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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended December 31, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from __________ to __________
Commission file number 1-6575
BRAD RAGAN, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0756067
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4404-G STUART ANDREW BOULEVARD, CHARLOTTE, NORTH CAROLINA 28217
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 704-521-2100
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) AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
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. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: Approximately $20,884,650 as of March 10,
1998.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 2,190,619 shares of
Common Stock ($1 Par Value) as of March 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
GENERAL
Brad Ragan, Inc. (hereafter called the "Company" or the "Registrant,"
as appropriate for this report), is a 75%-owned subsidiary of The Goodyear Tire
& Rubber Company, Akron, Ohio ("Goodyear").
The business of the Company is the sale of new and retreaded tires,
home products and automotive services. It is functionally divided into two
industry segments: (a) commercial tire retreading and tire replacement
operations, which are generally referred to as commercial centers, and (b)
retail automotive service, new tires and home products operations.
The Company's commercial division generated 63.5% of consolidated sales
during 1997, 61.5% in 1996 and 60.8% in 1995. These commercial centers serve
both the off-the-road customers (mines, contractors and others) and
over-the-highway customers (trucking).
The Company's retail division operates primarily in the rural markets
of the southeastern United States, offering a broad line of Goodyear tires,
automotive services and home products.
For purposes of identifying revenues by division, the Company defines
each operating location as either commercial or retail. Financial information
for both of these segments is presented in Note 15 of Notes to Financial
Statements located elsewhere in this report.
RECENT DEVELOPMENTS
On October 23, 1997, the Company announced that its Board of Directors
had received a proposed Agreement and Plan of Share Exchange from The Goodyear
Tire & Rubber Company pursuant to which Goodyear would acquire the 556,924
shares (approximately 25%) of Brad Ragan, Inc. Common Stock that it does not
already own for a cash price of $32.00 per share. The Board established a
Special Committee of independent directors to study the proposal along with its
financial and legal advisors and make a recommendation to the Board regarding
the offer. Interstate/Johnson Lane Corporation acted as financial advisor to the
Special Committee.
On February 13, 1998 the Company further announced that the Board of
Directors, acting on the recommendation of the Special Committee of independent
directors, had agreed in principle to the Goodyear proposed Agreement and Plan
of Share Exchange for the revised cash price of $37.25 per share.
The agreement in principle is subject to the approval of a definitive
Agreement and Plan of Share Exchange by the parties and subsequently must be
approved by a majority vote of the shares of the Company's outstanding common
stock at its Annual Meeting of Shareholders presently scheduled to be held in
May 1998. Goodyear has indicated that it intends to vote the shares of stock it
already owns in favor of the proposal, thus assuring approval of the
transaction.
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COMMERCIAL
The number of the Company's commercial centers in operation at the end
of each of the last five years was as follows:
Centers in Operation
at December 31
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
49 48 49 51 51
The Company's 51 commercial centers are located in 19 states. Eight of
the centers are capable of retreading all common sizes of off-the-road tires
used on earth-moving and other similar heavy equipment by the BAND-LUG(TM)
process, the BAND-LUG(TM) "Computer Cut Tread" process or the mold cure process.
Thirteen of the commercial centers (four of which have off-the- road retreading
capability) can retread over-the-highway truck tires. The remaining centers are
sales and service outlets. From its commercial centers, the Company operates a
fleet of approximately 250 one-ton or larger service trucks.
Purchases of over-the-highway and off-the-road tires are principally
from Goodyear and are controlled from the corporate office and from individual
locations. Other merchandise and supplies required in commercial centers are
ordered by the managers of individual locations.
The commercial division has two supporting units: a rubber mixing plant
in Radford, Virginia, and a mobile equipment service unit in Spruce Pine, North
Carolina. These units service the needs of the Company in addition to
contributing revenue from sales to Goodyear and other customers.
The Company serves commercial customers from its commercial centers
through its sales force calling on existing and potential customers as well as
through its service associates who ascertain the customers' needs and
requirements on site and furnish tires and services. These service associates
constitute an important link between the Company and its customers. They are
often able to generate significant on-the-job sales as part of their customer
service.
In 1997, the Company was not dependent upon any one customer or group
of customers for as much as 10.0% of the commercial division's revenue. The
Company does not have any material long-term contracts with its commercial
customers for specific quantities of products, because customer requirements
vary widely depending on the level of activity in the customer's operations.
Tires are supplied from inventory or to the customer's order on a very short
lead-time basis, and the Company, therefore, does not consider order backlog a
material element in its business.
The Company's commercial operations are divided into two major
categories: off-the-road ("OTR") and over-the-highway.
Off-the-Road ("OTR")
The Company provides a broad range of products and services to its OTR
customers. These include new tires, various types of retreading, tire repairs
and OTR tire service. Such services are an integral part of the mix of choices
available to customers and give the Company more opportunities to serve them.
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The Company relies upon its internally developed retreading techniques
to provide value to the customer and return on investment in the OTR tire
replacement market.
Its BAND-LUG(TM) process involves the application of bands of uncured
natural rubber to the prepared surfaces of OTR tire casings and the attachment
of formed bars of rubber to the bands to form raised lugs. The tire is then
cured in a pressurized steam vessel capable of containing any size tire up to
and including the largest OTR tires commonly in use. Principal advantages of the
BAND-LUG(TM) process over conventional methods include (a) diversity of tread
depth, design and composition obtainable with a single extruder and steam
vessel, (b) faster curing and processing time because heat is applied equally to
the inside and outside of the tire and (c) because tires are cured in a relaxed
state and at lower temperatures, tire casings are subjected to less stress and
possible damage. Disadvantages of the process include (a) appearance of tires,
which does not as closely approximate that of new tires, and (b) the fact that
the process is labor intensive.
The Company has developed an extension of the BAND-LUG(TM) process
known as the BAND-LUG(TM) "Computer Cut Tread" method, which provides a greater
selection of tread designs, depths and sizes as well as an improved appearance.
It utilizes a computer controlled machine, which automatically cuts the tread
pattern in built up rubber that has been applied in bands onto the carcass. The
tread pattern is uniform in depth, width and configuration on each tire.
The Company also employs the mold cure retreading process in which
extruded rubber is applied to a buffed carcass and cured in a pressurized mold
to form the tread pattern. The process produces a dimensionally uniform tire
with the appearance of a new tire.
Over-the-Highway
The over-the-highway tire market serviced by the Company consists of
truck tire replacement customers for both new and retreaded tires. Retreading
capability for truck tires exists in thirteen locations, all of which utilize a
precure retread process.
Most of the Company's commercial over-the-highway tire business is
concentrated in the "medium" commercial truck tire sizes. These tires are sold
to owners of small and large fleets for various applications including linehaul,
local delivery, mining and a variety of other commercial uses.
The Company's commercial centers also sell tires for smaller vehicles
including light-duty trucks and automobiles. These revenue sources represent
approximately 6.3% of the commercial division's sales.
RETAIL
The Company's retail stores are authorized dealers for Goodyear tires
and General Electric appliances. Forty-six of these outlets are located in North
Carolina, twenty-seven in South Carolina, sixteen in Tennessee, fifteen in
Georgia, ten in Alabama, four in Virginia and five in Mississippi. The number of
the Company's retail stores in operation at the end of each of the last five
years was as follows:
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STORES IN OPERATION
at December 31
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1993 1994 1995 1996 1997
---- ---- ---- ---- ----
123 122 121 122 123
The selective closing, sale or consolidation of outlets is determined
through an evaluation of earnings, working capital return and operating cash
flow. The Company will continue to review marginal retail locations based on
these financial criteria along with the market potential of the area.
Market potential, competitive conditions and projected financial return
are criteria used in assessing opportunities for modernization, relocation or
new construction in both new and existing markets.
The typical retail store has approximately 7,500 square feet of space,
with individual stores ranging from 3,150 to 16,000 square feet. All are air
conditioned and well maintained. The retail stores in North Carolina and South
Carolina operate under the name "Carolina Tire Company," and the stores in other
states operate under the name "Brad Ragan Tire and Appliance." The name is
prominently displayed on the storefront. The stores also display the Goodyear
name and logo. No single store presently accounts for more than three percent of
total retail store sales.
Sales of new and retreaded tires account for approximately 25.9% of the
Company's retail sales. Approximately 43.8% is derived from sales of home
products, including refrigerators, air conditioners, ranges, freezers and
washer-dryers and from mowers, tillers, televisions and home entertainment
products. The balance of retail sales is generated from providing automotive
service, including automobile brake and alignment services and engine tune-ups.
Approximately 50% of the retail division's sales are made on credit
under installment sale security agreements between the Company and the customer.
The Company considers its installment credit polices to be an important factor
in the retail division sales strategy. Credit terms may be extended up to 36
months, although 24 months is the maximum on most sales. Down payments of at
least 10% are encouraged but not required. The Company operates a credit
administration center in Charlotte, NC, for the purpose of establishing credit
limits on individual accounts, approving new accounts and initiating collection
activities when accounts become past due. During 1997, finance charge revenues
amounted to approximately $11,609,000 or 11.4% of retail division revenues.
Property and life insurance is offered, but not required, on installment credit
sales.
The Company advertises in local newspapers and over local radio stations
through cooperative efforts with Goodyear, General Electric and others. The
Company also utilizes direct mailing efforts to promote retail sales.
The Company's Vice President and General Manager-Retail Division and
staff, along with each individual store manager, plan and maintain purchasing
and inventory controls and product marketing. A 64,000 square foot retail
warehouse located in Salisbury, North Carolina, permits the Company to
consolidate the majority of its home products purchasing.
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EMPLOYEE RELATIONS
The Company has approximately 1,730 employees. Approximately 860 of the
employees are engaged primarily in commercial operations, 835 employees are in
retail operations and 35 are engaged in other operations, primarily in
administrative and management capacities.
Approximately 82 employees are members of labor unions. The Company
considers that the relations between it and its employees are good.
COMPETITION AND REGULATION
In its commercial activities the Company competes primarily with the
major rubber companies and with regional and local independent companies that
sell new and retreaded tires.
The Company's retail stores are engaged in competition with chain stores
in certain markets and other local tire and appliance outlets. Accurate figures
with respect to the size of the markets served by the Company are not readily
available. Management believes that the Company is a minor factor in the overall
retail markets served, although it is frequently a significant factor in the
relatively small communities in which its stores are generally located.
The Company has no formal established program whereby professional
employees are engaged full time on material research activities relating to the
development of new products or the improvement of existing products.
All of the Company's operations must meet extensive federal, state and
local regulatory standards, primarily in the areas of safety, health and
environmental pollution. In general, the Company has experienced no difficulty
in complying with these standards, and it believes that they have not had any
material adverse effect on its sales or operations. Additional governmental
standards and regulations may be prescribed in the future; however, the Company
is unable to predict what effect, if any, such standards and regulations will
have on its sales or results of operations. Management of the Company believes
that the operation of its facilities and its disposal of waste materials are in
compliance with all applicable laws and regulations, but compliance with future
requirements regarding environmental quality may necessitate capital outlays. It
is not anticipated that any such capital outlays would materially affect the
earning power of the business or cause material changes in the Company's
business or intended business.
Various federal and state authorities have the power to adopt safety
regulations with respect to motor vehicles and the tires with which they are
equipped. Management believes that the Company is presently in compliance with
all published state and federal statutes and regulations (including those of the
United States Department of Transportation) relative to retreading of tires. The
Company cannot predict, however, what other laws and regulations might be
adopted in the future or what their effect on its business might be.
SUPPLIERS
Goodyear supplies a majority of the new tires sold by the Company, and
nearly all Company locations are franchised dealers of Goodyear. Goodyear
provides the Company with an open, unsecured short-term line of credit to fund
working capital requirements.
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On December 31, 1997, the Company issued a one-year $5.5 million
promissory note to Goodyear that may be renewable on December 31, 1998,
depending on business conditions. The note represented an extension of a
previous inventory ledger balance financing arrangement dated November 30, 1989,
with an outstanding balance due on December 31, 1997, of $5.5 million. The note
is interest-bearing at 120% of the prime rate as announced by Citibank, N.A.,
New York, on the first day of each quarter during the term of the note.
According to the agreement, Goodyear will fully waive any interest due under the
note, provided the ratio of the Company's annual purchases of off-the-road tires
from Goodyear to the average outstanding balance of the note equals or exceeds
two and one half to one (2.5:1). Interest will be prorated if the ratio is less
than 2.5:1. In 1997, the ratio exceeded 2.5:1, and, therefore, interest charges
related to this agreement were waived.
The Company's rubber processing plant in Radford, Virginia, supplies
substantially all of the Company's rubber needs for the BAND-LUG(TM) and
BAND-LUG(TM) "Computer Cut Tread" processes and most of its needs for
conventional mold processes. With this plant, the Company can compound rubber to
meet the specialized needs of its customers and obtain better control over
inventories of rubber supplies and the quality of the rubber compounds it uses.
The plant currently operates on one shift.
With respect to appliance sales, stores operate under dealer
arrangements with General Electric and other suppliers. These arrangements may
be terminated on short notice by either party. General Electric Capital provides
financing for certain inventories of General Electric products.
In management's opinion, while the termination of any of these supply
arrangements would have some temporary impact upon the directly affected portion
of the Company's business, it would not adversely affect its overall business
for any significant period of time, inasmuch as alternative sources of supply
are believed to be readily available.
The Company is not dependent upon any single outside source for any
other supplies or services used.
SEASONALITY
The second and third quarters normally produce stronger sales and
revenues for the Company. The retail division experiences increased sales of
home products and powered equipment, while the commercial division's sales of
off-the-road and farm tires are greater during the spring and summer months.
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ITEM 2. PROPERTIES.
The following table summarizes the Company's present use of properties:
APPROXIMATE SQUARE FEET OF FLOOR SPACE
PRINCIPAL USE LEASED OWNED
------------- ------ -----
Commercial 699,167 227,942
Retail 930,154 94,120
Corporate 24,384 - 0 -
At December 31, 1997, the Company operated 123 retail centers, 51
commercial centers, two commercial support facilities, one retail warehouse and
one manufacturing plant in the United States as described in Item 1 hereof.
Three retail stores, five commercial centers, one support facility, the retail
warehouse and the manufacturing plant are Company-owned, and the balance are
rented under leases expiring at various dates through the year 2009. The Company
believes that the activities carried out in rented properties can be readily
transferred to other locations should the need to do so arise. In the Company's
opinion, all of its properties are suitable and adequate for the activities
conducted by the Company therein.
ITEM 3. LEGAL PROCEEDINGS.
In connection with a proposal by The Goodyear Tire & Rubber Company to
acquire all of the outstanding shares of Common Stock of the Company that it
does not already own, a class action complaint (the "Complaint") was filed on
November 13, 1997 in the Superior Court Division of the General Court of Justice
for Mecklenburg County, North Carolina, styled as Herbert R. Behrens and Martin
Bergstein, Trustee FBO Herbert R. Behrens v. Brad Ragan, Inc., et al. (the
"Action"). The Action was brought on behalf of the plaintiffs and all other
shareholders of the Company (except the named defendants and their affiliates)
and seeks injunctive relief, compensatory damages in excess of $10,000 and fees.
The Complaint names the Company and the Directors as defendants and generally
alleges that the Directors have a conflict of interest arising from their
affiliation with Goodyear and that the Directors' course of conduct in
responding to Goodyear's proposal has been in violation of their fiduciary
duties to the Company.
The Company believes that the course of conduct taken by the Board and
the Special Committee in response to the Goodyear proposal was and is in
compliance with the Directors' fiduciary duties and that the allegations made in
the Complaint are therefore without merit. The Company has instructed legal
counsel to vigorously defend the Action. The Company does not believe that an
adverse decision in the Action would have a material adverse impact on the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
under the symbol BRD. There were approximately 140 shareholders of record as of
March 10, 1998.
Information regarding stock prices during the past two years follows:
Quarter Ended Stock Prices
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Low High
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March 31, 1996 $34 1/2 $36 1/2
June 30, 1996 30 3/4 36
September 30, 1996 30 3/4 31 1/4
December 31, 1996 30 1/4 31
For Year 1996 30 1/4 36 1/2
March 31, 1997 $27 1/2 $30 1/2
June 30, 1997 20 27 1/2
September 30, 1997 24 29
December 31, 1997 30 37
For Year 1997 20 37
The Company has not paid a cash dividend since 1991.
ITEM 6. SELECTED FINANCIAL DATA
See "Five Year Highlights" under Item 14 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
REVIEW OF 1997 RESULTS
Net sales for the year ended December 31, 1997 increased $7,270,000 or
3.0% to $245,743,000 from $238,473,000 for 1996. On a same-location basis, net
sales increased 6.7% in the commercial segment while retail segment sales
declined 4.2%. Commercial sales increases occurred in new tire sales (up 8.1%),
retreading (up 4.0%), and vehicle and equipment sales (up 8.0%). Retail segment
sales declines occurred in the weather sensitive area of home products (down
4.0%) as unusual weather conditions affected sales in this product category.
Miscellaneous income increased $288,000 due to additional finance
charge income received through the Company's retail installment credit program
as a result of an increase in the average term on retail installment contracts,
partially offset by the effect of lower sales financed under the retail
installment credit program and lower sales of credit related insurance products.
Gross margins increased from 30.4% in 1996 to 31.1% in 1997. The margin
increase was the result of fluctuation in the Company's mix of business and
competitive pricing strategies amongst the major tire manufactures.
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Selling, administrative and general expenses increased $1,669,000
primarily due to increases in employee compensation and benefit related
expenses. Overall, as a percent to sales, SAG expenses were reduced from 35.0%
in 1996 to 34.6% in 1997.
Interest expense increased slightly due to higher average rates and an
increase in the average month-end debt balance outstanding. The average interest
rate for 1997 was 7.14% compared to 6.94% for 1996. The average debt balance
outstanding for 1997 was $37,295,000 compared to $35,624,000 for 1996.
The Company's effective tax rate for 1997 was 42.1% compared to 37.4%
for 1996. The 1996 tax benefit related primarily to the unusual charge recorded
in that year.
The Company recorded net income of $1,428,000 or $.65 per share (Basic
and Diluted) for the year ended December 31, 1997 compared to a net loss of
$2,909,000 or $1.33 per share (Basic and Diluted) for 1996. The 1996 results
included a $4.8 million unusual charge associated with the settlement of two
class action lawsuits related to retail installment credit sales.
REVIEW OF 1996 RESULTS
Net sales for the year ended December 31, 1996, increased $1.5 million
or .6% to $238,473,000 compared to $236,975,000 for 1995. On a same location
basis, net sales increased 3.6% for the commercial segment and decreased 1.0%
for the retail segment.
Miscellaneous income decreased $641,000 for 1996 compared to 1995
primarily due to lower revenues derived from charges in respect of certain
credit sales transactions.
The gross margin rate increased slightly to 30.4% for 1996 compared to
30.0% for 1995.
Selling, administrative and general expenses increased $3.0 million for
1996 compared to 1995 primarily due to increased expense for compensation and
benefits and also expenses associated with an adverse court decision and related
litigation costs in a general liability case against the Company.
Interest expense increased slightly due to an increase in the average
outstanding short-term borrowings for 1996 compared to 1995.
The Company's effective tax rate was 37.4% in 1996 compared to 43.7% in
1995. The 1996 tax benefit related primarily to the unusual charge recorded in
that year.
The Company recorded a net loss of $2,909,000 or $1.33 per share (Basic
and Diluted) for the year ended December 31, 1996, compared to net income of
$1,356,000 or $.62 per share (Basic & Diluted) for 1995. The earnings decrease
is primarily attributable to a $4.8 million unusual charge recorded in 1996
associated with the tentative settlement of two class action lawsuits related to
retail installment credit sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains an open, unsecured line of credit with The
Goodyear Tire & Rubber Company, its major shareholder, to fund working capital
requirements. The borrowing rate
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on the line of credit is based on the 30-day LIBOR plus 1.5% as reported on the
Reuter's Money Service Monitor System effective the first day of each calendar
month. Although Goodyear retains the right to require payment or discontinue
additional advances on the line of credit at its discretion, management believes
that Goodyear will continue to provide funding. The Company believes that
Goodyear has the financial capacity to fund any anticipated request by the
Company to expand this line of credit. At December 31, 1997, the level of this
debt was $29,550,000, or $5.2 million lower than the December 31, 1996, level.
An outstanding note balance of $5,500,000 payable to Goodyear on
December 31, 1997, pursuant to an inventory ledger balance financing agreement,
was extended for one year and becomes due and payable on December 31, 1998. For
further discussion, refer to Note 2 of Notes to Financial Statements included
elsewhere in this report.
Working capital increased 2.0% during 1997 to $40.3 million compared to
$39.6 million for 1996. Net cash provided by operating activities was $8.7
million in 1997. Net cash provided by net income before depreciation and
amortization was $3.7 million. Additional cash provided by increased accounts
payable and accrued expenses of $7.3 million was partially offset by related
increased inventory balances. Financing activities reflect a net decrease in the
short-term credit facility provided by Goodyear of $5.2 million.
The Company is self-insured for substantial portions of liabilities
related to casualty losses, disability, workers' compensation and health care
benefits. Payments of $5.8 million were made during 1997 for this purpose
compared to $7.1 million in 1996. It is expected that cash flows generated from
operations will continue to be sufficient to fund these programs.
YEAR 2000 COMPLIANCE
Computers and the programs which they run have typically recorded and
stored dates with a two character representation for the year, making the year
2000 indistinguishable from the year 1900. This situation could result in system
failure or miscalculation where program logic is date sensitive and is generally
referred to as the "Year 2000 Problem".
The Company has developed a plan to access and modify its computer
programs, files, and data interchanges to correctly recognize and process dates
subsequent to December 31, 1999. The Company is currently on schedule to meet
its targets for Year 2000 Compliance.
In 1996 the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus that the costs associated with modifying
internal use software for the Year 2000 should be expensed as incurred.
Presently, the Company does not believe that Year 2000 compliance will require
significant out-of-pocket expense nor does the Company anticipate that the Year
2000 Problem will have a material adverse effect on its business operations or
financial performance. There can be no assurance, however, that the Year 2000
Problem will have no adverse affect.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements of the Company appear under Item 14
of this report:
Page No.
Statements of Operations and Retained Earnings
Years ended December 31, 1997, 1996 and 1995 17
Statements of Financial Position -
December 31, 1997, and December 31, 1996 18
Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995 19
Notes to Financial Statements 20
Schedule II - Valuation and Qualifying Accounts
and Reserves 26
Report of Independent Accountants 27
The supplementary financial information required by Item 8 of Form 10-K
appears under Item 14 of this report. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BOARD OF DIRECTORS
The following persons are members of the Company's Board of Directors:
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT
- ---- ----------------------------------
Eugene R. Culler Executive Vice President of Goodyear
Michael R. Thomann President and Chief Executive Officer of the
Company
Ronald J. Carr Vice President - Finance and Chief Financial
Officer, Secretary and Treasurer of the Company
Richard D. Pearson Owner and manager of companies involved
in selling and leasing heavy duty trucks and
other heavy equipment
Richard E. Sorensen Dean of the College of Business, Virginia
Polytechnic Institute and State University
James W. Barnett Executive in Residence, Interim Director, Institute
for Global Business, University of Akron, Akron,
Ohio. Formerly Vice President, Original Equipment
Tire Sales, Worldwide for Goodyear, Akron, Ohio.
Additional information regarding Directors required by Item 10 of Form
10-K appears in the Company's proxy statement for the 1998 Annual Meeting of
Shareholders under the captions "Election of Directors" and "Beneficial
Ownership of Common Stock" reference to which is hereby made, and the
information there is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding the present
executive officers of the Company:
NAME AND AGE POSITIONS AND OFFICES WITH THE COMPANY
- ------------ --------------------------------------
Eugene R. Culler (59) Chairman of the Board
Michael R. Thomann (49) President and Chief Executive Officer
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Ronald J. Carr (53) Vice President - Finance and Chief Financial
Officer, Secretary and Treasurer
James E. Owens (63) Vice President and General Manager -
Retail Division
Ronald P. Rumble (53) Vice President and General Manager -
Commercial Division
There are no family relationships between any of the executive officers
or Directors.
Mr. Eugene R. Culler, Jr. has been employed by Goodyear for more than
35 years. He has been Executive Vice President responsible for North American
Tires since April, 1995. Prior to that he was President and CEO of Goodyear's
Canadian subsidiary. He previously served as Chairman of the Board of Directors
of the Company from August, 1988 to October, 1991. He was most recently elected
a Director and Chairman of the Board of the Company on July 27, 1995.
Mr. Thomann has 25 years service with the Company and Goodyear. Most
recently he was General Manager, Farm, Terra, and Off-the-Road Tires for
Goodyear. From 1987 to 1993 he was Vice President and General Manager -
Commercial Division for the Company. He was elected President and CEO of the
Company effective April 16, 1996.
Mr. Carr joined the Company on May 1, 1992. He has been employed by the
Company and Goodyear for 30 years, most recently as Manager, Financial
Information for Goodyear's North American Tire Division (September, 1989 through
April, 1992). Prior to that he held various positions in Goodyear's General
Products and Tire Divisions and at Motor Wheel Corporation, a former Goodyear
subsidiary. He was elected Vice President - Finance and Chief Financial Officer,
Secretary and Treasurer on May 1, 1992.
Mr. Owens has been employed by the Company and Goodyear for 45 years.
Most recently, he was District Manager for Goodyear in Birmingham, Alabama, for
three years and District Manager in Atlanta, Georgia, for five years. He was
elected Vice President and General Manager - Retail Division on February 8,
1988.
Mr. Rumble joined the Company on March 1, 1993. He has been employed by
the Company and Goodyear for more than 25 years, most recently as Marketing
Manager, Commercial Truck Tires for the Replacement Tire Division. Prior to
that, he held various positions in Goodyear's Replacement Tire, Original
Equipment and General Products Divisions. Effective March 1, 1993, he was
elected Vice President and General Manager - Commercial Division.
Officers serve for a term of one year or until their successors are
elected and qualify. The next meeting of the Board of Directors at which
officers will be elected is scheduled for May 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K appears in the
Company's proxy statement for the 1998 Annual Meeting of Shareholders under the
caption "Executive Compensation," reference to which is hereby made, and the
information there is incorporated herein by reference.
14
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Form 10-K appears in the
Company's proxy statement for the 1998 Annual Meeting of Shareholders under the
caption "Beneficial Ownership of Common Stock" reference to which is hereby
made, and the information there is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K appears in the
Company's proxy statement for the 1998 Annual Meeting of Shareholders under the
caption "Compensation Committee Interlocks and Insider Participation," reference
to which is hereby made, and the information there is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The listing of financial statements and financial statement schedules
required by Item 14 of Form 10-K appears on page 12 under Item 8 of
this report. The listing of exhibits appears on the Exhibit Index.
(b) Reports on Form 8-K. None filed during the last quarter of the fiscal
year covered by this report.
(c) Exhibits Filed. See Exhibit Index.
(d) Financial Statement Schedules. See Schedule II, which follows Notes to
Financial Statements.
15
16
FIVE YEAR HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BRAD RAGAN, INC.
Amounts in thousands, except share and per share data. (Unaudited)
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
REVENUES 1ST QTR $ 57,485 $ 53,224 $ 55,923 $ 52,417 $ 50,808
2ND 67,477 67,852 66,872 66,262 66,837
3RD 67,427 66,941 67,003 67,045 64,500
4TH 67,168 63,982 61,344 63,283 60,554
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 259,557 $ 251,999 $251,142 $ 249,007 $242,699
- ---------------------------------------------------------------------------------------------------------------------
COSTS OF PRODUCTS SOLD 1ST QTR $ 37,497 $ 35,000 $ 36,469 $ 33,767 $ 33,038
2ND 43,628 43,881 43,485 42,994 43,924
3RD 44,329 44,300 44,432 44,422 42,775
4TH 43,822 42,740 41,464 41,985 40,235
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 169,276 $ 165,921 $165,850 $ 163,168 $159,972
- ---------------------------------------------------------------------------------------------------------------------
SELLING, ADMINISTRATIVE AND 1ST QTR $ 20,194 $ 19,115 $ 18,976 $ 18,191 $ 17,672
GENERAL EXPENSES 2ND 21,931 25,830 20,257 20,169 19,901
3RD 21,331 21,989 20,441 20,210 19,581
4TH 21,599 16,452 20,723 20,885 19,828
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 85,055 $ 83,386 $ 80,397 $ 79,455 $ 76,982
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME 1ST QTR $ (884) $ (1,448) $ (129) $ 77 $ (333)
TAX AND EFFECT OF CHANGE IN 2ND 818 (2,449) 2,503 2,678 2,567
ACCOUNTING PRINCIPLE 3RD 1,067 (12) 1,477 1,914 1,723
4TH 1,465 (735) (1,441) (158) 110
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,466 $ (4,644) $ 2,410 $ 4,511 $ 4,067
- ---------------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR 1ST QTR $ (347) $ (620) $ (55) $ 30 $ -
INCOME TAXES 2ND 399 (884) 1,031 323 -
3RD 422 (59) 676 406 -
4TH 564 (172) (598) (84) -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,038 $ (1,735) $ 1,054 $ 675 $ -
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EFFECT OF 1ST QTR $ (537) $ (828) $ (74) $ 47 $ (333)
CHANGE IN ACCOUNTING PRINCIPLE 2ND 419 (1,565) 1,472 2,355 2,567
3RD 645 47 801 1,508 1,723
4TH 901 (563) (843) (74) 110
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,428 $ (2,909) $ 1,356 $ 3,836 $ 4,067
- ----------------------------------------------------------------------------------------------------------------------
EFFECT OF CHANGE IN ACCOUNTING 1ST QTR $ - $ - $ - $ - $ 1,253
PRINCIPLE 2ND - - - - -
3RD - - - - -
4TH - - - - -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ - $ - $ - $ - $ 1,253
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1ST QTR $ (537) $ (828) $ (74) $ 47 $ (1,586)
2ND 419 (1,565) 1,472 2,355 2,567
3RD 645 47 801 1,508 1,723
4TH 901 (563) (843) (74) 110
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,428 $ (2,909) $ 1,356 $ 3,836 $ 2,814
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF 1ST QTR $ (0.25) $ (0.38) $ (0.03) $ 0.02 $ (0.15)
COMMON STOCK: INCOME 2ND 0.37 (0.71) 0.67 1.08 1.17
(LOSS) BEFORE EFFECT OF CHANGE 3RD 0.29 0.02 0.37 0.68 0.78
IN ACCOUNTING PRINCIPLE * 4TH 0.24 (0.26) (0.39) (0.03) 0.05
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 0.65 $ (1.33) $ 0.62 $ 1.75 $ 1.85
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF 1ST QTR $ - $ - $ - $ - $ (0.57)
COMMON STOCK: EFFECT OF 2ND - - - - -
CHANGE IN ACCOUNTING 3RD - - - - -
PRINCIPLE 4TH - - - - -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ - $ - $ - $ - $ (0.57)
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF 1ST QTR $ (0.25) $ (0.38) $ (0.03) $ 0.02 $ (0.72)
COMMON STOCK: 2ND 0.37 (0.71) 0.67 1.08 1.17
NET INCOME (LOSS) 3RD 0.29 0.02 0.37 0.68 0.78
4TH 0.24 (0.26) (0.39) (0.03) 0.05
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 0.65 $ (1.33) $ 0.62 $ 1.75 $ 1.28
- ---------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE $ - $ - $ - $ - -
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 2,190,619 2,190,619 2,190,619 2,190,619 2,190,619
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 132,010 $ 127,330 $122,013 $ 118,823 $114,037
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $ - $ - $ - $ 4 $ 17
- ---------------------------------------------------------------------------------------------------------------------
WORKING CAPITAL $ 40,345 $ 39,560 $ 41,942 $ 42,010 $ 40,231
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY $ 48,166 $ 46,738 $ 49,647 $ 48,291 $ 44,454
- ---------------------------------------------------------------------------------------------------------------------
BOOK VALUE PER SHARE $ 21.99 $ 21.34 $ 22.66 $ 22.04 $ 20.29
- ---------------------------------------------------------------------------------------------------------------------
*THE COMPANY ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 112 DURING
THE 1993 FOURTH QUARTER, RETROACTIVE TO JANUARY 1, 1993. ACCORDINGLY, THE
PREVIOUSLY REPORTED RESULTS OF THE FIRST QUARTER OF 1993 HAVE BEEN RESTATED.
16
17
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BRAD RAGAN, INC.
Amounts in thousands, except per share data.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES $ 245,743 $ 238,473 $ 236,975
MISCELLANEOUS INCOME - NET (NOTE 3) 13,814 13,526 14,167
- ---------------------------------------------------------------------------------------------------------------------------
259,557 251,999 251,142
- ---------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES:
COST OF PRODUCTS SOLD 169,276 165,921 165,850
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES 85,055 83,386 80,397
UNUSUAL CHARGE - 4,832 -
INTEREST EXPENSE 2,760 2,504 2,485
- --------------------------------------------------------------------------------------------------------------------------
257,091 256,643 248,732
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 2,466 (4,644) 2,410
- --------------------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 13) 1,038 (1,735) 1,054
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,428 (2,909) 1,356
- --------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS AT BEGINNING OF YEAR 35,376 38,285 36,929
- --------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS AT END OF YEAR $ 36,804 $ 35,376 $ 38,285
- --------------------------------------------------------------------------------------------------------------------------
BASIC INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.65 $ (1.33) $ 0.62
- --------------------------------------------------------------------------------------------------------------------------
The notes to financial statements are an integral part of these statements.
17
18
STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BRAD RAGAN, INC.
Amounts in thousands, except share and per share data.
DECEMBER 31,
----------------------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,110 $ 682
ACCOUNTS RECEIVABLE, NET (NOTE 4)
INVENTORIES (NOTE 5) 72,204 69,771
MERCHANDISE 39,607 36,911
MATERIALS AND MANUFACTURING SUPPLIES 2,668 2,781
- -----------------------------------------------------------------------------------------------------------------------
42,275 39,692
PREPAID EXPENSES 242 1,622
OTHER CURRENT ASSETS 3,126 3,249
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 118,957 115,016
OTHER ASSETS 2,903 2,921
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 6) 9,680 8,887
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, LESS
ACCUMULATED AMORTIZATION OF $957 AND $924 470 506
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 132,010 $ 127,330
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
SHORT-TERM DEBT - MAJORITY SHAREHOLDER $ 29,550 $ 34,766
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
TRADE 11,625 12,728
MAJORITY SHAREHOLDER 18,426 9,983
SALARIES, WAGES AND COMMISSIONS 8,408 7,469
TAXES, OTHER THAN INCOME 1,027 1,097
FEDERAL AND STATE TAX ON INCOME 808 --
CURRENT PORTION OF DEFERRED REVENUE 2,306 2,466
NOTE PAYABLE - MAJORITY SHAREHOLDER 5,500 5,500
OTHER ACCRUED LIABILITIES 878 1,364
CURRENT PORTION OF OTHER LONG-TERM LIABILITIES 84 83
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES $ 78,612 $ 75,456
OTHER LONG-TERM LIABILITIES, LESS CURRENT PORTION 3,466 3,346
LONG-TERM DEFERRED REVENUE 1,766 1,790
CONTINGENCIES (NOTE 14)
SHAREHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $1 PER SHARE:
AUTHORIZED 10,000,000 SHARES: ISSUED 2,190,619 SHARES 2,191 2,191
ADDITIONAL PAID-IN CAPITAL 9,171 9,171
RETAINED EARNINGS 36,804 35,376
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 48,166 46,738
- -----------------------------------------------------------------------------------------------------------------------
$ 132,010 $ 127,330
=======================================================================================================================
The notes to financial statements are an integral part of these statements.
18
19
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BRAD RAGAN, INC.
Amounts in thousands.
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 1,428 $ (2,909) $ 1,356
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH FROM OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 2,320 2,097 1,670
(GAIN) LOSS ON SALE OF PROPERTY, PLANT AND EQUIPMENT (22) (46) (223)
DEFERRED TAX ASSET (28) (626) (291)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (2,433) (1,536) 2,826
INVENTORY (2,583) (2,308) (3,298)
PREPAID EXPENSES 1,380 (892) (454)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 7,340 (2,999) 2,144
SALARIES, WAGES AND COMMISSIONS 939 142 97
TAXES, OTHER THAN INCOME TAX (70) 51 (82)
FEDERAL AND STATE TAXES ON INCOME 808 -- (369)
DEFERRED REVENUE (184) (124) 27
OTHER ACCRUED LIABILITIES (486) 1,364 --
OTHER 280 407 359
---------- ---------- ----------
TOTAL ADJUSTMENTS 7,261 (4,470) 2,406
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 8,689 (7,379) 3,762
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (3,102) (1,950) (3,689)
PROCEEDS FROM DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT 57 90 421
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,045) (1,860) (3,268)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
LONG-TERM DEBT PAID -- -- (3)
SHORT-TERM DEBT - MAJORITY SHAREHOLDER (5,216) 9,443 (253)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,216) 9,443 (256)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 428 204 238
BEGINNING CASH AND CASH EQUIVALENTS 682 478 240
---------- ---------- ----------
ENDING CASH AND CASH EQUIVALENTS $ 1,110 $ 682 $ 478
========== ========== ==========
The notes to financial statements are an integral part of these statements.
19
20
NOTES TO FINANCIAL STATEMENTS
(Amounts in thousands except share and per share amounts)
BRAD RAGAN, INC.
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Organization: The Company is a 75%-owned subsidiary of The Goodyear Tire &
Rubber Company ("Goodyear").
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, cash
in banks and cash equivalents, which are highly liquid debt instruments with
maturities of less than 90 days.
Accrued Insurance Reserves: Substantial portions of liabilities related to
casualty losses, disability, workers' compensation and health care benefits are
self-insured. The expected cost of casualty and workers' compensation claims is
recognized at the time a claim is asserted and also includes an estimate of
incurred but not reported claims.
Earnings Per Share: The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share", for the year
ended December 31, 1997. SFAS 128 replaces the presentation of primary earnings
per share ("EPS") and fully diluted EPS with a presentation of basic EPS and
diluted EPS, respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Similar to fully diluted
EPS, diluted EPS assumes the issuance of common stock for all other potentially
dilutive equivalent shares outstanding. The calculation of basic EPS and diluted
EPS for the Company utilizes a common denominator, and therefore, both
measurements produce identical results. All prior-period EPS data have been
restated. The adoption of this new accounting standard did not have a material
effect on the Company's reported EPS amounts.
Inventories: Inventories are stated at the lower of cost or market, with cost
determined using the last-in, first-out (LIFO) method for substantially all
inventories.
Accounts Receivable: Included in accounts receivable are amounts relating to
installment sales, which amounts are payable over periods in excess of one year.
In accordance with normal trade practice, these amounts are classified as
current assets. Gross profit on installment sales is recognized in the year of
sale, and interest income is recognized ratably over the life of the contract.
Extended Warranty Contracts: The Company sells extended warranty contracts on
certain tires and home products. Under tire warranty contracts, the Company
provides certain services when the contract is sold, recognizing the portion of
contract revenue attributable to such services; the balance of the revenue is
deferred and amortized using the straight-line method over the life of the
contract while costs associated with warranty services are recognized as
incurred. Revenues for all other extended warranty contracts are deferred and
amortized over the life of the contract if the Company is liable for servicing
the warranty contract or recognized at the time of sale if a third party is
responsible for the warranty service.
Depreciation and Amortization: Depreciation is computed principally by the
straight-line method over the estimated useful life of each asset. Ranges of the
estimated lives used in computing depreciation and amortization are as follows:
buildings, 15 to 40 years; machinery and equipment, 3 to 10 years; vehicles, 3
to 5 years; and leasehold improvements, over life of lease.
Amortization of Intangibles: Amortization of intangibles is computed using the
straight-line method over the estimated period benefited ranging from five to
forty years.
Location Start-Up Costs: Location start-up costs incurred during preoperation
periods are charged against current operations.
Income Taxes: The Company provides for income taxes currently payable and
records deferred income tax assets and liabilities based on the temporary
differences between financial reporting and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred income tax assets are reduced, if
necessary, through a valuation allowance to the amount which management believes
is more likely than not to be realized.
Impairment of long lived assets: The Company continually monitors conditions
that may affect the carrying value of its long-term assets. When conditions
indicate potential impairment of a long-term asset, the Company will undertake
necessary market studies and re-evaluate projected future cash flows associated
with the asset. When projected future cash flows, not discounted for the time
value of money, are less than the carrying value of the asset, the impaired
asset is written down to its net realizable value.
Pervasiveness of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
20
21
Reclassifications: Certain prior year amounts have been reclassified to conform
to current year presentation.
NOTE 2: AFFILIATE TRANSACTIONS
- --------------------------------------------------------------------------------
Goodyear is the Company's principal supplier of new tires and is the Company's
majority shareholder. As one of Goodyear's largest dealers, the Company has a
continuing relationship with Goodyear that includes sales assistance,
cooperative advertising, training of employees, leasing of facilities and other
matters. Purchases from Goodyear were $62,207, $59,078 and $63,811 for the years
ended December 31, 1997, 1996 and 1995, respectively. Sales of product and
services to Goodyear were $7,454, $7,713 and $9,167 for the years ended December
31, 1997, 1996 and 1995, respectively. The Company also leases certain equipment
and facilities from Goodyear. Rents paid pursuant to such leases amounted to
$1,283, $1,346 and $1,439 in 1997, 1996 and 1995, respectively. The Company
began providing various credit related administrative services to Goodyear's
company - owned outlets during 1996. Revenues generated from providing these
services in 1997 and 1996 were $295 and $184, respectively.
On December 31, 1997, the Company issued a one-year $5.5 million promissory note
to Goodyear that may be renewable on December 31, 1998, depending upon business
conditions. The note represented an extension of a previous inventory ledger
balance financing arrangement dated November 30, 1989, with an outstanding
balance due on December 31, 1995, of $5.5 million. The note is interest-bearing
at 120% of the prime rate as announced by Citibank, N.A., New York, NY, on the
first day of each quarter during the term of the note. Interest due under the
note will be fully waived provided the ratio of the Company's annual purchases
of off-the-road tires from Goodyear to the average outstanding balance of the
note equals or exceeds two and one half to one (2.5:1). Interest will be
prorated if the ratio is less than 2.5:1. In 1997, 1996, and 1995 the ratio
exceeded 2.5:1, and interest was fully waived.
On February 13, 1998 the Company announced that the Board of Directors, acting
on the recommendation of a Special Committee of independent directors, had
agreed in principle to a proposed Agreement and Plan of Share Exchange from The
Goodyear Tire & Rubber Company pursuant to which Goodyear would acquire the
556,924 shares (approximately 25%) of Brad Ragan, Inc. Common Stock that it does
not already own for a cash price of $37.25 per share. The agreement in principle
is subject to the approval of a definitive Agreement and Plan of Share Exchange
by the parties and subsequently must be approved by a majority vote of the
shares of the Company's outstanding common stock at its Annual Meeting of
Shareholders presently scheduled to be held in May 1998. Goodyear has indicated
that it intends to vote the shares of stock it already owns in favor of the
proposal, thus assuring approval of the transaction.
NOTE 3: MISCELLANEOUS INCOME
- --------------------------------------------------------------------------------
Miscellaneous income consisted of the following:
Year Ended December 31,
1997 1996 1995
------- ------- -------
Finance charge revenue $11,609 $11,383 $11,902
Delivery commissions 1,065 1,041 996
Interest on short-term investments 685 705 787
Other - net 455 397 482
------- ------- -------
$13,814 $13,526 $14,167
- --------------------------------------------------------------------------------
NOTE 4: ACCOUNTS RECEIVABLE
- --------------------------------------------------------------------------------
Accounts receivable consisted of the following:
December 31,
1997 1996
------- -------
Installment receivables $62,531 $60,082
Commercial receivables 15,828 15,362
All other 1,524 1,482
------- -------
79,883 76,926
Less: Unearned interest income 5,279 5,105
Allowance for doubtful accounts 2,400 2,050
------- -------
$72,204 $69,771
- --------------------------------------------------------------------------------
Installment receivables are due from individuals who reside in markets served by
the Company's retail outlets. Commercial receivables are due from customers
primarily in the trucking and mining industries.
Amounts included in installment accounts receivable having balances due after
one year were approximately $20.4 million at December 31, 1997, and $18.3
million at December 31, 1996.
NOTE 5: INVENTORIES
- --------------------------------------------------------------------------------
Current cost exceeded the LIFO value of inventories by approximately $4,061 at
December 31, 1997, and $4,853 at December 31, 1996.
21
22
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant and equipment consisted of the following:
December 31,
--------------------
1997 1996
------- -------
Land $ 556 $ 574
Buildings 4,269 4,280
Machinery and equipment 21,450 19,393
Vehicles 3,335 3,392
Leasehold improvements 3,740 3,316
------- -------
33,350 30,955
Less accumulated depreciation and amortization 23,670 22,068
------- -------
$ 9,680 $ 8,887
NOTE 7: LEASES
- --------------------------------------------------------------------------------
The Company uses leasing extensively for store facilities, vehicles and other
equipment. Certain facility leases have ordinary renewal options, generally for
five years at escalating rates based on the lessor's operating costs. Total
rental expense for all leases amounted to $9,822, $9,771 and $9,756 for years
ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, obligations to make future minimum rental payments for all
noncancellable operating leases were as follows: 1998 - $7,396; 1999 - $5,559;
2000 - $3,887; 2001 - $2,708; 2002 - $1,686 and thereafter - $4,405.
NOTE 8: CREDIT ARRANGEMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, the Company had an unsecured short-term line of credit
with Goodyear. The interest rate on the credit line is equal to the 30-day LIBOR
plus 1.5%. This rate is fixed for a 30-day period and is reset monthly.
The average balance outstanding under credit line arrangements was $37,295,
$35,624 and $31,721 at an average interest rate, computed by dividing interest
expense on the credit lines by the weighted average borrowings outstanding, of
7.14%, 6.94% and 7.5% for the years ended December 31, 1997, 1996 and 1995,
respectively. The maximum amount outstanding at any month-end during these
periods was $42,379 at April 30, 1997, $43,179 at October 31, 1996 and $39,407
at July 31, 1995. The interest rate was 7.47% at December 31, 1997, 6.88% at
December 31, 1996 and 7.47% at December 31, 1995.
The Company made cash interest payments of $2,778, $2,456 and $2,520 in the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, and 1996, the carrying amounts of the Company's financial
assets and liabilities reported in the statements of financial position
approximated their fair values.
NOTE 10: RETIREMENT SAVINGS PLAN
- --------------------------------------------------------------------------------
Substantially all employees of the Company are covered by a salary deferral
thrift plan after a qualifying year of service. Company contributions to the
plan are based primarily on a matching percentage of employee deferrals and
amounted to $581 in 1997, $552 in 1996 and $538 in 1995.
NOTE 11: POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
The Company provides life insurance and health care benefits to certain of its
retired employees. Substantial portions of these insurance benefits are not
insured by a third party, but are paid by the Company. The Company recognizes
the cost of providing health care and other benefits to retirees over the term
of employee service.
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost includes the following components:
- --------------------------------------------------------------------------------
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Service cost - benefit earned during the period $ 77 $121 $ 84
Interest cost on expected benefit obligation 149 168 122
Net amortization and deferrals 3 38 --
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $229 $327 $206
- --------------------------------------------------------------------------------
22
23
The following table sets forth the funded status and amounts recognized in the
Company's statements of financial position:
- -------------------------------------------------------------------------------
December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ (552) $ (559) $ (409)
Vested active plan participants (567) (875) (586)
Other active plan participants (990) (859) (692)
- -------------------------------------------------------------------------------
(2,109) (2,293) (1,687)
Plan assets -- -- --
Accumulated postretirement benefit
obligation in excess of plan assets (2,109) (2,293) (1,687)
Unrecognized net loss 190 615 253
- -------------------------------------------------------------------------------
Accrued and deferred postretirement
benefit cost recognized in the
statement of financial position $(1,919) $(1,678) $(1,434)
- -------------------------------------------------------------------------------
An 8.00% annual rate of increase in the cost of health care benefits is assumed
in 1998. This rate gradually decreases to 5% in 2010 and remains at that level
thereafter. A 1.0% change in the assumption would have minimal impact on the
Company's accumulated postretirement benefit obligation, because, under the
terms of the plan, the retiree would assume the increased cost. The weighted
average discount rate used to determine the accumulated postretirement benefit
obligation was 7.75% for 1997, 1996 and 1995.
NOTE 12: ADVERTISING
- -----------------------------------------------------------------------------
The Company expenses the production cost of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits. Direct
response advertising consists primarily of coupon books for the Company's
products and services. The capitalized costs of the advertising are amortized
over the period during which the coupons are valid. At December 31, 1997, and
1996, $4 and $81 of advertising expense was reported as assets, respectively.
Advertising expense was $2,539, $2,754 and $3,076 in 1997, 1996 and 1995,
respectively.
NOTE 13: INCOME TAXES
- -----------------------------------------------------------------------------
Pretax income from continuing operations has been taxed by various domestic
federal and state authorities. Sales subject to foreign taxation are not
material.
- -----------------------------------------------------------------------------
The provision (benefit) for income taxes consisted of the following:
- -----------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
1997 1996 1995
------- ------- -------
Current Tax Expense (Benefit)
Federal $ 950 $(1,011) $ 1,085
State 116 (98) 259
------- ------- -------
Total current tax expense (benefit) $ 1,066 $(1,109) $ 1,344
- -----------------------------------------------------------------------------
Deferred Tax Expense (Benefit)
Federal $ (23) $ (520) $ (241)
State (5) (106) (49)
------- ------- -------
Total deferred tax expense (benefit) $ (28) $ (626) $ (290)
------- ------- -------
Total provision (benefit) $ 1,038 $(1,735) $ 1,054
- -----------------------------------------------------------------------------
23
24
A reconciliation between the provision (benefit) for income taxes and the amount
of income tax computed by applying the statutory federal income tax rate to
pretax income from continuing operations is as follows:
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
1997 1996 1995
------- ------- ------
Computed tax provision (benefit) - Statutory rate $ 838 $(1,579) $ 819
State income taxes 106 (199) 104
Non-deductible items 86 75 86
Other - net 8 (32) 45
------- ------- ------
$ 1,038 $(1,735) $1,054
- --------------------------------------------------------------------------------
Income tax payments (refunds), were $(1,003), $(208) and $2,166 for the years
ended December 31, 1997, 1996 and 1995 respectively.
Upon applying the "more likely than not" asset realization criteria prescribed
in SFAS 109, there was sufficient positive evidence to support recognition of
net deferred assets, and a valuation allowance has not been required at December
31, 1997 or 1996. A net deferred tax asset of $5,492, $5,464 was recorded at
December 31, 1997, and 1996, respectively. The realization of the net deferred
asset value is dependent upon the generation of taxable income in future
periods.
Deferred tax assets (liabilities) are comprised of the following :
- --------------------------------------------------------------------------------
December 31,
---------------------
1997 1996
------- -------
Deferred Tax Assets
Bad debt reserve $ 919 $ 785
Accrued vacation pay 306 287
Insurance reserve - general liability 1,141 993
Insurance reserve - medical & dental 148 169
Deferred warranty revenue 1,523 1,580
Accrued postretirement cost other than pensions 739 643
Accrued postemployment benefits 464 464
Inventory reserves 319 350
Contingency reserves 336 522
Other - net 16 212
------- -------
Gross deferred tax assets $ 5,911 6,005
------- -------
Deferred Tax Liabilities
Depreciation $ (418) $ (540)
Other (1) (1)
------- -------
Gross deferred tax liabilities $ (419) $ (541)
------- -------
Net deferred tax assets $ 5,492 $ 5,464
- --------------------------------------------------------------------------------
NOTE 14: CONTINGENCIES
- --------------------------------------------------------------------------------
The Company is a defendant in a number of legal actions generally incidental to
the normal course of business. It is management's opinion, after consulting with
legal counsel, that it is not likely that the amount of loss, if any, that may
ultimately arise upon the resolution of such actions will have a material effect
on the Company's financial position and results of operations. However, in the
event of an unanticipated adverse final determination in respect of certain
matters, the Company's financial position or results of operations for the
period in which such determination occurs, could be materially affected.
The Company elected to purchase only catastrophe insurance and is partially
self-insured for casualty losses. Self insurance retentions for workers'
compensation are up to the statutory benefit for individual states, general
liability and automobile liability up to $3,000 and product liability up to
$7,000.
24
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NOTE 15: BUSINESS SEGMENT INFORMATION
- -------------------------------------------------------------------------------
Brad Ragan, Inc.'s business is functionally divided into two segments,
commercial operations and retail operations. Commercial operations include the
sale of new tires and the manufacture and sale of retreaded off-the-road,
over-the-highway and farm and industrial tires. Retail stores distribute tires,
major brand appliances, consumer electronics and power equipment and offer
automotive repair services. Identifiable assets, depreciation expense and
capital expenditures by segment include both items directly identified with
those operations and an allocable share of jointly used assets. Intersegment
sales and transfers for each of the three years presented are immaterial and,
therefore, have not been separately reported.
Commercial Retail
Year Ended December 31, Year Ended December 31,
------------------------------------ -----------------------------------
1997 1996 1995 1997 1996 1995
------------------------------------ -----------------------------------
Net sales $156,041 $146,683 $144,018 $89,702 $91,790 $92,957
Miscellaneous income - net 1,083 1,084 1,259 12,346 12,163 12,756
Cost of products sold 113,615 108,233 106,728 55,661 57,687 59,122
Selling, administrative
and general expenses 39,714 38,915 36,591 45,120 48,990 43,571
Operating profit 3,795 619 1,958 1,267 (2,724) 3,020
Identifiable assets 51,471 48,089 46,827 80,539 79,241 75,185
Capital expenditures 2,025 1,693 2,075 1,036 249 1,545
Depreciation expense 1,440 1,276 978 756 710 564
- -------------------------------------------------------------------------------
Corporate
Year Ended December 31
---------------------------
1997 1996 1995
---------------------------
Corporate revenues, net $384 $ 279 $ 152
Corporate operating profit (loss) 164 (83) (83)
- -------------------------------------------------------------------------------
NOTE 16: UNUSUAL CHARGE
- -------------------------------------------------------------------------------
The Company recorded a $4.8 million unusual charge in 1996 associated with the
tentative settlement of two class action lawsuits related to retail installment
credit sales.
25
26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BRAD RAGAN, INC.
Amounts in thousands.
Additions
Balance at Beginning Charged to Costs Balance at End
Description of Period & Expenses Deductions of Period
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 1997 $2,050 $2,097 $1,747(A) $2,400
Year ended December 31, 1996 $1,907 $1,648 $1,505(A) $2,050
Year ended December 31, 1995 $1,637 $1,737 $1,467(A) $1,907
(A) Uncollected accounts charged to allowance, less recoveries of accounts
previously written off.
26
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brad Ragan, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Brad Ragan,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Charlotte, North Carolina
January 23, 1998
27
28
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.
BRAD RAGAN, INC.
March 10, 1998 By: /s/ M. R. Thomann
----------------------
M. R. Thomann
President and Chief Executive Officer
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:
NAME AND SIGNATURE POSITION(S) DATE
- ------------------ ----------- ----
/s/ EUGENE R. CULLER Chairman of the Board March 10, 1998
- --------------------
EUGENE R. CULLER
/s/ MICHAEL R. THOMANN President and Chief Executive March 10, 1998
- ----------------------- Officer
MICHAEL R. THOMANN
/s/ RONALD J. CARR Vice President - Finance March 10, 1998
- ------------------- and Chief Financial Officer,
RONALD J. CARR Secretary, Treasurer and a
Director
/s/ RICHARD D. PEARSON Director March 10, 1998
- -----------------------
RICHARD D. PEARSON
/s/ RICHARD E. SORENSEN Director March 10, 1998
- ------------------------
RICHARD E. SORENSEN
s/ JAMES R. BARNETT Director March 10, 1998
- --------------------
JAMES R. BARNETT
28
29
EXHIBIT INDEX
to
Annual Report on Form 10-K of Brad Ragan, Inc., for
Year Ended December 31, 1997
Exhibit No. Description
- ----------- -----------
3.1 Restated articles of incorporation of Brad Ragan,
Inc., as last amended May 25, 1988 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1988).
3.2 Bylaws of Brad Ragan, Inc., as last amended October 25, 1990
(incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990).
4.1 Form of Certificate of the Company's Common Stock ($1
par value) (incorporated by reference to Exhibit 4(a)
to the Company's Registration Statement on Form S-1,
Registration No. 2-38082).
10.1 Performance Recognition Plan of Brad Ragan, Inc.,
effective January 1, 1997, which the Company has
adopted for its officers (excluding the Chairman of
the Board) and other selected key employees.
10.2 The Goodyear Tire & Rubber Company Retirement Benefit
Plan For Employees With Service With Designated
Subsidiaries, effective November 1, 1994, which the
Company has adopted for its officers (excluding the
Chairman of the Board) and other selected key
employees is filed as a part of this report.
(Incorporated by reference to the exhibit of the same
number contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1994)
27 Financial Data Schedule (for SEC use only)
29