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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1999;
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-7007
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BANDAG, INCORPORATED
--------------------
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2905 North Highway 61, Muscatine, Iowa 52761-5886
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319/262-1400
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Name of each exchange
on which registered
- ------------------------------------- ------------------------------------
Common Stock - $1 Par Value New York Stock Exchange and Chicago
Class A Common Stock - $1 Par Value Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock - $1 Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 13, 2000: Common Stock, $150,878,977; Class A Common
Stock (non-voting), $110,392,503; Class B Common Stock, $634,008.
The number of shares outstanding of the issuer's classes of common stock as of
March 13,2000: Common Stock, 9,089,156 shares; Class A Common Stock, 9,637,754
shares; Class B Common Stock, 2,045,075 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of the
Shareholders to be held May 2, 2000 are incorporated by reference in Part III.
PART I
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ITEM 1. BUSINESS
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Introduction
------------
All references herein to the "Company" or "Bandag" refer to Bandag,
Incorporated and its subsidiaries unless the context indicates otherwise.
The Company has two reportable business segments: the manufacture and
sale of precured tread rubber, equipment and supplies for retreading tires (the
"Traditional Business") and the sale and maintenance of new and retread tires to
principally commercial and industrial customers through its wholly-owned
subsidiary Tire Distribution Systems, Inc. ("TDS").
As a result of a recapitalization of the Company approved by the
Company's shareholders on December 30, 1986, and substantially completed in
February 1987, the Carver Family (as hereinafter defined) obtained absolute
voting control of the Company. As of March 13, 2000, the Carver Family
beneficially owned shares of Common Stock and Class B Common Stock constituting
77% of the votes entitled to be cast in the election of directors and other
corporate matters. The "Carver Family" is composed of (i) Lucille A. Carver, a
director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J.
Carver and their spouses, and (iii) certain trusts and other entitles for the
benefit of the Carver Family members.
Effective as of November 1, 1997, the Company acquired five franchised
dealerships through TDS. The aggregate purchase price of the transactions was
approximately $158.6 million, which includes the fair market value of 10,000
shares of the Company's Class A Common Stock. Since the original acquisitions,
TDS has acquired 11 additional smaller dealerships. TDS is operated through Tire
Distribution Systems, Inc. See "TDS" herein.
On February 5, 1999, Tire Management Solutions, Inc. ("TMS"), a
wholly-owned subsidiary of the Company, entered into its first tire management
outsourcing contract. The contract is with Roadway Express. Pursuant to the
contract, the entire fleet tire management program of Roadway Express was
outsourced to TMS. TMS, in turn, subcontracts with over 160 individual Bandag
franchises across the country to provide the outsourced tire services. TMS
anticipates that additional tire management outsourcing contracts will be
obtained in the future.
Traditional Business
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(a) General
-------
The Traditional Business is engaged primarily in the production and
sale of precured tread rubber and equipment used by its franchisees for the
retreading of tires for trucks, buses, light commercial trucks, industrial
equipment, off-the-road equipment and passenger cars. Bandag specializes in a
patented cold-bonding retreading process which it introduced to the United
States in 1957 (the "Bandag Method"). The Bandag Method separates the process of
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vulcanizing the tread rubber from the process of bonding the tread rubber to the
tire casing, allowing for optimization of temperature and pressure levels at
each stage of the retreading process.
The Company and its licensees have 1,295 franchisees worldwide, with
31% located in the United States and 69% internationally. The majority of
Bandag's franchisees are independent operators of full service tire
distributorships. The Traditional Business' revenues primarily come from the
sale of retread material and equipment to its franchisees. The Traditional
Business' products compete with new tire sales, as well as retreads produced
using other retread processes. The Company concentrates its marketing efforts on
existing franchisees and on expanding their respective market penetration. Due
to its strong distribution systems, marketing efforts and leading technology,
Bandag, through its independent franchisee network, has been able to maintain
the largest market presence in the retreading industry.
The Traditional Business competes primarily in the light and heavy
truck tire replacement market. Both new tire manufacturers and tread rubber
suppliers compete in this market. While the Company has independent franchisees
in over 109 countries, and competes in all of these geographic markets, its
largest market is the United States. Truck tires retreaded by the Company's
franchisees make up approximately 15% of the U.S. light and heavy truck tire
replacement market. The Company's primary competitors are new tire manufacturers
such as The Goodyear Tire & Rubber Company, Bridgestone Corporation and Groupe
Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as
well as in other markets as a tread rubber supplier to a combination of company
owned and independent retreaders, and Groupe Michelin competes in the retread
market in the United States and in other markets.
The Traditional Business consists of the franchising of a patented
process for the retreading of tires primarily for trucks, buses, light
commercial trucks, and the production and sale of precured tread rubber and
related products used in connection with this process.
The Traditional Business can be divided into two main areas: (i)
manufacturing the tread rubber and (ii) bonding the tread to a tire casing.
Bandag manufactures over 500 separate tread designs and sizes, treads
specifically designed for various applications, allowing fleet managers to
fine-tune their tire programs. Bandag tread rubber is vulcanized prior to
shipment to its independent franchisees. The Bandag franchisee prepares the tire
casing for retreading and performs the retreading process of bonding the cured
tread to the prepared tire casing. This two-step process allows utilization of
the optimum temperature and pressure levels at each step. Lower temperature
levels during the bonding process result in a more consistent, higher quality
finished retread with less damage to the casing. Bandag has developed a totally
integrated retreading system with the materials, bonding process and
manufacturing equipment specifically designed to work together as a whole.
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(b) Markets and Distribution
------------------------
The principal market categories for the Traditional Business are truck
and bus, with more than 90% of the tread rubber sold by the Company used in the
retreading of these tires. Additionally, the Company markets tread rubber for
the retreading of off-the-road equipment, industrial and light commercial
vehicle and passenger car tires; however, historically, sales of tread rubber
for these applications have not contributed materially to the Company's results
of operations.
Trucks and Buses Tread rubber, equipment, and supplies for retreading
and repairing truck and bus tires are sold by the Company primarily to
independent franchisees and TDS which use the Bandag Method for that purpose.
Bandag has 1,295 independent franchisees throughout North America, Central
America, South America, Europe, Africa, Far East, Australia and New Zealand.
These franchisees are owned and operated by independent franchisees, some with
multiple franchises and/or locations. Of these franchisees, 395 are located in
the United States. One hundred fifty nine (159) of Bandag's foreign franchisees
are franchised by a licensee of the Company in Australia, and joint ventures in
India and Sri Lanka. A limited number of franchisees are trucking companies,
which operate retread shops primarily for their own needs. A few franchisees
also offer "hot-cap" retreading and most sell one or more lines of new tires.
The current franchise agreement offered by the Company grants the
franchisee the non-exclusive retread manufacturing rights to use the Bandag
Method for one or more applications and the Bandag trademarks in connection
therewith within a specified territory, but the franchisee is free to market
Bandag retreads outside the territory. No initial franchise fee is paid by a
franchisee for its franchise.
Direct Sales to Transportation Fleets The Company has entered into
contracts with companies pursuant to which Bandag agrees to sell retread tires
directly to transportation fleets of such companies and provide maintenance and
service for the retread tires (the "Direct Sales Contracts"). Bandag
subcontracts the sales, maintenance, and service components of the Direct Sales
Contracts to its independent franchisees and to TDS.
Other Applications The Company continues to manufacture and supply to
its franchisees a limited amount of tread for off-the-road (OTR) tires,
industrial tires, including solid and pneumatic, passenger car tires and light
commercial tires for light trucks and recreational vehicles.
(c) Competition
-----------
The Company faces strong competition in the market for replacement
truck and bus tires, the principal retreading market, which it serves. The
competition comes not only from the major manufacturers of new tires, but also
from manufacturers of retreading materials. Competitors include producers of
"camelback," "strip stock," and "slab stock" for "hot-cap" retreading, as well
as a number of producers of precured tread rubber. Various methods for bonding
precured tread rubber to tire casings are used by competitors.
-4-
Bandag retreads are often sold at a higher price than tires retreaded
by the "hot-cap" process as well as retreads sold using competitive precured
systems. The Company believes that the superior quality and greater mileage of
Bandag retreads and expanded service programs to franchisees and end-users
outweigh any price differential.
Bandag franchisees compete with many new-tire dealers and retreading
operators of varying sizes, which include shops operated by the major new-tire
manufacturers, large independent retread companies, retreading operations of
large trucking companies, and smaller commercial tire dealers.
For additional information on competition faced by the Traditional
Business see the foregoing discussion in "General" herein.
(d) Sources of Supply
-----------------
The Company manufactures the precured tread rubber, cushion gum, and
related supplies in Company-owned and leased manufacturing plants in the United
States, Canada, Brazil, Belgium, South Africa, Mexico, Malaysia and Venezuela.
The Company has entered into joint venture agreements in India and Sri Lanka.
The Company also manufactures pressure chambers, tire casing analyzers, buffers,
tire builders, tire-handling systems, and other items of equipment used in the
Bandag retreading method. Curing rims, chucks, spreaders, rollers, certain
miscellaneous equipment, and various retreading supplies, such as repair patches
sold by the Company, are purchased from others.
The Company purchases rubber and other materials for the production of
tread rubber and other rubber products from a number of suppliers. The rubber
for tread is primarily synthetic and obtained principally from sources, which
most conveniently serve the respective areas in which the Company's plants are
located. Although synthetic rubber and other petrochemical products have
periodically been in short supply and significant cost fluctuations have been
experienced in previous years, the Company to date has not experienced any
significant difficulty in obtaining an adequate supply of such materials.
However, the effect on operations of future shortages will depend upon their
duration and severity and cannot presently be forecast.
The principal source of natural rubber, used for the Company's cushion
gum, is the Far East. The supply of natural rubber has historically been
adequate for the Company's purposes. Natural rubber is a commodity subject to
wide price fluctuations as a result of the forces of supply and demand.
Synthetic prices historically have been related to the cost of petrochemical
feedstocks.
(e) Patents
-------
The Company owns or has licenses for the use of a number of United
States and foreign patents covering various elements of the Bandag Method. The
Company has patents covering improved features, some of which started expiring
in 1995 and others that will continue to
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expire through the year 2011, and the Company has applications pending for
additional patents.
The Company does not consider that patent protection is the primary
factor in its successful retreading operation, but rather, that its proprietary
technical "know-how," product quality, franchisee support programs and effective
marketing programs are more important to its success.
The Company has secured registrations for its trademark and service
mark BANDAG, as well as other trademarks and service marks, in the United States
and most of the other important commercial countries.
TDS
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(a) General
-------
The five dealerships that were acquired in November 1997 by TDS, an
indirect wholly-owned subsidiary of the Company, were: Universal Tire, Inc.
(Nashville, TN); Southern Tire Mart, Inc. (Columbia, MS); J.W. Brewer Tire Co.,
Inc. (Wheat Ridge, CO): Joe Esco Tire Co. (Oklahoma City, OK); and Sound Tire,
Inc. (Auburn, WA). Since the original acquisitions, TDS has acquired 11
additional smaller dealerships. As of December 31, 1999, all of the acquired
dealerships were merged into TDS. TDS, which provides new and retread tire
products and tire management services to national, regional and local fleet
transportation companies, operates 44 Bandag franchise and manufacturing
locations and 109 commercial, retail and wholesale outlets in 17 states.
(b) Markets and Distribution
------------------------
TDS offers complete tire management services including: the complete
line of Bandag retreads, new tires (commercial, retail and off-the-road),
24-hour road service and alignment. The tire management services are provided
over a broad geographic area including the northwest and all across the south.
This geographic coverage allows TDS to provide consistent, cost-effective
programs, information, products, and services to local, regional and national
fleets.
A cost effective tire management service continues to grow in
importance for fleets of all sizes. The trucking industry continues to
consolidate. Trucking fleets are under intense pressure to be cost competitive
and reliable in their services. Tire related costs are one of the top operating
expenses for trucking fleets. Bandag and its dealer alliance network (including
TDS) are able to provide trucking companies comprehensive tire management
services which result in lower tire operating costs for the trucking company
while at the same time helping the trucking company increase its service
reliability through the same tire management programs.
TDS markets its products through sales personnel located at each of its
commercial locations, retread production facilities and retail facilities. TDS's
sales people make personal sales calls on existing customers to ensure
satisfaction and loyalty. TDS facilities are generally
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located near major highway arteries, industrial centers, and customer locations.
TDS commercial locations operate as points of sale for retread tires, new tires
and services. In addition, the commercial locations operate as a home base for
mobile service trucks which must be able to provide customers with reliable and
timely emergency service as well as regularly scheduled maintenance service.
In an effort to fully service its customers, TDS sells new truck tires
manufactured by Bridgestone Corporation, Continental/General, Kelly Tires,
Yokahama, Cooper, and other manufacturers except for The Goodyear Tire and
Rubber Company and Groupe Michelin.
(c) Competition
-----------
TDS competitors are other tire dealers, which offer competing retread
applications, as well as those which are Bandag franchised dealers. In addition,
such tire dealers typically sell and service new tires produced by new tire
manufacturers and service providers such as The Goodyear Tire and Rubber
Company, Bridgestone Corporation and Groupe Michelin. The Goodyear Tire and
Rubber Company and Groupe Michelin compete in the U.S. market and in other
markets as a tread rubber supplier to a combination of company owned and
independent retreaders.
(d) Sources of Supply
-----------------
TDS purchases retread rubber and most of its retreading equipment and
supplies from Bandag and purchases new tires from new tire companies including
Bridgestone Corporation, Yokahama, Continental/General, Cooper and Kelly. Groupe
Michelin and The Goodyear Tire and Rubber Company have terminated their dealer
relationships with TDS dealers and will not sell new tires to TDS dealers. TDS
has not experienced any material adverse effects from such terminations and has
been successful in obtaining and utilizing new tires from other tire
manufacturers in its business.
Regulations
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Various federal and state authorities have adopted safety and other
regulations with respect to motor vehicles and components, including tires, and
various states and the Federal Trade Commission enforce statutes or regulations
imposing obligations on franchisors, primarily a duty to disclose material facts
concerning a franchise to prospective franchisees. Management is unaware of any
present or proposed regulations or statutes which would have a material adverse
effect upon its businesses, but cannot predict what other regulations or
statutes might be adopted or what their effect on the Company's businesses might
be.
Other Information
-----------------
The Company conducts research and development of new products,
primarily in the Traditional Business, and the improvement of materials,
equipment, and retreading processes. The cost of this research and development
program was approximately $16,159,000 in 1997, $18,342,000 in 1998, and
$12,325,000 in 1999.
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The Company's business has seasonal characteristics, which are tied not
only to the overall performance of the economy, but more specifically to the
level of activity in the trucking industry. Tire demand does, however, lag the
seasonality of the trucking industry. The Company's third and fourth quarters
have historically been the strongest in terms of sales volume and earnings.
The Company has sought to comply with all statutory and administrative
requirements concerning environmental quality. The Company has made and will
continue to make necessary capital expenditures for environmental protection. It
is not anticipated that such expenditures will materially affect the Company's
earnings or competitive position.
As of December 31, 1999, the Company had approximately 4,441 employees.
Financial Information about Business Segments and Foreign and Domestic
----------------------------------------------------------------------
Operations and Revenues of Principal Product Groups
---------------------------------------------------
Financial Statement "Operating Segment and Geographic Area Information"
follows on page 9.
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Operating Segment and Geographic Area Information
The Company has two reportable operating segments: the manufacture of precured
tread rubber, equipment and supplies for retreading tires (Traditional Business)
and the sales and maintenance of new and retread tires to principally commercial
and industrial customers (TDS).
Information concerning operations for the Company's two reportable operating
segments and different geographic areas follows (see Note L to Notes to
Consolidated Financial Statements):
Traditional Business
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North America(4)(5) Europe(6) Latin America(4) Asia(4)(7)
-------------------------- ----------------------- ------------------------ ---------------------
In millions: 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
Net Sales
Net sales to unaffiliated
customers (1)(2) $373.8 $422.0 $483.4 $103.7 $110.9 $123.0 $99.2 $122.2 $118.1 $25.5 $28.0 $42.7
Transfers between
segments 72.5 65.7 24.1 0.8 1.0 0.5 - - - - - -
-------------------------- ----------------------- ------------------------ ---------------------
Segment area totals $446.3 $487.7 $507.5 $104.5 $111.9 $123.5 $99.2 $122.2 $118.1 $25.5 $28.0 $42.7
Eliminations (deduction)
Total Net Sales
Gross Profit $214.5 $219.1 $217.9 $46.0 $49.6 $53.8 $36.3 $43.8 $41.4 $8.8 $9.1 $13.0
Intangible Amortization 0.2 0.6 1.0 - - - - - - - - -
Depreciation Expense 21.5 19.8 19.5 4.9 6.1 6.7 5.1 5.9 5.1 0.6 1.1 1.4
Earnings (Expenses)
Operating earnings (loss)(3) $95.2 $98.8 $89.3 $11.4 $4.9 $8.8 $13.4 $15.5 $18.9 $4.6 $(1.4) $3.2
Gain on sale of stock - - - - - - - - - - - -
Interest revenue - - - - - - - - - - - -
Interest expense - - - - - - - - - - - -
Corporate expenses - - - - - - - - - - - -
-------------------------- ----------------------- ------------------------ ---------------------
Earnings (Loss) Before
Income Taxes $95.2 $98.8 $89.3 $11.4 $4.9 $8.8 $13.4 $15.5 $18.9 $4.6 $(1.4) $3.2
Total Assets at
December 31 $281.1 $321.8 $312.6 $52.4 $67.1 $73.9 $64.6 $80.4 $74.4 $12.1 $15.1 $21.2
Expenditures for
Long-Lived Assets 20.0 33.3 15.8 3.0 4.3 7.5 4.7 10.0 15.1 0.9 1.3 1.0
Additions to Long-Lived
Assets due to Acquisitions - 0.9 - - - - - - - - - -
Long-Lived Assets 89.6 90.8 86.6 11.4 15.2 16.3 32.0 43.6 40.4 2.9 3.2 5.1
Sales by Product
Retread products $360.1 $404.5 $462.5 $101.8 $104.4 $110.5 $95.8 $117.0 $111.4 $15.3 $15.4 $24.2
New tires - - - - - - - - - 3.0 4.8 8.2
Retread tires - - - - - - - - - 6.4 5.9 7.5
Other 13.7 17.5 20.9 1.9 6.5 12.5 3.4 5.2 6.7 0.8 1.9 2.8
TDS Other (4) Consolidated
-------------------------- ---------------------- ---------------------------
In millions: 1999 1998 1997 1999 1998 1997 1999 1998 1997
Net Sales
Net sales to unaffiliated
customers (1)(2) $393.1 $376.6 $55.3 $17.4 - - $1,012.7 $1,059.7 $822.5
Transfers between
segments - - - - - - 73.3 66.7 24.6
-------------------------- ---------------------- ---------------------------
Segment area totals $393.1 $376.6 $55.3 $17.4 - - $1,086.0 $1,126.4 $847.1
Eliminations (deduction) (73.3) (66.7) (24.6)
-----------------------------
Total Net Sales $1,012.7 $1,059.7 $822.5
Gross Profit $92.1 $84.8 $14.0 $(5.0) $- $- $392.7 $406.4 $340.1
Intangible Amortization 9.7 8.0 1.3 - - - 9.9 8.6 2.3
Depreciation Expense 11.0 9.4 1.5 0.8 0.5 0.4 43.9 42.8 34.6
Earnings (Expenses)
Operating earnings (loss)(3) $(2.5) $2.5 $(2.0) $(11.4 $(5.7) $(1.4) $110.7 $114.6 $116.8
Gain on sale of stock - - - - - 95.1 - - 95.1
Interest revenue - - - 6.1 9.0 7.5 6.1 9.0 7.5
Interest expense - - - (9.7) (10.8) (3.3) (9.7) (10.8) (3.3
Corporate expenses - - - (15.0) (13.3) (13.2) (15.0) (13.3) (13.2
-------------------------- ---------------------- ---------------------------
Earnings (Loss) Before
Income Taxes $(2.5) $2.5 $(2.0) $(30.0 $(20.8) $84.7 $92.1 $99.5 $202.9
Total Assets at
December 31 $243.2 $217.2 $217.9 $69.0 $54.1 $199.9 $722.4 $755.7 $899.9
Expenditures for
Long-Lived Assets 10.8 15.6 1.0 2.5 0.9 1.8 41.9 65.4 42.2
Additions to Long-Lived
Assets due to Acquisitions 4.4 12.9 125.1 - - - 4.4 13.8 125.1
Long-Lived Assets 125.8 133.9 123.2 3.6 1.9 1.6 265.3 288.6 273.2
Sales by Product
Retread products $- $- $- $- - - $573.0 $641.3 $708.6
New tires 218.2 214.1 36.5 - - - 221.2 218.9 44.7
Retread tires 96.9 86.6 11.6 - - - 103.3 92.5 19.1
Other 78.0 75.9 7.2 17.4 - - 115.2 107.0 50.1
(1) No customer accounted for 10% or more of the Company's sales to
unaffiliated customers in 1999, 1998, or 1997.
(2) Export sales from North America were less than 10% of sales to unaffiliated
customers in each of the years 1999, 1998, and 1997.
(3) Aggregate foreign exchange gains (losses) included in determining net
earnings amounted to approximately $800,000, $(3,200,000) and $1,500,000 in
1999, 1998 and 1997 respectively.
(4) For segment reporting purposes, Mexico and South Africa operations are
included in the Latin America segment and New Zealand and Australia
operations are included in the Asia segment, consistent with management's
groupings for internal purposes. Other includes Corporate activities and in
1999 and 1998, the Tire Management Solutions pilot initiative.
(5) Includes in 1999 non-recurring charges of $12,800,000 related to costs
associated with the closure of a domestic manufacturing facility and other
non-recurring costs. Includes in 1997 non-recurring charges of $16,500,000
related to the closure of a domestic manufacturing facility and exit costs
from a rubber recycling venture.
(6) Includes in 1999 non-recurring charges of $700,000 for termination
benefits. Includes in 1998 non-recurring charges of $4,176,000 for
termination benefits.
(7) Includes in 1998 net non-recurring charges of $29,000 related to costs
associated with the closure of foreign manufacturing facilities and other
non-recurring costs. The net non-recurring charges include a gain of
$3,297,000 consisting of the non-taxable recognition of accumulated
translation gains due to the exit of operations in Indonesia.
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Executive Officers of the Company
The following table sets forth the names and ages of all executive
officers of the Company as of March 13, 2000, the period of service of each with
the Company, positions and offices with the Company presently held by each, and
the period during which each officer has served in his present office:
Period of Period in
Service Present Position Present
Name Age with Company or Office Office
---- --- ------------ --------- ------
Martin G. Carver* 51 21 Yrs. Chairman of the Board, Chief 19 Yrs.
Executive Officer and President
Lucille A. Carver* 82 42 Yrs. Treasurer 41 Yrs.
Nathaniel L. Derby II 57 29 Yrs. Vice President, Manufacturing Design 3 Yrs.
Warren W. Heidbreder 53 18 Yrs. Vice President, Chief Financial 3 Yrs.
Officer and Secretary
Frederico U. Kopittke 56 5 Yrs. Vice President, Latin America and 1 Yr.
South Africa
John C. McErlane 46 15 Yrs. Vice President, Marketing and Sales 2 Yr.
* Denotes that officer is also a director of the Company.
Mr. Martin G. Carver was elected Chairman of the Board effective June
23, 1981, Chief Executive Officer effective May 18, 1982, and President
effective May 25, 1983. Prior to his present position, Mr. Carver was also Vice
Chairman of the Board from January 5, 1981 to June 23, 1981.
Mrs. Carver has, for more than five years, served as a Director and
Treasurer of the Company.
Mr. Derby joined Bandag in 1971. In December 1985, he was promoted to
Vice President, Engineering and served in that position until August 1996 when
he was elected to the office of Vice President, Engineering. He served in that
office until May 1997, when he was elected to his current office of Vice
President, Manufacturing Design effective April 28, 1997.
Mr. Heidbreder joined Bandag in 1982. In 1986 he was elected to the
office of Vice President, Legal and Tax Administration, and Secretary. In
November 1996, he was elected to his current office of Vice President, Chief
Financial Officer, and Secretary effective as of January 1, 1997.
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Mr. Kopittke joined Bandag in July 1994 as Company Manager of Bandag do
Brasil Ltda. He served in that position until March 1998 when he was elected to
the office of Vice President, Latin America. In August 1998, he was elected to
his current office of Vice President Latin America and South Africa, effective
July 13, 1998. Before joining Bandag, Mr. Kopittke was employed for more than 16
years by Nalco Chemical Company in South America.
Mr. McErlane joined Bandag in 1985. From 1985 through 1995, he held
several managerial positions with the Company. In 1996, he was promoted to the
position of Director, Marketing. In January 1997, he was promoted to the office
of Vice President, Marketing and served in that position until March 1998, when
he was elected to his current office of Vice President, Marketing and Sales
effective February 16, 1998.
All of the above-named executive officers have been elected by the
Board of Directors and serve at the pleasure of the Board of Directors.
ITEM 2. PROPERTIES
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Traditional Business
--------------------
The general offices of the Company are located in a company-owned
56,000 square foot office building in Muscatine, Iowa.
The tread rubber manufacturing plants of the Company are located to
service principal markets. The Company owns thirteen of such plants. However,
the Company only operates twelve of these plants, four of which are located in
the United States, and the remainder in Canada, Belgium, South Africa, Brazil
(two plants), Mexico, Malaysia, and Venezuela. Operations in one tread rubber
manufacturing plant located in the United States were suspended in the fourth
quarter of 1999 but the facility remains viable for general corporate purposes.
The plants vary in size from 9,600 square feet to 194,000 square feet with the
first plant being placed into production during 1959. All of the plants are
owned in fee except for the plants located in Malaysia and Venezuela, which are
under standard lease contracts.
Retreading equipment is manufactured at Company-owned plants located in
Muscatine, Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet
and 10,000 square feet, respectively. In addition, the Company owns a research
and development center in Muscatine of approximately 58,400 square feet and a
26,000 square foot facility used primarily for training franchisees and
franchisee personnel. Similar training facilities are located in Brazil, Mexico
(leased facility), South Africa and Europe. The Company also owns a 26,000
square foot office and machining facility in Muscatine.
Construction of a new 83,000 square foot training and conference center
was completed in early 1999 in Muscatine, Iowa.
In addition, the Company mixes rubber and produces cushion gum and
envelopes at a Company-owned 168,000 square foot plant in California. The
Company owns its European headquarters facility in Belgium and a 129,000 square
foot warehouse in the Netherlands.
-11-
TDS Business
------------
TDS currently owns 45 and leases 91 facilities. Forty-four contain
space for TDS's retread production and 109 contain space for commercial, retail
and wholesale operations. The Company believes that it will be able to renew its
existing leases as they expire or find suitable alternative locations. The
leases generally provide for a base rental, as well as charges for real estate
taxes, insurance, maintenance and various other items.
In the opinion of the Company, its properties are maintained in good
operating condition and the production capacity of its plants is adequate for
the near future. Because of the nature of the activities conducted, necessary
additions can be made within a reasonable period of time.
ITEM 3. LEGAL PROCEEDINGS
- ------ -----------------
General
- -------
The Company is a part to a number of lawsuits and claims arising out of
the normal course of business. While the results of such litigation are
uncertain, management believes that the final outcome of any such litigation
will not have a material adverse effect on the Company's consolidated financial
position or the result of operations. Changes in assumptions, as well as actual
experience, could cause estimates made by management to change.
Bandag, Incorporated vs. Michelin Technologies, Inc. and Michelin North America,
- -------------------------------------------------------------------------------
Inc.
- ---
On September 16, 1999, the Company filed a lawsuit in the U.S. District
Court for the Eastern District of Iowa against Michelin North America, Inc. and
Michelin Retread Technologies, Inc. (collectively "Michelin"), subsidiaries of
Compagnie Generale des Etablissements Michelin, a French based company with
global distribution. According to the suit, Michelin has attempted to eliminate
the Company as a competitor in the U.S. replacement tire market for the
commercial trucking industry by undermining the Company's dealer network,
interfering with the Company's contractual and business relationships with its
dealers and fleet customers, and engaging in unfair competition, false
advertising, and violating U.S. anti-trust laws. On November 17, 1999, Michelin
filed a counterclaim against the Company, primarily alleging various violations
of the U.S. anti-trust laws. Both the Company's lawsuit and Michelin's
counterclaim seek compensatory and injunctive relief. While the results of the
Company's suit and Michelin's counterclaim cannot be predicted with certainty, a
victory on Michelin's counterclaim could have a material adverse effect on the
Company's consolidated financial position and results of operations. Management,
however, believes that its claims against Michelin are meritorious and that
Michelin's counterclaim is completely without merit. The Company intends to
vigorously defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
-12-
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS.
- -------
Information concerning cash dividends declared and market prices of the
Company's Common Stock and Class A Common Stock for the last three fiscal years
is as follows:
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Cash Dividends Per Share-
Declared
First Quarter $ 0.2850 $ 0.2750 $ 0.2500
Second Quarter 0.2850 0.2750 0.2500
Third Quarter 0.2850 0.2750 0.2500
Fourth Quarter 0.2950 0.2850 0.2750
------------------------------------------------------------------------
Total Year 1.1500 3.6 1.1100 8.3 $ 1.0250
Stock Price Comparison (1)
Common Stock
First Quarter $28.13 - 41.63 $53.31 - 59.13 $45.00 - 51.88
Second Quarter 28.38 - 37.25 39.00 - 59.75 46.38 - 51.75
Third Quarter 28.25 - 36.25 29.88 - 42.06 47.94 - 54.13
Fourth Quarter 23.50 - 31.75 28.31 - 39.94 48.38 - 55.75
Year-end Closing Price 24.88 39.94 53.44
Class A Common Stock
First Quarter $23.38 - 37.75 $48.00 - 54.38 $45.25 - 50.38
Second Quarter 23.88 - 32.13 34.50 - 54.00 45.00 - 49.50
Third Quarter 22.50 - 29.56 28.44 - 39.50 47.50 - 53.44
Fourth Quarter 19.94 - 24.50 27.38 - 35.13 46.38 - 52.00
Year-end Closing Price 21.06 34.88 47.88
(1) High and low composite prices in trading on the New York and Chicago Stock Exchanges (ticker symbol
BDG for Common Stock and BDGA for Class A Common Stock).
The approximate number of record holders of the Company's Common Stock
as of March 13, 2000, was 2,179, the number of holders of Class A Common Stock
was 1,200 and the number of holders of Class B Common Stock was 231. The Common
Stock and Class A Common Stock are traded on the New York Stock Exchange and the
Chicago Stock Exchange. There is no established trading market for the Class B
Common Stock.
Sale of Unregistered Securities
On November 11, 1999, the Company issued 20,000 shares of Common Stock
to Martin G. Carver pursuant to his exercise of stock options for an aggregate
consideration of $469,000. No underwriters were engaged in connection with the
foregoing sale. The issuance of the foregoing securities was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) as a
transaction not involving a public offering.
-13-
ITEM 6. SELECTED FINANCIAL DATA
- ------ ------------------------
The following table sets forth certain Selected Financial Data for the
periods and as of the dates indicated:
1999 1998 1997(2) 1996 1995
------------------------------------------------------------------------
(In thousands, except per share data)
Net Sales $1,012,665 $1,059,669 $822,523 $756,925 $740,363
Net Earnings(1) 52,330 59,319 121,994 81,604 97,027
------------------------------------------------------------------------
Total Assets $722,421 $755,729 $899,904 $588,342 $554,159
Long-term Debt and Other Obligations 111,151 109,757 123,195 10,125 11,857
Net Earnings Per Share:
Basic Earnings Per Share $2.41 $2.64 $5.35 $3.46 $3.84
Diluted Earnings Per Share $2.40 $2.63 $5.33 $3.44 $3.82
Cash Dividends Per Share-Declared $1.1500 $1.1100 $1.0250 $0.9250 $0.8250
(1) Includes in 1999 the effect of non-recurring charges of $13,500,000 pre-tax, $7,671,000 after-tax, or $.35 per
diluted share, related to costs associated with the closure of a domestic manufacturing facility and other
non-recurring costs.
Includes in 1998 the effect of net non-recurring charges of $4,205,000 pre-tax, $1,174,000 after-tax, or $.05
per diluted share, related to costs associated with the closure of foreign manufacturing facilities and other
non-recurring costs.
Includes in 1997 the effect of a non-recurring gain on the sale of marketable equity securities of $95,087,000
pre-tax, $55,800,000 after-tax, or $2.44 per diluted share, and non-recurring charges of $16,500,000 pre-tax,
$9,900,000 after-tax, or $.43 per diluted share, related to the closing of a manufacturing facility and exit
cost from a rubber recycling venture.
(2) During 1997 the Company's subsidiary, Tire Distribution Systems, Inc., commenced operations with the
acquisition of five tire dealerships whose operations are included in the consolidated financial statements
from November 1, 1997, the effective date of the acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- ------ -------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
GENERAL
Results include the Company's Traditional Business, Tire Distribution Systems,
Inc. (TDS), and Tire Management Solutions, Inc., a pilot operation (TMS). The
comparability of operating results between years is affected by TDS's
acquisition of tire dealerships in each of the years 1999 and 1998 and by
certain non-recurring items.
Consolidated net sales in 1999 decreased 4% from 1998. This included a decrease
of 10% in the Traditional Business. Of this Traditional Business decrease,
approximately 4 percentage points were a result of the lower translated value of
the Company's foreign-currency-
-14-
denominated sales. The remaining decrease resulted from lower equipment sales
and a 6% decline in retread material unit volume from 1998. The decline in
Traditional Business sales was primarily due to competitive pressures and
industry consolidation in the United States, which is expected to continue into
2000 and beyond. In addition, the Company experienced some dealer separations in
the United States which negatively impacted sales volume. The Company
anticipates that future sales volume may continue to be negatively impacted by
additional dealer separations. The Company has not received any additional
notices of separations that would have a significant impact on operating
results. The decline in Traditional Business sales was offset by a 4% increase
in TDS sales over 1998 and sales for TMS. The increase in TDS net sales is
principally attributable to dealership acquisitions during the year. The
Company's seasonal sales pattern, which is tied to trucking activity, was
similar to previous years with the third and fourth quarters being the strongest
for both sales and earnings. All segments were similarly affected.
Gross profit margin for the Traditional Business increased by 2.4 percentage
points over 1998 mainly due to lower raw material costs in the United States.
Consolidated gross profit margin for 1999 increased by .5 percentage points over
1998, a lower increase than seen in the Traditional Business margin due to a
higher portion of consolidated sales coming from TDS, which operates at a lower
gross margin, and the inclusion of TMS.
Consolidated operating and other expenses in 1999 decreased 3% from 1998. Before
non-recurring items, operating and other expenses of the Traditional Business
decreased 15% from 1998. This decrease was offset by a 15% increase in TDS
operating and other expenses over 1998 due to acquisitions. Earnings benefited
from progress in efforts to return operating expenses to a more traditional
level, but with the decline in unit volume, net earnings declined 1% from 1998
before non-recurring items. The Company's consolidated effective income tax rate
of 43.2% was higher than the 1998 rate of 40.4% principally due to a
non-recurring loss on the exit from a rubber recycling venture and non-taxable
recognition of accumulated translation gains in 1998.
The lower earnings resulted in diluted earnings per share of $2.40 for the year,
down from diluted earnings per share of $2.63 in 1998. Earnings in 1999 included
the effect of non-recurring charges of $7,671,000, net of tax benefits, or $.35
per diluted share. The prior year included the effect of net non-recurring
charges of $1,174,000, net of tax benefits, or $.05 per diluted share. Refer to
Note B of the notes to the consolidated financial statements for discussion of
the non-recurring charges.
Non-recurring charges in 1999 relate to the closure of a North American
manufacturing facility, along with the elimination of certain non-manufacturing
positions. These measures were taken to address a fundamental change in the
nature of our business as it moves from a product-driven organization to a fully
integrated provider of tire management products and services. As a result of the
actions taken in 1999, the Company expects savings in 2000 to approximate
$14,000,000.
-15-
TRADITIONAL BUSINESS
The Company's Traditional Business operations located in the United States and
Canada are integrated and managed as one unit, which is referred to internally
as North America. Net sales in North America were 9% below 1998 primarily due to
7% lower retread material unit volume. Net sales were also negatively impacted
by a 29% decline in equipment sales. The North American sales decline was due to
competitive pressures and industry consolidation in the United States, which is
expected to continue into 2000 and beyond, as well as some dealer separations in
the United States. A 5% decrease in average raw material costs from 1998 yielded
a 3.2-percentage-point improvement in North America's gross profit margin over
1998. North American operating expenses, which included $12,800,000 of
non-recurring charges, were 8% lower than 1998. However, operating expenses
exclusive of non-recurring charges decreased by 18% due to decreases in R&D
projects, marketing programs, promotional expenses, and personnel-related costs.
Earnings before income taxes for 1999 decreased 4% from 1998.
The Company's operations located in Europe principally service markets in
European countries, but also export to certain other countries in the Middle
East and Northern and Central Africa. This collection of countries is under one
management group and is referred to internally as Europe. Net sales in Europe
declined 7% from 1998 on a 5% retread material unit volume decrease. The 2
percentage point spread between the net sales decrease and the retread material
unit volume decrease is due to the lower translated value of the Belgium franc.
Gross profit margin decreased .4 percentage points from 1998 due to the
inclusion of lower margin service revenue. Operating expenses decreased 21% from
1998 due to lower personnel and marketing costs in the current year and
non-recurring costs included in 1998. The increase in earnings before income
taxes over 1998 reflected the decline in operating expenses.
The Company's exports from North America to markets in the Caribbean, Central
America and South America, along with operations in Brazil, Mexico, Venezuela
and South Africa are combined under one management group referred to internally
as Latin America. In general, Latin American operating results were
significantly affected by the devaluation of the Brazilian real. Net sales in
Latin America declined 19% from 1998 on a retread material unit volume decrease
of 3% and lower translated value of foreign-currency-denominated sales. The
decline in retread material unit volume was driven by fewer exports from North
America coupled with lower shipments in South Africa due to South African
economic constraints and increased competition. The gross profit margin
increased by .7 percentage points over 1998 due to price increases in South
Africa and lower production costs and higher margins on locally produced
products in Mexico. Operating expense levels for each country were comparable to
1998 relative to the respective change in unit volume, except for Mexico, which
experienced lower operating expenses in 1999 due to higher severance, bad debt,
and staffing expense incurred in 1998. Primarily as a result of lower sales,
earnings before income taxes were 13% below 1998.
The Company's exports from North America to markets in Asian countries, along
with operations in New Zealand, Indonesia and Malaysia and a licensee in
Australia, are combined under one management group referred to internally as
Asia. Net sales in Asia declined 9% as a result of a 4% decrease in retread
material unit volume, lower exported equipment sales, and
-16-
reduced new tire sales in New Zealand. Lower raw material costs and higher
margins on export shipments in Malaysia were partially offset by the higher cost
of imported retread materials in New Zealand, resulting in a
2.1-percentage-point increase in the gross profit margin over 1998. Operating
expenses for the year declined 54% from 1998 mainly due to the non-recurring
charges in 1998 which reduced personnel-related costs and managerial and
administrative support costs. Earnings before income taxes for 1999 showed
significant improvement principally due to lower operating expenses.
TIRE DISTRIBUTION SYSTEMS, INC.
Excluding the effect of acquisitions, TDS sales declined 2% from 1998, from
$376,557,000 to $369,944,000, due primarily to discontinuing the sale of certain
off-the-road tires. From an operating perspective, TDS continued to make
progress in integrating the dealerships it has acquired since 1997. TDS's
operating expenses were 15% above 1998. Operating expenses were unfavorably
impacted in 1999 by the integration of new acquisitions and the consolidation of
the Central Division office into the Eastern Division headquarters. In 1999, TDS
recorded a loss before interest and taxes of $2,510,000 compared to earnings
before interest and taxes of $2,517,000 in 1998. The decrease in earnings before
interest and taxes from 1998 reflect the unfavorable impact of current year
acquisitions and the cost of consolidating certain operations.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
GENERAL
Results include both the Company's Traditional Business and TDS. The
comparability of operating results between years is affected by TDS, which
commenced operations effective November 1, 1997 with the acquisition of five
tire dealerships and which acquired several additional dealerships throughout
1998, and also by certain non-recurring items.
Consolidated net sales in 1998 increased 29% from 1997. This increase was solely
attributable to the TDS operations, as Traditional Business net sales were 5%
below 1997. Of this 5% decrease, approximately 2 percentage points were a result
of lower translated value of the Company's foreign-currency-denominated sales.
The remaining 3-percentage-point decrease resulted from lower equipment sales.
The Company's seasonal sales pattern was similar to previous years and both
business segments were similarly affected.
Gross profit margin for the Company's Traditional Business increased by 1.7
percentage points due to lower raw material costs in the U.S. and Mexico. Gross
profit margins in Europe, Brazil and South Africa remained steady. Inclusion of
the TDS operations, which operate at a lower gross margin, decreased
consolidated gross margin by 3.1 percentage points.
Consolidated operating and other expenses in 1998 increased 30% from 1997. A
full year of TDS operating and other expenses accounted for 27 percentage points
of this increase. The remaining 3-percentage-point increase in operating and
other expenses was attributable to continued business development, and the
rationalization of unnecessary infrastructure to
-17-
improve profitability. The additional business development spending was to
improve capabilities to further build the dealer alliance and to prepare the
Company for the introduction of tire management outsourcing in early 1999. The
lower Traditional Business sales and the higher operating expenses resulted in a
net earnings decline of 20% in 1998 before non-recurring items. The Company's
consolidated effective income tax rate of 40.4% was higher than the 1997 rate of
39.9% principally due to the impact of a full year of nondeductible TDS goodwill
amortization.
Diluted earnings per share were $2.63 in 1998 compared to $5.33 in 1997. Diluted
earnings per share in 1997 included the effect of a non-recurring gain on the
sale of marketable equity securities of $55,800,000 after tax, or $2.44 per
diluted share, and non-recurring charges of $9,900,000, net of tax benefits, or
$.43 per diluted share, related to the closing of a manufacturing facility and
exit costs from a rubber recycling venture. Fourth quarter and full year 1998
diluted earnings per share benefited by $.12 per diluted share as a result of a
lower effective tax rate in the fourth quarter compared to 1997. Refer to Note B
of the notes to the consolidated financial statements for discussion of
non-recurring items.
Non-recurring charges in 1998 relate to the closure of foreign manufacturing
facilities, employee reductions and other exit costs. In 1998, the Company
closed manufacturing facilities in Indonesia and New Zealand and a regional
office in Hong Kong, all in response to the economic crisis in the area. The
Company also took actions in Europe to bring expenses more in line with lower
sales volume expectations.
TRADITIONAL BUSINESS
Net sales in North America were 4% below 1997 due to 1% lower retread material
unit volume, 2% from the absence of sales from the rubber recycling venture, and
1% attributable to product mix. Gross profit margin improved 2 percentage points
because average raw material costs were lower than 1997's average. As a result
of the higher gross profit margin and lower expenses, earnings before income
taxes in 1998 increased 11% from 1997.
Net sales in Europe declined 9% from 1997, despite a slight increase in retread
material unit volume. Four percentage points of the decline were due to the
lower translated value of the Belgian franc. The remaining 5-percentage-point
decline resulted mainly from lower equipment sales. Gross profit margin in 1998
increased 1 percentage point from 1997,resulting from decreased lower-margin
equipment sales and lower-per-unit-capacity costs due to higher production.
Operating expenses decreased 1% from 1997 due to the lower translated value of
the Belgian franc. In local currency, 1998 operating expenses were 3% over 1997
due to non-recurring costs and additional bad debt expense. Principally as a
result of the lower sales, earnings before income taxes declined by 45% from
1997.
Latin America exceeded 1997 retread material unit volume by 11%, but net sales
increased only 3% due to lower equipment sales in Brazil, Mexico, the Andean
area and South Africa and the lower translated value of foreign currencies.
Gross profit margin increased by 1 percentage point over 1997 mainly due to
lower raw material costs and higher production in Mexico. The other areas were
basically even with 1997. The volume growth in Brazil and
-18-
Mexico drove a 25% increase over 1997 in operating expenses. Also contributing
to the operating expense increase were severance and higher staffing expense.
Principally because of the higher operating expenses, earnings before income
taxes were 18% below 1997.
Net sales declined 34% in Asia as a result of a 17% decline in retread material
unit volume, lower equipment sales in Malaysia, reduced new tire sales in New
Zealand and the devaluation of currencies throughout Asia. Gross profit margin
increased 2 percentage points over 1997 due to the absence of lower-margin
equipment sales in Malaysia, increased higher-margin export sales from Malaysia
and higher production in Indonesia. Operating expenses increased slightly over
1997 with the inclusion of non-recurring charges in 1998. The decline in
earnings before income taxes from 1997 reflect the significant drop in net
sales.
TIRE DISTRIBUTION SYSTEMS, INC.
TDS operating results reflect a full year for 1998. Net sales and earnings
before income taxes and interest for TDS were $376,557,000 and $2,517,000,
respectively. TDS had to replace two major new tire brands during the year, but
same store-sales were down only slightly. From an operating perspective, TDS
continued to make progress in integrating the acquired dealerships. The TDS
integration strategy calls for the sale of acquired retail or manufacturing
locations in markets more appropriately served by other independent Bandag
dealers. For this reason, during 1998 several locations were sold to independent
Bandag dealers. In addition, a wholesale business was closed and several retail
locations were consolidated.
IMPACT OF INFLATION AND CHANGING PRICES
It has generally been the Company's practice to adjust its selling prices and
sales allowances to reflect changes in production and raw material costs in
order to maintain its gross profit margin. In the past three years, costs have
remained relatively constant and the Company has not found it necessary to
implement general price increases. However, the Company foresees a rise in raw
material costs in 2000 due to increasing oil prices. Accordingly, the Company
may adjust prices in the near future. The Company's gross profit margin could be
negatively impacted if resulting price adjustments fail to fully offset any
increase in raw material costs.
Replacement of fixed assets requires a greater investment than the original
asset cost due to the impact of general price level increases over the useful
lives of plant and equipment. This increased capital investment would result in
higher depreciation charges affecting both inventories and cost of products
sold.
CAPITAL RESOURCES AND LIQUIDITY
At the end of 1999, current assets exceeded current liabilities by $274,065,000.
Cash and cash equivalents totaled $50,633,000 at December 31, 1999, increasing
by $12,721,000 during the year. The Company invests excess funds over various
terms, but only instruments with an original maturity date of over 90 days are
classified as investments. These investments decreased by $260,000 from 1998.
-19-
The only changes in working capital requirements are for normal business growth.
The Company funds its capital expenditures from the cash flow it generates from
operations. During 1999, the Company spent $41,903,000 for capital expenditures.
The Company believes that spending in recent years is representative of future
capital spending needs. In addition, the Company made $6,899,000 in cash
payments in 1999 for acquisitions of TDS businesses.
As of December 31, 1999, the Company had available uncommitted lines of credit
totaling $71,924,000 in the United States for working capital purposes. Also,
the Company's foreign subsidiaries had approximately $34,343,000 in credit and
overdraft facilities available to them. From time to time during 1999, the
Company borrowed funds to supplement operational cash flow needs or to settle
intercompany transactions. The Company's long-term liabilities totaled
$111,151,000 at December 31, 1999, which is approximately 20% of the combined
total of long-term liabilities and stockholders' equity; this is an increase of
$1,394,000 from December 31, 1998.
During the year, the Company purchased 1,214,000 shares of its outstanding
Common Stock and Class A Common Stock for $25,082,000 at prevailing market
prices and paid cash dividends amounting to $25,001,000. The Company generally
funds its dividends and stock repurchases from the cash flow generated from its
operations. Historically, the Company has utilized excess funds to purchase its
own shares.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
The Company is exposed to market risk from changes in interest rates, foreign
exchange rates, and commodity prices. To mitigate such risks, the Company enters
into various hedging transactions. All hedging transactions are authorized and
executed pursuant to clearly defined Company policies and procedures, which
strictly prohibit the use of financial instruments for trading purposes.
Analytical techniques and selective hedging instruments are applied to manage
and monitor such market exposures.
Foreign Currency Exposure
Foreign currency exposures arising from cash flow transactions include firm
commitments and anticipatory transactions. Translation exposure is also part of
the overall foreign exchange risk. The Company's exposure to foreign currency
risks exists primarily with the Brazilian real, Canadian dollar, Mexican peso,
Japanese yen and major European currencies. The Company regularly enters into
foreign currency contracts primarily using foreign exchange forward contracts
and options to hedge most of its firm commitment exposures. The Company also
employs foreign exchange forward contracts as well as option contracts to hedge
approximately 40% - 60% of its anticipated future cash flow transactions over a
period of one year. The notional amount of these contracts at December 31, 1999,
was $7,688,000. The Company also limits its exposure to foreign currency
fluctuations by entering into offsetting asset or liability positions and by
establishing and monitoring limits on unmatched positions. The Company's
-20-
pretax earnings from foreign subsidiaries and affiliates translated into U.S.
dollars using a weighted average exchange rate was $42,904,000 for the year
ending December 31, 1999. On that basis, the potential loss in the value of the
Company's pretax earnings from foreign subsidiaries resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates would
amount to $3,522,000.
Interest Rate Exposure
In order to mitigate the impact of fluctuations in the general level of interest
rates, the Company generally maintains a large portion of its debt as fixed rate
in nature by borrowing on a long-term basis. At December 31, 1999, the Company
had no outstanding short-term debt. The total outstanding long-term debt was
$100,000,000. At year-end, the fair value of the Company's long-term debt was
$98,170,000. In addition, at December 31, 1999, the fair value of securities
held for investment was $11,440,000. The fair value of the Company's total
long-term debt and its securities held for investment would not be materially
affected by a hypothetical 10% adverse change in interest rates. Therefore, the
effects of interest rates changes in the fair value of the Company's financial
instruments are limited.
Commodities Exposure
Due to the nature of its business, the Company procures almost all of its
synthetic rubber used in manufacturing tire tread at quarterly fixed rates using
contracts with the Company's main suppliers. Therefore, the Company's exposure
to changes in commodity prices is insignificant.
IMPACT OF YEAR 2000
The Company completed all Year 2000 readiness work by December 31, 1999, and, as
a result, experienced no significant problems during, and subsequent to, the
change to the new calendar year. The Company does not expect to have any further
exposure to the Year 2000 issue.
The cumulative amount spent related to the Year 2000 issue totaled $11,266,000.
Of this total, $6,665,000 was recorded as expense in the year incurred and the
remaining $4,601,000, which was spent to replace hardware and software and
upgrade existing hardware, was capitalized. The Company does not expect to have
significant expenditures in the future relating to the Year 2000 issue.
EURO CONVERSION
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing currencies ("legal currencies")
and one common currency, the euro. The euro is now trading on currency exchanges
and may be used in certain transactions such as electronic payments. Beginning
in January 2002, new euro-denominated notes and coins will be issued, and legal
currencies will be withdrawn from circulation. The conversion to the euro has
eliminated currency exchange rate risk for transactions between the member
-21-
countries, which for the Company primarily consists of sales to certain
customers and payments to certain suppliers.
The Company has addressed the issues involved with the new currency, which
include converting information technology systems and recalculating currency
risk, and revised its processes for preparing accounting and taxation records.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. These
forward-looking statements can be identified as such because the context of the
statement includes phrases such as "is expected," "the Company anticipates,"
"the Company expects," "the Company foresees," "the Company believes," "the
Company does not expect," or other words of similar import. Similarly,
statements that describe future plans or strategies are also forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those currently
anticipated. Factors which could affect actual results include the effect of
currency exchange rates; the devaluation of foreign currencies, particularly the
Brazilian real; the effectiveness of the Company's hedging techniques;
additional dealer separations; and the increase in raw material costs. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements. The forward-looking
statements included herein are made as of the date hereof and Bandag,
Incorporated undertakes no obligation to update publicly such statements to
reflect subsequent events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
See the discussion under the caption "Quantitative and Qualitative Disclosures
About Market Risk" in Item 7 of this Form 10-K, "Management's Discussion and
Analysis of Operations and Financial Condition," which is incorporated herein by
reference.
-22-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Report of Independent Auditors 24
Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997 25
Consolidated Statements of Earnings for the Years Ended
December 31, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 30
-23-
Report of Independent Auditors
Stockholders and Board of Directors
Bandag, Incorporated
We have audited the accompanying consolidated balance sheets of Bandag,
Incorporated and subsidiaries as of December 31, 1999, 1998, and 1997, and the
related consolidated statements of earnings, cash flows and changes in
stockholders' equity for the years then ended. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bandag,
Incorporated and subsidiaries at December 31, 1999, 1998, and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
January 27, 2000
-24
Consolidated Balance Sheets December 31
In thousands 1999 1998 1997
----------- ----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 50,633 $ 37,912 $ 196,400
Investments - Note D 9,461 9,721 1,575
Accounts receivable, less allowance
(1999 - $20,761; 1998 - $18,724; 1997 - $12,707) 199,710 217,299 231,648
Inventories:
Finished products 94,278 96,889 90,228
Material and work in process 16,244 14,845 17,295
----------- ----------- -----------
110,522 111,734 107,523
Deferred income tax assets 46,804 48,097 41,505
Prepaid expenses and other current assets 10,988 14,361 20,343
----------- ----------- -----------
Total Current Assets 428,118 439,124 598,994
Property, Plant, and Equipment, on the basis of cost:
Land 12,651 12,444 8,494
Buildings and improvements 119,157 107,240 98,769
Machinery and equipment 357,906 351,949 326,632
Construction and equipment installation in progress 13,073 32,112 25,551
----------- ----------- -----------
502,787 503,745 459,446
Less allowances for depreciation and amortization (304,802) (290,699) (261,846)
----------- ----------- -----------
197,985 213,046 197,600
Intangible Assets, less accumulated amortization
(1999 - $24,071; 1998 - $14,157; 1997 - $5,516) 67,331 75,539 75,627
Other Assets 28,987 28,020 27,683
=========== =========== ===========
Total Assets $ 722,421 $ 755,729 $ 899,904
=========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 33,472 $ 38,286 $ 52,100
Accrued employee compensation and benefits 25,530 27,498 28,874
Accrued marketing expenses 27,190 37,044 32,608
Other accrued expenses 39,696 40,623 66,921
Dividends payable 6,127 6,257 6,274
Income taxes payable 18,998 13,704 20,039
Short-term notes payable and current portion of other obligations 3,040 11,497 99,726
----------- ----------- -----------
Total Current Liabilities 154,053 174,909 306,542
Long-Term Debt and Other Obligations - Note E 111,151 109,757 123,195
Deferred Income Tax Liabilities 3,142 3,766 6,753
Stockholders' Equity - Note I
Common Stock; $1.00 par value; authorized - 21,500,000 shares;
issued and outstanding - 9,088,403 shares in 1999; 9,083,797 shares
in 1998; 9,751,063 shares in 1997 9,088 9,084 9,751
Class A Common Stock; $1.00 par value; authorized - 50,000,000 shares;
issued and outstanding - 9,637,187 shares in 1999; 10,824,974 shares
in 1998; 11,013,561 shares in 1997 9,637 10,825 11,014
Class B Common Stock; $1.00 par value; authorized - 8,500,000 shares;
issued and outstanding - 2,045,251 shares in 1999; 2,046,577 shares
in 1998; 2,048,785 shares in 1997 2,045 2,047 2,049
Additional paid-in capital 7,476 7,287 6,052
Retained earnings 456,247 452,274 445,887
Accumulated other comprehensive income (30,418) (14,220) (11,339)
----------- ----------- -----------
Total Stockholders' Equity 454,075 467,297 463,414
=========== =========== ===========
Total Liabilities and Stockholders' Equity $ 722,421 $ 755,729 $ 899,904
=========== =========== ===========
See notes to consolidated financial statements.
-25-
Consolidated Statements of Earnings Year Ended December 31
In thousands, except per share data 1999 1998 1997
----------- ----------- -----------
Income
Net sales $ 1,012,665 $ 1,059,669 $ 822,523
Gain on sale of marketable equity securities - Note D - - 95,087
Other income 15,213 19,829 14,092
----------- ----------- -----------
1,027,878 1,079,498 931,702
Costs and Expenses
Cost of products sold 619,926 653,301 482,387
Engineering, selling, administrative and other expenses 292,635 311,707 226,560
Non-recurring charges - Note B 13,500 4,205 16,500
Interest expense 9,727 10,772 3,339
----------- ----------- -----------
935,788 979,985 728,786
----------- ----------- -----------
Earnings Before Income Taxes 92,090 99,513 202,916
Income Taxes - Note F 39,760 40,194 80,922
=========== =========== ===========
Net Earnings $ 52,330 $ 59,319 $ 121,994
=========== =========== ===========
Net Earnings Per Share - Note G:
Basic $ 2.41 $ 2.64 $ 5.35
=========== =========== ===========
Diluted $ 2.40 $ 2.63 $ 5.33
=========== =========== ===========
See notes to consolidated financial statements.
-26-
Consolidated Statements of Cash Flows Year Ended December 31
In thousands 1999 1998 1997
----------- ----------- -----------
Operating Activities
Net earnings $ 52,330 $ 59,319 $ 121,994
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provisions for depreciation and amortization 53,764 51,410 36,857
Change in deferred income taxes 579 (9,758) (13,375)
Gain on sale of marketable equity securities - - (95,087)
Other (4,173) (2,306) (9,680)
Change in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable 13,481 16,964 11,863
Inventories (2,007) (1,378) 847
Prepaid expenses and other current assets 1,466 4,771 (6,824)
Accounts payable and other accrued expenses (9,284) (26,246) 16,577
Income taxes payable 6,263 (6,168) 8,130
----------- ----------- -----------
Net Cash Provided by Operating Activities 112,419 86,608 71,302
Investing Activities
Additions to property, plant and equipment (41,903) (65,375) (42,223)
Proceeds from dispositions of property, plant, and equipment 3,503 4,128 4,117
Purchases of investments (11,784) (20,941) (3,645)
Maturities of investments 12,044 12,795 4,159
Payments for acquisitions of businesses (6,899) (17,542) (47,659)
Sale of marketable equity securities - - 119,558
----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities (45,039) (86,935) 34,307
Financing Activities
Proceeds from short-term notes payable 538 48,590 11,491
Proceeds from issuance of long-term debt - - 100,000
Principal payments on short-term notes payable and long-term obligations (2,717) (151,328) (18,422)
Cash dividends (25,001) (24,867) (23,395)
Purchases of Common Stock and Class A Common Stock (25,082) (29,353) (8,643)
----------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities (52,262) (156,958) 61,031
Effect of exchange rate changes on cash and cash equivalents (2,397) (1,203) (1,693)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 12,721 (158,488) 164,947
Cash and cash equivalents at beginning of year 37,912 196,400 31,453
=========== =========== ===========
Cash and Cash Equivalents at End of Year $ 50,633 $ 37,912 $ 196,400
=========== =========== ===========
See notes to consolidated financial statements.
-27-
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Class A Common Class B Common Accumulated
Issued and Stock Issued Stock Issued Additional Other
In thousands, except per Outstanding and Outstanding and Outstanding Paid-In Retained Comprehensive Comprehensive
share data Shares Amount Shares Amount Shares Amount Capital Earnings Income Income
---------- ------ ---------- ------- --------- ------ --------- -------- ------------- -------------
Balance at January 1, 1997 9,842,861 $9,843 11,027,759 $11,028 2,051,984 $2,052 $4,069 $355,663 $28,212
Net earnings for the year 121,994 $121,994
Other comprehensive income,
net of tax:
Unrealized gain on
securities available-
for-sale (33,854) (33,854)
Adjustment from foreign
currency translation (5,697) (5,697)
---------
Other comprehensive income
for the year (39,551)
---------
Comprehensive income for
the year $82,443
=========
Cash dividends - $1.0250
per share (23,395)
Conversion of Class B
Common Stock to
Common Stock - Note I 3,199 3 (3,199) (3)
Common Stock and Class A
Common Stock issued under
Restricted Stock Grant
Plan - Note I 6,840 6 6,840 7 663
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note I (2,145) (2) (1,765) (2) (193)
Common Stock and Class A
Common Stock issued under
Stock Award Program
Plan - Note I 2,708 3 2,708 3 245
Purchases of Common Stock
and Class A Common Stock (122,400) (122) (51,981) (52) (94) (8,375)
Stock options exercised -
Note I 20,000 20 20,000 20 885
Stock issued in acquisition
of businesses - Note C 10,000 10 477
--------- ------ ----------- ------- --------- ------ ------ -------- ---------
Balance at December 31, 1997 9,751,063 $9,751 11,013,561 $11,014 2,048,785 $2,049 $6,052 $445,887 $(11,339)
Net earnings for the year 59,319 $59,319
Other comprehensive income,
net of tax -
Adjustment from foreign
currency translation (2,881) (2,881)
-------
Comprehensive income for
the year $56,438
=======
Cash dividends - $1.1100
per share (24,867)
Conversion of Class B
Common Stock to Common
Stock - Note I 2,208 2 (2,208) (2)
Common Stock and Class A
Common Stock issued under
Restricted Stock Grant
Plan - Note I 10,635 11 10,635 10 753
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note I (3,865) (4) (2,685) (3) (330)
Common Stock and Class A
Common Stock issued under
Stock Award Program
Plan - Note I 2,838 3 2,838 3 297
Purchases of Common Stock
and Class A Common Stock (699,082) (699) (219,375) (219) (370) (28,065)
Stock options exercised
- Note I 20,000 20 20,000 20 885
--------- ------ ---------- ------- --------- ------ ------ -------- --------
Balance at December 31, 1998 9,083,797 $9,084 10,824,974 $10,825 2,046,577 $2,047 $7,287 $452,274 $(14,220)
-28-
Consolidated Statements of Changes in Stockholders' Equity (continued)
Common Stock Class A Common Class B Common Accumulated
Issued and Stock Issued Stock Issued Additional Other
In thousands, except per Outstanding and Outstanding and Outstanding Paid-In Retained Comprehensive Comprehensive
share data Shares Amount Shares Amount Shares Amount Capital Earnings Income Income
---------- ------ ---------- ------- --------- ------ --------- -------- ------------- -------------
Net earnings for the year 52,330 $52,330
Other comprehensive income,
net of tax -
Adjustment from foreign
currency translation (16,198) (16,198)
--------
Comprehensive income for
the year $36,132
========
Cash dividends - $1.1500
per share (24,871)
Conversion of Class B Common
Stock to Common Stock -
Note J 1,326 1 (1,326) (2)
Common Stock and Class A
Common Stock issued under
Restricted Stock Grant
Plan - Note J 5,115 5 5,115 5 218
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note J (3,720) (4) (3,180) (3) (305)
Common Stock and Class A
Common Stock issued under
Stock Award Program Plan-
Note J 3,018 3 3,018 3 209
Purchases of Common Stock
and Class A Common Stock (21,133) (21) (1,192,740) (1,193) (382) (23,486)
Stock options exercised
- Note I 20,000 20 449
---------- ------ ---------- ------ --------- ------ ------ -------- --------
Balance at December 31, 1999 9,088,403 $9,088 9,637,187 $9,637 2,045,251 $2,045 $7,476 $456,247 $(30,418)
========== ====== ========= ====== ========= ====== ====== ======== ========
See notes to consolidated financial statements.
-29-
Notes to Consolidated Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts and transactions of
all subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amounts
reported in the consolidated balance sheets for cash and cash equivalents
approximates its fair value.
Accounts Receivable and Concentrations of Credit Risk:
Concentrations of credit risk with respect to accounts receivable are limited
due to the number of customers the Company has and their geographic dispersion.
The Company maintains close working relationships with these customers and
performs ongoing credit evaluations of their financial condition. No one
customer is large enough to pose a significant financial risk to the Company.
The Company maintains an allowance for losses based upon the expected
collectibility of accounts receivable. Credit losses have been within
management's expectations.
Inventories:
Inventories are valued at the lower of cost or market. Approximately 43%, 47%
and 52% of year end inventory amounts at December 31, 1999, 1998 and 1997,
respectively, were determined by the last in, first out (LIFO) method and on the
first in, first out method for the remainder.
The excess of current cost over the amount stated for inventories valued by the
LIFO method amounted to approximately $20,138,000, $21,932,000, and $22,635,000,
at December 31, 1999, 1998, and 1997, respectively.
Property, Plant, and Equipment:
Provisions for depreciation of plant and equipment is computed using
straight-line and declining-balance methods, over the following estimated useful
lives:
Buildings 5 to 50 years
Building Improvements 3 to 40 years
Machinery and Equipment 3 to 15 years
-30-
Depreciation expense approximated $43,850,000, $42,769,000, and $34,576,000 in
1999, 1998, and 1997, respectively.
Intangible Assets:
Intangible assets, which principally represent the cost in excess of the fair
value of the net assets acquired in acquisitions of businesses, are amortized
using the straight-line method over 10 years. At December 31, 1999, 1998, and
1997, net goodwill amounted to $64,621,000, $72,161,000, and $74,600,000,
respectively. Amortization expense approximated $9,914,000, $8,641,000, and
$2,281,000 in 1999, 1998, and 1997, respectively.
Foreign Currency Translation:
Assets and liabilities of foreign subsidiaries are translated at the year end
exchange rate and items of income and expense are translated at the average
exchange rate for the year. Exchange gains and losses arising from translations
denominated in a currency other than the functional currency of the foreign
subsidiary and translation adjustments in countries with highly inflationary
economies or in which operations are directly and integrally linked to the
Company's U.S. operations are included in income.
Long Lived Assets:
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", when indicators of impairment are present, the Company
evaluates the carrying value of property, plant, and equipment and intangibles,
including goodwill, in relation to the operating performance and future
undiscounted cash flows of the underlying businesses. The Company adjusts the
net book value of the underlying assets to fair value if the sum of the expected
future cash flows is less than book value.
Research and Development:
Expenditures for research and development, which are expensed as incurred,
approximated $12,325,000, $18,342,000, and $16,159,000, which includes
$1,050,000, $5,709,000, and $1,407,000 relating to costs associated with the
conceptual design of Tire Management Solutions, Inc. (TMS) business processes,
in 1999, 1998, and 1997, respectively.
Advertising:
The Company expenses all advertising costs in the year incurred. Advertising
expense was $5,305,000, $9,057,000, and $10,931,000 in 1999, 1998, and 1997,
respectively.
Revenue Recognition:
Sales and associated costs are recognized at the time of delivery of products or
performance of services.
Derivative Instruments and Hedging Activities:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal
-31-
years beginning after June 15, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
effect of SFAS No. 133 on the earnings and the financial position of the Company
will be significant.
Stock Based Compensation:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the quoted market price
of the company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Reclassification:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
B. NONRECURRING CHARGES
During the fourth quarter 1999, the Company recorded non-recurring charges
totaling $13,500,000 ($7,671,000 net of tax benefits) for termination benefits.
These termination benefits cover the company-wide reduction of 175 employees
through a combination of voluntary early retirements, the closing of a North
American tread rubber manufacturing facility and other position eliminations. Of
the total number of employees affected, benefit payments of $2,161,000 have been
made during the year for 56 employees. Further employee termination costs of
$6,433,000 are accrued at December 31, 1999. The majority of these payments will
be made in 2000. No charge related to the manufacturing facility has been
expensed as the Company expects to use the facility in the future for general
Corporate purposes.
The early retirement program announced in the fourth quarter of 1999 offered
unreduced retirement benefits to employees over the age of 55 and who have
accumulated 65 points (points = age + years of service). The early retirement
program charges primarily represent a $4,906,000 increase in the pension benefit
obligation which resulted when 62 employees elected this program.
During 1998, the Company recorded net non-recurring charges totaling $4,205,000
($1,174,000 net of tax benefits). The net non-recurring charges included a
provision of
-32-
$7,502,000 ($4,471,000 net of tax benefits) for facility closures, personnel
reductions, and other exit costs. Additionally, the net non-recurring charges
include a gain of $3,297,000 consisting of the non-taxable recognition of
accumulated translation gains due to the exit of operations in Indonesia.
Included in the non-recurring charges is $4,845,000 related to personnel
reductions. In 1998, the Company paid $1,035,000 related to the termination of
13 employees. In 1999, the Company paid $2,950,000 related to the termination of
99 employees and reduced the original provision by $159,000. Remaining employee
termination costs of $701,000 have been accrued at December 31, 1999. Included
in the non-recurring charge is $2,657,000 for facility closure and other exit
costs which contains $642,000 for the write down of assets. In 1999, the Company
paid $905,000 for facility closure and other exit costs and reduced the original
provision by $192,000 due to costs lower than original estimates. The Company's
remaining obligation to be paid in 2000 for facility closure and other exit
costs as of December 31, 1999 is $918,000.
During the fourth quarter of 1997, the Company recorded non-recurring charges
totaling $16,500,000 ($9,900,000 net of tax benefits). The non-recurring charges
include a provision of $13,000,000 to adjust the asset carrying amounts of
$9,733,000 and to cover exit costs from a rubber recycling venture. During 1998,
the Company completed the sale of its investment in the rubber recycling
venture. There were no significant adjustments related to the sale. During 1997,
$3,500,000 was recorded for the 1998 closing of a domestic manufacturing
facility, including attendant personnel reductions. As of December 31, 1998, the
Company had paid $2,270,000 related to the closure of the facility. In 1999, the
Company paid $662,000 to complete the closure of the domestic manufacturing
facility. The remainder of $568,000 was adjusted to income due to reduced costs
on the demolition and disposal of the building. The net sales and results of
operations of the rubber recycling venture included in the Company's
consolidated statements of earnings in 1998 and 1997 were not significant.
C. ACQUISITIONS
During 1999, the Company acquired four tire dealerships that are a part of Tire
Distribution Systems, Inc. (TDS), a wholly-owned subsidiary of the Company. The
dealerships were acquired for a total of $7.1 million in cash and short-term
payables. During 1998, the Company acquired five tire dealerships and two
retread tire facilities that are a part of TDS. The dealerships were acquired
for a total of $20.5 million in cash and short-term payables. Also, during the
fourth quarter of 1997, TDS acquired five tire dealerships for a total of $158.6
million in cash, short-term notes payable and 10,000 shares of Bandag Class A
Common Stock. All of these dealerships were Bandag franchisees at the time of
acquisition and are in the business of selling and servicing new and retread
tires, primarily for commercial and industrial vehicles.
The acquisitions were accounted for using the purchase method of accounting.
Accordingly, the purchase price for each acquisition was allocated to the
respective assets and liabilities based on their estimated fair values as of the
date of acquisition. The accounts and transactions of the acquired businesses
have been included in the consolidated financial statements from the respective
effective dates of the acquisitions.
-33-
Pro forma results of operations for 1999 and 1998, assuming the purchase
transaction occurred as of January 1, 1998, would not differ materially from
reported amounts.
Certain supplemental non-cash information related to the Company's acquisitions
of businesses are as follows:
In thousands 1999 1998 1997
---------------------------------------------
Assets acquired $7,413 $22,187 $248,724
Less liabilities (1) (514) (4,630) (177,387)
Less stock issued (2) - - (487)
------------------------------------------
Cash paid 6,899 17,557 70,850
Less cash acquired - (15) (23,191)
==========================================
Net cash paid for acquisitions $6,899 $17,542 $ 47,659
==========================================
(1) Includes short-term payables to sellers of $160,000, $2,960,000 and
$87,224,000 in 1999, 1998, and 1997, respectively.
(2) Represents fair market value of Class A Common Stock issued to sellers.
NOTE D. INVESTMENTS
Debt securities are classified as held-to-maturity based upon the positive
intent and ability of the Company to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion is included in investment income. Interest on
securities classified as held-to-maturity is included in investment income. The
cost of securities sold is based on the specific identification method.
During the fourth quarter 1997, the Company sold its investment in marketable
equity securities. As a result, a realized gain of $95,087,000 was included in
the Consolidated Statements of Earnings for 1997. Dividends on securities
classified as available-for-sale are included in investment income.
The following is a summary of securities held-to-maturity:
Gross Gross Estimated
Unrealized Unrealized Fair
In thousands Cost Gains (Losses) Value
---------------------------------------------
December 31, 1999
Securities Held-to-Maturity
Obligations of states and political subdivisions $11,461 $ 1 $(22) $11,440
=============================================
December 31, 1998
Securities Held-to-Maturity
Obligations of states and political subdivisions $21,221 $15 - $21,236
=============================================
-34-
December 31, 1997
Securities Held-to-Maturity
Obligations of states and political subdivisions $38,561 - - $38,561
Investment in Eurodollar time deposits 2,600 - - 2,600
=============================================
$41,161 - - $41,161
=============================================
At December 31, 1999, 1998 and 1997, securities held-to-maturity are due in one
year or less and include $2,000,000, $11,500,000, and $39,586,000, respectively,
reported as cash equivalents.
NOTE E. FINANCING ARRANGEMENTS
The following summarizes information concerning the Company's short-term notes
payable:
Year Ended December 31
In thousands 1999 1998 1997
--------------------------------
Total short-term notes payable at year end $ - $2,091 $90,628
Weighted average interest rate at year end - 3.6% 6.4%
Weighted average interest rate for the year 3.9% 5.0% 6.0%
At December 31, 1997, short-term notes payable includes $87,224,000 related to
the businesses acquired in 1997 (See Note C).
The following is a summary of the Company's long-term debt and other obligations
as of December 31:
Interest
In thousands Rates 1999 1998 1997
--------------------------------------
Senior Unsecured Notes Payable, maturing
2002 6.41% $ 60,000 $ 60,000 $ 60,000
Senior Unsecured Notes Payable, maturing
2007 6.50% 40,000 40,000 40,000
------------------------------
Total long-term debt 100,000 100,000 100,000
Other obligations 11,151 9,757 23,195
==============================
Total long-term debt and other obligations $111,151 $109,757 $123,195
==============================
The aggregate amount of scheduled annual maturities of long-term debt and other
obligations for each of the next five years is: $3,040,000 in 2000, $6,713,000
in 2001, $66,594,000 in 2002, $6,138,000 in 2003, $5,930,000 in 2004, and
$25,776,000 thereafter.
Cash payments for interest on debt were $9,189,000, $10,869,000, and $3,143,000
in 1999, 1998, and 1997, respectively.
-35-
The fair values of the Company's financing arrangements were estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1999, 1998 and 1997, the fair value of the Company's outstanding long-term debt
was approximately $98,170,00, $105,656,000, and $100,673,000, respectively.
Total available funds under unused lines of credit at December 31, 1999 amounted
to $106,267,000.
NOTE F. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
reflecting the net tax effects of temporary differences are summarized as
follows:
December 31
In thousands 1999 1998 1997
-----------------------------------
Employee benefits $ 4,977 $ 4,698 $ 2,749
Marketing programs 20,381 24,916 15,174
Accounts receivable valuation allowances 3,957 3,746 3,111
Unremitted earnings of foreign subsidiaries (9,909) (6,776) (5,625)
Excess pension funding (7,248) (6,297) (4,482)
Purchased tax benefits - - (445)
Cost to exit rubber recycling venture 115 766 4,980
Basis difference in fixed assets 4,085 523 (1,527)
Other nondeductible reserves 4,906 4,984 4,583
Obsolescence and valuation reserves 2,105 2,820 2,824
Insurance and legal reserves 3,412 2,647 3,387
Foreign tax credits and net operating loss
carryforwards 6,844 3,126 -
Equipment and plant reserves 52 496 2,707
Other, net 9,985 8,682 7,316
===================================
Net deferred tax assets $43,662 $44,331 $34,752
===================================
The components of earnings before income taxes are summarized as follows:
Year Ended December 31
In thousands 1999 1998 1997
---------------------------------------
Domestic $49,186 $69,341 $167,126
Foreign 42,904 30,172 35,790
=======================================
Earnings before income taxes $92,090 $99,513 $202,916
=======================================
-36-
Significant components of the provision for income tax expense (credit) are
summarized as follows:
Year Ended December 31
In thousands 1999 1998 1997
--------------------------------------
Current:
Federal $20,640 $38,071 $70,354
State 2,894 4,526 14,667
Foreign 9,240 7,176 8,886
Deferred:
Federal 6,238 (8,844) (11,619)
State - - -
Foreign 748 (290) (786)
Equivalent credit relating to
purchased income tax benefits - (445) (580)
======================================
Income taxes $39,760 $40,194 $80,922
======================================
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
Year Ended December 31
1999 1998 1997
------------------------------
Computed at the expected statutory rate 35.0% 35.0% 35.0%
State income tax - net of federal tax benefit 1.8% 2.9% 4.7%
Amortization of goodwill not deductible 2.7% 2.5% -%
Deferred tax on unremitted earnings of foreign
subsidiaries 2.8% 1.1% 0.3%
Other 0.9% (1.1)% (0.1)%
=============================
Income tax at the effective rate 43.2% 40.4% 39.9%
=============================
Undistributed earnings of subsidiaries on which deferred income taxes have not
been provided are not significant.
Income taxes paid amounted to $33,197,000, $56,108,000, and $86,122,000 in 1999,
1998, and 1997, respectively.
NOTE G. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of shares of
Common Stock, Class A Common Stock, Class B Common Stock and dilutive potential
common shares (non-vested restricted stock and stock options) outstanding during
the year.
The following table sets forth the computation of basic and diluted earnings per
share:
-37-
Year Ended December 31
In thousands , except per share data 1999 1998 1997
--------------------------------------
Numerator -
Net Earnings $52,330 $59,319 $121,994
Denominator:
Weighted-average shares - Basic 21,707 22,471 22,786
Effect of dilutive:
Non-vested restricted stock 40 34 36
Stock options 17 54 86
-------------------------------------
57 88 122
Weighted-average shares - Diluted 21,764 22,559 22,908
=====================================
Net Earnings Per Share:
Basic $2.41 $2.64 $5.35
=====================================
Diluted $2.40 $2.63 $5.33
=====================================
Options to purchase 60,200 shares of Class A Common Stock at an option price of
$33.875 were outstanding during 1999 but were not included in the computation of
diluted earnings per share because the exercise price was greater than the
average market price of the common shares and, therefore, the effect would have
been antidilutive.
NOTE H. LEASES
Certain equipment and operating properties are rented under non-cancelable and
cancelable operating leases. Total rental expense under operating leases was
$14,049,000, $12,508,000, and $8,303,000 for the years ended December 31, 1999,
1998 and 1997, respectively. At December 31, 1999, future minimum lease payments
under operating leases having initial lease terms in excess of one year are:
$8,000,000 in 2000, $5,199,000 in 2001, $3,727,000 in 2002, $2,390,000 in 2003,
$1,629,000 in 2004, and $5,639,000 thereafter
NOTE I. STOCKHOLDERS' EQUITY
Class A Common Stock and Class B Common Stock have the same rights regarding
dividends and distributions upon liquidation as Common Stock. However, Class A
Common Stockholders are not entitled to vote, Class B Common Stockholders are
entitled to ten votes for each share held and Common Stockholders are entitled
to one vote for each share held. Transfer of shares of Class B Common Stock is
substantially restricted and must be converted to Common Stock prior to sale. In
certain instances, outstanding shares of Class B Common Stock will be
automatically converted to shares of Common Stock. Unless extended for an
-38-
additional period of five years by the Board of Directors, all then-outstanding
shares of Class B Common Stock will be converted to shares of Common Stock on
January 16, 2002.
Under the terms of the Bandag, Incorporated Restricted Stock Grant Plan, the
Company is authorized to grant up to an aggregate of 100,000 shares of Common
Stock and 100,000 shares of Class A Common Stock to certain key employees. The
shares granted under the Plan will entitle the grantee to all dividends and
voting rights; however, such shares will not vest until seven years after the
date of grant. If a grantee's employment is terminated prior to the end of the
seven-year period for any reason other than death, disability or termination of
employment after age 60, the shares will be forfeited and made available for
future grants. A grantee who has attained age 60 and whose employment is then
terminated prior to the end of the seven-year vesting period does not forfeit
the non-vested shares. During the years ended December 31, 1999, 1998, and 1997,
5,115 shares, 10,635 shares and 6,840 shares of Common Stock, respectively, were
granted under the Plan. During the years ended December 31, 1999, 1998 and 1997,
5,115 shares, 10,635 shares and 6,840 shares of Class A Common Stock,
respectively, were also granted under the Plan. The resulting charge to earnings
amounted to $385,000, $1,300,000, and $1,177,000, in 1999, 1998, and 1997,
respectively. During the year ended December 31, 1999, 3,720 shares of Common
Stock and 3,180 shares of Class A Common Stock were forfeited. During the year
ended December 31, 1998, 3,865 shares of Common Stock and 2,685 shares of Class
A Common Stock were forfeited. During the year ended December 31, 1997, 2,145
shares of Common Stock and 1,765 shares of Class A Common Stock were forfeited.
The credit to 1999, 1998 and 1997 earnings related to the shares forfeited was
approximately $312,000, $337,000, and $197,000, respectively. At December 31,
1999, 29,295 shares of Common Stock and 36,965 shares of Class A Common Stock
are available for grant under the Plan.
Under the terms of the Bandag, Incorporated Nonqualified Stock Option Plan, the
Company was authorized through November 13, 1997 to grant options to purchase up
to 500,000 shares of Common Stock and 500,000 shares of Class A Common Stock to
certain key employees at an option price equal to the market value of the shares
on the date of grant. During 1999, options to purchase 20,000 shares of Common
Stock were exercised and during each of 1998 and 1997 options to purchase 20,000
shares of Common Stock and 20,000 shares of Class A Common Stock were exercised.
At December 31, 1999, options to purchase 40,000 shares of Common Stock and
40,000 shares of Class A Common Stock were outstanding and exercisable at
$23.458 per share for Common Stock options and $22.792 per share for Class A
Common Stock options. Options to purchase 20,000 shares of Common Stock and
20,000 shares of Class A Common Stock expire on November 13, 2000, and November
13, 2001.
Under the terms of the Bandag, Incorporated Stock Award Plan, the Company may
award to certain eligible employees and directors incentive stock options,
nonqualified stock options, and restricted stock. Up to 900,000 shares of Class
A Common Stock is authorized for issuance under the Plan. All employees of
Bandag and its subsidiaries and directors of Bandag who are not employees of
Bandag or its subsidiaries are eligible to participate in the Plan. In 1999, the
Company granted options to purchase 60,200 shares of Class A Common Stock to
-39-
certain key employees at an option price of $33.875 per share. The options
granted under this plan vest over five years and have an option term of ten
years. As of December 31, 1999, options to purchase 60,200 shares of Class A
Common Stock were outstanding at an average exercise price of $33.875 per share.
No options issued under this plan were exercisable at December 31, 1999. The
fair value of the options granted is estimated on the grant date using the
Black-Scholes model. The estimated fair value of the options granted assumes a
dividend yield of 2.15%, a risk free interest rate of 4.9%, an expected option
life of 10 years, and a stock price volatility of 20.67%. The fair value of
options granted during 1999 is $9.96 per option. The Company did not award any
restricted Class A Common Stock under this Plan during the year.
The Company has a stock award program covering substantially all U.S. and
Canadian Traditional Business, corporate, and TMS employees which was
established to promote employee commitment and ownership in the Company. In
1999, 1998, and 1997, $120,000, $225,000, and $283,000, respectively, were
charged to earnings for the estimated cost of awards to be made under the stock
award program.
NOTE J. RETIREMENT BENEFIT PLANS
The Company sponsors defined-benefit pension plans covering full-time employees
directly employed by Bandag, Incorporated, Bandag Licensing Corporation (BLC),
Bandag Canada Ltd., and certain employees in the Company's European operations.
Certain employees of TDS are also covered by defined-benefit plans. In addition
to providing pension benefits, the Company provides certain postretirement
medical benefits to certain individuals who retired from employment before
January 1, 1993. Employees who retire after December 31, 1992 and are at least
age 62 with 15 years of service of direct employment with Bandag, Incorporated,
BLC, and Kendon are eligible for temporary medical benefits that cease at age
65.
The reconciliations of the benefit obligations, the reconciliations of the fair
value of plan assets, and the reconciliations of funded status of the plans, as
determined by consulting actuaries are as follows:
-40-
Pension Benefits Postretirement Benefits
In thousands 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------
Change in benefit obligations:
Benefit obligations at the beginning of the year $ 73,603 $62,305 $58,357 $4,432 $5,899 $5,427
Service cost 3,796 3,117 2,420 213 264 247
Interest cost 4,785 4,326 3,382 283 407 375
Participants' contributions 51 40 46 - - -
Plan amendments 347 - (539) - - -
Plan merger - - 2,204 - - -
Exchange rate changes 164 (180) (96) - - -
Curtailment gain (459) - - - - -
Settlement loss 190 - - - - -
Special termination benefits 5,629 - - - - -
Settlement payments (898) - - - - -
Benefits paid (2,125) (2,232) (1,637) (67) (85) (306)
Actuarial (gain) or loss (11,445) 6,227 (1,832) (735) (2,053) 156
==================================================================
Benefit obligations at end of year $ 73,638 $73,603 $62,305 $4,126 $4,432 $5,899
==================================================================
Change in plan assets at fair value:
Fair value of plan assets at beginning of year $115,347 $116,304 $ 90,775 $ - $ - $ -
Actual return on plan assets 18,378 966 23,582 - - -
Plan merger - - 2,798 - - -
Employer contributions 100 477 859 67 85 306
Participants' contributions 51 40 46 - - -
Benefits paid (2,125) (2,232) (1,637) (67) (85) (306)
Settlement payments (898) - - - - -
Exchange rate changes 171 (208) (119) - - -
==================================================================
Fair value of plan assets at end of year $131,024 $115,347 $116,304 $ - $ - $ -
==================================================================
Reconciliation of funded status:
Funded status $ 57,386 $ 41,744 $ 53,999 $(4,126) $(4,432) $(5,899)
Unrecognized actuarial gain (41,026) (22,119) (38,737) (3,099) (2,386) (334)
Unrecognized transition asset (3,509) (4,171) (4,968) - - -
Unrecognized prior service cost 748 413 1,054 51 54 58
==================================================================
Prepaid (accrued) benefit cost $ 13,599 $ 15,867 $ 11,348 $(7,174) $(6,764) $(6,175)
==================================================================
Weighted average assumptions:
Discount rate 7.5% 6.5% 7.0% 7.5% 6.5% 7.0%
Rate of increase in future compensation 4.0% 4.5% 4.5% N/A N/A N/A
Expected long-term rate of return on assets 8.0% 8.0% 8.0% N/A N/A N/A
Assets of the plans are principally invested in U.S. domestic common stocks, and
short term notes and bonds (fixed income securities) with maturities under five
years.
Net periodic (benefit) cost is composed of the following:
-41-
Pension Benefits Postretirement Benefits
In thousands 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------
Components of net periodic (benefit) cost:
Service cost $3,796 $3,117 $2,420 $213 $264 $247
Interest cost 4,785 4,326 3,382 283 407 375
Expected return on plan assets (9,262) (9,421) (6,950) - - -
Amortization of prior service cost 110 88 123 3 3 3
Amortization of transitional assets (820) (749) (748) - - -
Recognized actuarial gain (617) (1,547) (622) (112) - -
==================================================================
Net periodic (benefit) cost $(2,008) $(4,186) $(2,395) $387 $674 $625
==================================================================
Additional (gain) or loss recognized due to:
Curtailment $5,090 - - - - -
Settlement (184) - - - - -
The assumed health care cost trend rate is 7% for 2000 and is assumed to
decrease to 6% in 2001. A one-percentage-point change in the assumed health care
cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
----------------- ---------------
In thousands
----------------- ---------------
Effect on total of service and interest
cost components $71 $(59)
Effect on postretirement benefit obligation $508 $(435)
The Company also sponsors defined-contribution plans, covering substantially all
employees in the United States. Annual contributions are made in such amounts as
determined by the Company's Board of Directors. Although employees may
contribute up to 15% of their annual compensation from the Company, they are
generally not required to make contributions in order to participate in the
plans. The Company currently provides plans with a variety of contribution
levels (including employee contribution match provisions). The Company recorded
expense for contributions in the amount of $4,132,000, $4,626,000, and
$3,439,000 in 1999, 1998, and 1997, respectively.
Employees in most foreign countries are covered by various retirement benefit
arrangements generally sponsored by the foreign governments. The Company's
contributions to foreign plans were not significant in 1999, 1998, and 1997.
NOTE K. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into agreements (derivative financial instruments) to manage
the risks associated with certain aspects of its business, but does not actively
trade such instruments nor enter into such agreements for speculative purposes.
The Company principally utilizes foreign currency forward exchange contracts and
foreign currency option contracts.
-42-
Option contracts that are designated as hedges are marked to market with
realized and unrealized gains and losses deferred and recognized in earnings as
an adjustment to sales when the future sales occur (the deferral accounting
method). Realized and unrealized gains and losses on options that are not
designated as hedges, that fail to be effective hedges, or that relate to sales
that are no longer probable of occurring would be included in income as foreign
exchange gains or losses. The unrealized gains and losses are included in other
assets and liabilities.
The Company periodically uses foreign currency forward exchange contracts to
reduce its exposure to foreign currency risk from receivables denominated in
foreign currencies and certain firm purchase commitments. For contracts that are
designated and effective as hedges, discounts or premiums are accreted or
amortized to other operating expenses over the contract lives using the straight
line method while the realized and unrealized gains and losses resulting from
changes in the spot exchange rate, net of related taxes, are included in the
cumulative translation adjustment account in stockholders' equity. The related
amounts due to or from counterparties are included in other assets or other
liabilities. Contract amounts, after considering tax effects, in excess of the
carrying value of the Company's obligations are marked to market, with changes
in market value recorded in earnings as foreign exchange gains or losses.
Realized and unrealized gains or losses at the time of maturity, termination,
sale or repayment of a derivative contract or designated item are recorded in a
manner consistent with the original designation of the derivative in view of the
nature of the termination, sale, or repayment transaction. Amounts arising at
the settlement of currency forward or option contracts require no special
accounting because such amounts are periodically recorded. Realized and
unrealized changes in fair value of derivatives designated with items that no
longer exist or are no longer probable of occurring are recorded as a component
of the gain or loss arising from the disposition of the designated item.
At December 31, 1999, 1998 and 1997, the Company had approximately $7,688,000,
$4,781,000, and $12,301,000, respectively, in foreign currency forward exchange
contracts and foreign currency option contracts designated and effective as
hedges which become due in various amounts and at various dates through the
following year. The difference between the contract amounts and their fair
value, in the aggregate, was insignificant at December 31, 1999, 1998 and 1997.
NOTE L. OPERATING SEGMENT AND GEOGRAPHIC AREA INFORMATION
Description of Types of Products and Services:
The Company has two reportable operating segments: the Traditional Business and
TDS.
The Traditional Business manufactures precured tread rubber, equipment and
supplies for retreading tires and operates on a worldwide basis. SFAS No. 131
requires segment information to be reported based on how management internally
evaluates the operating performance of their business units. The operations of
the Traditional Business segment are
-43-
evaluated by worldwide geographic region. For segment reporting purposes, the
Company's operations located in the United States and Canada are integrated and
managed as one unit, which is referred to internally as "North America." The
Company's operations located in Europe principally service those European
countries, but also export to certain other countries in the Middle East and
Northern and Central Africa. Exports from North America to markets in the
Caribbean, Central America and South America, along with operations in Brazil,
Mexico, Venezuela and South Africa are combined under one management group
referred to internally as "Latin America." Exports from North America to markets
in Asian countries, along with operations in New Zealand, Indonesia and Malaysia
and a licensee in Australia are combined under one management group referred to
internally as "Asia."
TDS operates retreading locations and commercial, retail, and wholesale outlets
throughout the United States for the sale and maintenance of new and retread
tires to principally commercial and industrial customers.
Measurement of Segment Profit and Loss and Segment Assets:
The Company evaluates performance and allocates resources based primarily on
profit or loss before interest and income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
Intersegment sales and transfers are recorded at fair market value less a
discount between geographic areas within the Traditional Business and for
transactions between the Traditional Business and TDS at a value consistent with
that to unaffiliated customers.
Other segment assets are principally cash and cash equivalents, investments,
corporate office and related equipment, and assets relating to TMS operations.
The information regarding segment operations and other geographic information is
presented on page 9 of this report, and is incorporated herein by reference.
The following tables present information concerning net sales and long-lived
assets for countries which exceed 5% of the respective totals:
Net Sales (a) Year Ended December 31
(In thousands) 1999 1998 1997
--------------------------------------------------
United States $727,030 $762,549 $499,043
Brazil 54,935 73,488 67,470
Other 230,700 223,632 256,010
=================================================
Consolidated $1,012,665 $1,059,669 $822,523
=================================================
-44-
Long-lived Assets (b) December 31
(In thousands) 1999 1998 1997
----------------------------------------------
United States $216,896 $224,277 $208,598
Brazil 17,434 27,030 26,324
Other 30,986 37,278 38,305
----------------------------------------------
Consolidated $265,316 $288,585 $273,227
==============================================
(a) Revenues are attributed to countries based on the location of customers.
(b) Corporate long-lived assets are included in the United States.
NOTE M. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 1999
and 1998 are summarized as follows:
Quarter Ended 1999
In thousands, except per share data Mar. 31 Jun. 30 Sep. 30 Dec. 31
-------------------------------------------
Net sales $224,138 $252,120 $273,240 $263,167
Gross profit 88,940 98,792 103,118 101,889
Net earnings 10,037 16,126 18,056 8,111
Net earnings per share:
Basic $0.46 $0.74 $0.83 $0.38
Diluted $0.46 $0.73 $0.82 $0.38
Quarter Ended 1998
In thousands, except per share data Mar. 31 Jun. 30 Sep. 30 Dec. 31
-------------------------------------------
Net sales $235,931 $266,127 $282,636 $274,975
Gross profit 90,747 102,571 109,137 103,913
Net earnings 9,150 14,168 17,456 18,545
Net earnings per share:
Basic $0.40 $0.62 $0.78 $0.84
Diluted $0.40 $0.62 $0.77 $0.84
Fourth quarter 1999 earnings reflect a non-recurring after-tax charge of
$7,671,000 ($.35 per diluted share) as a result of a restructuring of North
American operations which includes a company-wide reduction in jobs through a
combination of voluntary early retirements, the closure of a North American
tread rubber manufacturing facility, and other position eliminations. See Note
B.
Third quarter 1998 earnings reflect a non-recurring after-tax charge of
$2,491,000 ($.11 per diluted share) and fourth quarter 1998 earnings reflect a
net non-recurring after-tax gain of $1,317,000 ($.06 per diluted share). The
non-recurring items in the third and fourth quarters of 1998 relate to the
closure of two manufacturing facilities, the elimination of employee positions,
and other exit costs. See Note B.
-45-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information called for by Item 10 (with respect to the directors of
the registrant and with respect to the information required to be furnished
under Rule 405 of Regulation S-K) is incorporated herein by reference from the
registrant's definitive Proxy Statement involving the election of directors
filed or to be filed pursuant to Regulation 14A not later than 120 days after
December 31, 1999. In accordance with General Instruction G (3) to Form 10-K,
the information with respect to executive officers of the Company required by
Item 10 has been included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The information called for by Item 11 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The information called for by Item 12 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information called for by Item 13 is incorporated herein by
reference from the registrant's definitive Proxy Statement involving the
election of directors filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.
-46-
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a)(1) Financial Statements
The following consolidated financial statements are included in Part
II, Item 8:
Page
----
Consolidated Balance Sheets as of December 31, 1999,
1998 and 1997....................................25
Consolidated Statements of Earnings for the Years
Ended December 31, 1999, 1998 and 1997.............................26
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 ............................27
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999, 1998 and
1997...............................................................28
Notes to Consolidated Financial Statements..........................30
(2) Financial Statement Schedule
Schedule II - Valuation and qualifying accounts and reserves.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits
Exhibit No. Description
3.1 Bylaws: As amended August 24, 1999
3.2 Restated Articles of Incorporation, effective December 30,
1986. (Incorporated by reference to Exhibit No. 3.2 to the
Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles of
Incorporation, effective May 6, 1992. (Incorporated by
reference to Exhibit No. 3.3 to the Company's Form 10-K for
the year ended December 31, 1992.)
4.1 Instruments defining the rights of security holders.
(Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the
Company's Form 10-K for the year ended December 31, 1992.)
-47-
4.2 Note Purchase Agreement dated December 15, 1997 for
$60,000,000 of 6.41% Senior Notes due December 15, 2002.
(Incorporated by reference to Exhibit 4.2 to the Company's
Form 10-K for the year ended December 31, 1997.)
4.3 Note Purchase Agreement dated December 15, 1997 for
$40,000,000 of 6.50% Senior Notes due December 15, 2007.
(Incorporated by reference to Exhibit 4.3 to the Company's
Form 10-K for the year ended December 31, 1997.)
10.1* Bandag, Incorporated Restricted Stock Grant Plan, as amended
August 24, 1999.
10.2 U.S. Bandag System Franchise Agreement Truck and Bus Tires.
(Incorporated by reference to Exhibit No. 10.2 to the
Company's Form 10-K for the year ended December 31, 1993.)
10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus Tires, as
revised April 1996. (Incorporated by reference to Exhibit No.
10.2(a) to the Company's Form 10-K for the year ended December
31, 1996.)
10.2(b) Bandag System Franchise Agreement, as revised November 1998
(Incorporated by reference to Exhibit 10.2(a) to the Company's
form 10-K for the year ended December 31, 1998.)
10.3* Miscellaneous Fringe Benefits for Executives. (Incorporated by
reference to Exhibit No. 10.3 to the Company's Form 10-K for
the year ended December 31, 1996.)
10.4* Nonqualified Stock Option Plan, as amended November 12, 1996
(Incorporated by reference to Exhibit No. 10.4 to the
Company's Form 10-K for the year ended December 31, 1996.)
10.5* Nonqualified Stock Option Agreement of Martin G. Carver dated
November 13, 1987, as amended by an Addendum dated June 12,
1992. (Incorporated by reference to Exhibit No. 10.7 to the
Company's Form 10-K for the year ended December 31, 1992.)
10.6* Form of Participation Agreement under the Bandag, Incorporated
Restricted Stock Grant Plan. (Incorporated by reference as
Exhibit 10.7 to the Company's Form 10-K for the year ended
December 31, 1994.)
10.7* Separation and Release Agreement with Henry H. Li regarding
termination of employment, effective July 31, 1998.
(Incorporated by reference to Exhibit No. 10.7 to the
Company's Form 10-K for the year ended December 31, 1998).
10.8* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Martin G. Carver (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
-48-
10.9* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Nathaniel L. Derby, II (incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q/A for
the quarter ended June 30, 1999).
10.10* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Sam Ferrise II (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.11* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Warren W. Heidbreder (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.12* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and John C. McErlane (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.13* Bandag, Incorporated Stock Award Plan, as amended August 24,
1999.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
27.1 Revised December 1998 Financial Data Schedule (EDGAR filing
only)
*Represents a management compensatory plan or arrangement.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on October 21, 1999 reporting
under Item 5. The Current Report included unaudited condensed
consolidated balance sheets for the quarter ended September 30, 1999
and the year ended December 31, 1998, unaudited condensed consolidated
statements of earnings for the three and nine month periods ended
September 30, 1999 and 1998, respectively, and unaudited condensed
consolidated statements of cash flows for the nine months periods ended
September 30, 1999 and 1998.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BANDAG, INCORPORATED AND SUBSIDIARIES
COL. C
COL. A COL. B ADDITIONS COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------------
1 2
Balance at Charged to Charged to Other Balance at
Beginning Costs and Accounts - Deductions - End of
DESCRIPTION of Period Expenses Describe Describe Period
-----------------------------------------------------------------------------------
Year ended December 31, 1999:
Allowance for doubtful accounts $18,724,000 $9,286,000 $7,249,000(1) $20,761,000
Year ended December 31, 1998:
Allowance for doubtful accounts $12,707,000 $8,460,000 $2,443,000(1) $18,724,000
Year ended December 31, 1997:
Allowance for doubtful accounts $13,320,000 $3,491,000 $4,104,000(1) $12,707,000
(1) - Uncollectible accounts written off, net of recoveries and foreign exchange fluctuations.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BANDAG, INCORPORATED
By /s/ Martin G. Carver
--------------------------------
Martin G. Carver
Chairman of the Board,
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert T. Blanchard
- -------------------------------- ---------------------------------------
Robert T. Blanchard Lucille A. Carver
Director Director
/s/ Roy J. Carver, Jr. /s/ Gary E. Dewel
- -------------------------------- ---------------------------------------
Roy J. Carver, Jr. Gary E. Dewel
Director Director
/s/ James R. Everline /s/ Phillip J. Hanrahan
- -------------------------------- ---------------------------------------
James R. Everline Phillip J. Hanrahan
Director Director
/s/ Edgar D. Jannotta /s/ R. Stephen Newman
- -------------------------------- ---------------------------------------
Edgar D. Jannotta R. Stephen Newman
Director Director
/s/ Martin G. Carver /s/ Warren W. Heidbreder
- -------------------------------- ---------------------------------------
Martin G. Carver Warren W. Heidbreder
Chairman of the Board, Vice President, Chief Financial
Chief Executive Officer, Officer(Principal Financial Officer)
President and Director
(Principal Executive Officer) /s/ Charles W. Vesey
---------------------------------------
Charles W. Vesey
Corporate Controller
(Principal Accounting Officer)
Date: March 28, 2000
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EXHIBIT INDEX
-------------
Exhibit No. Description
3.1 Bylaws: As amended August 24, 1999
3.2 Restated Articles of Incorporation, effective December 30,
1986. (Incorporated by reference to Exhibit No. 3.2 to the
Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles of
Incorporation, effective May 6, 1992. (Incorporated by
reference to Exhibit No. 3.3 to the Company's Form 10-K for
the year ended December 31, 1992.)
4.1 Instruments defining the rights of security holders.
(Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the
Company's Form 10-K for the year ended December 31, 1992.)
4.2 Note Purchase Agreement dated December 15, 1997 for
$60,000,000 of 6.41% Senior Notes due December 15, 2002.
(Incorporated by reference to Exhibit 4.2 to the Company's
Form 10-K for the year ended December 31, 1997.)
4.3 Note Purchase Agreement dated December 15, 1997 for
$40,000,000 of 6.50% Senior Notes due December 15, 2007.
(Incorporated by reference to Exhibit 4.3 to the Company's
Form 10-K for the year ended December 31, 1997.)
10.1* Bandag, Incorporated Restricted Stock Grant Plan, as amended
August 24, 1999.
10.2 U.S. Bandag System Franchise Agreement Truck and Bus Tires.
(Incorporated by reference to Exhibit No. 10.2 to the
Company's Form 10-K for the year ended December 31, 1993.)
10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus Tires, as
revised April 1996. (Incorporated by reference to Exhibit No.
10.2(a) to the Company's Form 10-K for the year ended December
31, 1996.)
10.2(b) Bandag System Franchise Agreement, as revised November 1998
(Incorporated by reference to Exhibit 10.2(a) tot he Company's
form 10-K for the year ended December 31, 1998.)
10.3* Miscellaneous Fringe Benefits for Executives. (Incorporated by
reference to Exhibit No. 10.3 to the Company's Form 10-K for
the year ended December 31, 1996.)
10.4* Nonqualified Stock Option Plan, as amended November 12, 1996
(Incorporated by reference to Exhibit No. 10.4 to the
Company's Form 10-K for the year ended December 31, 1996.)
10.5* Nonqualified Stock Option Agreement of Martin G. Carver dated
November 13, 1987, as amended by an Addendum dated June 12,
1992. (Incorporated by reference to Exhibit No. 10.7 to the
Company's Form 10-K for the year ended December 31, 1992.)
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10.6* Form of Participation Agreement under the Bandag, Incorporated
Restricted Stock Grant Plan. (Incorporated by reference as
Exhibit 10.7 to the Company's Form 10-K for the year ended
December 31, 1994.)
10.7* Separation and Release Agreement with Henry H. Li regarding
termination of employment, effective July 31, 1998.
(Incorporated by reference to Exhibit No. 10.7 to the
Company's Form 10-K for the year ended December 31, 1998).
10.8* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Martin G. Carver (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.9* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Nathaniel L. Derby, II (incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q/A for
the quarter ended June 30, 1999).
10.10* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Sam Ferrise II (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.11* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and Warren W. Heidbreder (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.12* Severance Agreement, dated as of May 4, 1999, by and between
Bandag, Incorporated and John C. McErlane (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q/A for the
quarter ended June 30, 1999).
10.13* Bandag, Incorporated Stock Award Plan, as amended August 24,
1999.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
27.1 Revised December 1998 Financial Data Schedule (EDGAR filing
only)
*Represents a management compensatory plan or arrangement.
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