Option Plan, the
Company was authorized through November 13, 1997 to grant options to purchase up
to 500,000 shares of Common Stock and 500,000 shares of Class A Common Stock to
certain key employees at an option price equal to the market value of the shares
on the date of grant. No options were granted under the Plan in 1997 or 1996.
During both 1998 and 1997, options to purchase 20,000 shares of Common Stock and
20,000 shares of Class A Common Stock were exercised. At December 31, 1998,
options to purchase 60,000 shares of Common Stock and 60,000 shares of Class A
Common Stock were outstanding and exercisable at $23.458 per share for Common
Stock options and $22.792 per share for Class A Common Stock options. Options to
purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock
expire on November 13, 1999, and each of the two anniversaries thereafter.
The Company has a stock award program covering substantially all U.S. and
Canadian Traditional Business employees which was established to promote
employee commitment and ownership in the Company. In 1998, 1997 and 1996,
$225,000, $283,000 and $250,000, respectively, were charged to earnings for the
estimated cost of awards to be made under the stock award program.
NOTE I. RETIREMENT BENEFIT PLANS
The Company sponsors defined-benefit pension plans covering full-time employees
directly employed by Bandag, Incorporated, Bandag Licensing Corporation ("BLC"),
Bandag Canada Ltd., and certain employees in the Company's European operations.
For the years ended December 31, 1998, 1997, and 1996, certain employees of TDS
are also covered by defined-benefit plans. In addition to providing pension
benefits, the Company provides certain postretirement medical benefits to
certain individuals who retired from employment before January 1, 1993.
Employees who retire after December 31, 1992 and are at least age 62 with 15
years of service after direct employment with Bandag, Incorporated, BLC, and
Kendon Corporation are eligible for temporary medical benefits that cease at age
65.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits." This Statement standardizes the disclosure
requirements for pensions and other postretirement benefits. Prior years'
information has been restated to conform with the requirements of this
Statement.
-40-
<PAGE>
The reconciliations of the benefit obligations, the reconciliations of the fair
value of plan assets, and the reconciliations of funded status of the plans, as
determined by consulting actuaries are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
(In thousands) 1998 1997 1996 1998 1997 1996
-------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligations at the
Beginning of the year $62,305 $58,357 $54,496 $5,899 $5,427 $4,974
Service cost 3,117 2,420 2,193 264 247 231
Interest cost 4,326 3,382 3,153 407 375 344
Participants' contributions 40 46 46 - - -
Plan amendments - (539) 23 - - -
Plan merger - 2,204 - - - -
Exchange rate changes (180) (96) - - - -
Benefits paid (2,232) (1,637) (1,305) (85) (306) (48)
Actuarial (gain) or loss 6,227 (1,832) (249) (2,053) 156 (74)
--------------------------------------------------------------------------------
Benefit obligation at end of year $73,603 $62,305 $58,357 $4,432 $5,899 $5,427
================================================================================
Change in plan assets at fair value:
Fair value of plan assets at beginning of year $116,304 $90,775 $79,291 $ - $ - $ -
Actual return on plan assets 966 23,582 11,928 - - -
Plan merger - 2,798 - - - -
Employer contributions 477 859 815 85 306 48
Participants' contributions 40 46 46 - - -
Benefits paid (2,232) (1,637) (1,305) (85) (306) (48)
Exchange rate changes (208) (119) - - - -
----------------------------------------------------------------------------------
Fair value of plan at end of year $115,347 $116,304 $90,775 $ - $ - $ -
==================================================================================
Reconciliation of funded status:
Funded status $41,744 $53,999 $32,418 $(4,432) $(5,899) $(5,427)
Unrecognized actuarial gain (22,119) (38,737) (19,557) (2,386) (334) (490)
Unrecognized transition asset (4,171) (4,968) (5,591) - - -
Unrecognized prior service cost 413 1,054 1,187 54 58 61
----------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $15,867 $11,348 $8,457 $(6,764) $(6,175) $(5,856)
==================================================================================
Weighted-average assumptions:
Discount rate 6.5% 7.0% 7.0% 6.5% 7.0% 7.0%
Rate of increase in future compensation 4.5% 4.5% 4.5% N/A N/A N/A
Expected long-term rate of return on assets 8.0% 8.0% 8.0% N/A N/A N/A
</TABLE>
Assets of the plans are principally invested in U.S. domestic common stocks, and
short term notes and bonds (fixed income securities) with maturities under five
years.
-41-
<PAGE>
Net periodic (benefit) cost is composed of the following:
<TABLE>
<CAPTION>
Pension Benefits
Postretirement Benefits
(In thousands) 1998 1997 1996 1998 1997 1996
- -------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net period (benefit) cost
Service cost $3,117 $2,420 $2,193 $264 $247 $231
Interest cost 4,326 3,382 3,153 407 375 344
Expected return on plan assets (9,421) (6,950) (6,051) - - -
Amortization of prior service cost 88 123 124 3 3 3
Amortization of transitional (assets) or
obligations (749) (748) (737) - - -
Recognized actuarial (gain) or loss (1,547) (622) (316) - - -
---------------------------------------------------------------------
Net periodic (benefit) cost $(4,186) $(2,395) $(1,634) $674 $625 $578
=====================================================================
</TABLE>
The assumed health care cost trend rate is 8% for 1999 and is assumed to
decrease gradually to an ultimate level of 6% in 2001. Changing the assumed
health care cost trend rates by one percentage point in each year would have the
following effects:
1 Percentage 1 Percentage
(In thousands) Point Increase Point Decrease
Effect on total of service
and interest cost components $115 $(98)
Effect on postretirement
benefit obligation $527 (450)
The Company also sponsors defined-contribution plans, covering substantially all
employees in the United States. Annual contributions are made in such amounts as
determined by the Company's Board of Directors. Although employees may
contribute up to 15% of their annual compensation from the Company, they are
generally not required to make contributions in order to participate in the
plans. The Company currently provides plans with a variety of contribution
levels (including employee contribution match provisions). The Company recorded
expense for contributions in the amount of $4,626,000, $3,439,000, and
$2,796,000 in 1998, 1997, and 1996, respectively.
Employees in most foreign countries are covered by various retirement benefit
arrangements generally sponsored by the foreign governments. The Company's
contributions to foreign plans were not significant in 1998, 1997, and 1996.
NOTE J. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into agreements (derivative financial instruments) to manage
the risks associated with certain aspects of its business, but does not actively
trade such instruments nor enter into such agreements for speculative purposes.
The Company principally utilizes foreign currency forward exchange contracts and
foreign currency option contracts.
Option contracts that are designated as hedges are marked to market with
realized and unrealized gains and losses deferred and recognized in earnings as
an adjustment to sales when
-42-
<PAGE>
the future sales occur (the deferral accounting method). Realized and unrealized
gains and losses on options that are not designated as hedges, that fail to be
effective hedges, or that relate to sales that are no longer probable of
occurring would be included in income as foreign exchange gains or losses. The
unrealized gains and losses are included in other assets and liabilities.
The Company periodically uses foreign currency forward exchange contracts to
reduce its exposure to foreign currency risk from receivables denominated in
foreign currencies and certain firm purchase commitments. For contracts that are
designated and effective as hedges, discounts or premiums are accreted or
amortized to other operating expenses over the contract lives using the
straight-line method while the realized and unrealized gains and losses
resulting from changes in the spot exchange rate, net of related taxes, are
included in the cumulative translation adjustment account in stockholders'
equity. The related amounts due to or from counterparties are included in other
assets or other liabilities. Contract amounts, after considering tax effects, in
excess of the carrying value of the Company's obligations are marked to market,
with changes in market value recorded in earnings as foreign exchange gains or
losses.
Realized and unrealized gains or losses at the time of maturity, termination,
sale or repayment of a derivative contract or designated item are recorded in a
manner consistent with the original designation of the derivative in view of the
nature of the termination, sale, or repayment transaction. Amounts arising at
the settlement of currency forward or option contracts require no special
accounting because such amounts are periodically recorded. Realized and
unrealized changes in fair value of derivatives designated with items that no
longer exist or are no longer probable of occurring are recorded as a component
of the gain or loss arising from the disposition of the designated item.
At December 31, 1998, 1997 and 1996, the Company had approximately $4,781,000,
$12,301,000 and $23,862,000, respectively, in foreign currency forward exchange
contracts and foreign currency option contracts designated and effective as
hedges which become due in various amounts and at various dates through the
following year. The difference between the contract amounts and their fair
value, in the aggregate, was insignificant at December 31, 1998, 1997 and 1996.
NOTE K. OPERATING SEGMENT AND GEOGRAPHIC AREA INFORMATION
Description of Types of Products and Services:
The Company has two operating segments: the Traditional Business and TDS.
The Traditional Business manufactures precured tread rubber, equipment and
supplies for retreading tires and operates on a worldwide basis. SFAS No. 131
requires segment information to be reported based on how management internally
evaluates the operating performance of their business units. The operations of
the Traditional Business segment are evaluated by worldwide geographic region.
For segment reporting purposes, the Company's operations located in the United
States and Canada are integrated and managed as one unit,
-43-
<PAGE>
which is referred to internally as "North America". The Company's operations
located in Europe principally services those European countries, but also export
to certain other countries in the Middle East and Northern and Central Africa.
Exports from North America to markets in the Caribbean, Central America and
South America, along with operations in Brazil, Mexico, Venezuela and South
Africa are combined under one management group referred to internally as "Latin
America". Exports from North America to markets in Asian countries, along with
operations in New Zealand, Indonesia and Malaysia and a licensee in Australia
are combined under one management group referred to internally as "Asia".
TDS operates franchised retreading locations and commercial, retail, and
wholesale outlets throughout the United States for the sale and maintenance of
new and retread tires to principally commercial and industrial customers.
Measurement of Segment Profit and Loss and Segment Assets
The Company evaluates performance and allocates resources primarily based on
profit or loss before interest and income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
Intersegment sales and transfers are recorded at fair market value less a
discount between geographic areas within the Traditional Business and for
transactions between the Traditional Business and TDS at a value consistent with
that to unaffiliated customers.
Corporate assets are principally cash and cash equivalents, investments,
corporate office, and related equipment.
The information regarding segment operations and other geographic information is
presented on page 9 of this report, and is included herein by reference.
The following table presents information concerning net sales and long-lived
assets for countries which exceed 5% of the respective totals:
<TABLE>
<CAPTION>
(In thousands) Net Sales (a) Long-lived Assets (b)
- -------------- --------------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 762.5 $ 499.0 $ 435.1 $ 224.3 $ 208.6 $ 87.3
Brazil 73.5 67.5 60.6 27.0 26.3 19.2
Other 223.7 256.0 261.2 37.3 38.3 40.4
----------------------------------- ----------------------------------
Consolidated $1,059.7 $ 822.5 $ 756.9 $ 288.6 $ 273.2 $ 146.9
==================================== ==================================
(a) Revenues are attributed to countries based on the location of customers.
(b) Corporate long-lived assets are included in the United States.
</TABLE>
-44-
<PAGE>
NOTE L. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except per share data) Mar. 31 Jun. 30 Sep. 30 Dec. 31
----------------------------------- ---------------------------------------------------
1998:
<S> <C> <C> <C> <C>
Net sales $235,931 $266,127 $282,636 $274,975
Gross profit 95,682 102,571 109,137 103,913
Net earnings 9,150 14,168 17,456 18,545
Net earnings per share:
Basic $0.40 $0.62 $0.78 $0.84
Diluted $0.40 $0.62 $0.77 $0.84
1997:
Net sales $169,518 $195,748 $201,242 $256,015
Gross profit 68,969 80,446 85,230 105,491
Net earnings 13,740 17,560 23,794 66,900
Net earnings per share:
Basic $0.60 $0.77 $1.04 $2.94
Diluted $0.60 $0.77 $1.04 $2.92
</TABLE>
Third quarter 1998 earnings reflect a non-recurring after tax charge of
$2,491,000 ($.11 per diluted share) and fourth quarter 1998 earnings reflect a
non-recurring after tax gain of $1,317,000 ($.06 per diluted share). The
non-recurring items in the third and fourth quarters of 1998 relate to the
closure of two foreign manufacturing facilities, the elimination of employee
positions, and other exit costs. Further explanation of non-recurring items can
e seen at Note B.
Fourth quarter 1997 net earnings reflect a non-recurring after tax gain of
$55,800,000 ($2.44 per diluted share) as a result of the sale of marketable
equity securities which is further described in Note D. As further described in
Note B, net earnings for the fourth quarter 1997 also reflect non-recurring
after tax charges totaling $9,900,000 ($.43 per diluted share) relating to costs
to exit a rubber recycling venture and closing a domestic manufacturing
facility.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-45-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 (with respect to the directors of
the registrant) is incorporated herein by reference from the registrant's
definitive Proxy Statement involving the election of directors filed or to be
filed pursuant to Regulation 14A not later than 120 days after December 31,
1998. In accordance with General Instruction G (3) to Form 10-K, the information
with respect to executive officers of the Company required by Item 10 has been
included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.
-46-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements are included in Part
II, Item 8:
Page
Consolidated Balance Sheets as of December 31,
1998, 1997 and 1996....................................25
Consolidated Statements of Earnings for the
Years Ended December 31, 1998,
1997 and 1996..........................................26
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998,
1997 and 1996 .........................................27
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998,
1997 and 1996..........................................28
Notes to Consolidated Financial Statements...............30
(2) Financial Statement Schedule
Schedule II - Valuation and qualifying accounts and reserves.
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.
(3) Exhibits
Exhibit No. Description
3.1 Bylaws: As amended February 5, 1997 (Incorporated by
reference to Exhibit No. 3.1 to the Company's
Form 10-K for the year ended December 31, 1996.)
3.2 Restated Articles of Incorporation, effective December 30,
1986. (Incorporated by reference to Exhibit No. 3.2 to the
Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles
of Incorporation, effective May 6, 1992. Incorporated by
reference to Exhibit No. 3.3 to the Company's Form 10-K
for the year ended December 31, 1992.)
-47-
<PAGE>
4.1 Instruments defining the rights of security holders.
(Incorporated by reference to Exhibit Nos. 3.2 and
3.3 to the Company's Form 10-K for the year ended
December 31, 1992.)
4.2 Note Purchase Agreement dated December 15, 1997 for
$60,000,000 of 6.41% Senior Notes due December 15, 2002.
(Incorporated by reference to Exhibit 4.2 to the Company's
Form 10-K for the year ended December 31, 1997.)
4.3 Note Purchase Agreement dated December 15, 1997 for
$40,000,000 of 6.50% Senior Notes due December
15, 2007. (Incorporated by reference to Exhibit 4.3
to the Company's Form 10-K for the year ended
December 31, 1997.)
10.1* Bandag, Incorporated Restricted Stock Grant Plan, as
amended November 12, 1996 (Incorporated by reference to
Exhibit No. 10.1 to the Company's Form 10-K for the year
ended December 31, 1996.)
10.2 U.S. Bandag System Franchise Agreement Truck and Bus
Tires. (Incorporated by reference to Exhibit No. 10.2 to
the Company's Form 10-K for the year ended December 31,
1993.)
10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus
Tires, as revised April 1996. (Incorporated by reference
to Exhibit No. 10.2(a) to the Company's Form 10-K for the
year ended December 31, 1996.)
10.2(b) Bandag System Franchise Agreement, as revised November
1998
10.3* Miscellaneous Fringe Benefits for Executives.
(Incorporated by reference to Exhibit No. 10.3 to
the Company's Form 10-K for the year ended December 31,
1996.)
10.4* Nonqualified Stock Option Plan, as amended November 12,
1996 (Incorporated by reference to Exhibit No. 10.4 to the
Company's Form 10-K for the year ended December 31, 1996.)
10.5* Nonqualified Stock Option Agreement of Martin G. Carver
dated November 13, 1987, as amended by an Addendum dated
June 12, 1992. (Incorporated by reference to Exhibit No.
10.7 to the Company's Form 10-K for the year ended
December 31, 1992.)
10.6* Form of Participation Agreement under the Bandag,
Incorporated Restricted Stock Grant Plan. (Incorporated by
reference as Exhibit 10.7 to the Company's Form 10-K for
the year ended December 31, 1994.)
10.7* Agreement with William A. Sweatman regarding termination
of employment dated May 21, 1997 (Incorporated by
reference to Exhibit No. 10.7 to the Company's Form 10-K
for the year ended December 31, 1997).
10.8* Separation and Release Agreement with Henry H. Li
regarding termination of employment, effective July 31,
1998.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
*Represents a management compensatory plan or arrangement.
(b) Current reports on Form 8-K were filed by the Company on February 20, 1998
and December 18, 1998.
-48-
<PAGE>
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BANDAG, INCORPORATED AND SUBSIDIARIES
<CAPTION>
COL. C
COL. A COL. B ADDITIONS COL. D COL. E
- ---------------------------------------- --------------- ---------------------------------- ----------------- ---------------
1 2
Balance at Charged to Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
DESCRIPTION of Period Expenses Describe Describe Period
--------------- -------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $12,707,000 $8,460,000 $2,443,000(1) $18,724,000
Year ended December 31, 1997:
Allowance for doubtful accounts $13,320,000 $3,491,000 $4,104,000(1) $12,707,000
Year ended December 31, 1996:
Allowance for doubtful accounts $12,327,000 $3,289,000 $2,296,000(1) $13,320,000
(1) - Uncollectible accounts written off, net of recoveries and foreign exchange
fluctuations.
</TABLE>
-49-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BANDAG, INCORPORATED
By /s/ Martin G. Carver
Martin G. Carver
Chairman of the Board,
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: March 26, 1999
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.
/s/ Robert T. Blanchard
Robert T. Blanchard Lucille A. Carver
Director Director
/s/ Roy J. Carver, Jr. /s/ Gary E. Dewel
Roy J. Carver, Jr. Gary E. Dewel
Director Director
/s/ James R. Everline /s/ Phillip J. Hanrahan
James R. Everline Phillip J. Hanrahan
Director Director
/s/ Edgar D. Jannotta /s/ R. Stephen Newman
Edgar D. Jannotta R. Stephen Newman
Director Director
/s/ Martin G. Carver /s/ Warren W. Heidbreder
Martin G. Carver Warren W. Heidbreder
Chairman of the Board, Vice President, Chief Financial
Chief Executive Officer, Officer (Principal Financial Officer)
President and Director
(Principal Executive Officer) /s/ Charles W. Vesey
Charles W. Vesey
Corporate Controller
(Principal Accounting Officer)
Date: March 26, 1999
-50-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Bylaws: As amended February 5, 1997 (Incorporated by
reference to Exhibit No. 3.1 to the Company's
Form 10-K for the year ended December 31, 1996.)
3.2 Restated Articles of Incorporation, effective December 30,
1986. (Incorporated by reference to Exhibit No. 3.2 to the
Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles
of Incorporation, effective May 6, 1992. Incorporated by
reference to Exhibit No. 3.3 to the Company's Form 10-K
for the year ended December 31, 1992.)
4.1 Instruments defining the rights of security holders.
(Incorporated by reference to Exhibit Nos. 3.2 and
3.3 to the Company's Form 10-K for the year ended
December 31, 1992.)
4.2 Note Purchase Agreement dated December 15, 1997 for
$60,000,000 of 6.41% Senior Notes due December 15, 2002.
(Incorporated by reference to Exhibit 4.2 to the Company's
Form 10-K for the year ended December 31, 1997.)
4.3 Note Purchase Agreement dated December 15, 1997 for
$40,000,000 of 6.50% Senior Notes due December
15, 2007. (Incorporated by reference to Exhibit 4.3
to the Company's Form 10-K for the year ended
December 31, 1997.)
10.1* Bandag, Incorporated Restricted Stock Grant Plan, as
amended November 12, 1996 (Incorporated by reference to
Exhibit No. 10.1 to the Company's Form 10-K for the year
ended December 31, 1996.)
10.2 U.S. Bandag System Franchise Agreement Truck and Bus
Tires. (Incorporated by reference to Exhibit No. 10.2 to
the Company's Form 10-K for the year ended December 31,
1993.)
10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus
Tires, as revised April 1996. (Incorporated by reference
to Exhibit No. 10.2(a) to the Company's Form 10-K for the
year ended December 31, 1996.)
10.2(b) Bandag System Franchise Agreement, as revised November
1998
10.3* Miscellaneous Fringe Benefits for Executives.
(Incorporated by reference to Exhibit No. 10.3 to
the Company's Form 10-K for the year ended December 31,
1996.)
10.4* Nonqualified Stock Option Plan, as amended November 12,
1996 (Incorporated by reference to Exhibit No. 10.4 to the
Company's Form 10-K for the year ended December 31, 1996.)
10.5* Nonqualified Stock Option Agreement of Martin G. Carver
dated November 13, 1987, as amended by an Addendum dated
June 12, 1992. (Incorporated by reference to Exhibit No.
10.7 to the Company's Form 10-K for the year ended
December 31, 1992.)
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<PAGE>
10.6* Form of Participation Agreement under the Bandag,
Incorporated Restricted Stock Grant Plan. (Incorporated by
reference as Exhibit 10.7 to the Company's Form 10-K for
the year ended December 31, 1994.)
10.7* Agreement with William A. Sweatman regarding termination
of employment dated May 21, 1997 (Incorporated by
reference to Exhibit No. 10.7 to the Company's Form 10-K
for the year ended December 31, 1997).
10.8* Separation and Release Agreement with Henry H. Li
regarding termination of employment, effective July 31,
1998.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
*Represents a management compensatory plan or arrangement.
BANDAG SYSTEM FRANCHISE AGREEMENT
THIS AGREEMENT is made by and between Bandag, Incorporated, an Iowa corporation
("BANDAG") and _____________________________________________________
("FRANCHISEE"), a ____ corporation organized under the laws of the state of
_____________, ____ sole proprietorship owned by
____________________________________________________, ____ partnership organized
under the laws of the state of _________________________________, doing business
under the name: ________________________________________________________, whose
mailing address is:
_____________________________________________________________, with employer
federal identification number
_____________________________.
Introduction
Over many years and at substantial expense, BANDAG has developed, promoted and
improved for its franchises, and continues to improve, a unique method of
retreading tires with pre-cured rubber. This method utilizes manufacturing
technology, engineering and know-how, other proprietary processes, and
specialized equipment made by or for BANDAG or one of its corporate affiliates
for use in the process of inspecting and preparing casings for retreading,
affixing and bonding the tread rubber to the casing, and repairing casings
(herein, such equipment, as modified, improved and supplemented by BANDAG from
time to time, to be called "BANDAG Equipment"). BANDAG has also developed for
use in this unique retreading method BANDAG(R) tread rubber, BANDAG(R) cushion
gum, other tread materials and other materials used between the tread materials
and the casing (including without limitation cushion rubber, cushion gum and
other adhesives, repair gums, filling materials, special extrusions, re-belting
materials, cements and other rubber items) (herein, such items, as modified,
improved and supplemented by BANDAG from time to time, to be called "BANDAG
Rubber Products"). In addition, BANDAG has developed at substantial expense
valuable market research, proprietary rights (including patents, trademarks,
confidential know-how and copyrights), expertise in managing retread facilities,
and programs for the marketing and sale of retreaded tires, for the technical
and sales training of personnel, and for customer service. In this Agreement,
all the foregoing described in this Introduction, as they may be modified from
time to time by BANDAG, shall be referred to as the "BANDAG Method".
FRANCHISEE desires to acquire the right to practice the BANDAG Method, and
BANDAG is pleased to grant this valuable right to FRANCHISEE on the terms stated
in this Agreement.
In consideration of the mutual agreements herein and other good and valuable
consideration, BANDAG and FRANCHISEE agree as follows:
I. BANDAG Method and Grant of Franchise
(a) BANDAG hereby grants to FRANCHISEE the non-exclusive right to make and
sell light truck, truck and bus tires (but excluding any aircraft,
agricultural or passenger tires) retreaded by the BANDAG Method (as
improved by BANDAG during the term of this Agreement) with a minimum bead
diameter of 13 inches and a maximum finished outside diameter of 53.5
inches.
<PAGE>
(b) FRANCHISEE may make retreaded tires by the BANDAG Method only at the
facility located at:
"Authorized Location:" ____________________________________
____________________________________
____________________________________
(c) FRANCHISEE's non-exclusive Territory shall be:
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
________________________________.
FRANCHISEE may sell tires retreaded by the BANDAG Method wherever and to
whomever and at any price FRANCHISEE may choose, in or outside the
Territory (as is the case with other BANDAG franchisees).
(d) FRANCHISEE may not resell BANDAG Rubber Products purchased from BANDAG or
from any other franchisee of BANDAG other than to (i) end users (and in
that instance, only if such items are incorporated into tires retreaded
by the BANDAG Method) and (ii) other BANDAG franchisees authorized to
retread tires by the BANDAG Method in the United States.
(e) While this Agreement is in effect, FRANCHISEE will not in any manner
(directly or indirectly) own, manage, operate, join, participate in,
associate with or be connected with or interested in, as a franchisee,
investor, lender, manager, agent, employee, officer, director, partner,
shareholder or proprietor of or consultant to, or provide service, advice
or other assistance to, any occupation, entity, interest, business or
enterprise that is engaged in any form of tire retreading business, other
than as described in Annex A, that competes with Bandag, or the Bandag
Method, or retread tires by any method other than the Bandag Method,
without the express prior written approval of Bandag. In order to obtain
Bandag's consent, Franchisee must demonstrate to Bandag's satisfaction
that the transaction contemplated will not in any way damage Bandag, the
Bandag Method, and/or the Bandag franchise network. In the event that any
part of the covenants or agreements set forth in this Section I(e) shall
be determined by any court of competent jurisdiction to be invalid or
unenforceable by reason of extending for too great a period of time or
over too great a geographical area, or by reason of being too extensive
in any other respect, and if such determination is upheld on appeal or no
appeal from such determination is taken, then Bandag and Franchisee agree
that this Agreement shall be amended so that the affected part of said
covenant shall be interpreted to extend only over the maximum period of
time for which it may be enforceable, and/or over the maximum
geographical area as to which it may be enforceable and/or to the maximum
extent in all other respects as to which it may be enforceable, all as
determined by such court in such action. Notwithstanding the foregoing,
the unaffected parts of said covenants shall remain in full force and
effect.
(f) For the purposes of this Agreement,
(1) "Affiliate" shall mean any natural person or legal entity that,
directly or indirectly, controls, is controlled by or is under common
control with either FRANCHISEE or any Controlling Person; and
(2) "Controlling Person" shall be any natural person or other legal
entity with a 5% or greater interest in FRANCHISEE or in another entity
that has, directly or indirectly, a 5% or greater interest in FRANCHISEE,
or otherwise having the power to control, directly or indirectly, the
management, direction or day-to-day operations of FRANCHISEE. Without
limiting the
2
<PAGE>
generality of the foregoing, a natural person or legal entity shall be a
"Controlling Person" of FRANCHISEE if it owns a 5% or greater interest in
another entity that either is itself a Controlling Person of FRANCHISEE
or has an indirect ownership interest in FRANCHISEE through one or more
intervening levels of direct or indirect subsidiaries. For example, if
FRANCHISEE is a wholly-owned subsidiary of another corporation that is,
in turn, owned equally by three other corporations, each of these three
corporations shall be considered a Controlling Person for purposes of
this Agreement.
II. Materials Provided by BANDAG; Obligations of FRANCHISEE
(a) To assist its franchisees, BANDAG has developed materials relating to the
BANDAG Method and to production engineering (including technical
bulletins), public relations, and advertising, merchandising and
promotion of the BANDAG Method and of tires retreaded by the BANDAG
Method. BANDAG will provide to FRANCHISEE from time to time such
materials as are provided by BANDAG to its franchisees generally. BANDAG
may amend and revise such materials and charge for materials in excess of
those normally provided.
(b) All proprietary and other information obtained directly or indirectly by
FRANCHISEE with respect to BANDAG's business plans, policies, and
modified or new methods, processes or products, and all written matter
furnished to FRANCHISEE by BANDAG or its affiliates (whether or not
FRANCHISEE shall be charged for same), shall remain BANDAG's property and
shall be deemed confidential information. Such information and materials
(including any translation) shall not be reproduced or disclosed to
others or used for any purpose other than performance of FRANCHISEE's
obligations under this Agreement. FRANCHISEE shall cause its employees to
comply with this provision.
If there is any claim or litigation involving the confidential
information, and if BANDAG in its sole discretion undertakes the
negotiation, settlement, defense or prosecution, FRANCHISEE shall execute
any documents and render assistance (exclusive of out-of-pocket
expenditures) as may be reasonably requested to carry out the same. If
any confidential information is sought by discovery procedures,
FRANCHISEE shall (i) notify BANDAG within three (3) days after receipt of
such discovery request, (ii) seek appropriate protective orders for such
information and (iii) join in any motion BANDAG may file to protect
against disclosure of such materials.
III. Maintenance of Quality and Reputation
(a) FRANCHISEE acknowledges the superior quality, performance and reputation
of BANDAG Equipment, BANDAG Rubber Products, and the other items and
services that constitute part of the BANDAG Method. FRANCHISEE further
acknowledges that it is essential to the reputation of the BANDAG Method
and to the maintenance of the BANDAG trademarks and logos, and to avoid
misleading the public with respect to the quality of the tires retreaded
by FRANCHISEE, that the retreaded tires sold by FRANCHISEE be retreaded
strictly in accordance with the BANDAG Method and with BANDAG Equipment
and BANDAG Rubber Products, including BANDAG(R)tread rubber and
BANDAG(R)cushion gum. Accordingly, FRANCHISEE shall utilize in the
retreading of tires with pre-cured rubber at the Authorized Location only
BANDAG Rubber Products and BANDAG Equipment. FRANCHISEE shall also follow
such procedures for retreading tires with pre-cured rubber as are
established by BANDAG from time to time and shall maintain standards and
procedures required to comply with the BANDAG Quality Certification
Program, as revised by BANDAG from time to time. BANDAG may from time to
time require additional certifications for production and marketing of
particular products or utilization of particular technology, and require
FRANCHISEE's continued adherence to the same, if FRANCHISEE desires to
produce such particular products or utilize such technology associated
with the Bandag Method. In addition, FRANCHISEE shall not engage in any
business conduct
3
<PAGE>
reasonably likely to affect adversely the reputation or goodwill of
BANDAG or the BANDAG Method
(b) Representative samples of any and all materials used in retreading tires
by the BANDAG Method and not falling under Section III(a) of this
Agreement must be submitted for testing and inspection to BANDAG (at
FRANCHISEE's expense) and must be approved by BANDAG in writing prior to
such use by FRANCHISEE; BANDAG will not unreasonably withhold its
approval of such materials if they meet BANDAG's standards for quality
and performance.
(c) All purchases from BANDAG or one of its corporate affiliates shall be at
the prices established by BANDAG from time to time, and shall be subject
to the seller's Standard Terms and Conditions of Sale, as revised from
time to time. These terms and conditions (as supplemented by this
Agreement) shall constitute the entire and only agreement between the
parties with respect to the sale of such products to FRANCHISEE. No
additional or different terms set forth in FRANCHISEE'S purchase order,
acknowledgment or other forms or correspondence shall govern any sales of
such products to FRANCHISEE, and BANDAG hereby objects to any such
additional or different terms contained in any communication from
FRANCHISEE. A copy of the Standard Terms and Conditions of Sale at the
effective date of this Agreement is attached hereto as Annex B. A breach
of such Terms shall be a breach of this Agreement.
(d) FRANCHISEE shall maintain its Authorized Location in accordance with
standards and procedures prescribed by BANDAG from time to time.
FRANCHISEE shall maintain BANDAG Equipment in satisfactory operating
condition and incorporate all modifications prescribed by BANDAG.
(e) FRANCHISEE warrants that all required inspections of equipment used in
retreading tires by the BANDAG Method will be undertaken and that, to the
extent required by local law, FRANCHISEE shall post on such equipment
appropriate certificates of inspection or other evidence of approval.
FRANCHISEE further agrees: (1) to maintain and/or install such safety
features on BANDAG Equipment as are originally installed or are
thereafter recommended by BANDAG and in conformity with all applicable
safety codes and regulations; (2) not to alter any safety features on
BANDAG Equipment, whether such equipment was purchased from BANDAG or a
third party; and (3) to rework or authorize BANDAG to rework any BANDAG
Equipment to reestablish or retrofit any safety feature for the BANDAG
Equipment.
BANDAG determines that any of FRANCHISEE's equipment used in retreading
tires by the BANDAG Method is unsafe or does not comply with current
safety standards used by BANDAG or applicable safety codes and
regulations, BANDAG may give FRANCHISEE written notification thereof, and
FRANCHISEE shall, within one month thereafter at its expense, either (y)
rework, or authorize BANDAG to rework, such equipment, or (z) remove such
equipment from service and sell it back to BANDAG, or trade it in for new
BANDAG Equipment, in either case, at its then-current fair market value,
all without prejudice to the right of BANDAG to remove certificates of
inspection or nameplates from equipment not found in compliance with
applicable safety codes or standards and to notify appropriate
governmental officials that the equipment in question no longer meets
applicable safety requirements.
(f) FRANCHISEE acknowledges that it will, in the operation of its business of
retreading tires with pre-cured rubber, comply with all applicable
federal, state and local laws, ordinances, regulations and orders.
FRANCHISEE shall also refrain from taking any action that prevents BANDAG
from realizing the benefits of this Agreement.
4
<PAGE>
(g) FRANCHISEE shall not sell, lease or in any other way transfer title or
possession of any BANDAG Equipment to third parties other than BANDAG
franchisees, without first offering such Equipment in writing free and
clear of all claims and encumbrances for purchase by BANDAG at fair
market value. "Fair market value", as used in this Agreement, means the
cash purchase price that would apply in an arm's-length transaction
between an informed and willing BANDAG franchisee under no compulsion to
purchase and an informed and willing BANDAG franchisee under no
compulsion to sell.
IV. Records and Inspection
FRANCHISEE shall maintain and provide to BANDAG financial statements, books of
account, and supply, purchasing, inventory, production and sales records
(including the date of purchase, weight and source of BANDAG Rubber Products
used by FRANCHISEE and records showing the identity and address of all
purchasers of BANDAG Rubber Products and of tires retreaded by the BANDAG
Method), together with any other business records or information records that
BANDAG may request in order to determine whether FRANCHISEE is performing its
obligations under this Agreement. FRANCHISEE shall permit BANDAG to examine
FRANCHISEE's records, premises and samples of tires made by the BANDAG Method
during regular business hours.
V. Relationship of Parties
The relationship of the parties is that of franchisor and franchisee, and seller
and buyer only, and FRANCHISEE acknowledges that this Agreement does not create
a fiduciary relationship between FRANCHISEE and BANDAG. The parties are
independent contractors, and exercise sole control over their businesses at
their own risk.
VI. Use of the Marks, Display, Advertising and Promotion of BANDAG Name
FRANCHISEE shall have the non-exclusive right to use the "BANDAG" name and mark,
including BANDAG's trademarks, service marks and logos (collectively, the
"Marks") in the Territory in connection with the manufacture and sale of tires
retreaded by the BANDAG Method, subject to BANDAG's Logo and Trademark Usage
Requirements and Policy, as revised from time to time by BANDAG. FRANCHISEE
shall at all times comply with such Requirements and Policy, which is attached
in its current form as Annex C.
VII. Best Efforts
FRANCHISEE shall at all times while this Agreement remains in effect exert its
best efforts to produce and sell tires retreaded by the BANDAG Method.
VIII. Duration
This Agreement shall continue in effect for five years unless terminated as
provided elsewhere in this Agreement.
IX. Termination of the Agreement by BANDAG
BANDAG shall have the right to terminate this Agreement:
(a) Effective upon notice to FRANCHISEE, in the event of any breach of
Section I(d) or (e), II(b), III(a), XI, XII or XVI of this Agreement, or
5
<PAGE>
(b) Effective upon notice to FRANCHISEE, in the event FRANCHISEE shall
fail to pay all amounts due to BANDAG within ten (10) days after BANDAG
notifies FRANCHISEE that payment is due, or
(c) Effective upon notice to FRANCHISEE, in the event FRANCHISEE shall
fail to operate the business of retreading tires by the BANDAG Method at
the location authorized in Section I for more than sixty (60) consecutive
days or otherwise abandons the franchise granted herein, or
(d) Effective upon notice to FRANCHISEE, in the event FRANCHISEE
introduces and/or supports any proceedings challenging the validity of
any trademarks or other unpatented proprietary rights, whether registered
or not, under which BANDAG derives its licensing power hereunder, or
(e) Effective upon notice to FRANCHISEE, in the event of (1) any breach
or non-compliance with any term or provision of this Agreement other than
those described in subsections (a) through (d) above, or any breach or
non-compliance with any other agreement between BANDAG and FRANCHISEE,
and in either such case the breach or non-compliance is not remedied
within thirty (30) days of notice thereof from BANDAG, or (2) the
repeated breach or non-compliance with one or more term or provision of
this Agreement, whether or not such breach or non-compliance is corrected
after notice, or
(f) Immediately, in the event FRANCHISEE becomes insolvent or is subject
to any bankruptcy, insolvency, or similar proceeding, makes an assignment
for the benefit of creditors, becomes unable to pay its debts as they
become due, goes into liquidation or winding up, or in the event a
receiver is appointed for substantial part of FRANCHISEE's assets, or
(g) Effective upon thirty (30) days' notice, in the event of (1) a
decision by a court or government agency that invalidates any significant
provision of this Agreement, or (2) the failure of the heirs or
successors of FRANCHISEE or a Controlling Person to apply for approval of
a transfer of the pre-cured retreading business or the assets of such
business in accordance with Section XI(c), or BANDAG's disapproval of
such transfer.
X. Effect of Termination
(a) In the event of termination of this Agreement for any reason:
(1) FRANCHISEE shall surrender and cease to exercise all rights granted
under this Agreement, shall cease all use of the BANDAG Method, shall
cease all use of BANDAG Equipment, and shall cease selling tires
retreaded after date of termination with pre-cured rubber on BANDAG
Equipment. In addition, no officer, director, relative, manager,
shareholder, partner or other owner of FRANCHISEE or any Affiliate or
Controlling Person, or any business enterprise in which any of them is
engaged or to which any of them is related, may directly or indirectly
operate such BANDAG Equipment or sell tires retreaded after date of
termination with pre-cured rubber on BANDAG Equipment. FRANCHISEE shall
also, at its own expense, cease all use of BANDAG's name and Marks in any
and all connections, and refrain from representing any of its products
produced after termination as "BANDAG products" or as being the "same as
BANDAG" or "similar to BANDAG" or represent itself as a BANDAG franchisee
or otherwise identify itself with BANDAG. Without limiting the foregoing,
FRANCHISEE shall change the corporate name to eliminate use of any BANDAG
Marks and change all stationary, envelopes, business cards, other
advertisements and other items and file such documents in all federal,
state and local offices as may be considered appropriate by BANDAG to
change the corporate name of record in such offices.
6
<PAGE>
(2) Termination of this Agreement shall not relieve FRANCHISEE from its
obligation to pay to BANDAG all moneys that may be due, and all amounts
yet unpaid and not yet due for equipment, materials and supplies shall
become due and payable within ten (10) days of the date of termination.
(3) FRANCHISEE shall immediately cease using, and return within a period
of ten (10) days following termination, all property of BANDAG, including
but not limited to all confidential and proprietary written materials
(and all copies thereof) received from BANDAG and all translations
thereof. Such materials will be delivered in person to a BANDAG designee
or returned via courier service, to be signed for by the recipient.
(4) BANDAG shall have the option, exercisable by notice within sixty (60)
days following the effective date of termination of this Agreement, to
purchase (i) any or all BANDAG Rubber Products at the price paid by
FRANCHISEE and/or (ii) any or all BANDAG Equipment at its 10-year
straight line depreciated value, with a minimum of 15 percent of the
purchase price paid by FRANCHISEE for such Equipment. This option extends
to all BANDAG Equipment and BANDAG Rubber Products used in the business
of FRANCHISEE prior to the effective date of termination. From the
purchase price shall be deducted the amount of any set off or
counterclaim that BANDAG may have against FRANCHISEE. Within two (2) days
of receipt of notice from BANDAG, FRANCHISEE shall prepare for immediate
return all such items.
(b) After receipt of BANDAG's notice of termination, FRANCHISEE shall not
commit itself to further advertising contracts or other agreements by
which it represents itself as a franchisee of BANDAG.
XI. Transfer of Control
(a) FRANCHISEE acknowledges that, to assure BANDAG that FRANCHISEE's
obligations herein will be performed fully and that customers of tires
retreaded by the BANDAG Method will receive adequate service, BANDAG must
know and approve who in fact controls FRANCHISEE. Accordingly, neither
FRANCHISEE nor any Controlling Person, nor any holder or owner of any
equity interest in FRANCHISEE, may enter into any agreement pertaining
to, causing or resulting in a Transfer of Control, or consummate or
permit the consummation thereof, without in each case obtaining BANDAG's
prior written approval. To provide BANDAG an opportunity to consider
whether or not to approve a proposed Transfer of Control, a written
request for such approval shall be submitted to BANDAG at least one
hundred twenty (120) days prior to the proposed or intended date for the
Transfer of Control, which request shall describe the proposed Transfer
of Control and give the identity of the proposed transferee. FRANCHISEE
shall also submit such other information regarding the proposed Transfer
of Control as may be requested by BANDAG. Franchisee agrees that under no
circumstances will Franchisee transfer or assign, directly or indirectly,
any interest in the Franchise to any Person (as defined in this Section
XI(a)) who has any form of retreading business that in any way competes
with the business of Bandag, or the Bandag Method without the express
prior written approval of Bandag in each instance. Furthermore,
Franchisee shall not offer any interest in Franchisee through any form of
public offering or exchange without the express prior written approval of
Bandag in each instance. The foregoing prohibits the engagement of any
Person who intends to offer any interest of Franchisee to the public in
any form of public offering without the express prior written approval of
Bandag in each instance. In order to obtain Bandag's consent to a
transfer, assignment or public offering or exchange, Franchisee and/or
Shareholders must demonstrate to Bandag's satisfaction that the transfer,
assignment, offering or exchange contemplated will not in any way damage
Bandag, the Bandag Method, and/or the Bandag franchise network. For
purposes of this Section XI(a), "Person" means any individual,
corporation, estate, partnership, joint venture, association, joint stock
company, trust, or unincorporated organization.
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(b) For the purposes of this Agreement, "Transfer of Control" shall mean (i)
if FRANCHISEE or any direct or indirect Controlling Person is a
partnership, any change in the identity or respective ownership of the
partners of any of them, (ii) if FRANCHISEE or any direct or indirect
Controlling Person is a corporation, any sale, gift or other transfer of
ownership or possession of shares comprising 5% or more of the total
number of issued and outstanding shares of FRANCHISEE or such Controlling
Person or (iii) the transfer of or change in the direct or indirect
control of, or the transfer or change in the power to control, directly
or indirectly, the management, direction or day-to-day operations of
FRANCHISEE or of any direct or indirect Controlling Person; provided,
however, that the death or determination of incompetency of a partner or
any natural person constituting a Controlling Person of FRANCHISEE shall
not be a "Transfer of Control".
(c) If a partner or Controlling Person of FRANCHISEE dies or is determined to
be incompetent, the transfer of the business or assets of FRANCHISEE's
business of retreading tires with pre-cured rubber operated at the
Authorized Location to any heirs or successors of the deceased or the
incompetent, whether by bequest or otherwise, shall be subject to
BANDAG's prior written approval. Such heirs or successors shall apply to
BANDAG for such approval within 60 days after such death or
determination, providing BANDAG with such information as is then
customarily requested by BANDAG with respect to new franchisees.
XII. General and Product Liability; Warranties; Insurance and Indemnification
(a) FRANCHISEE shall purchase and maintain in full force and effect
comprehensive general liability insurance (including but not limited to
product liability, completed operations and contractual liability,
including FRANCHISEE's obligations under the indemnity provisions of this
Agreement) adequate to insure its undertakings herein and shall furnish a
certificate of such insurance upon request by BANDAG.
(b) FRANCHISEE shall defend indemnify and hold BANDAG harmless from and
against all liabilities, recoveries of judgment, claims and demands on
account of personal injury, including death or property loss or damage to
others (including FRANCHISEE's employees or customers) arising out of or
in any manner connected with (i) FRANCHISEE's business operations, (ii)
FRANCHISEE's operations as a BANDAG franchisee, (iii) the retreading of
any tires, (iv) the sale of any retreaded tires, (v) the performance by
FRANCHISEE of this Agreement, (vi) the breach of any of FRANCHISEE's
obligations herein, or (vii) the use by any person who is not a BANDAG
franchisee of BANDAG Equipment sold, transferred or otherwise provided to
such person or his employer by FRANCHISEE. FRANCHISEE shall at its own
expense defend any and all such claims and demands and hold BANDAG
harmless from and against all charges of attorneys incurred thereby and
all costs and other expenses arising therefrom. FRANCHISEE, on its behalf
and on behalf of anyone claiming through or by it, including its
employees, agents, subcontractors and insurers, hereby waives its rights
of recovery against BANDAG for loss covered by insurance maintained by
FRANCHISEE or for FRANCHISEE's benefit. It is the intent of the parties
that BANDAG shall not be subject to subrogation by anyone, including any
insurer, as a result of any such loss.
(c) BANDAG MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH
RESPECT TO THE MERCHANTABILITY OR SUITABILITY OF TIRES RETREADED BY
FRANCHISEE. FRANCHISEE has no authority to make any kind of warranty or
representation to others on behalf of BANDAG.
(d) (i) Except as BANDAG may otherwise expressly agree in writing,
FRANCHISEE, acting on its own behalf only, shall execute and deliver to
each purchaser from FRANCHISEE of a tire retreaded by the BANDAG Method a
BANDAG Dealer National Warranty on a form then currently furnished by
BANDAG. BANDAG may also require FRANCHISEE to execute and deliver to each
purchaser from FRANCHISEE of a tire retreaded by particular technology
8
<PAGE>
associated with the BANDAG Method a special warranty on a form then
currently furnished by BANDAG. FRANCHISEE shall perform and fulfill
promptly all of the terms and conditions of all such warranties.
FRANCHISEE shall have the sole and complete responsibility for all such
warranties (even though wording may have been provided by BANDAG) and for
performance of any other warranties provided by FRANCHISEE to buyers of
tires retreaded by the BANDAG Method and/or sold or distributed as
contemplated by this Agreement. FRANCHISEE will perform all warranty and
other services hereunder as an independent contractor and not as the
agent of BANDAG and will assume responsibility for and hold BANDAG
harmless from all claims (including but not limited to claims resulting
from the negligent or willful acts or omissions of FRANCHISEE, and
including attorneys' fees) against either of them arising out of or in
connection with FRANCHISEE's performance of such service.
(ii) FRANCHISEE agrees to comply with all policies and procedures
described in the BANDAG Dealer National Warranty or such other special
warranty that may be required by BANDAG, as any thereof may be revised by
BANDAG from time to time, including but not limited to performing
warranty service on tires retreaded by the BANDAG Method that FRANCHISEE
did not manufacture or sell, and policies and procedures established by
BANDAG from time to time relating to the keeping of books and records
respecting claims FRANCHISEE may make for reimbursement for costs
incurred by FRANCHISEE. BANDAG will reimburse FRANCHISEE for costs
incurred for service FRANCHISEE performs for retreaded tires that the
FRANCHISEE did not manufacture or sell in accordance with the policies
and procedures of BANDAG described in the BANDAG Dealer National Warranty
or such other special warranty. FRANCHISEE agrees that BANDAG may inspect
FRANCHISEE's books and records respecting any warranty service or other
claims FRANCHISEE may submit to BANDAG.
(iii) FRANCHISEE hereby authorizes BANDAG to charge its account with
BANDAG for each adjustment on a BANDAG retread sold by FRANCHISEE,
performed by another franchisee under a BANDAG Dealer National Warranty
or other special warranty required by BANDAG, in such amount as may be
provided therefor in the applicable warranty, and to credit FRANCHISEE's
account for each adjustment on a BANDAG retread sold by another
franchisee, performed by the FRANCHISEE under a BANDAG Dealer National
Warranty or such other special warranty, in such amount as may be
provided therefor in the warranty, all in accordance with BANDAG's
then-current practices under the BANDAG Dealer National Warranty Program
or any other special warranty program BANDAG may require in connection
with a particular technology.
XIII. Security Interest
(a) FRANCHISEE agrees to execute and deliver to BANDAG BANDAG's then-current
standard form security agreement to secure all of FRANCHISEE's
obligations to BANDAG (as more fully described in such agreement), and to
cause those persons or entities that own the BANDAG Equipment used in
FRANCHISEE's retread business from time to time to execute and deliver a
similar security agreement to secure FRANCHISEE's and their respective
obligations to BANDAG.
(b) BANDAG agrees, upon written request from the holder of a properly
perfected Bank Lien, to subordinate the security interest granted to
BANDAG by FRANCHISEE, to the extent it secures the rights and options of
BANDAG hereunder to purchase certain assets used in FRANCHISEE's business
of retreading tires with pre-cured rubber (but not any security interest
granted in connection with purchases by FRANCHISEE, or purchase money
financing by BANDAG of any items purchased by FRANCHISEE), to such Bank
Lien. FRANCHISEE hereby covenants and agrees to execute and deliver to
BANDAG any deeds, documents, instruments and other writings requested by
BANDAG to grant or create a lien for the purposes described in this
section, and to take any actions reasonably deemed advisable by BANDAG or
its counsel to create, establish, preserve, perfect, continue perfected,
record, register, protect, determine priority of and enforce
9
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such lien and BANDAG's rights, and FRANCHISEE shall pay all expenses
relating to the foregoing.
(c) For the purposes of this Agreement, "Bank Lien" shall mean a security
interest, lien, charge or encumbrance granted by FRANCHISEE to a
financial institution to secure indebtedness for borrowed money.
XIV. Force Majeure
Performance of their respective obligations hereunder (other than any obligation
for the payment of money) by either BANDAG or FRANCHISEE may be interrupted
without liability to the extent the interruption is due to a force majeure. The
term "force majeure" shall include an Act of God, war, civil commotion, fire,
explosion, flood, strike, lock-out, or any other cause beyond the reasonable
control of BANDAG or FRANCHISEE.
XV. Notices; Litigation
Any notice or demand hereunder must be in writing and shall be deemed given when
personally delivered by hand, when telecopied or telexed and acknowledged by
appropriate means, or one (1) day after delivery to a courier service, prepaid,
addressed to the party's address shown in this Agreement or as modified in
writing pursuant to this Agreement, or three (3) days after deposited in the
U.S. mails, first class mail, postage prepaid, addressed as above. In this
regard, FRANCHISEE shall notify BANDAG within ten (10) days of institution of a
lawsuit by way of the service of a complaint, cross-claim, counterclaim or the
like against FRANCHISEE if such lawsuit involves issues relating to rights
granted hereunder and shall permit BANDAG to intervene and control the lawsuit
with regard to such issues.
XVI. Assignment and Subfranchising
BANDAG may assign part or all of this Agreement and may delegate any or all of
its obligations hereunder to affiliates. No assignment, sublicense or
subfranchise may be made by FRANCHISEE without the prior written consent of
BANDAG.
XVII. Improvements by FRANCHISEE
In return for the inclusion within Section I hereof of improvements to the
BANDAG Method made by BANDAG, all inventions, patents and patent applications
which are conceived, made or acquired by FRANCHISEE in performing under this
Agreement or that relate to BANDAG's proprietary rights or equipment shall
automatically be irrevocably licensed on a royalty-free and non-exclusive basis
to BANDAG, giving BANDAG the non-exclusive right to make, have made, use and
sell such improvements, along with the right to sublicense such inventions,
patents and patent applications to any and all BANDAG franchisees.
XVIII. Execution; Representations and Warranties
If FRANCHISEE has ten (10) or fewer shareholders and/or partners, FRANCHISEE
represents and warrants that the names of all its shareholders and/or partners
at the time of execution of this Agreement are listed below, and FRANCHISEE
agrees to notify BANDAG immediately of any change of its shareholders or
partners. If FRANCHISEE has more than ten (10) shareholders and/or partners,
FRANCHISEE represents and warrants that all Controlling Persons and all persons
with an interest in any BANDAG Equipment at the time of execution of this
Agreement are listed below, and FRANCHISEE agrees to notify BANDAG immediately
of any change in any of these. FRANCHISEE further represents and warrants that
the signatures below on behalf of FRANCHISEE are duly authorized, and that the
persons signing have full power and authority to bind FRANCHISEE.
10
<PAGE>
XIX. Arbitration
(a) Any dispute arising out of or relating to this Agreement will be
submitted to and resolved by final and binding arbitration as the sole
and exclusive remedy. Any claim subject to this Section shall be made by
filing a demand for arbitration within one (1) year following the
conduct, act or other event first giving rise to the claim; otherwise,
the right to any remedy shall be deemed forever waived and lost. The
right and duty of the parties to this Agreement to resolve any disputes
by arbitration shall be governed exclusively by the Federal Arbitration
Act as amended; and arbitration shall take place according to the
Commercial Rules of the American Arbitration Association, and shall be
held in its Chicago, Illinois office, and be decided by one arbitrator
chosen according to such Rules. Each party shall bear all of its own
costs of arbitration except that the fees of the arbitrator shall be
divided equally between the parties.
(b) Unless otherwise agreed by the parties, pre-hearing discovery in the
dispute to be arbitrated shall be limited to the following: (1)
production of any documents that the producing party intends to introduce
into evidence at the hearing; (2) production of any documents generated
by the party seeking production, or generated in the course of actual
transactions between the parties; (3) production of any written,
video-taped or tape-recorded statement given by the party seeking
production; (4) production of any documents relied on by any expert whose
opinions and conclusions will be offered at the hearing; and (5) not more
than two depositions per side, with total adverse examination time in
both depositions combined not to exceed 12 clock hours.
(c) The arbitrator shall have no authority to amend or modify the terms of
this Agreement or to award punitive or exemplary damages. His or her
award may be enforced by the judgment of any court having jurisdiction
over the party against which enforcement is sought.
(d) Each party shall have the right, without awaiting the outcome of the
arbitration, to seek from an appropriate court provisional remedies
including, but not limited to, temporary restraining orders or
preliminary injunctions before, during or after arbitration. Seeking any
such remedies shall not be deemed to be a waiver of either party's right
to compel arbitration. FRANCHISEE acknowledges that BANDAG will confront
a material risk of severe and irreparable injury for which it will not
have an adequate remedy in damages if FRANCHISEE breaches any of its
obligations under Sections I(b), (d) or (e), II(b), III(g), VI, X, XI,
XIII, XVI or XVII, and that such obligations (without limitation) shall
therefore be specifically enforceable.
(e) ACKNOWLEDGMENT OF ARBITRATION.
Each of the parties to this Agreement understands that this Agreement contains
an agreement to arbitrate. After signing this document, each of the parties
understands that it will not be able to bring a lawsuit concerning any dispute
that may arise which is covered by the arbitration agreement, unless it involves
a question of constitutional or civil rights and arbitration thereof may not be
compelled pursuant to the Federal Arbitration Act. Instead, each of the parties
agrees to submit any such dispute to an impartial arbitrator.
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XX. Miscellaneous
(a) This is the entire Agreement and supersedes all prior agreements and
communications, either oral or in writing between the parties hereto with
respect to the subject matter hereof, except that the execution hereof
does not relieve FRANCHISEE from any obligations with respect to
materials, equipment or supplies sold or delivered by BANDAG to
FRANCHISEE, or to maintain the confidentiality of confidential
information delivered or communicated by BANDAG to FRANCHISEE, prior to
the effective date of this Agreement. Except for (I) the above-described
obligations, (ii) any product warranties made by FRANCHISEE, and (iii)
FRANCHISEE's indemnification obligations hereunder and its responsibility
for product liability on products manufactured by it at any time, BANDAG
and FRANCHISEE, each on behalf of themselves and of every company
directly or indirectly controlled by, controlling or under common control
with them, and the agents, officers, employees, successors and assigns of
all of them, release each other and the above-described persons and
entities from any and all claims, purported claims, liabilities and
defaults arising from the actions of the other under any and all prior
agreements or otherwise prior to the effective date of this Agreement.
Any amendment, addition or variation to this Agreement must be in writing
and duly executed by both BANDAG and FRANCHISEE.
(b) The representations, obligations and covenants of FRANCHISEE in Sections
II(b), III(g), V, X, XII, XVII, XIX and XX(a) (with respect to the
release) shall survive termination of this Agreement.
(c) The parties intend that all provisions will be enforceable to the maximum
extent permitted under law.
(d) FRANCHISEE acknowledges that it has conducted an independent
investigation of the business franchised hereunder, and recognizes that
the business venture contemplated by this Agreement involves certain
business risks and that its success will be largely dependent on the
ability of FRANCHISEE and its Controlling Persons as independent
businessmen. BANDAG expressly disclaims the making of, and FRANCHISEE
acknowledges that it has not received, any warranty or guarantee, express
or implied, as to the potential volume, profits or success of the
business venture contemplated by this Agreement, nor has FRANCHISEE
relied on any separate written or oral communications or understanding or
on any warranty or representation by or with BANDAG. In addition, except
for any express warranties that may be contained in manuals provided by
BANDAG to FRANCHISEE from time to time describing the capabilities of the
BANDAG Method, BANDAG expressly disclaims any warranties or
representations, express or implied, with respect to the BANDAG Method,
including merchantability and fitness for purpose. FRANCHISEE
acknowledges and agrees that it has read and understood this Agreement
and the attachments hereto, if any, that BANDAG has fully and adequately
explained the provisions of each to FRANCHISEE's satisfaction, and that
BANDAG has accorded FRANCHISEE ample time and opportunity to consult with
advisors of FRANCHISEE's own choosing about the potential benefits and
risks of entering into this Agreement.
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(e) BANDAG may permit FRANCHISEE to remedy any default hereunder without
waiving the default so remedied, and a waiver of any default shall not be
a waiver of any other subsequent or prior default. BANDAG's failure to
enforce any of its rights shall not be a waiver thereof. The exercise of
any right does not limit BANDAG's right to exercise any other right;
every right of BANDAG under this Agreement is cumulative with every other
right BANDAG may have under this Agreement, under any other agreement or
otherwise.
(f) With respect to any provisions in this Agreement where BANDAG is
permitted to make certain modifications, determinations and exceptions,
they shall be within BANDAG's sole and absolute discretion unless
otherwise expressly provided in this Agreement.
IN WITNESS WHEREOF, BANDAG and FRANCHISEE have caused this Agreement to be
executed in two originals, effective as of the date of execution by BANDAG.
FRANCHISEE BANDAG, INCORPORATED
________________________________ By: _______________________________
Print Name of Corporation,
Partnership, or Individual Title: _____________________________
Date: _____________________________
By: ____________________________
Title: __________________________ Address:
Bandag World Headquarters
Date: __________________________ 2905 North Highway 61
Muscatine, IA 52761-5886
U.S.A.
List of all partners (if a partnership) or shareholders (if a corporation) of
FRANCHISEE:
- -------------------------------- ----------------------------------
Print Name Print Name
- -------------------------------- ----------------------------------
Print Name Print Name
- -------------------------------- ----------------------------------
Print Name Print Name
- -------------------------------- ----------------------------------
Print Name Print Name
13
<PAGE>
UNDERTAKING BY THE PRINCIPALS OF BANDAG FRANCHISEE
I (we) understand that the BANDAG SYSTEM FRANCHISE AGREEMENT between Bandag,
Incorporated ("BANDAG") and _______________________________________,
("FRANCHISEE") executed by FRANCHISEE on the _______ day of ________________
19____, provides that upon termination of the Agreement FRANCHISEE must:
1. cease using and return to BANDAG all confidential and proprietary
written materials and all translations;
2. cease using all BANDAG trademarks and logos;
3. cease using the Bandag Method and equipment made by or for BANDAG,
and cease selling tires retreaded after date of termination with
pre-cured rubber on equipment made by or for BANDAG; and
4. cease using the word BANDAG in its corporate, trade or business
name, any assumed name, and in any other way.
In consideration of the grant of a franchise by BANDAG, other good and valuable
consideration, and my (our) access to confidential information and the Bandag
Method and Equipment, I (we) agree that in the event of termination of the
Franchise Agreement I (we) shall honor the above understandings personally and
in any undertaking in which I (we) might be involved.
- ------------------------ ----------------------- ----------------
Print Name Signature Date
- ------------------------ ----------------------- ----------------
Print Name Signature Date
- ------------------------ ----------------------- ----------------
Print Name Signature Date
14
<PAGE>
ANNEX LISTING
ANNEX A EXCEPTION TO SECTION I(e) IN-TERM NONCOMPETITION PROVISION
ANNEX B GENERAL TERMS AND CONDITIONS OF SALE
ANNEX C BANDAG(R) LOGO AND TRADEMARK USAGE REQUIREMENTS AND POLICY
15
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Exception To Section I(e) In-Term Noncompetition Provision
1. Tire retreading pursuant to the AMF Flexcure System.
ANNEX A
Page 1 of 1
<PAGE>
BANDAG, INCORPORATED ("Seller")
TERMS AND CONDITIONS OF SALE
1. OFFER, GOVERNING PROVISIONS AND CANCELLATION. THESE TERMS AND
CONDITIONS SHALL CONSTITUTE THE ENTIRE AGREEMENT BETWEEN SELLER AND BUYER, AND
SHALL BE GOVERNED BY AND SHALL BE CONSTRUED ACCORDING TO INTERNAL LAWS OF THE
STATE OF IOWA. THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL NOT BE
GOVERNED BY THE PROVISIONS OF THE 1980 U.N. CONVENTION ON CONTRACTS FOR THE
INTERNATIONAL SALE OF GOODS. No order may be canceled or altered by the Buyer
except upon terms and conditions acceptable to Seller, as evidenced by Seller's
written consent. In the event of such an approved cancellation by Buyer, Seller
shall be entitled to payment of the full price, less the amount of any expenses
saved by Seller by reason of the cancellation.
2. PRICES AND PAYMENT. All prices listed are payable in United States
Dollars. All prices are subject to change without notice, and the price of
products on order but unshipped will be adjusted to the price in effect at the
time of shipment. With respect to goods sold hereunder other than equipment,
payment is due on the terms agreed by Seller in writing, or, if there is no such
written agreement, in accordance with the applicable price list, or, if no price
list is applicable, upon Buyer's receipt of Seller's invoice. With respect to
equipment sold hereunder, payment is due in accordance with an applicable
written purchase agreement, or, if none, on delivery. Notwithstanding the
foregoing, at its sole option at any time, Seller may require Buyer to make
payment in advance or by irrevocable letter of credit, and may defer shipment or
cancel any order if the Buyer does not promptly provide such payment or a letter
of credit. Any such letter of credit shall be issued for Seller's benefit by a
prime U.S. bank, shall be subject to and governed by the Uniform Customs and
Practice for Documentary Credits (ICC Publication No. 400, 1983 Revision), shall
provide for payment against Seller's invoice and bill of lading, and shall be in
form and substance satisfactory to Seller.
3. TAXES AND OTHER CHARGES. Any tax, duty, custom, inspection or testing
fee, or any other tax, fee or charge of any nature whatsoever imposed by any
governmental authority, on or measured by the transaction between Seller and the
Buyer shall be paid by the Buyer in addition to the prices invoiced. Buyer shall
provide Seller at the time the order is submitted with any applicable exemption
certificate or other document acceptable to the authority imposing such tax, fee
or charge. In the event the Seller is required to pay any such tax, fee or
charge, the Buyer shall reimburse Seller therefor.
4. DELIVERY, CLAIMS AND FORCE MAJEURE. (a) Equipment. With respect to
equipment sold by Seller hereunder, the method and route of shipment shall be at
the sole discretion of Seller. Sales of equipment shall be F.O.B. Buyer=s
facility. Sales of equipment for delivery outside of the U.S. and Canada shall
be F.O.B. U.S. port selected by Seller.
(b) Rubber Products. With respect to orders for less than 500 pounds of
Rubber Products sold by Seller hereunder: (I) shipments will be F.O.B. point of
shipment; (ii) all risk of loss or damage in transit shall be borne by the Buyer
after delivery to the carrier; and (iii) all costs of shipping shall be borne by
Buyer. With respect to orders for 500 pounds or more of Rubber Products,
shipments will be F.O.B. Buyer's plant, and all costs of shipping shall be borne
by Seller. As used herein, "Rubber Products" shall mean any and all tread
rubber, tread materials and all other materials used between the tread materials
and the casing (including without limitation all cushion rubber, cushion gum and
other adhesives, repair gums, filled materials, special extrusions, rebelting
materials, cements and other rubber items).
ANNEX B
Page 1 of 5
<PAGE>
(c) Promotional Materials. With respect to items other than equipment and
Rubber Products, and intended primarily for promotional or publicity purposes:
(i) sales by Seller hereunder will be F.O.B. point of manufacture or point of
shipment; (ii) all risk of loss or damage in transit shall be borne by Buyer
after delivery by the manufacturer to a carrier; and (iii) all costs of shipping
shall be borne by Buyer.
(d) Other Terms.
(i) Any additional expense arising from the use of a method or route of
shipment requested by Buyer shall be borne entirely by Buyer. Seller reserves
the right to make delivery in installments, unless otherwise agreed in writing
by Seller; all such installments are to be separately invoiced and paid for when
due per invoice, without regard to subsequent deliveries, and any deliveries not
in dispute shall be paid for regardless of other controversies relating to other
delivered or undelivered merchandise. Delay in delivery of any installment shall
not relieve buyer of its obligations to accept remaining deliveries. In any case
where Buyer is to bear the cost of shipping, Buyer shall bear all costs of bags,
barrels, boxes, pallets or other containers used to ship goods hereunder. No
shipping containers may be returned to Seller unless Seller has agreed to such
return in advance and all return freight is prepaid by Buyer. Seller may, at any
time, require any or all costs of shipping for which Buyer is responsible under
the terms hereof to be prepaid by Buyer.
(ii) Claims for shortages or other errors in delivery must be made in
writing to Seller within 10 days after receipt of shipment. Failure to give such
notice shall constitute unqualified acceptance and a waiver of all such claims
by Buyer. Claims for loss or damage to goods in transit, after risk of loss has
passed to Buyer, shall be made to the carrier and not to Seller.
(iii) All delivery dates are approximate. Seller shall not be liable for
any damage as a result of any delay or failure to deliver due to any act of God,
act of the Buyer, embargo or other governmental act, regulation or request,
fire, accident, strike, slow down or other labor difficulties, war, riot, delay
in transportation, defaults of common carriers, inability to obtain necessary
labor, materials or manufacturing facilities or, without limiting the foregoing,
any other event beyond the Seller's control. In the event of any such delay the
date of delivery shall be extended for a period equal to the length of the
delay. Buyer's exclusive remedy for other delays and for Seller's inability to
deliver for any reason, including Buyer's inability to produce goods which meet
the requirements of this contract, shall be rescission of this agreement.
5. STORAGE. If the products are not shipped within fifteen (15) days
after notification to the Buyer that they are ready for shipping, for any reason
beyond Seller's reasonable control, including the Buyer's failure to give
shipping instructions, Seller may store such products at the Buyer's risk in a
warehouse or yard or upon Seller's premises, and the Buyer shall pay all
handling, transportation and storage charges at the prevailing commercial rates
upon submission of invoices therefor.
6. CHANGES. Seller may at any time make such changes in design and
construction of products as Seller deems appropriate, without notice to Buyer.
Seller may furnish suitable substitutes for materials unobtainable because of
priorities or regulations established by governmental authority or
nonavailability of materials from suppliers.
ANNEX B
Page 2 of 5
<PAGE>
7. WARRANTIES.
(a) The NDI. With respect to any equipment that is the subject of a lease
agreement between Buyer and Seller (whether or not a true lease) (the "NDI"),
Seller warrants that each machine, model upgrade or feature of the NDI will be
in good working order on the day it is installed. If it is proven to Seller's
satisfaction not to have been in good working order at the time of installation,
the machine, model upgrade or feature will be repaired or replaced at Seller's
option.
(b) Other Products. Seller warrants that the original purchaser of
equipment manufactured by Seller other than the NDI will have the right to enjoy
the equipment free and clear of claims of third persons against Seller. Seller
warrants products manufactured by it and supplied hereunder other than the NDI
to be free from defects in materials and workmanship under normal use and
service for a period of six months from date of shipment (nine months for
equipment manufactured by Seller if such equipment is exported from country of
manufacture when shipped to Buyer), except that the following components of the
repair gum extruder are so warranted only for 90 days from date of shipment: the
circuit boards, barrels, barrel adapters and air motors, four months on cushion
gum. This warranty is only applicable to products properly maintained and used
according to Seller's instructions. If, within the applicable period, any such
product shall be proved to Seller's satisfaction to be defective, such product
shall be repaired or replaced at Seller's option, or, also at Seller's option,
the purchase price shall be refunded.
(c) Other Terms. (i) In the case of the NDI, such repair or replacement,
and, in the case of products other than the NDI, such repair, replacement or
refund, shall be Seller's sole obligation and Buyer's exclusive remedy
hereunder. With respect to the NDI, such remedy is conditioned upon Seller's
receiving written notice of any alleged malfunctioning within ten (10) days of
installation, and, at Seller's option, return of the NDI to Seller, F.O.B. its
factory. With respect to products other than the NDI, such remedy shall be
conditioned upon Seller's receiving written notice of any alleged defect within
ten (10) days after its discovery and, at Seller's option, return of such
products to Seller, F.O.B. its factory. This warranty does not apply to products
that Seller determines have been damaged by misuse, neglect, improper operation,
accident or alteration, or that Seller determines have been tampered with or
repaired in a manner not authorized by Seller. Products supplied by Seller
hereunder that are manufactured by someone else are not warranted by Seller in
any way, but Seller agrees to assign to Buyer any warranty rights in such
products that Seller may have from the original manufacturer.
(ii) THE WARRANTY CONTAINED IN THIS SECTION 7 IS EXCLUSIVE AND IN LIEU OF
ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, AND SELLER
EXPRESSLY DISCLAIMS AND EXCLUDES ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. The exclusive remedy
stated in this Section 7 shall not be deemed to have failed of its essential
purpose so long as, (1) with respect to the NDI, Seller is willing and able to
repair or replace the malfunctioning item within ninety (90) days of the date on
which Seller determines a malfunction to exist, or (2) with respect to products
other than the NDI, Seller is willing and able to repair or replace defective
products, or refund the purchase price, within ninety (90) days of the date on
which Seller determines a defect to exist.
ANNEX B
Page 3 of 5
<PAGE>
(iii) Any description of the products, whether in writing or made orally
by Seller or Seller's agents, specifications, samples, models, bulletins,
drawings, diagrams, engineering sheets or similar materials used in connection
with Buyer's order are for the sole purpose of identifying the products and
shall not be construed as an express warranty. Any suggestions by Seller or
Seller's agents regarding use, application or suitability of the products shall
not be construed as an express warranty unless confirmed to be such in writing
by Seller.
8. COMPLIANCE WITH LAWS. Seller certifies that these goods were produced
in compliance with all applicable requirements of sections 6, 7 and 12 of the
Fair Labor Standards Act, as amended, and all regulations and orders of the
United States Department of Labor issued under section 14 thereof. Seller does
not warrant, however, that any materials, equipment and features meet the
requirements of any local, state or federal laws or regulations (other than
those specifically enumerated above) applicable to Buyer, including those issued
under OSHA. The equipment describes herein is provided only with the safety
devices and features shown in the applicable specifications. Should the customer
require any additional devices or features, they should be specifically
identified, and Seller will adjust the price accordingly.
9. RETURNS. Products may be returned to Seller only when Seller's written
permission, signed by duly authorized personnel of Seller, shall be obtained by
Buyer in advance. Goods may not be returned unless they are in marketable
condition. Returned products must be securely packaged and reach Seller without
damage. Any cost incurred by Seller to put products in marketable condition will
be charged to Buyer.
10. PATENTS, TRADEMARKS AND COPYRIGHTS. Seller will, at its own expense,
defend any suits that may be instituted by anyone against Buyer for alleged
infringement of any United States patent, trademark, or copyright relating to
any products manufactured and furnished by Seller hereunder, if such alleged
infringement consists of the use of such products, or parts thereof, in Buyer's
business, and if Buyer shall have made all payments then due hereunder,
provided, however, that Buyer shall give Seller immediate notice in writing of
any such suit, shall transmit to Seller immediately upon receipt all processes
and papers served upon Buyer, shall permit Seller through its counsel, either in
the name of Buyer or in the name of Seller, to defend the same and shall give
all needed information, assistance and authority to enable Seller to do so. If
such products are in such suit held in and of themselves to infringe any valid
United States patent, trademark or copyright, then: (a) Seller will pay any
final award of damages in such suit attributable to such infringement, and (b)
if in such suit use of such products by Buyer is permanently enjoined by reason
of such infringement, Seller shall, at its own expense and at its sole option,
either (i) procure for Buyer the right to continue using the products, (ii)
modify the products to render them noninfringing, (iii) replace the products
with noninfringing goods, or (iv) refund the purchase price and the
transportation costs paid by Buyer for the products.
Notwithstanding the foregoing, Seller shall not be responsible for any
compromise or settlement made without its written consent, or for infringements
of combination or process patents covering the use of the products in
combination with other goods or materials not furnished by Seller. The foregoing
states the entire liability of Seller for infringement, and in no event shall
Seller be liable for consequential damages attributable to an infringement.
ANNEX B
Page 4 of 5
<PAGE>
As to any products furnished by Seller to Buyer manufactured in
accordance with drawings, designs or specifications proposed or furnished by
Buyer, or any claim of contributory infringement resulting from the use or
resale by Buyer of products sold hereunder, Seller shall not be liable, and
Buyer shall indemnify Seller and hold Seller harmless from and against any and
all loss, liability, damage, claim or expense (including but not limited to
Seller's reasonable attorneys' fees and other costs of defense) incurred by
Seller as a result of any claim of patent, trademark, copyright or trade secret
infringements, or infringements of any other proprietary rights of third
parties.
The purchase of any products hereunder does not entitle Buyer to employ
the same in any patented process.
11. EXCLUSION OF CONSEQUENTIAL DAMAGES AND DISCLAIMER OF LIABILITY;
BUYER'S INDEMNITY. Seller's liability with respect to breaches of warranty shall
be limited as provided in Section 7 hereof. With respect to other breaches of
this contract, Seller's liability shall in no event exceed the contract price.
SELLER SHALL NOT BE SUBJECT TO AND DISCLAIMS: (1) ANY OTHER OBLIGATIONS OR
LIABILITIES ARISING OUT OF BREACH OF CONTRACT OR OF WARRANTY, (2) ANY
OBLIGATIONS WHATSOEVER ARISING FROM TORT CLAIMS (INCLUDING NEGLIGENCE AND STRICT
LIABILITY) OR ARISING UNDER OTHER THEORIES OF LAW WITH RESPECT TO PRODUCTS SOLD
OR SERVICES RENDERED BY SELLER, OR ANY UNDERTAKINGS, ACTS OR OMISSIONS RELATING
THERETO, AND (3) ALL CONSEQUENTIAL, INCIDENTAL AND CONTINGENT DAMAGES
WHATSOEVER.
Without limiting the generality of the foregoing, Seller specifically disclaims
any liability for penalties (including administrative penalties), special or
punitive damages, damages for lost profits or revenues, loss of use of products
or any associated equipment, cost of capital, facilities or services, downtime,
shut-down or slowdown costs, spoilage of material, or for any other types of
economic loss. All the limitations and disclaimers contained in this paragraph
and in the rest of this contract shall apply to claims of Buyer's customers or
any third party asserted by Buyer against Seller for indemnity or contribution,
as well as direct claims of Buyer against Seller.
Buyer shall indemnify Seller against any and all losses, liabilities,
damages and expenses (including, without limitation, attorneys' fees and other
costs of defending any action) that Seller may incur as a result of any claim by
Buyer or others arising out of or in connection with the products and/or
services sold hereunder and based on product or service defects not proven to
have been caused solely by Seller's negligence.
12. MANUALS, BROCHURES, INSTRUCTIONS. Any and all operating manuals,
instructions, brochures, warnings or the like concerning the goods supplied
hereunder shall be written in the English language, and are supplied as an aid
to Buyer and are not represented to be accurate, complete or sufficient. Buyer
warrants that it will accurately transcribe such manuals, instructions,
brochures or warnings to appropriate languages and dialects to comply with all
applicable laws and so that its employees and all third party users of the goods
will be properly informed of all the contents thereof. Buyer will indemnify and
hold harmless Seller against all liabilities and expenses (including attorneys'
fees) arising out of the use of the goods by the Buyer or a third party in any
case where the Buyer fails to make available adequate warnings, labels, manuals
and instructions concerning the proper and normal use of the goods.
13. SEVERABILITY. If any provisions of these terms and conditions of sale
shall be deemed illegal or unenforceable, such illegality or unenforceability
shall not affect the validity and enforceability of any legal and enforceable
provision hereof, which shall be construed as if such illegal and unenforceable
provision(s) had not been inserted herein.
ANNEX B
Page 5 of 5
<PAGE>
BANDAG7 LOGO AND TRADEMARK USAGE REQUIREMENTS AND POLICY
(a) BANDAG shall have the exclusive right to register BANDAG's trademarks,
service marks and logos (collectively, the "Marks") with governmental
authorities. All use of the Marks by Franchisee and goodwill arising therefrom
shall inure exclusively to BANDAG's benefit. Franchisee shall assign to BANDAG
any rights acquired in the Marks or any registration thereof.
(b) Franchisee shall: (i) not impair the value of BANDAG's Marks, whether
registered or not; (ii) use only the Marks designated by BANDAG; (iii) not use
trademarks, service marks, symbols, slogans, logos or the like that are
confusingly similar to the Marks; (iv) not use the Marks, or any word, name or
other symbol tending to be confusingly similar to the Marks, in the name of any
bank account of Franchisee or in any other way tending to create liability of
BANDAG or other than in connection with the BANDAG Method and the sale of tires
retreaded by the BANDAG Method; and (v) immediately cease any pre-existing use
of the Marks that conflicts with the terms of this Agreement. Franchisee shall
promptly report any unauthorized use of the Marks to BANDAG. Unless BANDAG
objects in writing to Franchisee at any time, Franchisee may, but is not
required to, include the Mark "BANDAG" in its corporate or trade name and use
such name in the business of making and selling tires retreaded by the BANDAG
Method. If Franchisee elects to use the name BANDAG in its corporate or trade
name, Franchisee shall not: (1) use the word BANDAG as the first word in its
corporate name (e.g., "Bandag Retreads, Inc." is prohibited), (2) use the name
BANDAG in a corporate name with the name of any state, province, county, city,
governmental or political unit or subdivision, (e.g., "San Francisco Bandag,
Inc.", "Texas Bandag", etc. would be prohibited), or (3) use the name BANDAG in
a corporate name being used by any other BANDAG franchisee (wherever located).
In addition, Franchisee must comply with all policies and procedures adopted by
BANDAG from time to time regarding use of the Mark BANDAG in the names of its
franchisees. Franchisee shall, immediately upon request by BANDAG, consent in
writing, in such form as may be requested by BANDAG, to the use of the "BANDAG"
Mark by third parties in their corporate or trade name.
(c) Franchisee shall display the name "BANDAG" in its Territory on its
buildings, signs and trucks used in the business of retreading tires by the
BANDAG Method, and shall reasonably advertise and promote the name "BANDAG" in
connection with such business subject, however, at all times, to the
restrictions set forth below. Every use of the name "BANDAG" in any display,
advertisement, promotion or otherwise by Franchisee shall be in a form and
character approved by BANDAG.
BANDAG encourages franchisees to use the BANDAG logo for all kinds of approved
advertising and identification within its Territory. However, to protect the
integrity of BANDAG's Marks, BANDAG restricts the usage of the BANDAG Marks by
areas.
The following is a list of authorized uses of the BANDAG Marks within
Franchisee's Territory:
1. Building and standing signs on property used by Franchisee.
2. Vehicles used in Franchisee's business.
3. Yellow-page advertising.
4. Newspaper advertising.
5. Electronic media advertising (radio and/or television).
6. Envelope and letterhead.
7. Business cards.
8. Collateral materials (leaflets, handouts, price lists, calendars etc.)
9. Billboards.
10. Community service program sponsorship.
ANNEX C
Page 1 of 2
<PAGE>
The following is a listing of unauthorized uses of the BANDAG Marks:
1. Building and/or standing signs located outside Franchisee's Territory.
2. Vehicles used exclusively outside Franchisee's Territory.
3. Yellow-page advertising which does not cover part of Franchisee's
Territory.
4. Newspapers not generally distributed within Franchisee's Territory.
5. Electronic media not servicing Franchisee's Territory.
6. Envelope and letterheads having addresses outside Franchisee's
Territory.
7. Business cards having an address outside Franchisee's Territory.
8. Sales and informational materials using an address outside
Franchisee's Territory.
9. Billboards located outside Franchisee's Territory.
10. Community service program sponsorship of groups not utilized by the
citizens within Franchisee's Territory
ANNEX C
Page 2 of 2
Exhibit 10.8
SEPARATION AND GENERAL RELEASE AGREEMENT
THIS SEPARATION AND GENERAL RELEASE AGREEMENT (the "Agreement") is made
as of this ____ day of August, 1998, by and between Henry H. Li ("Li"), residing
at #8A Old Peak Road, 19 B Garden Terrace 3, Hong Kong, and Bandag, Inc.
("Bandag"), located at 2905 N. Hwy. 61, Muscatine, Iowa 52761.
WHEREAS, on or about July 29, 1996, Li commenced employment with Bandag
as Vice President of Asian Operations;
WHEREAS, Bandag and Li executed an Expatriate Agreement effective July
29, 1996 (the "Expatriate Agreement"), which recited certain benefits and
entitlements afforded to Li, including participation in Bandag's pension and
profit sharing programs;
WHEREAS, in the Employment Offer for Henry Li, dated May 24, 1996 (the
"Offer Letter"), Bandag made assurances to Li that he would be entitled to a
"Special Termination Payment" if Bandag initiated Li's termination for reasons
other than unlawful or deliberately negligent conduct by Li;
WHEREAS, Bandag terminated Li's employment effective July 31, 1998;
WHEREAS, Bandag is providing Li with severance compensation,
continuation of health care coverage, outplacement, and other benefits which
exceed what Li is entitled to by law or under Bandag's policies; and
WHEREAS, Li and Bandag wish to settle and resolve all disputes and all
claims or potential claims and demands whatsoever that Li may have against
Bandag on the terms set forth herein, and for that reason have entered into this
Agreement;
NOW, THEREFORE, for good and valuable consideration, Li and Bandag
hereby agree as follows:
1. Severance: In consideration of the covenants undertaken and the
release given herein by Li, Bandag agrees to pay Li a lump sum payment of three
months salary, in the amount of Eighty-Seven Thousand, One Hundred and Twenty
Dollars and No Cents ($87,120.00), less standard income and payroll tax
withholdings and deductions, with such payment to be made within ten (10) days
of the expiration of the revocation period described below in paragraph 12.
2. Special Termination Payment: In further consideration of the
covenants undertaken and the release given herein by Li, Bandag agrees to pay Li
a special termination payment in the gross amount of Five Hundred and Thirteen
Thousand, Two Hundred and Ninety-Six Dollars and No Cents ($513,296.00), less
standard income and payroll tax withholdings and deductions. This special
termination payment has been calculated pursuant to the formula set forth in the
Offer Letter, which is the difference between the Kodak Pension Benefit Li would
have received from Kodak at age 55 and the Kodak/Bandag Pension Benefit
<PAGE>
value at the date of termination. The special termination payment as described
herein will be paid out to Li in two (2) lump sum payments; One Hundred
Sixty-Nine Thousand, Three Hundred Eight-Eight Dollars and No Cents
($169,388.00) will be paid within ten (10) days of the expiration of the
revocation period described below in paragraph 12; and Three Hundred Three
Thousand, Nine Hundred Eight Dollars and No Cents ($343,908.00) will be paid on
January 1, 1999. In addition, Bandag agrees to pay Li a lump sum of Thirty-Two
Thousand, Four Hundred and Fifty-One and No Cents ($32,451.00), less standard
income and payroll tax withholdings and deductions, such amount being equal to
the pension benefit to which Li would have been entitled had he vested in the
Bandag pension plan, with such payment to be made within ten (10) days of the
expiration of the revocation period described below in paragraph 12.
3. Health-Care Benefits and COBRA: In further consideration of the
covenants undertaken and the release given herein by Li, Bandag agrees to
provide Li with three months continuation of CIGNA health care benefits, or to
pay Li's premiums for such continued coverage under the Consolidated Omnibus
Budget Reconciliation Act ("COBRA"). Bandag will provide Li with these
health-care benefits, without regard to whether Li elects benefits pursuant to
his rights as set forth in COBRA. Bandag will provide Li with a COBRA notice
upon his termination.
4. Housing Allowance: In further consideration of the covenants
undertaken and the release given herein by Li, Bandag agrees to pay Li a lump
sum housing allowance in the amount of Thirty-Seven Thousand, Four Hundred and
Seventy-Seven Dollars and Ninety Cents ($37,477.90), and further agrees to
directly pay reasonable utility bills upon receipt from Li. Such payments are to
be made within ten (10) days of the expiration of the revocation period
described below in paragraph 12.
5. Outplacement: In further consideration of the covenants undertaken
and the release given herein by Li, Bandag agrees to reimburse Li for the costs
reasonably associated with his outplacement services, in an amount not to exceed
Sixty Thousand Dollars and No Cents ($60,000.00). Li agrees to provide Bandag
with all invoices associated with these costs, and Bandag's obligation to
reimburse Li for such outplacement services is conditioned on Li providing such
documentation.
6. Accrued Vacation: Bandag agrees to pay Li his accrued vacation in
the amount of Twenty-Seven Thousand Dollars and No Cents ($27,000.00), less
standard income and payroll tax withholdings and deductions, with such payment
to be made within ten (10) days of the expiration of the revocation period
described below in paragraph 12.
7. Stock: In further consideration for the covenants undertaken by
Bandag, Li agrees to forfeit 840 shares of Bandag Common Stock and 840 shares of
Bandag Class A Common Stock per the terms of the Bandag Restricted Stock Award
Program, and to take all steps necessary to effectuate that stock forfeiture.
8. Repatriation: If Li elects to stay in Hong Kong, Bandag will
reimburse Li for his local moving and storage expenses up to the amount of
Thirteen Thousand Dollars
-2-
<PAGE>
and No Cents ($13,000.00) as supported by actual moving and storage invoices or,
at Li's discretion, will pay those invoices directly (up to that same $13,000.00
amount) upon receiving them from Li with a request for direct payment by Bandag.
If Li elects to relocate, Bandag will reimburse Li for all of his actual and
reasonable relocation expenses again as supported by actual invoices or, at Li's
discretion, will pay those invoices directly upon receiving them from Li with a
request for direct payment by Bandag. Li will make his election as to whether he
will stay in Hong Kong or relocate, and he will notify Bandag in writing of that
election, within sixty (60) days of the execution of this Agreement. That
election and notification by Li will be final and binding for purposes of this
Agreement, and Li will not be entitled to the reimbursement or payment as
described in this paragraph if he does not provide such timely written
notification to Bandag of his election.
9. Tax Preparation: Bandag agrees to assist Li in the preparation of
his 1996, 1997, and 1998 tax returns, in accordance with the terms of Bandag's
Expatriate Program.
10. Comprehensive And General Release Of Bandag: In consideration for
the covenants undertaken herein by Bandag, Li hereby releases, discharges, and
covenants not to sue Bandag, its direct or indirect parents, subsidiaries,
affiliates, and related companies, and its and their past and present directors,
officers, employees, attorneys, representatives, members, insurers, agents,
successors, and assigns (individually and collectively the "BANDAG RELEASEES")
from and with respect to any and all actual or potential actions, claims, and
demands whatsoever, whether known or unknown, suspected or unsuspected, in law
or equity, which against the BANDAG RELEASEES or any of them Li ever had, nor
has, or hereafter can, shall, or may have for, upon, or by reason of any matter,
cause, or thing whatsoever from the beginning of the world to the date of this
Agreement, including without limitation any and all claims: (a) arising out of
or in any way relating to Li's employment with Bandag or his separation from
that employment; (b) arising out of or in any way relating to any transactions,
occurrences, acts, statements, disclosures, or omissions occurring prior to the
date of this Agreement; (c) arising out of or in any way relating to the
Expatriate Agreement or the Offer Letter regarding pension obligations; (d)
arising out of or in any way relating to any claims under common law; (e)
arising out of or in any way relating to any claims under any federal, state, or
local statute, regulation, ordinance, or other law prohibiting discrimination on
the basis of age, sex, race, color, religion, disability, national origin, or
workers' compensation status, including Title VII of the Civil Rights Act of
1964, as amended, the Age Discrimination in Employment Act of 1967, as amended,
and Chapters 216, 216A and 216C of the Iowa General Laws; or (f) for salary,
bonuses, commissions, severance pay, vacation pay, travel privileges,
disability, life insurance, medical insurance, unemployment insurance, or any
other fringe benefit of or from Bandag. IT IS THE EXPRESS INTENT OF THE PARTIES
THAT THE RELEASE PROVIDED HEREIN BY LI BE A GENERAL, FULL, AND COMPREHENSIVE
RELEASE, TO THE FULLEST EXTENT PERMITTED BY LAW, AS TO EACH AND ALL OF THE
BANDAG RELEASEES.
11. Comprehensive And General Release Of Li: In consideration for the
covenants undertaken hereby by Li, Bandag hereby releases, discharges, and
covenants not to
-3-
<PAGE>
sue Li and his heirs, executors, administrators, successors, assigns, and
attorneys (individually and collectively the "LI RELEASEES") from and with
respect to any and all actual or potential actions, claims, and demands
whatsoever, whether known or unknown, suspected or unsuspected, in law or
equity, which against the LI RELEASEES or any of them Bandag and its direct or
indirect parents, subsidiaries, affiliates, and related companies ever had, now
have, or hereafter can, shall, or may have for, upon, or by reason of any
matter, cause, or thing whatsoever from the beginning of the world to the date
of this Agreement, including without limitation any and all claims: (a) arising
out of or in any way relating to Li's employment with Bandag or his separation
from that employment; (b) arising out of or in any way relating to any
transactions, occurrences, acts, statements, disclosures, or omissions occurring
prior to the date of this Agreement; or (c) arising out of or in any way
relating to the Expatriate Agreement or the Offer Letter regarding pension
obligations. IT IS THE EXPRESS INTENT OF THE PARTIES THAT THE RELEASE PROVIDED
HEREIN BY BANDAG BE A GENERAL, FULL, AND COMPREHENSIVE RELEASE, TO THE FULLEST
EXTENT PERMITTED BY LAW, AS TO EACH AND ALL OF THE LI RELEASEES.
12. ADEA Waiver: The parties recognize and agree that Bandag shall have
no obligation to make any of the payments called for herein and that this
Agreement shall not become effective until such time as Li has had a period of
twenty-one (21) days to reflect on this Agreement before executing it and an
additional period of seven (7) days after executing the Agreement to revoke it.
The parties further recognize and agree that this provision is intended to
ensure an effective waiver of any claims by Li under the federal Age
Discrimination in Employment Act, as amended by the Older Workers Benefit
Protection Act of 1990. By his signature below, Li warrants and represents that
he has been given twenty-one (21) days prior to his execution of this Agreement
to reflect on this Agreement and all material changes thereto, and in the event
he executes this Agreement before that full twenty-one (21) days he does so
knowingly and voluntarily and with the intention of waiving any remaining time
in that twenty-one (21) day reflection period, that he understands all of the
terms of this Agreement, that he has been advised in writing to consult with an
attorney prior to executing this Agreement, and that he knowingly and
voluntarily enters into this Agreement in all respects. The parties further
agree that Li is not entitled to any payment or compensation of any kind or
nature whatsoever in the event that he revokes this Agreement or elects not to
enter into this Agreement. The parties further intend and agree that this
Agreement, if executed and not revoked within seven (7) days after that
execution, shall constitute an effective waiver of any claim of any age
discrimination claims and of any other claim of whatever kind or nature by Li
against any of the BANDAG RELEASEES as defined in this Agreement.
13. Commitment Not To Apply: In further consideration for the covenants
undertaken herein by Bandag, Li agrees that he will not now or in the future
apply for employment or re-employment with Bandag or any of its direct or
indirect parents, subsidiaries, affiliates or related companies.
14. Confidentiality: Li agrees to keep all aspects of the Agreement
confidential. Notwithstanding the foregoing, Li may disclose the terms of this
Agreement to
-4-
<PAGE>
the Internal Revenue Service, to his attorneys and financial advisors, and to
his spouse, provided that such persons are advised of the confidential nature of
this Agreement and agree to maintain any information provided to them regarding
this Agreement in strict confidence.
15. No Admission: While this Agreement resolves all issues between Li
and Bandag relating to any alleged violation of any state, federal, or local
law, regulations, or ordinance, this Agreement does not constitute an
adjudication or finding on the merits and it is not, and shall not be construed
as, an admission by Bandag of any violation of any policies, procedures, state,
federal, or local laws, regulations, or ordinances. Neither this Agreement or
anything in this Agreement shall be construed to be admissible in any proceeding
as evidence of or an admission by Bandag of any violation of any policies,
procedures, state, federal, or local laws, regulations, or ordinances, or of any
wrongdoing by Bandag; provided, however, that this Agreement shall be admissible
in any proceeding to enforce its terms.
16. Complete Agreement: This Agreement is an integrated document and
constitutes and contains the complete understanding and agreement of the parties
with respect to the subject matter addressed herein and supersedes and replaces
all prior negotiations and agreements of any kind or nature between Li and
Bandag, whether written or oral, including the Expatriate Agreement and the
Offer Letter.
17. Severability: If any of the provisions, terms, or clauses of this
Agreement are held invalid, illegal, unenforceable, or ineffective, such
provisions, terms and clauses shall be deemed severable such that all other
provisions, terms, and clauses of this Agreement shall remain valid and binding
upon the parties.
18. Governing Law: This Agreement is deemed to have been executed and
delivered within the State of Iowa, and the rights and obligations of the
parties hereunder shall be governed by, and construed and enforced in accordance
with, the laws of the State of Iowa, without regard to principles of conflict of
laws.
19. Currency: It is agreed and understood by the parties hereto that
all payments referenced herein shall be made in U.S. dollars.
20. Payment Method: Bandag agrees to make all payments to Li referenced
herein through wire transfer to Li's account upon instructions to be provided by
Li and his bank.
21. Counterparts: This Agreement may be executed in counterparts and
each counterpart when executed shall have the effect of a signed original.
Photographic copies of such signed counterparts may be used in lieu of the
original for any purpose.
-5-
<PAGE>
22. Certification: BY THEIR AUTHORIZED SIGNATURES BELOW, THE PARTIES TO
THIS AGREEMENT CERTIFY THAT THEY AGREE TO ALL OF THE TERMS OF THIS AGREEMENT,
THAT THEY HAVE HAD AN OPPORTUNITY TO DISCUSS THOSE TERMS WITH ATTORNEYS OR
ADVISORS OF THEIR OWN CHOOSING, AND THAT THEY HAVE SIGNED THIS AGREEMENT
VOLUNTARILY AND WITH FULL UNDERSTANDING OF ITS LEGAL CONSEQUENCES.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed and delivered at Muscatine, Iowa as of
the date first written above.
Henry H. Li Bandag, Inc.
/s/ Henry H. Li By: /s/ Jacqueline A. Musacchia
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The Company has the following subsidiaries including significant
subsidiaries as defined in Regulation S-X, each incorporated in the jurisdiction
stated opposite its name. All of the following subsidiaries are 100% owned by
the Company. The Company has additional subsidiaries, which, if considered in
the aggregate as a single subsidiary, would not constitute a "significant
subsidiary" as such term is defined in Regulation S-X.
Name of Subsidiary Jurisdiction of
Incorporation
Bandag A.G. ....................................................Switzerland
Bandag Canada Ltd. ..................................................Canada
Bandag Europe N.V. .................................................Belgium
Bandag Licensing Corporation. ........................................Iowa
Bandag Incorporated of S.A. (Proprietary) Limited .............South Africa
Bandag New Zealand Limited .....................................New Zealand
Bandag do Brasil Ltda ...............................................Brazil
Bandag B.V. ....................................................Netherlands
Bandag de Mexico, S.A. de C.V. ......................................Mexico
BTC, Inc. .........................................................Delaware
Tire Distribution Systems, Inc. ...................................Delaware
Tire Management Solutions, Inc. .......................................Iowa
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED STATEMENT OF EARNINGS AND THE AUDITED CONSOLIDATED BALANCE SHEETS
OF THE REGISTRANT AS OF THE AND FOR THE YEAR ENDED DECEMBER 31, 1998,
RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,912
<SECURITIES> 9,712
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<PP&E> 503,745
<DEPRECIATION> 290,699
<TOTAL-ASSETS> 755,729
<CURRENT-LIABILITIES> 174,909
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0
0
<COMMON> 21,956
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<CGS> 648,366
<TOTAL-COSTS> 648,366
<OTHER-EXPENSES> 320,847
<LOSS-PROVISION> 8,460
<INTEREST-EXPENSE> 10,772
<INCOME-PRETAX> 99,513
<INCOME-TAX> 40,194
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<NET-INCOME> 59,319
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.63
</TABLE>
