ITEM 1. BUSINESS GENERAL
Brad Ragan, Inc. (hereafter called the "Company" or the "Registrant," as appropriate for this report), is a 75%-owned subsidiary of The Goodyear Tire & Rubber Company, Akron, Ohio ("Goodyear").
The business of the Company is the sale of new and retreaded tires, home products and automotive services. It is functionally divided into two industry segments: (a) commercial tire retreading and tire replacement operations, which are generally referred to as commercial centers, and (b) retail automotive service, new tires and home products operations.
The Company's commercial division generated 61.5% of consolidated sales during 1996, 60.8% in 1995 and 60.2% in 1994. These commercial centers serve both the off-the-road customers (mines, contractors and others) and over-the-highway customers (trucking).
The Company's retail division operates primarily in the rural markets of the southeastern United States, offering a broad line of Goodyear tires, automotive service and home products.
For purposes of identifying revenues by division, the Company defines each operating location as either commercial or retail. Financial information for both of these segments is presented in Note 16 of Notes to Financial Statements located elsewhere in this report.
COMMERCIAL
The number of the Company's commercial centers in operation at the end of each of the last five years was as follows:
Centers in Operation at December 31
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- 49 49 48 49 51
The Company's 51 commercial centers are located in 19 states. Eight of the centers are capable of retreading all common sizes of off-the-road tires used on earth-moving and other similar heavy equipment by the BAND-LUG(TM) process, the BAND-LUG(TM) "Computer Cut Tread" process or the mold cure process. Thirteen of the commercial centers (four of which have off-the-road retreading capability) can retread over-the-highway truck tires. The remaining centers are sales and service outlets. From its commercial centers, the Company operates a fleet of approximately 250 one-ton or larger service trucks.
Purchases of over-the-highway and off-the-road tires are principally from Goodyear and are controlled from the corporate office and from individual locations. Other merchandise and supplies required in commercial centers are ordered by the managers of individual locations.
The commercial division has two supporting units: a rubber mixing plant in Radford, Virginia, and a mobile equipment service unit in Spruce Pine, North Carolina. These units service the needs of the Company in addition to contributing revenue from sales to Goodyear and other customers.
The Company serves commercial customers from its commercial centers through its sales force calling on existing and potential customers as well as through its service associates who ascertain the customers' needs and requirements on site and furnish tires and services. These service associates constitute an important link between the Company and its customers. They are often able to generate significant on-the-job sales as part of their customer service.
In 1996, the Company was not dependent upon any one customer or group of customers for as much as 10.0% of the commercial division's revenue. The Company does not have any material long-term contracts with its commercial customers for specific quantities of products, because customer requirements vary widely depending on the level of activity in the customer's operations. Tires are supplied from inventory or to the customer's order on a very short lead-time basis, and the Company, therefore, does not consider order backlog a material element in its business.
The Company's commercial operations are divided into two major categories: off-the-road ("OTR") and over-the-highway.
Off-the-Road ("OTR")
The Company provides a broad range of products and services to its OTR customers. These include new tires, various types of retreading, tire repairs and OTR tire service. Such services are an integral part of the mix of choices available to customers and give the Company more opportunities to serve them.
The Company relies upon its internally developed retreading techniques to provide value to the customer and return on investment in the OTR tire replacement market.
Its BAND-LUG(TM) process involves the application of bands of uncured natural rubber to the prepared surfaces of OTR tire casings and the attachment of formed bars of rubber to the bands to form raised lugs. The tire is then cured in a pressurized steam vessel capable of containing any size tire up to and including the largest OTR tires commonly in use. Principal advantages of the BAND-LUG(TM) process over conventional methods include (a) diversity of tread depth, design and composition obtainable with a single extruder and steam vessel, (b) faster curing and processing time because heat is applied equally to the inside and outside of the tire and (c) because tires are cured in a relaxed state and at lower temperatures, tire casings are subjected to less stress and possible damage. Disadvantages of the process include (a) appearance of tires, which does not as closely approximate that of new tires, and (b) the fact that the process is labor intensive.
The Company has developed an extension of the BAND-LUG(TM) process known as the BAND-LUG(TM) "Computer Cut Tread" method, which provides a greater selection of tread designs, depths and sizes as well as an improved appearance. It utilizes a computer controlled machine, which automatically cuts the tread pattern in built up rubber that has been applied in bands onto the carcass. The tread pattern is uniform in depth, width and configuration on each tire.
Over-the-Highway
The over-the-highway tire market serviced by the Company consists of truck tire replacement customers for both new and retreaded tires. Retreading capability for truck tires exists in thirteen locations, all of which utilize a precure retread process.
Most of the Company's commercial over-the-highway tire business is concentrated in the "medium" commercial truck tire sizes. These tires are sold to owners of small and large fleets for various applications including linehaul, local delivery, mining and a variety of other commercial uses.
The Company's commercial centers also sell tires for smaller vehicles including light-duty trucks and automobiles. These revenue sources represent approximately 6.0% of the commercial division's sales.
RETAIL
The Company's retail stores are authorized dealers for Goodyear tires and General Electric appliances. Forty-six of these outlets are located in North Carolina, twenty-seven in South Carolina, sixteen in Tennessee, fourteen in Georgia, ten in Alabama, four in Virginia and five in Mississippi. The number of the Company's retail stores in operation at the end of each of the last five years was as follows:
STORES IN OPERATION at December 31 ------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- 123 123 122 121 122
The selective closing, sale or consolidation of outlets is determined through an evaluation of earnings, working capital return and operating cash flow. The Company will continue to review marginal retail locations based on these financial criteria along with the market potential of the area.
Market potential, competitive conditions and projected financial return are criteria used in assessing opportunities for modernization, relocation or new construction in both new and existing markets.
The typical retail store has approximately 7,500 square feet of space, with individual stores ranging from 3,150 to 16,000 square feet. All are air conditioned and well maintained. The retail stores in North Carolina and South Carolina operate under the name "Carolina Tire Company," and the stores in other states operate under the name "Brad Ragan Tire and Appliance." The name is prominently displayed on the storefront. The stores also display the Goodyear name and logo. No single store presently accounts for more than three percent of total retail store sales.
Sales of new and retreaded tires account for approximately 26.1% of the Company's retail sales. Approximately 44.5% is derived from sales of home products, including refrigerators, air conditioners, ranges, freezers and washer-dryers and from mowers, tillers, televisions and home entertainment products. The balance of retail sales is generated from providing automotive service, including automobile brake and alignment services and engine tune-ups.
Approximately 51% of the retail division's sales are made on credit under installment sale security agreements between the Company and the customer. The Company considers its installment credit polices to be an important factor in the retail division sales strategy. Credit terms may be extended up to 36 months, although 24 months is the maximum on most sales. Down payments of at least 10% are encouraged but not required. The Company operates a credit administration center in Charlotte, NC, for the purpose of establishing credit limits on individual accounts, approving new accounts and initiating collection activities when accounts become past
due. During 1996, finance charge revenues amounted to approximately $11,383,000 or 11% of retail division revenues. Property and life insurance is offered, but not required, on installment credit sales.
The Company advertises in local newspapers and over local radio stations through cooperative efforts with Goodyear, General Electric and others. The Company also utilizes direct mailing efforts to promote retail sales.
The Company's Vice President and General Manager-Retail Division and staff, along with each individual store manager, plan and maintain purchasing and inventory controls and product marketing. A 64,000 square foot retail warehouse located in Salisbury, North Carolina, permits the Company to consolidate the majority of its home products purchasing.
EMPLOYEE RELATIONS
The Company has approximately 1,750 employees. Approximately 855 of the employees are engaged primarily in commercial operations, 855 employees are in retail operations and 40 are engaged in other operations, primarily in administrative and management capacities.
Approximately 69 employees are members of labor unions. The Company considers that the relations between it and its employees are good.
COMPETITION AND REGULATION
In its commercial activities the Company competes primarily with the major rubber companies and with regional and local independent companies that sell new and retreaded tires.
The Company's retail stores are engaged in competition with chain stores in certain markets and other local tire and appliance outlets. Accurate figures with respect to the size of the markets served by the Company are not readily available. Management believes that the Company is a minor factor in the overall retail markets served, although it is frequently a significant factor in the relatively small communities in which its stores are generally located.
The Company has no formal established program whereby professional employees are engaged full time on material research activities relating to the development of new products or the improvement of existing products.
All of the Company's operations must meet extensive federal, state and local regulatory standards, primarily in the areas of safety, health and environmental pollution. In general, the Company has experienced no difficulty in complying with these standards, and it believes that they have not had any material adverse effect on its sales or operations. Additional governmental standards and regulations may be prescribed in the future; however, the Company is unable to predict what effect, if any, such standards and regulations will have on its sales or results of operations. Management of the Company believes that the operation of its facilities and its disposal of waste materials are in compliance with all applicable laws and regulations, but compliance with future requirements regarding environmental quality may necessitate capital outlays. It is not anticipated that any such capital outlays would materially affect the earning power of the business or cause material changes in the Company's business or intended business.
Various federal and state authorities have the power to adopt safety regulations with respect to motor vehicles and the tires with which they are equipped. Management believes that the Company is presently in compliance with all published state and federal statutes and regulations (including those of the United States Department of Transportation) relative to retreading of tires. The Company cannot predict, however, what other laws and regulations might be adopted in the future or what their effect on its business might be.
SUPPLIERS
Goodyear supplies a majority of the new tires sold by the Company, and nearly all Company locations are franchised dealers of Goodyear. Goodyear provides the Company with an open, unsecured short-term line of credit to fund working capital requirements.
On December 31, 1996, the Company issued a one-year $5.5 million promissory note to Goodyear that may be renewable on December 31, 1997, depending on business conditions. The note represented an extension of a previous inventory ledger balance financing arrangement dated November 30, 1989, with an outstanding balance due on December 31, 1996, of $5.5 million. The note is interest-bearing at 120% of the prime rate as announced by Citibank, N.A., New York, on the first day of each quarter during the term of the note. According to the agreement, Goodyear will fully waive any interest due under the note, provided the ratio of the Company's annual purchases of off-the-road tires from Goodyear to the average outstanding balance of the note equals or exceeds two and one half to one (2.5:1). Interest will be prorated if the ratio is less than 2.5:1. In 1996, the ratio exceeded 2.5:1, and, therefore, interest charges related to this agreement were waved.
The Company's rubber processing plant in Radford, Virginia, supplies substantially all of the Company's rubber needs for the BAND-LUG(TM) and BAND-LUG(TM) "Computer Cut Tread" processes and most of its needs for conventional mold processes. With this plant, the Company can compound rubber to meet the specialized needs of its customers and obtain better control over inventories of rubber supplies and the quality of the rubber compounds it uses. The plant currently operates on one shift.
With respect to appliance sales, stores operate under dealer arrangements with General Electric and other suppliers. These arrangements may be terminated on short notice by either party. General Electric Capital provides financing for certain inventories of General Electric products.
In management's opinion, while the termination of any of these supply arrangements would have some temporary impact upon the directly affected portion of the Company's business, it would not adversely affect its overall business for any significant period of time, inasmuch as alternative sources of supply are believed to be readily available.
The Company is not dependent upon any single outside source for any other supplies or services used.
SEASONALITY
The second and third quarters normally produce stronger sales and revenues for the Company. The retail division experiences increased sales of home products and powered equipment, while the commercial division's sales of off-the-road and farm tires are greater during the spring and summer months.
ITEM 2.
ITEM 2. PROPERTIES.
The following table summarizes the Company's present use of properties:
APPROXIMATE SQUARE FEET OF FLOOR SPACE
PRINCIPAL USE LEASED OWNED ------------- ------ -----
Commercial 693,992 227,942
Retail 921,324 96,690
Corporate 24,384 - 0 -
At December 31, 1996, the Company operated 122 retail centers, 49 commercial centers, one commercial support facility, one retail warehouse and one manufacturing plant in the United States as described in Item 1 hereof. Three retail stores, five commercial centers, the support facility, the retail warehouse and the manufacturing plant are Company-owned, and the balance are rented under leases expiring at various dates through the year 2007. The Company believes that the activities carried out in rented properties can be readily transferred to other locations should the need to do so arise. In the Company's opinion, all of its properties are suitable and adequate for the activities conducted by the Company therein.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
During 1996 the Company was involved in two civil proceedings relating to certain installment credit sales transactions as follows:
(1) Ricks, et al. vs. Brad Ragan, Inc. et al., was a class action lawsuit, containing allegations concerning Alabama fraud and consumer protection laws in connection with credit sales transactions. After having been removed to Federal Court, on September 28, 1995, the case was remanded to the Circuit Court for Jefferson County, Alabama, and was later dismissed.
(2) Jordan, et al vs. Avco Financial, et al., was filed in April, 1995, in the United States District Court for the Middle District of Georgia, Columbus Division, against the Company and several other defendants on behalf of a purported class of plaintiffs consisting of all persons nationwide who were charged for non-filing insurance by the defendants. The complaint alleged that the defendants, in the course of charging and collecting non-filing insurance fees in respect of certain retail installment credit sales transactions, violated the federal Truth in Lending Act, the federal Racketeer Influenced and Corrupt Organizations Act and that the defendants' activities constituted common law fraud, breach of contract and conversion. The plaintiffs were seeking statutory remedies, unspecified compensatory and punitive damages and attorneys' fees and costs. The Company has denied all allegations of wrongdoing. Nevertheless, the Company has decided to enter into a settlement to avoid the burden, disruption, time, expense and uncertainty of continued
litigation. A settlement agreement was preliminarily approved by the court on October 10, 1996, and the Company deposited $3.3 million into escrow in accordance with the terms of the settlement. The Jordan action was subsequently transferred to the United States District Court for the Middle District of Alabama for consolidation with another class action pending in that Court. The consolidated case was designated In Re: American Security Insurance Company "Non-Filing Insurance" Fee Litigation. On February 4, 1997, an amended settlement agreement was preliminarily approved by the court, and a settlement class was conditionally certified.
A $4.8 million second quarter unusual charge was recorded in 1996 which included the $3.3 million paid into escrow and related costs and expenses associated with this litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange under the symbol BRD. There were approximately 150 shareholders of record as of March 10, 1997.
Information regarding stock prices during the past two years follows:
Quarter Ended Stock Prices ------------- ------------------------- Low High --- ---- March 31, 1995 $27 $32 June 30, 1995 27 1/2 30 1/4 September 30, 1995 27 34 December 31, 1995 32 34 For Year 1995 27 34
March 31, 1996 $34 $36 1/2 June 30, 1996 30 1/4 36 September 30, 1996 29 3/4 31 3/4 December 31, 1996 30 31 1/2 For Year 1996 29 3/4 36 1/2
The Company has not paid a cash dividend since 1991.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See "Five Year Highlights" under Item 14 of this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
REVIEW OF 1996 RESULTS
Net sales for the year ended December 31, 1996, increased $1.5 million or .6% to $238,473,000 compared to $236,975,000 for 1995. On a same location basis, net sales increased 3.6% for the commercial segment and decreased 1.0% for the retail segment.
Miscellaneous income decreased $641,000 for 1996 compared to 1995 primarily due to lower revenues derived from charges in respect of certain credit sales transactions.
The gross margin rate increased slightly to 30.4% for 1996 compared to 30.0% for 1995.
Selling, administrative and general expenses increased $3.0 million for 1996 compared to 1995 primarily due to increased expense for compensation and benefits and also expenses associated with an adverse court decision and related litigation costs in a general liability case against the Company.
Interest expense increased slightly due to an increase in the average outstanding short-term borrowings for 1996 compared to 1995.
The Company's effective tax rate was 37.4% in 1996 compared to 43.7% in 1995. The 1996 tax benefit includes adjustments for the difference between the income tax provision recorded in 1995 and the actual liability on the 1995 tax return filed in 1996.
The Company recorded a net loss of $2,909,000 ($1.33 per share) for the year ended December 31, 1996, compared to net income of $1,356,000 ($.62 per share) for 1995. The earnings decrease is primarily attributable to a $4.8 million unusual charge recorded in 1996 associated with the tentative settlement of two class action lawsuits related to retail installment credit sales.
REVIEW OF 1995 RESULTS
Net sales for the year ended December 31, 1995, increased $2.9 million or 1.3% to $236,975,000 compared to $234,037,000 for 1994. On a same location basis, net sales were up for the commercial and retail divisions 1.1% and .1%, respectively.
Miscellaneous income decreased $803,000 for 1995 compared to 1994 primarily due to lower finance charge income resulting from decreased consumer credit sales and the discontinuance of certain charges in connection with retail installment sales. It is anticipated that miscellaneous income will be lower in future periods due in substantial part to a reduction in anticipated net revenues derived from charges in respect of certain retail credit sales transactions.
The gross margin rate decreased slightly to 30.0% for 1995 compared to 30.3% for 1994.
Selling, administrative and general expenses increased 1.2% during 1995 due to expense associated with increased sales. Such expenses remained constant as a percentage of sales at 33.9% for both 1995 and 1994.
Interest expense increased $612,000 for 1995 compared to 1994 due to higher short-term borrowing rates. The Company's average short-term borrowing rate increased to 7.5% for 1995 compared to 5.86% for 1994.
The Company's effective income tax rate was 43.7% in 1995 as compared to 15.0% in 1994. The 1994 provision for income taxes was reduced by approximately $1.2 million (26% of pre-tax income) due primarily to a reduction in the Company's deferred income tax asset valuation allowance. The Company had net deferred income tax assets of approximately $4.8 million as of December 31, 1995. For further discussion refer to Note 14 of Notes to Financial Statements included elsewhere in this report.
The Company recorded net income of $1,356,000 ($.62 per share) for the year ended December 31, 1995, compared to $3,836,000 ($1.75 per share) for 1994. The earnings decrease is primarily attributed to the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains an open, unsecured line of credit with The Goodyear Tire & Rubber Company, its major shareholder, to fund working capital requirements. The borrowing rate on the line of credit is based on the 30-day LIBOR plus 1.5% as reported on the Reuter's Money Service Monitor System effective the first day of each calendar month. Although Goodyear retains the right to require payment or discontinue additional advances on the line of credit at its discretion, management believes that Goodyear will continue to provide funding. The Company believes that Goodyear has the financial capacity to fund any anticipated request by the Company to expand this line of credit. At December 31, 1996, the level of this debt was $34,766,000, or $9.4 million higher than the December 31, 1995, level.
An outstanding note balance of $5,500,000 payable to Goodyear on December 31, 1996, pursuant to an inventory ledger balance financing agreement, was extended for one year and becomes due and payable on December 31, 1997. For further discussion, refer to Note 2 of Notes to Financial Statements included elsewhere in this report.
Working capital decreased 5.7% during 1996 to $39.6 million compared to $41.9 million for 1995. Net cash used in operating activities was $7.4 million in 1996. The negative cash flow impact of net loss, before depreciation and amortization, was $812,000. Additional cash was used principally by increases in inventory and decreases in related accounts payable balances, partially offset by an increase in other accrued liabilities. Financing activities reflect a net increase in the short-term credit facility provided by Goodyear of $9.4 million, which was principally used to fund increased inventory and receivable balances, capital expenditures and payment of a tentative litigation settlement.
The Company is self-insured for substantial portions of liabilities related to casualty losses, disability, workers' compensation and health care benefits. Payments of $7.1 million were made during 1996 for this purpose compared to $5.6 million in 1995. It is expected that cash flows generated from operations will continue to be sufficient to fund these programs.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements of the Company appear under Item 14 of this report:
Page No. -------- Statements of Operations and Retained Earnings Years ended December 31, 1996, 1995 and 1994 16
Statements of Financial Position - December 31, 1996, and December 31, 1995 17
Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 18
Notes to Financial Statements 19
Schedule II - Valuation and Qualifying Accounts and Reserves 25
Report of Independent Accountants 26
The supplementary financial information required by Item 8 of Form 10-K appears under Item 14 of this report. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BOARD OF DIRECTORS
The following persons are members of the Company's Board of Directors:
Additional information regarding Directors required by Item 10 of Form 10-K appears in the Company's proxy statement for the 1997 Annual Meeting of Shareholders under the captions "Election of Directors" and "Beneficial Ownership of Common Stock" reference to which is hereby made, and the information there is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding the present executive officers of the Company:
NAME AND AGE POSITIONS AND OFFICES WITH THE COMPANY ------------ --------------------------------------
Eugene R. Culler (58) Chairman of the Board
Michael R. Thomann (48) President and Chief Executive Officer
Ronald J. Carr (52) Vice President - Finance and Chief Financial Officer, Secretary and Treasurer
James E. Owens (62) Vice President and General Manager - Retail Division
Ronald P. Rumble (52) Vice President and General Manager - Commercial Division
There are no family relationships between any of the executive officers or Directors.
Mr. Eugene R. Culler, Jr. has been employed by Goodyear for 35 years. He has been Executive Vice President responsible for North American Tires since April, 1995. Prior to that he was President and CEO of Goodyear's Canadian subsidiary. He previously served as Chairman of the Board of Directors of the Company from August, 1988 to October, 1991. He was most recently elected a Director and Chairman of the Board of the Company on July 27, 1995.
Mr. Thomann has more than 20 years service with the Company and Goodyear. Most recently he was General Manager, Farm, Terra, and Off-the-Road Tires for Goodyear. From 1987 to 1993 he was Vice President and General Manager - - Commercial Division for the Company. He was elected President and CEO of the Company effective April 16, 1996.
Mr. Carr joined the Company on May 1, 1992. He has been employed by the Company and Goodyear for more than 25 years, most recently as Manager, Financial Information for Goodyear's North American Tire Division (September, 1989 through April, 1992). Prior to that he held various positions in Goodyear's General Products and Tire Divisions and at Motor Wheel Corporation, a former Goodyear subsidiary. He was elected Vice President - Finance and Chief Financial Officer, Secretary and Treasurer on May 1, 1992.
Mr. Owens has been employed by the Company and Goodyear for more than 40 years. Most recently, he was District Manager for Goodyear in Birmingham, Alabama, for three years and District Manager in Atlanta, Georgia, for five years. He was elected Vice President and General Manager-Retail Division on February 8, 1988.
Mr. Rumble joined the Company on March 1, 1993. He has been employed by the Company and Goodyear for more than 25 years, most recently as Marketing Manager, Commercial Truck Tires for the Replacement Tire Division. Prior to that, he held various positions in Goodyear's Replacement Tire, Original Equipment and General Products Divisions. Effective March 1, 1993, he was elected Vice President and General Manager - Commercial Division.
Officers serve for a term of one year or until their successors are elected and qualify. The next meeting of the Board of Directors at which officers will be elected is scheduled for May 23, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K appears in the Company's proxy statement for the 1997 Annual Meeting of Shareholders under the caption "Executive Compensation," reference to which is hereby made, and the information there is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Form 10-K appears in the Company's proxy statement for the 1997 Annual Meeting of Shareholders under the caption "Beneficial Ownership of Common Stock" reference to which is hereby made, and the information there is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K appears in the Company's proxy statement for the 1997 Annual Meeting of Shareholders under the caption "Compensation Committee Interlocks and Insider Participation," reference to which is hereby made, and the information there is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The listing of financial statements and financial statement schedules required by Item 14 of Form 10-K appears on page 11 under Item 8 of this report. The listing of exhibits appears on the Exhibit Index.
(b) Reports on Form 8-K. None filed during the last quarter of the fiscal year covered by this report.
(c) Exhibits Filed. See Exhibit Index.
(d) Financial Statement Schedules. See Schedule II, which follows Notes to Financial Statements.
FIVE YEAR HIGHLIGHTS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- BRAD RAGAN, INC.
THE COMPANY ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 112 DURING THE 1993 FOURTH QUARTER, RETROACTIVE TO JANUARY 1, 1993. ACCORDINGLY, THE PREVIOUSLY REPORTED RESULTS OF THE FIRST QUARTER OF 1993 HAVE BEEN RESTATED.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- BRAD RAGAN, INC.
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
STATEMENTS OF FINANCIAL POSITION - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- BRAD RAGAN, INC.
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- BRAD RAGAN, INC.
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
NOTES TO FINANCIAL STATEMENTS (Amounts in thousands except share and per share amounts) BRAD RAGAN, INC.
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------------------------------
Organization: The Company is a 75%-owned subsidiary of The Goodyear Tire & Rubber Company ("Goodyear").
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days.
Accrued Insurance Reserves: Substantial portions of liabilities related to casualty losses, disability, workers' compensation and health care benefits are self-insured. The expected cost of casualty and workers' compensation claims is recognized at the time a claim is asserted and also includes an estimate of incurred but not reported claims.
Earnings Per Share: Earnings per common share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during each period. An option to acquire 650,000 shares of the Company's common stock by Goodyear expired on November 10, 1994, and is considered a common stock equivalent only in the periods that its inclusion, using the treasury stock method, would have had a dilutive effect on earnings per share.
Inventories: Inventories are stated at the lower of cost or market, with cost determined using the last-in, first-out (LIFO) method for substantially all inventories.
Accounts Receivable: Included in accounts receivable are amounts relating to installment sales, which amounts are payable over periods in excess of one year. In accordance with normal trade practice, these amounts are classified as current assets. Gross profit on installment sales is recognized in the year of sale, and interest income is recognized ratably over the life of the contract.
Extended Warranty Contracts: The Company sells extended warranty contracts on certain tires and home products. Under tire warranty contracts, the Company provides certain services when the contract is sold. The Company recognizes the portion of contract revenue attributable to such services when the contract is sold and the services are performed; the balance of the revenue is deferred and amortized using the straight-line method over the life of the contracts. Revenues for all other extended warranty contracts are deferred and amortized over the lives of the contracts.
Depreciation and Amortization: Depreciation is computed principally by the straight-line method over the estimated useful life of each asset. Ranges of the estimated lives used in computing depreciation and amortization are as follows: buildings, 15 to 40 years; machinery and equipment, 3 to 10 years; vehicles, 3 to 5 years; and leasehold improvements, over life of lease.
Amortization of Intangibles: Amortization of intangibles is computed using the straight-line method over the estimated period benefited ranging from five to forty years.
Location Start-Up Costs: Location start-up costs incurred during preoperation periods are charged against current operations.
Income Taxes: The Company provides for income taxes currently payable and records deferred income tax assets and liabilities based on the temporary differences between financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax assets are reduced, if necessary, through a valuation allowance to the amount which management believes is more likely than not to be realized.
Impairment of long lived assets: The Company continually monitors conditions that may affect the carrying value of its long-term assets. When conditions indicate potential impairment of a long-term asset, the Company will undertake necessary market studies and re-evaluate projected future cash flows associated with the asset. When projected future cash flows, not discounted for the time value of money, are less than the carrying value of the asset, the impaired asset is written down to its net realizable value.
Pervasiveness of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2: AFFILIATE TRANSACTIONS - --------------------------------------------------------------------------------
Goodyear is the Company's principal supplier of new tires and is the Company's majority shareholder. As one of Goodyear's largest dealers, the Company has a continuing relationship with Goodyear that includes sales assistance, cooperative advertising, training of employees, leasing of facilities and other matters. Purchases from Goodyear were $59,078, $63,811 and $63,766 for the years ended
December 31, 1996, 1995 and 1994, respectively. Sales of product and services to Goodyear were $7,713, $9,167 and $7,181 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company also leases certain equipment and facilities from Goodyear. Rents paid pursuant to such leases amounted to $1,346, $1,439 and $1,516 in 1996, 1995 and 1994, respectively. The Company began providing various credit related administrative services to Goodyear's company - owned outlets during 1996.
On December 31, 1996, the Company issued a one-year $5.5 million promissory note to Goodyear that may be renewable on December 31, 1997, depending upon business conditions. The note represented an extension of a previous inventory ledger balance financing arrangement dated November 30, 1989, with an outstanding balance due on December 31, 1995, of $5.5 million. The note is interest-bearing at 120% of the prime rate as announced by Citibank, N.A., New York, NY, on the first day of each quarter during the term of the note. Interest due under the note will be fully waived provided the ratio of the Company's annual purchases of off-the-road tires from Goodyear to the average outstanding balance of the note equals or exceeds two and one half to one (2.5:1). Interest will be prorated if the ratio is less than 2.5:1. In 1996, 1995, and 1994 the ratio exceeded 2.5:1, and interest was fully waived.
On November 13, 1989, the Company entered into an option agreement granting Goodyear the non-transferable right to purchase up to 650,000 additional shares of the Company's Common Stock. Goodyear paid $162 to the Company for the option rights. The exercise price per share was based on the higher of the five-day average market price of the stock prior to the date of exercise or the book value at the end of the previous fiscal quarter; but in no event higher than $75.00 per share or lower than $25.00 per share. The option agreement expired unexercised on November 10, 1994.
NOTE 3: MISCELLANEOUS INCOME - ------------------------------------------------------------------------------- Miscellaneous income consisted of the following:
- -------------------------------------------------------------------------------- NOTE 4: ACCOUNTS RECEIVABLE - -------------------------------------------------------------------------------- Accounts receivable consisted of the following:
- -------------------------------------------------------------------------------- Installment receivables are due from individuals who reside in markets served by the Company's retail outlets. Commercial receivables are due from customers primarily in the trucking and mining industries.
Amounts included in accounts receivable having balances due after one year were approximately $18.3 million at December 31, 1996, and $17.3 million at December 31, 1995.
NOTE 5: INVENTORIES - -------------------------------------------------------------------------------- Current cost exceeded the LIFO value of inventories by approximately $4,853 at December 31, 1996, and $4,717 at December 31, 1995.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT - -------------------------------------------------------------------------------- Property, Plant and Equipment consisted of the following:
NOTE 7: LEASES - -------------------------------------------------------------------------------- The Company uses leasing extensively for store facilities, vehicles and other equipment. Certain facility leases have ordinary renewal options, generally for five years at escalating rates based on the lessor's operating costs. Total rental expense for all leases amounted to $9,771, $9,756 and $9,194 for years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, obligations to make future minimum rental payments for all noncancellable operating leases were as follows: 1997 - $6,849; 1998 - $5,308; 1999 - $3,495; 2000 - $1,915; 2001 - $1,073 and thereafter - $1,470.
NOTE 8: CREDIT ARRANGEMENTS - -------------------------------------------------------------------------------- At December 31, 1996, the Company had an unsecured short-term line of credit with Goodyear. The interest rate on the credit line is equal to the 30-day LIBOR plus 1.5%. This rate is fixed for a 30-day period and is reset monthly.
The average month-end balance outstanding under credit line arrangements was $35,624, $31,721 and $30,814 at an average interest rate, computed by dividing interest expense on the credit lines by the weighted average borrowings outstanding, of 6.94%, 7.5%, and 5.86% for the years ended December 31, 1996, 1995 and 1994, respectively. The maximum amount outstanding at any month-end during these periods was $43,179 at October 31, 1996, $39,407 at July 31, 1995, and $37,967 at October 31, 1994. The interest rate was 6.88% at December 31, 1996, 7.47% at December 31, 1995, and 7.56% at December 31, 1994.
The Company made cash interest payments of $2,456, $2,520 and $1,806 in the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- At December 31, 1996, and 1995, the carrying amounts of the Company's financial assets and liabilities reported in the statements of financial position approximated their fair values.
NOTE 10: RETIREMENT SAVINGS PLAN - -------------------------------------------------------------------------------- Substantially all employees of the Company are covered by a salary deferral thrift plan after a qualifying year of service. Company contributions to the plan are based primarily on a matching percentage of employee deferrals and amounted to $552 in 1996, $538 in 1995 and $541 in 1994.
NOTE 11: POSTRETIREMENT BENEFITS - -------------------------------------------------------------------------------- The Company provides life insurance and health care benefits to certain of its retired employees. Substantial portions of these insurance benefits are not insured by a third party, but are paid by the Company. The Company recognizes the cost of providing health care and other benefits to retirees over the term of employee service.
- -------------------------------------------------------------------------------- Net periodic postretirement benefit cost includes the following components: - --------------------------------------------------------------------------------
The following table sets forth the funded status and amounts recognized in the Company's statements of financial position:
- --------------------------------------------------------------------------------
An 8.25% annual rate of increase in the cost of health care benefits is assumed in 1997. This rate gradually decreases to 5% in 2010 and remains at that level thereafter. A 1.0% change in the assumption would have minimal impact on the Company's accumulated postretirement benefit obligation, because, under the terms of the plan, the retiree would assume the increased cost. The weighted average discount rate used to determine the accumulated postretirement benefit obligation was 7.75% for 1996 and 1995, and 8.5% for 1994.
Pursuant to the provisions of SFAS 112, the Company recognized the accumulated postemployment benefit obligation at January 1, 1993, as a one-time charge of $1,253 ($.57 per share) in the first quarter of 1993. This amount was recorded as the effect of change in accounting principle.
NOTE 12: ADVERTISING - -------------------------------------------------------------------------------- The Company expenses the production cost of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits.
Direct response advertising consists primarily of coupon books for the Company's products and services. The capitalized costs of the advertising are amortized over the period during which the coupons are valid.
At December 31, 1996, and 1995, $81 and $86 of advertising expense was reported as assets, respectively. Advertising expense was $2,754, $3,076 and $3,172 in 1996, 1995 and 1994, respectively.
NOTE 13: INCOME TAXES - -------------------------------------------------------------------------------- Pretax income from continuing operations has been taxed by various domestic federal and state authorities. Sales subject to foreign taxation are not material.
The provision (benefit) for income taxes consisted of the following:
A reconciliation between the provision (benefit) for income taxes and the amount of income tax computed by applying the statutory federal income tax rate to pretax income from continuing operations is as follows:
- --------------------------------------------------------------------------------
Income tax payments (refunds), were $(208), $2,166 and $1,860 for the years ended December 31, 1996, 1995 and 1994, respectively.
Upon applying the "more likely than not" asset realization criteria prescribed in SFAS 109, there was sufficient positive evidence to support recognition of net deferred assets, and a valuation allowance has not been required at December 31, 1996, and 1995. A net deferred tax asset of $5,464 and $4,838 was recorded at December 31, 1996, and 1995, respectively. The realization of the net deferred asset value is dependent upon the generation of taxable income in future periods.
Deferred tax assets (liabilities) are comprised of the following :
NOTE 14: CONTINGENCIES - -------------------------------------------------------------------------------- The Company is a defendant in a number of legal actions generally incidental to the normal course of business. It is management's opinion, after consulting with legal counsel, that it is not reasonably possible that the amount of loss, if any, that may ultimately arise upon the resolution of such actions will have a material effect on the Company's financial position and results of operations. However, in the event of an unanticipated adverse final determination in respect of certain matters, the Company's financial position or results of operations for the period in which such determination occurs, could be materially affected.
The Company elected to purchase only catastrophe insurance and is partially self-insured for casualty losses. Self insurance retentions for workers' compensation are up to the statutory benefit for individual states, general liability and automobile liability up to $3,000 and product liability up to $7,000.
NOTE 15: BUSINESS SEGMENT INFORMATION - -------------------------------------------------------------------------------- Brad Ragan, Inc.'s business is functionally divided into two segments, commercial operations and retail operations. Commercial operations include the sale of new tires and the manufacture and sale of retreaded off-the-road, over-the-highway and farm and industrial tires. Retail stores distribute tires, major brand appliances, consumer electronics and power equipment and offer automotive repair services. Identifiable assets, depreciation expense and capital expenditures by segment include both items directly identified with those operations and an allocable share of jointly used assets. Intersegment sales and transfers for each of the three years presented are immaterial and, therefore, have not been separately reported.
NOTE 16: UNUSUAL CHARGE - -------------------------------------------------------------------------------- The Company recorded a $4.8 million unusual charge in 1996 associated with the tentative settlement of two class action lawsuits related to retail installment credit sales.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BRAD RAGAN, INC.
(A) Uncollected accounts charged to allowance, less recoveries of accounts previously written off.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Brad Ragan, Inc.
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Brad Ragan, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Charlotte, North Carolina January 22, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRAD RAGAN, INC.
March 13, 1997 By: /s/ M. R. Thomann ------------------------------ M. R. Thomann President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
NAME AND SIGNATURE POSITION(S) DATE - ------------------ ----------- ----
/s/ EUGENE R. CULLER Chairman of the Board March 13, 1997 - --------------------------- EUGENE R. CULLER
/s/ MICHAEL R. THOMANN President and Chief Executive March 13, 1997 - --------------------------- Officer MICHAEL R. THOMANN
/s/ RONALD J. CARR Vice President - Finance March 13, 1997 - --------------------------- and Chief Financial Officer, RONALD J. CARR Secretary, Treasurer and a Director
/s/ CHARLES A. BETHEL, JR. Director March 13, 1997 - --------------------------- CHARLES A. BETHEL, JR.
/s/ RICHARD D. PEARSON Director March 13, 1997 - --------------------------- RICHARD D. PEARSON
/s/ RICHARD E. SORENSEN Director March 13, 1997 - --------------------------- RICHARD E. SORENSEN
EXHIBIT INDEX
to
Annual Report on Form 10-K of Brad Ragan, Inc., for Year Ended December 31, 1996
Exhibit No. Description ----------- -----------
3.1 Restated articles of incorporation of Brad Ragan, Inc., as last amended May 25, 1988 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988).
3.2 Bylaws of Brad Ragan, Inc., as last amended October 25, 1990 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990).
4.1 Form of Certificate of the Company's Common Stock ($1 par value) (incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-1, Registration No. 2-38082).
10.1 Performance Recognition Plan of The Goodyear Tire & Rubber Company, effective January 1, 1995, which the Company has adopted for its officers (excluding the Chairman of the Board) and other selected key employees. (Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1994)
10.2 The Goodyear Tire & Rubber Company Retirement Benefit Plan For Employees With Service With Designated Subsidiaries, effective November 1, 1994, which the Company has adopted for its officers (excluding the Chairman of the Board) and other selected key employees is filed as a part of this report. (Incorporated by reference to the exhibit of the same number contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1994)
27 Financial Data Schedule (for SEC use only)