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 March 31, 1996
---------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-19390
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TREADCO, INC.
- - -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 7534 and 5531 71-0706271
- - ------------------------- ------------------------- ----------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization)
1101 South 21st Street
Fort Smith, Arkansas
72901
(501) 788-6400
- - -----------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
the 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 May 1, 1996
--------------------------------- --------------------------------
Common Stock, $.01 par value 5,072,255 shares
TREADCO, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations --
For the Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows --
For the Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements --
March 31, 1996 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1996 1995
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 308,596 $ 1,619,901
Accounts receivable:
Trade receivables, less allowances for
doubtful accounts (1996 -- $1,212,792;
1995 -- $1,000,000) 17,838,017 18,132,847
Other 4,272,874 6,830,994
Due from affiliates 207,728 247,550
Inventories - Note D 32,000,819 32,986,490
Prepaid expenses 212,744 217,393
Federal and state income taxes 430,089 -
Deferred income taxes 1,579,896 1,579,896
----------- -----------
Total Current Assets 56,850,763 61,615,071
PROPERTY, PLANT AND EQUIPMENT
Land 2,918,834 2,706,417
Structures 9,829,124 9,829,124
Retreading and other equipment 16,950,136 16,411,345
----------- -----------
29,698,094 28,946,886
Less allowances for depreciation (13,415,830) (12,607,866)
----------- -----------
16,282,264 16,339,020
OTHER ASSETS
Goodwill, less amortization
(1996 -- $3,100,323;
1995 -- $2,984,826) 13,502,634 13,618,131
Noncompete agreements, less
amortization (1996 -- $674,896;
1995 -- $609,583) 631,354 696,667
Other 987,337 765,787
----------- -----------
15,121,325 15,080,585
----------- -----------
$ 88,254,352 $ 93,034,676
=========== ===========
TREADCO, INC.
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1996 1995
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 8,931,075 $ 8,363,965
Due to affiliate 571,553 477,469
Accrued salaries, wages and other expenses 5,972,662 6,779,354
Federal and state income taxes - 253,678
Current portion of long-term debt 862,623 862,623
----------- -----------
TOTAL CURRENT LIABILITIES 16,337,913 16,737,089
LONG-TERM DEBT, less current portion 7,000,000 10,000,000
OTHER LIABILITIES 59,051 54,366
DEFERRED INCOME TAXES 223,886 225,245
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 18,959,433 20,343,907
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 64,633,502 66,017,976
COMMITMENTS AND CONTINGENCIES -- Note E
----------- -----------
$ 88,254,352 $ 93,034,676
=========== ===========
<FN>
<F1>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
<F2>
See notes to consolidated financial statements.
</FN>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
1996 1995
(Unaudited)
SALES
Non-affiliates $ 31,632,333 $ 33,262,875
Affiliates 501,305 587,139
----------- -----------
32,133,638 33,850,014
COSTS AND EXPENSES
Materials and cost of new tires 23,565,762 23,626,788
Salaries and wages 5,267,861 4,661,561
Depreciation and amortization 860,336 720,739
Administrative and general 3,980,643 3,144,228
Amortization of goodwill 115,497 115,497
----------- -----------
33,790,099 32,268,813
----------- -----------
OPERATING INCOME (LOSS) (1,656,461) 1,581,201
OTHER INCOME
Interest income 15,129 11,328
Gain (loss) on asset sales 4,483 (259)
Other 24,806 44,138
----------- -----------
44,418 55,207
OTHER EXPENSES
Interest 160,469 38,611
Amortization of deferred financing
costs and noncompete agreements 65,312 65,312
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225,781 103,923
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,837,824) 1,532,485
FEDERAL AND STATE INCOME TAXES
(CREDIT) -- Note C
Current (657,601) 707,462
Deferred 1,359 (76,299)
----------- -----------
(656,242) 631,163
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NET INCOME (LOSS) $ (1,181,582) $ 901,322
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.23) $ .18
=========== ===========
AVERAGE SHARES OUTSTANDING 5,072,255 5,077,933
=========== ===========
CASH DIVIDENDS PAID PER COMMON SHARE $ .04 $ .04
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
TREADCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
1996 1995
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (1,181,582) $ 901,322
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 860,336 720,739
Amortization of goodwill 115,497 115,497
Amortization of noncompete agreements 65,312 65,312
Provision for losses on accounts
receivable 401,669 259,866
Provision (credit) for deferred
income taxes (1,359) (76,299)
(Gain) loss on asset sales (4,483) 259
Changes in operating assets and
liabilities:
Receivables 2,451,281 3,839,688
Inventories and prepaid expenses 990,320 (3,011,469)
Other assets (221,550) (125,231)
Trade accounts payable, accrued
expenses and taxes payable (923,350) (926,993)
Due to/from affiliates 133,906 345,752
Other liabilities 4,685 4,699
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,690,682 2,113,142
INVESTING ACTIVITIES
Purchases of property, plant
and equipment (810,357) (1,402,361)
Proceeds from asset sales 11,260 25,800
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (799,097) (1,376,561)
FINANCING ACTIVITIES:
Borrowings under revolving
credit facility - 2,000,000
Payments under revolving credit facility (3,000,000) (3,000,000)
Dividends paid (202,890) (202,890)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (3,202,890) (1,202,890)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,311,305) (466,309)
Cash and cash equivalents at
beginning of period 1,619,901 751,756
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 308,596 $ 285,447
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
TREADCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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 March 31, 1996, ABC owned approximately 46% of the
Company's outstanding shares.
NOTE B -- FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information 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 months
ended March 31, 1996, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996. 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,
1995.
NOTE C -- FEDERAL AND STATE INCOME TAXES
The following amounts and percentages, which relate to pre-tax income,
reflect the items included in income tax expense:
Three Months Ended
March 31
1996 1995
Income tax at regular rates $ (624,860) $ 521,045
Percent (34.0)% 34.0%
State taxes less federal benefits (68,463) 73,803
Percent (3.7) 4.8%
Amortization of goodwill 35,200 43,843
Percent 1.9% 2.8%
Other items 1,881 (7,528)
Percent 0.1% (0.4)%
--------- ---------
Income tax expense $ (656,242) $ 631,163
Percent (35.7)% 41.2%
========= =========
NOTE D -- INVENTORIES
March 31 December 31
1996 1995
New tires and finished retreaded tires $ 25,141,825 $ 25,579,427
Materials and supplies 6,858,994 7,407,063
----------- -----------
$ 32,000,819 $ 32,986,490
=========== ===========
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 financial
condition of the Company.
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court
alleging that Bandag and certain of its officers and employees have violated
Arkansas statutory and common law in attempting to solicit the Company's
employees to work for Bandag or its competing franchisees and attempting to
divert customers from the Company. At the Company's request, the Court
entered a Temporary Restraining Order barring Bandag, the Company'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 the
Company's employees to work for Bandag or any of its franchisees, from
diverting or soliciting the Company's customers to buy from Bandag
franchisees other than Treadco, and from disclosing or using any of the
Company'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. Treadco is opposing both the State Court and Federal District Court
filings by Bandag, but is participating in arbitration proceedings pending
the Federal judge's ruling. .
NOTE F -- CREDIT AGREEMENT
The Company has a revolving credit agreement with Societe Generale (the
"Credit Agreement") providing for borrowings of up to the lesser of $20
million or the applicable borrowing base. The Credit Agreement expires in
September 1998 unless renewed or extended. Borrowings under the Credit
Agreement bear interest, at the Company's option, at 3/4% above the bank's
LIBOR rate, or at the higher of the bank's prime rate or the "federal funds
rate" plus 1/2%. At March 31, 1996 the average interest rate on the Credit
Agreement was 6.1%. The Company pays a commitment fee of 3/8% on the unused
amount under the Credit Agreement. There was $7 million borrowed under the
Credit Agreement as of March 31, 1996.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company has converted eight of its production facilities that were under
Bandag, Incorporated ("Bandag") retread franchises to Oliver Rubber Company
("Oliver") licensed facilities. The converted locations are Little Rock, West
Memphis, Pine Bluff, Springdale and Fort Smith (AR), Phoenix (AZ),
Springfield (MO) and San Antonio (TX). The Company plans to complete the
conversion of its remaining Bandag franchises to the Oliver process by the
end of the third quarter.
The conversion has resulted in up to two lost production days during each
change, some short-term operational inefficiencies and time lost as
production employees have familiarized themselves with the new equipment.
Also, management has been required to spend time with the conversion at the
expense of the normal daily operations.
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
March 31
1996 1995
COSTS AND EXPENSES
Materials and cost of new tires 73.3% 69.8%
Salaries and wages 16.4 13.8
Depreciation and amortization 2.7 2.1
Administrative and general 12.4 9.3
Amortization of goodwill 0.4 0.3
----- -----
105.2% 95.3%
===== =====
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.
Three Months Ended March 31, 1996 as Compared to Three Months
Ended March 31, 1995
Sales for the three months ended March 31, 1996 decreased 5.1% to $32.1
million from $33.9 million for the three months ended March 31, 1995. Sales
from retreading for the three months ended March 31, 1996 were $17.1 million,
a 6.9% decrease from $18.4 million during the three months ended March 31,
1995. Sales of new tires for the three months ended March 31, 1996 were $15.0
million, a 2.9% decrease from $15.5 million during the three months ended
March 31, 1995. During the three months ended March 31, 1996, the Company
sold approximately 137,000 retreaded truck tires, a decrease of 4.8% from the
three months ended March 31, 1995 and new tires sold decreased 4.7% to 81,000
tires.
Economic conditions continued to weaken demand for both new replacement and
retreaded truck tires during the quarter. The Company faces new competition
at many of its locations, which has placed added pricing pressure in the
marketplace. As anticipated, Bandag, Inc. continues to target the Company's
accounts which has caused difficulty in retaining the national account
business and in some cases the business retained is at lower margins.
Retread sales for the three months ended March 31, 1995 included $1.2 million
of casing sales from the operations of the Company's subsidiary. The Company
has since discontinued its retail casing business because the operations were
not profitable.
For the three months ended March 31, 1996, "same store" sales decreased 9.6%
which was offset in part by a 4.5% increase from "new store" sales. "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 new production facilities in St. Louis (MO), Las Vegas (NV) and
Nashville (TN) and new sales locations in Fontana (CA) and Fulton (KY). The
Company plans to convert its Fontana (CA) sales locations to a production
facility later this year.
Operating costs and expenses were $33.8 million for the three months ended
March 31, 1996 compared to $32.3 million during the three months ended
March 31, 1995. The increase in sales and operating costs and expenses
resulted in operating loss of $1.7 million compared to operating income of
$1.6 million during the three months ended March 31, 1995. The Company had a
net loss of $1,182,000, or $.23 loss per share, compared to net income of
$901,000, or $.18 per share during the three months of March 31, 1995.
Average shares outstanding were 5.1 million for each of the three months
ended March 31, 1996 and 1995.
Operating costs and expenses as a percent of sales were 105.2% for the three
months ended March 31, 1996 compared to 95.3% for the three months ended
March 31, 1995. Materials and cost of new tires as a percent of sales
increased to 73.3% for the three months ended March 31, 1996 from 69.8%
during the three months ended March 31, 1995, resulting primarily from
expenses incurred during the conversion process and because lower new tire
prices have reduced margins. Salaries and wages as a percent of sales
increased to 16.4% for the three months ended March 31, 1996 from 13.8%
during the three months ended March 31, 1995. The majority of the increase
resulted from a smaller revenue base and from labor costs at six new
locations which have not reached adequate productivity levels. Administrative
and general expenses as a percent of sales increased to 12.4% for the three
months ended March 31, 1996 from 9.3% for the three months ended March 31,
1995. The increase resulted primarily from higher insurance costs, expenses
associated with employee medical benefits and increased legal fees relating
to the Bandag lawsuit.
Interest expense for the three months ended March 31, 1996 was $160,000
compared to $39,000 for the three months ended March 31, 1995. The increase
resulted primarily from the increase in debt outstanding.
The difference between the effective tax rate for the three months ended
March 31, 1996 and the federal statutory rate resulted primarily from state
income taxes, amortization of goodwill and other nondeductible expenses (see
Note C to the unaudited consolidated financial statements).
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 3.48:1 at March 31,
1996, compared to 3.68:1 at December 31, 1995. Net cash provided by operating
activities was $2.7 million for the three months ended March 31, 1996,
compared to $2.1 million for the three months ended March 31, 1995. The
increase is due primarily to the changes in inventories offset in part by the
Company's net loss.
The Company is a party to a revolving credit facility with Societe Generale
(the "Credit Agreement") providing for borrowings of up to the lesser of $20
million or the applicable borrowing base. The Company's borrowing base under
the Credit Agreement is equal to 80% of its eligible accounts receivable and
50% of its inventory consisting of tire casings, new tires and finished
retreads. At March 31, 1996, the borrowing base was $27.1 million. The Credit
Agreement expires in September 1998, unless renewed or extended. Borrowings
under the Credit Agreement bear interest, at the Company's options, at 3/4%
above the bank's LIBOR rate, or at the higher of the bank's prime rate or the
"federal funds rate" plus 1/2%. At March 31, 1996, the average interest rate
on the Credit Agreement was 6.1%. The Company pays a commitment fee of 3/8%
on the unused amount under the Credit Agreement. There was $7 million
borrowed under the Credit Agreement as of March 31, 1996.
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 which have
been met.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in legal actions,
the majority of which arise out of the normal course of its business. Other
than as discussed below, the Company is not a party to any pending legal
proceeding which the Company's management believes to be material to the
financial condition of the Company. The Company generally maintains liability
insurance against risks arising out of the normal course of its business (see
note E to the Company's Unaudited Consolidated Financial Statements).
On October 30, 1995, the Company filed a lawsuit in Arkansas State Court
alleging that Bandag and certain of its officers and employees have violated
Arkansas statutory and common law in attempting to solicit the Company's
employees to work for Bandag or its competing franchisees and attempting to
divert customers from Treadco. At the Company's request, the Court entered a
Temporary Restraining Order barring Bandag, Treadco's former officers J. J.
Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin
G. Carver and William Sweatman from soliciting or hiring Treadco's employees
to work for Bandag or any of its franchises, from diverting or soliciting
Treadco's customers to buy from Bandag franchises 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. Treadco is opposing both the State Court and Federal District Court
filings by Bandag, but is participating in arbitration proceedings pending
the Federal judge's ruling.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
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.
None
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: May 13, 1996 s/Donald L. Neal
-----------------------------
Donald L. Neal
Senior Vice President - Chief
Financial Officer
and Principal Accounting
Officer