-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UiuyrYr6Sl3w/JwDImly36Ynealnf7GDn1zbaM3rhVmE3l2UInN7/MPDYyQFG+QF 8T3J5TZAH2m6RJ5sp8IQFQ== 0000950134-98-008765.txt : 19981113 0000950134-98-008765.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950134-98-008765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREADCO INC CENTRAL INDEX KEY: 0000876948 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AUTOMOTIVE REPAIR, SERVICES & PARKING [7500] IRS NUMBER: 710706271 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19390 FILM NUMBER: 98745236 BUSINESS ADDRESS: STREET 1: 1101 SOUTH 21ST STREET CITY: FORT SMITH STATE: AR ZIP: 72901 BUSINESS PHONE: 5017856000 MAIL ADDRESS: STREET 1: PO BOX 10048 CITY: FORT SMITH STATE: AR ZIP: 72917-0048 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1998 ------------------ [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------------- --------------------- Commission File Number 0-19390 -------- TREADCO, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 7534 and 5531 71-0706271 - ---------------------------------- -------------------------------------------- ------------------------------ (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
1101 South 21st Street Fort Smith, Arkansas 72901 (501) 788-6400 -------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1998 - ----------------------------- -------------------------------- Common Stock, $.01 par value 5,072,255 shares 2 TREADCO, INC. INDEX
PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Balance Sheets -- September 30, 1998 and December 31, 1997............................................. 3 Statements of Operations -- For the Three and Nine Months Ended September 30, 1998 and 1997...................... 5 Statements of Cash Flows -- For the Nine Months Ended September 30, 1998 and 1997................................ 6 Notes to Financial Statements -- September 30, 1998 ................................. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ................................................................... 16 ITEM 2. Changes in Securities ............................................................... 16 ITEM 3. Defaults Upon Senior Securities ..................................................... 16 ITEM 4. Submission of Matters to a Vote of Security Holders ................................. 17 ITEM 5. Other Information ................................................................... 17 ITEM 6. Exhibits and Reports on Form 8-K .................................................... 17 SIGNATURES .......................................................................................... 18 EXHIBIT INDEX ...................................................................................... 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. TREADCO, INC. BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 1998 1997 -------------------------------- (UNAUDITED) (NOTE) ASSETS CURRENT ASSETS Accounts receivable: Trade receivables, less allowances for doubtful accounts (1998 -- $1,403,140; 1997 -- $1,719,389 ) ................................................ $ 25,380,640 $ 19,802,749 Other (primarily national accounts and volume rebates) ................................................. 7,425,635 5,734,366 Due from affiliates ..................................................... 118,307 90,305 Inventories ............................................................. 28,885,807 27,326,046 Prepaid expenses ........................................................ 271,944 3,175 Federal and state income taxes refundable ............................... -- 1,221,681 Deferred income taxes ................................................... 1,466,469 1,466,469 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS ................................................ 63,548,802 55,644,791 PROPERTY, PLANT AND EQUIPMENT Land..................................................................... 4,542,996 4,000,877 Structures .............................................................. 15,322,580 13,273,823 Retreading and other equipment .......................................... 34,031,427 32,048,910 - ------------------------------------------------------------------------------------------------------------------- 53,897,003 49,323,610 Less allowances for depreciation ........................................ (20,931,457) (17,994,542) - ------------------------------------------------------------------------------------------------------------------- 32,965,546 31,329,068 OTHER ASSETS Goodwill, less amortization (1998 -- $4,255,298; 1997 -- $3,908,806) ............................... 12,347,662 12,694,153 Noncompete agreements, less amortization (1998 -- $ 0; 1997 -- $1,132,082) ...................................... -- 174,167 Deferred income taxes ................................................... 83,528 -- Other ................................................................... 1,240,588 616,003 - ------------------------------------------------------------------------------------------------------------------- 13,671,778 13,484,323 - ------------------------------------------------------------------------------------------------------------------- $ 110,186,126 $ 100,458,182 ===================================================================================================================
3 4 TREADCO, INC. BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 1998 1997 ----------------------------------------- (UNAUDITED) (NOTE) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft ................................................. $ 645,100 $ 125,148 Trade accounts payable ......................................... 22,920,434 17,144,202 Due to affiliate ............................................... 707,850 731,711 Accrued salaries, wages and other expenses ..................... 8,773,447 8,066,536 Federal and state income taxes.................................. 182,594 - Current portion of long-term debt .............................. 2,169,876 2,304,691 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES .................................. 35,399,301 28,372,288 LONG-TERM DEBT, less current portion ................................ 14,958,063 12,883,763 OTHER LIABILITIES ................................................... 100,425 89,860 DEFERRED INCOME TAXES ............................................... - 277,703 STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share -- authorized 2,000,000 shares; none issued ..................... - - Common stock, par value $.01 per share -- authorized 18,000,000 shares; issued and outstanding 5,072,255 shares ................................. 50,723 50,723 Additional paid-in capital ..................................... 45,623,346 45,623,346 Retained earnings .............................................. 14,054,268 13,160,499 - ------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY ................................. 59,728,337 58,834,568 COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------------------------------------------- $ 110,186,126 $ 100,458,182 ===================================================================================================================
Note: The balance sheet at December 31, 1997 has been derived from audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying notes are an integral part of these financial statements. 4 5 TREADCO, INC. STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 -------------------------------------------------------------------- (UNAUDITED) SALES Non-affiliates ................................ $ 51,520,937 $ 46,168,823 $ 135,109,267 $ 119,276,915 Affiliates .................................... 615,614 600,215 1,625,827 1,839,484 - ------------------------------------------------------------------------------------------------------------------------ 52,136,551 46,769,038 136,735,094 121,116,399 COSTS AND EXPENSES Materials and cost of new tires ............... 34,536,670 31,368,557 89,736,037 82,423,691 Salaries and wages ............................ 8,421,010 7,313,915 23,272,610 20,140,152 Depreciation and amortization ................. 1,638,399 1,447,887 4,613,297 4,146,063 Administrative and general .................... 6,133,943 5,700,950 16,782,116 15,668,126 - ------------------------------------------------------------------------------------------------------------------------ 50,730,022 45,831,309 134,404,060 122,378,032 - ------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME (LOSS) .......................... 1,406,529 937,729 2,331,034 (1,261,633) OTHER INCOME Interest income ............................... 8,254 12,179 30,142 31,406 Gain on asset sales ........................... 61,298 243,148 430,096 245,754 Other ......................................... 79,555 31,246 130,694 156,907 - ------------------------------------------------------------------------------------------------------------------------ 149,107 286,573 590,932 434,067 OTHER EXPENSES Interest ...................................... 298,648 328,430 839,519 974,022 Amortization of goodwill....................... 115,498 115,498 346,492 346,492 Amortization of noncompete agreements ......... 43,542 65,312 174,167 195,937 - ------------------------------------------------------------------------------------------------------------------------ 457,688 509,240 1,360,178 1,516,451 - ------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAXES.................................. 1,097,948 715,062 1,561,788 (2,344,017) FEDERAL AND STATE INCOME TAXES (CREDIT) Current ...................................... 464,475 413,426 1,029,250 (1,087,079) Deferred ..................................... (21,894) (119,179) (361,231) 264,719 - ------------------------------------------------------------------------------------------------------------------------ 442,581 294,247 668,019 (822,360) - ------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) ............................... $ 655,367 $ 420,815 $ 893,769 $ (1,521,657) ======================================================================================================================== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE.............................. $ 0.13 $ 0.08 $ 0.18 $ (0.30) ======================================================================================================================== CASH DIVIDENDS PAID ======================================================================================================================== PER COMMON SHARE ............................ $ - $ 0.04 $ - $ 0.12 ========================================================================================================================
The accompanying notes are an integral part of these financial statements. 5 6 TREADCO, INC. STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30 1998 1997 ------------------------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss) .................................................. $ 893,769 $ (1,521,657) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization ................................... 4,613,297 4,146,063 Amortization of goodwill ........................................ 346,492 346,492 Amortization of noncompete agreements ........................... 174,167 195,937 Provision for losses on accounts receivable ..................... 1,141,380 1,920,463 Provision (credit) for deferred income taxes .................... (361,231) 264,719 Gain on asset sales ............................................. (430,096) (245,754) Changes in operating assets and liabilities: Receivables .................................................. (7,785,254) (7,924,763) Inventories and prepaid expenses ............................. (2,009,098) 1,837,405 Federal and state income taxes refundable .................... 1,221,681 730,103 Other assets ................................................. 28,614 (1,819) Trade accounts payable, accrued expenses ..................... 6,506,940 8,695,096 Due to/from affiliates ......................................... (51,863) 27,387 Other liabilities .............................................. 10,565 13,499 - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 4,299,363 8,483,171 INVESTING ACTIVITIES Purchases of plant facilities and other property and equipment, less notes payable ............................... (7,517,184) (1,677,354) Proceeds from asset sales .......................................... 579,250 799,876 - ------------------------------------------------------------------------------------------------------------------------ Acquisition of assets .............................................. (1,275,759) - NET CASH USED BY INVESTING ACTIVITIES ................................. (8,213,693) (877,478) FINANCING ACTIVITIES Borrowings under revolving credit facility ......................... 44,075,000 23,235,000 Payments under revolving credit facility ........................... (38,975,000) (29,135,000) Principal payments on other long-term debt and capitalized lease obligations .............................. (1,705,622) (1,530,497) Dividends paid ..................................................... - (608,671) Net increase in cash overdrafts .................................... 519,952 417,671 - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....................... 3,914,330 (7,621,497) - ------------------------------------------------------------------------------------------------------------------------ NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................ - (15,804) Cash and cash equivalents at beginning of period ................... - 15,804 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................................... $ - $ - ========================================================================================================================
The accompanying notes are an integral part of these financial statements. 6 7 TREADCO, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- NOTE A -- ORGANIZATION Treadco, Inc. (the "Company") was organized in June 1991 as the successor to the truck tire retreading and new truck tire sales business previously conducted and developed by a wholly owned subsidiary of Arkansas Best Corporation ("ABC"). In September 1991, the Company completed an initial public offering. At September 30, 1998, ABC owned approximately 49% of the Company's outstanding shares. NOTE B -- FINANCIAL STATEMENT PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the Company's financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. On March 31, 1998, the Company and Bridgestone/Firestone, Inc. ("Bridgestone") signed an agreement whereby Bridgestone would take over operations of the Company's Oncor retreading facility located in Hazelwood, MO. The Company will continue to market the Oncor retread tires produced at this plant. The book value of the assets sold to Bridgestone in connection with the transaction was approximately equal to the related debt obligation to Bridgestone of $1.8 million which was eliminated by the transaction. Accordingly, no gain or loss was recognized by the Company on the transaction. NOTE C -- INVENTORIES
SEPTEMBER 30 DECEMBER 31 1998 1997 - -------------------------------------------------------------------------------------------------- New tires and finished retreaded tires ......................... $ 23,504,601 $ 22,391,595 Materials and supplies ......................................... 5,381,206 4,934,451 - -------------------------------------------------------------------------------------------------- $ 28,885,807 $ 27,326,046 ==================================================================================================
7 8 TREADCO, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) -- Continued - -------------------------------------------------------------------------------- NOTE D - NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 ------------------------------------------------------------------------ (UNAUDITED) NUMERATOR: Numerator for basic and diluted earnings per share - income (loss) available for common stockholders ........................ $ 655,367 $ 420,815 $ 893,769 $ (1,521,657) ============================================================================================================================ DENOMINATOR: Denominator for basic earnings per share Weighted-average shares..................... 5,072,255 5,072,255 5,072,255 5,072,255 Effect of dilutive securities: Employee stock options...................... 17,560 49,881 26,402 - - ---------------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares.............. 17,560 49,881 26,402 - - ---------------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversions..................... 5,089,815 5,122,136 5,098,657 5,072,255 ============================================================================================================================ Basic and diluted income (loss) per common share................................ $ 0.13 $ 0.08 $ 0.18 $ (0.30) ============================================================================================================================
NOTE E -- LITIGATION Other than as discussed below, the Company is not a party to any pending legal proceedings which management believes to be material to the results of operations, cash flows or the financial condition of the Company. On October 30, 1995, the Company filed a lawsuit in Arkansas State Court, alleging that Bandag, Inc. ("Bandag"), the Company's former retread franchisor, and certain of its officers and employees violated Arkansas statutory and common law in attempting to solicit the Company's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. At the Company's request, the Court entered a Temporary Restraining Order barring Bandag, Treadco's former officers J. J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin G. Carver and William Sweatman from soliciting or hiring Treadco's employees to work for Bandag or any of its franchisees, from diverting or soliciting Treadco's customers to buy from Bandag franchisees other than Treadco, and from disclosing or using any of Treadco's confidential information. On November 8, 1995, Bandag and the other named defendants asked the State Court to stop its proceedings pending a decision by the United States District Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed by Bandag in the Federal District Court on November 8, 1995. The Federal District Court ruled that under the terms of the Company's franchise agreements with Bandag, all of the issues involved in the Company's lawsuit against Bandag are to be decided by arbitration. The arbitration hearing began September 21, 1998 and the Company expects the hearing 8 9 TREADCO, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) -- Continued - -------------------------------------------------------------------------------- to be completed by the end of 1998. However, the timing of any ruling by the arbitrator can not be determined with certainty. The Company will as a part of the arbitration process submit a substantial claim against Bandag. Due to the uncertainties inherent in the arbitration process, the Company has not recorded any claim recovery in the accompanying financial statements. NOTE F -- LONG-TERM DEBT The Company is a party to a revolving credit facility with Societe Generale, Southwest Agency (the "Credit Agreement") providing for borrowings of up to the lesser of $20 million or the applicable borrowing base. The Company's borrowing base under the Credit Agreement is equal to 80% of its eligible accounts receivable and 50% of its inventory consisting of tire casings, new tires and finished retreads. At September 30, 1998, the borrowing base was $32.7 million and the amount advanced under the Credit Agreement was $9.1 million. Credit Agreement advances bear interest at variable rates determined under the Credit Agreement. At September 30, 1998, the weighted average interest rate on advances under the Credit Agreement was 6.86%. The Credit Agreement contains various covenants which limit, among other things, dividends, disposition of receivables, indebtedness and investments, as well as requiring the Company to meet certain financial tests. The Company was in compliance with the covenants at September 30, 1998. NOTE G - RECENT ACCOUNTING STANDARDS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Statement is effective for the Company on January 1, 2000. The Company is evaluating the impact the Statement will have on its financial statements and disclosures. In March 1998, the Accounting Standards Executive Committee of the American Institute of CPA's ("AuSEC") issued Statement of Position ("SOP"), Accounting for Costs of Computer Software Developed For or Obtained For Internal Use. Under the SOP, qualifying computer costs incurred during the "application development stage" are required to be capitalized and amortized to income over the software's estimated useful life. The SOP will be effective for the Company on January 1, 1999. The SOP will result in capitalization of costs related to internal computer software development. All such costs are currently expensed. The amount of costs capitalized within any period will be dependent on the nature of software development activities and projects in that period. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. The Statement requires the classification of components of other comprehensive income by their nature in a financial statement and display of the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the financial statements. The Company adopted FASB Statement No. 130 on January 1, 1998, however this statement had no impact on the Company's financial statements at that date since there are no items that are considered other comprehensive income. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT EVENTS On March 31, 1998, the Company and Bridgestone/Firestone, Inc. ("Bridgestone") signed an agreement whereby Bridgestone would take over operations of the Company's Oncor retreading facility located in Hazelwood, MO. The Company will continue to market the Oncor retread tires produced at this plant. On May 8, 1998, the Company acquired substantially all the assets of Commercial Tire Service, Inc., located in Augusta, Georgia. The Company will operate Augusta as a sales location. RESULTS OF OPERATIONS The Company is affected by seasonal fluctuations, which influence the demand for retreads and new tires. The Company generally experiences reduced demand for retreads and new tires in the first quarter due to more difficult driving and tire maintenance conditions resulting from inclement weather. The Company is also subject to cyclical national and regional economic conditions. The following table sets forth for the periods indicated a summary of sales by category:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------------------------------------------------------------------------------- % % 1998 1997 INCREASE 1998 1997 INCREASE - ----------------------------------------------------------------------------------------------------------------------------- SALES Retread............... $ 19,714,287 $ 18,536,942 6.4% $ 53,644,963 $ 49,029,943 9.4% New Tires............. 26,942,107 23,817,732 13.1% 68,899,449 60,881,139 13.2% - ----------------------------------------------------------------------------------------------------------------------------- Service............... 5,480,157 4,414,364 24.1% 14,190,682 11,205,317 26.6% $ 52,136,551 $ 46,769,038 11.5% $136,735,094 $121,116,399 12.9% =============================================================================================================================
The following table sets forth for the periods indicated a summary of the Company's operating costs and expenses as a percentage of sales.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 --------------------------------------------------- COSTS AND EXPENSES Materials and cost of new tires .................... 66.2% 67.1% 65.6% 68.1% Salaries and wages ................................. 16.2 15.6 17.0 16.6 Depreciation and amortization ...................... 3.1 3.1 3.4 3.4 Administrative and general ......................... 11.8 12.2 12.3 12.9 - ---------------------------------------------------------------------------------------------------------------- 97.3% 98.0% 98.3% 101.0% ================================================================================================================
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued - -------------------------------------------------------------------------------- Three Months Ended September 30, 1998 as Compared to Three Months Ended September 30, 1997 Sales (including sales to affiliates) for the three months ended September 30, 1998 increased 11.5% to $52.1 million from $46.8 million for the three months ended September 30, 1997. Retread sales for the 1998 third quarter increased primarily due to the higher volume of units sold and an overall increase in the sales price per unit of approximately 0.5%. The increase in the sales price is due primarily to the mix of tires sold. New tire sales for the 1998 third quarter were higher due to increased unit sales offset in part by a lower sales price per unit and an increase in national account sales. Treadco continues to experience a shortage of new tire availability with approximately 26,000 units on back order at September 30, 1998. Service revenues increased due to the Company's continued emphasis on its service operations. During the three months ended September 30, 1998, the Company sold approximately 195,000 retread truck tires, an increase of 5.8% from the three months ended September 30, 1997 and new tires sold increased 15.7% to 151,000 tires. For the three months ended September 30, 1998, same store sales increased 9.3% and new store sales accounted for 2.2% of the increase from the 1997 third quarter. Same store sales include both production locations and sales locations that have been in existence for the entire periods presented. New store sales resulted from two new sales locations. Operating costs and expenses as a percent of sales were 97.3% for the three months ended September 30, 1998 compared to 98.0% for the three months ended September 30, 1997. Materials and cost of new tires as a percent of sales decreased primarily from lower new tire costs and improved casing costs and controls. Salaries and wages as a percent of sales increased due primarily to the implementation of a gross profit-based commission plan for salesmen effective January 1, 1998. Also during the 1998 third quarter, the Company experienced near-record heat in most of its operating territory. As a result, labor productivity was less than normal during the quarter. Administrative and general cost as a percent of sales decreased primarily due to lower bad debt expense resulting from improved accounts receivable collections. Interest expense for the three months ended September 30, 1998 was $299,000 compared to $328,000 for the three months ended September 30, 1997. The decrease resulted primarily from a reduction in average debt outstanding. The difference between the effective tax rate for the three months ended September 30, 1998 and the federal statutory rate resulted primarily from state income taxes and amortization of nondeductible goodwill. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued - -------------------------------------------------------------------------------- Nine Months Ended September 30, 1998 as Compared to Nine Months Ended September 30, 1997 Sales (including sales to affiliates) for the nine months ended September 30, 1998 increased 12.9% to $136.7 million from $121.1 million for the nine months ended September 30, 1997. Retread sales for the nine months ended September 30, 1998 increased primarily due to the higher volume of units sold and an overall increase in the sales price per unit of approximately 1%. New tire sales for the nine months ended September 30, 1998 were higher due to increased unit sales. Treadco continues to experience a shortage of new tire availability with approximately 26,000 units on back order at September 30, 1998. Service revenues increased due to the Company's continued emphasis on its service operations. During the nine months ended September 30, 1998, the Company sold approximately 532,000 retread truck tires, an increase of 8.4% from the nine months ended September 30, 1997 and new tires sold increased 15.2% to 386,000 tires. For the nine months ended September 30, 1998, same store sales increased 11.5% and new store sales accounted for 1.4% of the increase from the nine months ended September 30, 1997. Same store sales include both production locations and sales locations that have been in existence for the entire periods presented. New store sales resulted from two new sales locations. Operating costs and expenses as a percent of sales were 98.3% for the nine months ended September 30, 1998 compared to 101.0% for the nine months ended September 30, 1997. Materials and cost of new tires as a percent of sales decreased primarily from lower new tire costs and improved casing costs and controls. Salaries and wages as a percent of sales increased primarily to the implementation of a gross profit-based commission plan for salesmen effective January 1, 1998. Administrative and general expenses as a percent of sales decreased primarily due to lower bad debt expense resulting from improved accounts receivable collections. Interest expense for the nine months ended September 30, 1998 was $840,000 compared to $974,000 for the nine months ended September 30, 1997. The decrease resulted primarily from a reduction in average debt outstanding. The difference between the effective tax rate for the nine months ended September 30, 1998 and the federal statutory rate resulted primarily from state income taxes and amortization of nondeductible goodwill. LIQUIDITY AND CAPITAL RESOURCES The ratio of current assets to current liabilities was 1.79:1 at September 30, 1998 and 1.96:1 at December 31, 1997. Net cash provided by operating activities was $4.3 million for the nine months ended September 30, 1998, compared to net cash provided of $8.5 million for the nine months ended September 30, 1997. The decrease is due primarily to an increase in inventory levels. Cash provided by operations, proceeds from asset sales of $579,000 and borrowings 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued - -------------------------------------------------------------------------------- were used to purchase plant facilities, trucks and other assets in the amount of $7.5 million during the nine months ended September 30, 1998. The Company is a party to a revolving credit facility with Societe Generale, Southwest Agency (the "Credit Agreement") providing for borrowings of up to the lesser of $20 million or the applicable borrowing base. At September 30, 1998, the amount borrowed under the Credit Agreement was $9.1 million, and the amount available for additional borrowings was $10.9 million. Management believes that, based upon the Company's current levels of operations, capital resources, borrowings available under the Credit Agreement and cash flow from operations will be sufficient to finance current and future operations, including the capital expenditure program, and meet all scheduled debt service requirements. YEAR 2000 The Year 2000 issue derives from computer programs being written using two digits rather than four to determine the applicable year. The Company recognizes that the approach of the Year 2000 brings a unique challenge to the ability of computer systems to recognize the date change from December 31, 1999, to January 1, 2000. As a result, the arrival of the Year 2000 could result in system failures or miscalculations, causing disruption of operations, including, among other things, a temporary inability to process transactions or to conduct other normal business activity. Management of the Company began addressing the impact of the Year 2000 on its business operations and cash flows during 1996. The Company concluded that the Year 2000 would impact its internal information technology ("IT") and non-information technology systems. In addition, the Company believes that the Year 2000 will impact its supplier chain environment. Beginning in 1996, and continuing since that time, the Company has designated a group of personnel, who work primarily for the Company's data-processing affiliate, Data-Tronics Corp. to manage the conversion process for its own internal systems, including purchased software, and to coordinate the conversion process for supplier chain environment systems and effects. A discussion of the status of each of these areas follows: Internal IT and Non-IT Systems Year 2000 conversions within the Company's mainframe environment are in process. Mainframe environment conversions include the Company's hardware and operating systems, its customized applications, and its purchased software. The Company has completed the Year 2000 conversion of its hardware and operating systems within its mainframe environment. Year 2000 conversions for customized applications within the mainframe environment included renovation and regression testing of 1 million lines of code, which has been completed. The Company will retain certain purchased software systems and replace certain purchased software systems. Installation of Year 2000 compliant versions of retained systems software is in progress and is expected to be completed by December 31, 1998. The Company is 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued - -------------------------------------------------------------------------------- negotiating the replacement of certain purchased software packages for Year 2000 compliant software. Negotiations should be complete and the software replaced by March 31, 1999. The carrying value of software systems to be replaced for Year 2000 compliance is nominal. Year 2000 conversions of the Company's desktop environment, which includes network hardware and operating systems software, as well as the networked PC hardware operating systems and applications inventory, are in process and should be completed by March 31, 1999. The Company's embedded systems are those that are automated with embedded computerized microprocessor chips. The Company has completed its conversion of its general office embedded systems. The Company will be performing an inventory of embedded systems in its locations to determine necessary Year 2000 conversions. This inventory should be complete by December 31, 1998. The Company expects to complete all conversions of embedded systems by March 31, 1999. External IT and Non-IT Systems The Company is in the process of obtaining an inventory of critical exposure arising from the Company's suppliers. The Company's list of suppliers includes financial institutions, telecommunications providers, utility companies and insurance providers, as well as basic suppliers critical to the operations of the Company, such as new tire manufacturers and the Company's supplier of retread rubber. The Company has sent and is continuing to send questionnaires to suppliers considered to be significant to operations to determine their status with respect to Year 2000 issues. The Company is continually updating its list of critical exposures. The Company does not have any single customer that would be material to the Company as a whole. However, the Company has some customers which, in aggregate, are significant to the Company's operations and financial results. The Company is in the process of developing guidelines for surveying significant customers' readiness for Year 2000. The Company presently expects that the guidelines will be completed and customer contacts initiated by March 31, 1999. The information provided by significant customers with respect to their Year 2000 readiness will be considered in the development of the Company's contingency plan. Year 2000 Costs Personnel employed by the Company's data processing affiliate, Data-Tronics Corp., are performing Year 2000 conversions and evaluations of third-party systems. Since the beginning of the process, the Company estimates its expenditures at approximately $31,000. For the period of time since 1996, Year 2000 costs have been absorbed in the Company's normal operating expenses which are funded with internally-generated funds and the Company's revolving credit facility. The Company's cash flows have not been adversely impacted to a material degree by Year 2000 costs. Costs incurred through the current date for Year 2000 conversion represent 2% of the total 1999 forecasted data processing and programming costs. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued - -------------------------------------------------------------------------------- The Company estimates that costs to be incurred until the year 2000 will total approximately $42,000. The Company expects to continue to expend these costs in normal operations and to fund them by utilizing internally-generated funds and the Company's revolving credit facility. Contingency Planning The Company is in the process of developing an assessment of its most reasonably likely worst case Year 2000 scenario and its Year 2000 contingency plan. The responses the Company receives from suppliers regarding their Year 2000 readiness will play a critical role in these determinations. The Company currently plans to have made an assessment of its most reasonably likely worst case Year 2000 scenario by March 31, 1999. This and other relevant information will be utilized to develop the Company's contingency plan. It is presently expected that the contingency plan will be developed by June 30, 1999. Like virtually all other public and private companies, the Company's day-to-day business is dependent on telecommunications services, banking services and utility services provided by a large number of entities. At this time, the Company is not aware of any of these entities or of any significant supplier that has disclosed that it will not be Year 2000 compliant by January 1, 2000. However, many of these entities are, like the Company, still involved in the process of attempting to become Year 2000 compliant. The Company plans to attempt to obtain written assurance of Year 2000 compliance from all entities which management considers critical to operations of the Company. However, it is likely that some critical suppliers will not give written assurance as to Year 2000 compliance because of concerns as to legal liability. Even where written assurance is provided by critical suppliers and a contingency plan is developed by the Company to deal with possible non-compliance by other critical suppliers, the Year 2000 conversion process will continue to create risk to the Company which is outside the control of the Company. There can be no assurance that a major Year 2000 disruption will not occur in a critical supplier which will have an impact on the Company that could be material. FORWARD LOOKING STATEMENTS The foregoing management discussion contains forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from current expectations due to a number of factors, including general economic conditions; competitive initiatives and pricing pressures; availability and cost of capital; shifts in market demand; weather conditions; government regulations; the performance and needs of industries served by Treadco; actual future costs of operating expenses such as the price of oil; self-insurance claims and employee wages and benefits; the timing and amount of capital expenditures; and the timing and amount of capital expenditures and the accuracy of assessments and estimates relating to Year 2000 issues. 15 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Other than as discussed below, the Company is not a party to any pending legal proceedings which management believes to be material to the results of operations, cash flows or the financial condition of the Company. On October 30, 1995, the Company filed a lawsuit in Arkansas State Court, alleging that Bandag, Inc. ("Bandag"), the Company's former retread franchisor, and certain of its officers and employees violated Arkansas statutory and common law in attempting to solicit the Company's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. At the Company's request, the Court entered a Temporary Restraining Order barring Bandag, Treadco's former officers J. J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin G. Carver and William Sweatman from soliciting or hiring Treadco's employees to work for Bandag or any of its franchisees, from diverting or soliciting Treadco's customers to buy from Bandag franchisees other than Treadco, and from disclosing or using any of Treadco's confidential information. On November 8, 1995, Bandag and the other named defendants asked the State Court to stop its proceedings pending a decision by the United States District Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed by Bandag in the Federal District Court on November 8, 1995. The Federal District Court ruled that under the terms of the Company's franchise agreements with Bandag, all of the issues involved in the Company's lawsuit against Bandag are to be decided by arbitration. The arbitration hearing began September 21, 1998 and the Company expects the hearing to be completed by the end of 1998. However, the timing of any ruling by the arbitrator can not be determined with certainty. The Company will as a part of the arbitration process submit a substantial claim against Bandag. Due to the uncertainties inherent in the arbitration process, the Company has not recorded any claim recovery in the accompanying financial statements. ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None 16 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibit 27 -- Financial Data Schedule (b) REPORTS ON FORM 8-K None 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TREADCO, INC. (Registrant) Date: November 10, 1998 /s/ David E. Loeffler ------------------------------------ David E. Loeffler Vice President-Treasurer, Chief Financial Officer and Principal Accounting Officer 18 19 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TREADCO, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 SEP-30-1998 0 0 26,783,780 1,403,140 28,885,807 63,548,802 53,897,003 20,931,457 110,186,126 35,399,301 14,958,063 0 0 50,723 59,677,614 110,186,126 136,735,094 136,735,094 134,404,060 134,404,060 (70,273) 1,141,380 839,519 1,561,788 668,019 893,769 0 0 0 893,769 0.18 0.18
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