ITEM 1. BUSINESS
Introduction
All references herein to the "Company" or "Bandag" refer to Bandag, Incorporated and its subsidiaries unless the context indicates otherwise.
The Company is engaged in two 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 ("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, 1998, the Carver Family beneficially owned shares of Common Stock and Class B Common Stock constituting 76% 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 its wholly-owned subsidiary, Tire Distribution Systems, Inc. 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. TDS is operated through Tire Distribution Systems, Inc. See "TDS" herein.
Traditional Business
(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 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 1,419 franchisees worldwide, with 34% located in the United States and 66% 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 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 121 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 a tread rubber supplier to a combination of company owned and independent retreaders and Groupe Michelin has announced its plans to enter the retread market in the United States.
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.
(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 primarily to independent franchisees by the Company to use the Bandag Method for that purpose. Bandag has 1,419 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, 487 are located in the United States. One hundred forty-eight (148) of Bandag's foreign franchisees are franchised by licensees 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 essentially 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.
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.
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 "Markets and Distribution" 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, Indonesia, Mexico, Malaysia, New Zealand 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 which were relatively stable prior to 1995. A relationship between natural rubber and synthetic rubber prices exists, but it is by no means exact.
(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 expire through the year 2011, and the Company has applications pending for additional patents.
The Company's patent counsel has advised the Company that the United States patents are by law presumed valid and that the Company does not infringe upon the patent rights of others. While the outcome of litigation can never be predicted with certainty, such counsel has advised the Company that, in his opinion, in the event of litigation placing the validity of such patents at issue, the Company's United States patent position should remain adequate.
The protection afforded the Bandag Method by foreign patents owned by the Company, as well as those under which it is licensed, varies among different countries depending mainly upon the extent to which the elements of the Bandag Method are covered, the strength of the patent laws and the degree to which patent rights are upheld by the courts. Patent counsel for the Company is of the opinion that its patent position in the foreign countries in which its principal sales are made is adequate and does not infringe upon the rights of others. The Company has, however, extended its foreign market penetration to some countries where little or no patent protection exists.
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
(a) General
The five dealerships that were acquired by Tire Distribution Systems, Inc., an indirect wholly-owned subsidiary of Bandag, are: 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). The five dealerships together, which provide new and retread tire products and tire management services to national, regional and local fleet transportation companies, operate 47 Bandag franchise and manufacturing locations and 91 commercial, retail and wholesale outlets in 18 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.
Cost effective tire management services 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' sales people make personal sales calls on existing customers to ensure satisfaction and loyalty. TDS facilities are 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/Firestone, Continental/General, Kelley Tires, Yokahama, Cooper and other manufacturers.
(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 & Rubber Company, Bridgestone Corporation and Groupe Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as a tread rubber supplier to a combination of company owned and independent retreaders. Groupe Michelin has also announced its plan to enter the retread market in the U.S.
(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/Firestone, Yokahama, Continental/General, Cooper and Kelley. Groupe Michelin and The Goodyear Tire and Rubber Company have terminated their dealer relationships with TDS dealers and have announced that they will not sell new tires to TDS dealers. Thus far, 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
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 $10,525,000 in 1995, $15,909,000 in 1996 and $21,113,000 in 1997.
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.
As stated in the Company's 13D filed pursuant to the acquisition of the HON INDUSTRIES Inc. common stock, "The shares of Common Stock purchased by Bandag have been acquired for investment purposes." The Company purchased the stock in 1987 and 1988 at a cost of $24.4 million and sold the same during the fourth quarter of 1997, realizing a before- tax gain of $95.1 million.
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, 1997, the Company had approximately 4,507 employees.
Revenues of Principal Product Groups
The following table sets forth (in millions of dollars), for each of the last three fiscal years, revenues attributable to the Company's principal product groups:
1997 1996 1995 Revenues: Tread rubber, cushion gum, and retreading supplies $714.7 $700.7 $688.8 New tires 44.7 - - Other products(1) 50.8 61.0 58.4 Retread tires 19.1 - - Corporate(2) 102.4 7.3 8.1 -------- ------- ------- Total $931.7 $769.0 $755.3
(1) Includes retreading equipment and related services. (2) Consists of interest and investment income.
Financial Information about Business Segments and Foreign and Domestic Operations
Financial Statement "Operations in Different Segments and Different Geographic Areas and Sales by Principal Products" follows on pages 9 and 10.
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, 1998, 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 Period of in Service Present Position Present Name Age with Company or Office Office
Martin G. Carver* 49 19 Yrs. Chairman of the 17 Yrs. Board, Chief Executive Officer and President
Lucille A. Carver* 80 40 Yrs. Treasurer 39 Yrs.
Nathaniel L. Derby II 55 27 Yrs. Vice President, 1 Yr. Manufacturing Design
Sam Ferrise II 41 17 Yrs. Executive Vice 1 Mo. President, Chief Operating Officer
Warren W. Heidbreder 51 16 Yrs. Vice President, 1 Yr. Chief Financial Officer, and Corporate Secretary
Hong Yan Li, Henry 50 2 Yrs. Vice President, 2 Yrs. Asian Operations
Frederico U. Kopittke 54 3 Yrs. Vice President, 1 Mo. Latin America
Patrick K. Robbins 57 7 Yrs. Vice President 2 Yrs. and General Manager, Eastern Hemisphere Retread Division and Southern Region
John C. McErlane 44 13 Yrs. Vice President, 1 Mo. Marketing and Sales
* 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 served as a Director and Treasurer of the Company for more than five years.
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. Ferrise joined Bandag in 1981. In November 1995, he was elected to the office of Vice President, Marketing. In February 1997, he was elected to the office of Vice President, Sales and Marketing effective January 20, 1997 and served in that position until March 1998 when he was elected to his current office of Executive Vice President and Chief Operating Officer effective February 16, 1998.
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.
Mr. Li joined Bandag in July 1996 as Vice President, Asian Operations and was elected to that office in August 1996. Before joining Bandag, Mr. Li was employed for more than 25 years by the Eastman Kodak Company.
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 his current office of Vice President, Latin America effective March 1, 1998. Before joining Bandag, Mr. Kopittke was employed for more than 16 years by Nalco Chemical Company in South America.
Mr. Robbins joined Bandag in 1991. He served as General Manager, New Zealand from 1991 until August 1996. In August 1996, he was elected to the office of Vice President, Southern Region. In May 1997, he was elected to his current office of Vice President and General Manager, Eastern Hemisphere Retread Division and Southern Region effective April 7, 1997.
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 March 1998, 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.
ITEM 2. PROPERTIES
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 operates sixteen of such plants, six of which are located in the United States, and the remainder in Canada, Belgium, South Africa, Brazil (two plants), New Zealand, Mexico, Malaysia, Indonesia and Venezuela. 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 New Zealand, Indonesia, 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.
A new training and conference center is under construction in Muscatine, Iowa. The approximately 83,000 square foot center is scheduled to be completed in late 1998.
In addition, the Company mixes rubber and produces cushion gum 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.
Dealer Business
TDS currently owns 30 and leases 75 facilities. Forty-seven contain space for TDS' retread production and ninety-one 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.
ITEM 3. LEGAL PROCEEDINGS
Treadco, Inc. v. Bandag, Inc., et. al. On October 27, 1995, Treadco, Inc. ("Treadco"), Bandag's largest franchisee, filed a complaint in the Sebastian County Chancery Court, Fort Smith, Arkansas, against Bandag (Treadco, Inc. v. Bandag, Inc., et al., Case No. 95-1224). Treadco alleges in that action various Arkansas statutory and common law claims relating to allegations that Bandag wrongfully induced several Treadco employees to terminate their employment with Treadco and begin working for Bandag, that Bandag wrongfully induced Treadco customers to switch their business to other Bandag franchises, and that Bandag otherwise violated its duty of good faith and fair dealing to Treadco. Treadco seeks an unspecified amount of money damages. On November 8, 1995, Bandag filed an action in the United States District Court for the Western District of Arkansas to compel the arbitration of Treadco's claims (Bandag, Inc. v. Treadco, Inc., Case No. 95-2204). The Arkansas Chancery Court stayed all proceedings pending the federal court's decision on Bandag's petition. The federal court has ruled that all claims should be settled at the arbitration hearing.
In addition to its original claims, Treadco has brought an antitrust counterclaim in the arbitration matter seeking treble damages and attorney fees. Treadco alleges that Bandag has engaged in conduct intended to restrain trade and destroy competition in violation of the Robinson-Patman Act. Discovery and the taking of depositions has been substantially completed. It appears that the earliest time for the arbitration hearing to be held is in September 1998.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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:
The approximate number of record holders of the Company's Common Stock as of March 13, 1998, was 2,429, the number of holders of Class A Common Stock was 1,347 and the number of holders of Class B Common Stock was 269. 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 4, 1997, in connection with the acquisition of Joe Esco Tire Co. by Tire Distribution Systems, Inc., the Company issued 10,000 shares of its Class A Common Stock to four shareholders. No underwriters were engaged in connection with the foregoing sales. 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.
On November 4, 1997, the Company issued 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock to Martin G. Carver pursuant to his exercise of stock options for an aggregate consideration of $925,000. No underwriters were engaged in connection with the foregoing sale. The issuance of the foregoing securities were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) as a transaction not involving a public offering.
On December 15, 1997, the Company sold (a) $60,000,000 of 6.41% Senior Notes due December 15, 2002 and (b) $40,000,000 of 6.50% Senior Notes due December 15, 2007 to a group of financial institutions. No underwriters were engaged in connection with the foregoing sales. The sale of the foregoing debt securities was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) as a transaction not involving a public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain Selected Consolidated Financial Data for the periods and as of the dates indicated:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The year's results include the operations of both the Company's traditional business and beginning on November 1, its newly-formed subsidiary, Tire Distribution Systems, Inc. (TDS), which acquired five dealerships in November.
Consolidated net sales in 1997 increased 9% from 1996. TDS accounted for approximately 7% of consolidated net sales or approximately 78% of the increase. The remaining 2% increase was 4% lower than the corresponding increase in retread material unit volume because of the 3% lower translated value of the Company's foreign-currency-denominated sales (primarily the Belgium franc), coupled with 1% lower equipment sales. The Company's seasonal sales pattern, which is tied to trucking industry activity, is similar to previous years with the third and fourth quarters being the strongest for both sales and earnings.
Gross profit margin for the Company's traditional business increased by .7 percentage points due to higher production to support increased sales and manufacturing efficiencies. Raw material costs, on average, remained relatively flat. Inclusion of the TDS operations, which operates at a lower gross margin, decreased consolidated gross margin by .2 percentage points.
Consolidated operating and other expenses in 1997 increased 16% from 1996. TDS accounted for 8% of these expenses or one-half of the total increase. The remaining 8% increase in operating and other expenses was related to increased spending for Sales and Marketing staffing and programs, employee training, and higher R&D for the traditional business segment. This 8% increase resulted in a net earnings decline for the traditional business in 1997 of 3% before non-recurring items. The Company's consolidated effective income tax rate of 39.9% was higher than the previous year's rate of 37.6%, principally due to higher state income taxes.
Consolidated diluted earnings per share were $5.33 in 1997 compared to $3.44 in 1996. The traditional business diluted earnings per share, before non-recurring items, was $3.45 compared to $3.44 in 1996. Non- recurring items include a net gain of approximately $55,800,000 after taxes, related to the sale of marketable equity securities. This non- recurring gain was partially offset by non-recurring charges which included provisions of $2,100,000, net of tax benefits, for the 1998 closing of a manufacturing facility and $7,800,000, net of tax benefits, to cover exit costs from a rubber recycling venture.
Net sales in the United States for the Company's traditional business were 2% higher than a year ago but two percentage points below the retread material unit volume increase due to lower equipment sales. Average raw material costs for the year were approximately flat with the previous year's average but higher production to support higher sales resulted in better absorption of fixed manufacturing costs. As a result, gross margin increased by two percentage points compared to the margin in the previous year. Earnings before income taxes in 1997 for the Company's traditional business in the United States declined 10% from the previous year due to increased operating expenses in support of marketing programs and building capabilities within the organization, as part of the Company's commitment to building an alliance with our dealers and end-users.
The Company's foreign operations comprised 37% and 22% of 1997's traditional net sales and earnings before income taxes, respectively. This represents the same percentage of total revenues as the prior year, and an 11 percentage point increase, as a percent of total earnings before income taxes, in comparison to the prior year.
Net sales in Europe declined 5% from 1996. The decline occurred despite a 5% increase in unit volume and because of the unfavorable impact of a stronger U.S. dollar on the translated value of the Company's foreign- currency-denominated sales. Gross profit margin in 1997 decreased approximately two percentage points compared to 1996 due to higher per unit manufacturing costs. Operating expenses increased 19%, due mainly to expenses incurred in developing dealer capabilities and adding distribution. As a result of the foregoing, earnings before income taxes declined by 55% over the previous year.
Unit volume for the Company's other combined foreign operations improved by 13% over 1996, and net sales increased by 8%. Gross profit margin improved slightly, while operating and other expenses, as a percent of sales, decreased approximately two percentage points from the previous year. Earning before income taxes increased by 25% due to both the improved gross margins and reduced operating expenses.
TDS results are included for the two-month period from its formation through year-end. Net sales and net loss for TDS were $55,304,000 and $2,996,000, respectively. See segment information on page 9 for additional information.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Consolidated net sales in 1996 increased 2% from 1995 matching the unit volume growth for retread materials. The translated value of the Company's foreign-currency-denominated sales decreased 1% from 1995 but that difference was offset by slightly higher equipment sales. The Company's seasonal sales pattern, which is tied to the trucking industry activity, is similar to previous years with the third and fourth quarters being the strongest for both sales and earnings.
The Company's consolidated gross profit margin increased by 1.4 percentage points from 1995 as a result of raw material cost decreases and manufacturing efficiencies resulting from past investments in process improvements. However, this gain was more than offset by higher operating expenses. The increased operating expenses related principally to increased spending for Sales and Marketing staffing and programs, employee training, distribution replacement, and higher R&D, resulted in a net earnings decline in 1996 of 16% from 1995. The Company's effective income tax rate of 37.6% was comparable to the previous year's rate of 37.4%.
Diluted earnings per share in 1996 of $3.44 were $.38 lower, a 10% decrease from 1995. During 1996, the Company acquired 1,298,000 shares of its outstanding Common Stock and Class A Common Stock for $61,691,000, at prevailing market prices.
Domestic net sales in 1996 were 3% higher than a year ago, as was the tread volume. Average raw material costs for the year were approximately 4% lower than the previous year's average. As a result, gross margin increased by two percentage points compared to a margin decrease experienced in the previous year. Domestic 1996 earnings before income taxes declined ten percentage points from the previous year due to increased investments in marketing programs and building capabilities within the organization, as part of our commitment to building an alliance with our dealers and end-users.
The Company's foreign operations comprised 37% and 20% of 1996's net sales and earnings before income taxes, respectively. This represents a one percentage-point decline, as a percent of total revenues and a four percentage-point decrease, as a percent of total earnings before income taxes, in comparison with the prior year.
Net sales in Europe declined 5% from 1995. The decline was the result of a 7% decrease in unit volume and a 3% decrease because of the unfavorable impact on the translated value of the Company's foreign-currency- denominated sales, which was partially offset with price increases of approximately 4% to 5%. Gross profit margin in 1996 increased approximately one percentage point compared to 1995 due to lower per unit manufacturing costs. Earnings before income taxes declined by 33% over the previous year.
Unit volume for the Company's other combined foreign operations improved by 5% over 1995, and net sales increased by 6%. Gross profit margin in 1996 remained the same, but operating and other expenses, as a percent of sales, increased by approximately six percentage points from the previous year due principally to a provision related to a tax dispute in Brazil and the Company's commitment to building a global organizational structure. Earnings before income taxes declined by 28% due to the increased operating expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Consolidated net sales increased 14% from 1994. Retread unit volume increased 3% while the translated value of the Company's foreign-currency- denominated sales increased 2%. The remaining 9% increase was from the cumulative increases in selling prices in 1994 and 1995 in response to higher raw material costs. The Company's seasonal sales pattern, which is tied to the trucking industry activity, is similar to previous years with the third and fourth quarters being the strongest for both sales and earnings.
The Company's consolidated gross profit margin declined by 1.8 percentage points from 1994, because of raw material cost increases which were not passed on to dealers. This, combined with increased operating expenses related principally to increased spending for marketing programs, resulted in net earnings improving only 3% above 1994. The Company's effective income tax rate of 37.4% was comparable to the previous year's rate.
Diluted earnings per share in 1995 of $3.82 were $.31 higher, a 9% increase from 1994. During the year, the Company acquired 1,946,000 shares of its outstanding Common Stock and Class A Common Stock for $107,964,000, at prevailing market prices.
Domestic net sales in 1995 were 11% higher than in 1994 due to increased selling prices in 1994 and 1995, and higher equipment sales. Tread volume increased only 1%. Average raw material costs for the year were approximately 27% higher than the previous year's average. Selling prices were increased only in the first quarter, as the Company chose to absorb further increases during the year. This resulted in a gross margin decline of 3 percentage points. Domestic 1995 earnings before income taxes declined four percentage points over the prior year due to flat sales volume and higher raw material costs, as well as increased spending for marketing programs.
The Company's foreign operations comprised 38% and 24% of 1995's net sales and earnings before income taxes, respectively. This represents a two percentage-point increase, as a percent of total revenues, and a seven percentage-point increase, as a percent of total earnings before income taxes, in comparison with the prior year.
Unit volume in Europe increased 6% over 1994. Net sales improved by 22%, with eight percentage points due to the favorable impact on the translated value of the Company's foreign-currency-denominated sales. Gross profit margin in 1995 increased two percentage points compared to 1994 due to higher production levels and lower manufacturing spending. Earnings before income taxes improved by 100% over the prior year.
Unit volume for the Company's other combined foreign operations improved by 6% over 1994, with net sales increasing by 16%. The sales increase exceeded the volume increase due to the favorable impact of the higher translated value of foreign-currency-denominated sales coupled with selling price increases initiated during the year in response to higher raw material costs. Gross profit margin decreased one percentage point, but operating expenses, as a percent of sales, decreased by approximately one percentage point from 1994. Earnings before income taxes increased by 21% due to the increased sales combined with a 5% increase in other income.
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.
Replacement of fixed assets requires a greater investment than the original asset cost due to the impact of the 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 1997, current assets exceeded current liabilities by $292,452,000. Cash and cash equivalents totaled $196,400,000 at year-end, increasing by $164,947,000 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 $514,000 from the prior year.
The only changes in working capital requirements are for normal business growth and to accommodate the needs precipitated by the addition of a new wholly-owned subsidiary, TDS. The Company funds its capital expenditures from the cash flow it generates from operations. During 1997, the Company spent $42,223,000 for capital expenditures coupled with $47,659,000 in cash payments for purchases of the TDS businesses. The Company will make the remaining cash payments of $87,224,000 for the purchase of the TDS businesses early in 1998. The proceeds on the sale of marketable equity securities amounted to $119,558,000 (net after-tax proceeds of $80,247,000).
As of December 31, 1997, the Company had available uncommitted lines of credit totaling $77,000,000 in the United States for working capital purposes. Also, the Company's foreign subsidiaries had approximately $34,000,000 in credit and overdraft facilities available to them. From time to time during 1997, the Company borrowed funds to supplement operational cash flow needs or to settle intercompany transactions. The Company's long-term liabilities totaled $123,195,000 at year end, which are approximately 21% of the combined total of long-term liabilities and stockholders' equity; this is an increase of $113,070,000. This increase in long-term obligations includes the addition of $100,000,000 in long- term debt. The $100,000,000 proceeds from long-term borrowings and the proceeds from the sale of marketable equity securities are being used to fund the cash payments for the acquired TDS businesses and for working capital purposes.
During the year, the Company purchased 174,000 shares of its outstanding Common Stock and Class A Common Stock for $8,643,000 at prevailing market prices and paid cash dividends amounting to $23,395,000. The Company generally funds its dividends and stock repurchases from the cash flow generated from its operations.
Impact of Year 2000
The Company operates with a combination of purchased and internally developed software systems. Many of the older computer systems were written using two digits rather than four to defined the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations. The Company will be required to modify or replace software which is not Year 2000 compliant so that its computer systems will function properly with respect to dates in the year 2000 and thereafter.
Purchased software systems account for a significant portion of the Company's software environment, especially for date sensitive applications such as Payroll and Accounts Receivable. The Company has performed assessments in recent years to identify clearly non-compliant software systems and to initiate replacement activities. Most of those activities are completed or well underway. Such an assessment is presently being conducted for the Company's newly-formed TDS subsidiary.
The Company presently believes that with a combination of actions, including modification of existing software, conversion to new versions of purchased software and replacement with new systems, the Year 2000 Issue will not pose significant operational problems for its computer systems. On the other hand, if such modifications and conversions are not made or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company.
During 1998 the Company will initiate formal communications with its significant suppliers and large customers to determine the extent to which the Company's activities would be impacted by those third parties' failure to remediate their own Year 2000 Issues. However, there can be no guarantee that the systems of other companies on which the Company relies will be corrected on a timely basis and therefore have no adverse effect on the Company.
The Company has assessed its own products to determine if it has exposure to contingencies related to the Year 2000 Issue and it believes that any such exposure will not be material.
The Company will utilize both internal and external resources to reprogram, or replace and test the software for Year 2000 compliance. The Company anticipates completing the Year 2000 project by mid-1999, giving priority to those systems likely to encounter problems and those having more significant potential impact to operations.
The total cost of Year 2000 Issue remediation is difficult to identify because many systems with Year 2000 Issue problems would have been replaced anyway due to operational issues and changing business needs. The Company believes that the costs clearly related to the Year 2000 Issue will total approximately $7,000,000 of which $2,400,000 has been spent to date. The majority of this will be expensed as incurred.
The costs of the project and the date on which the Company believes it will complete Year 2000 modifications are based on management's best estimates which are based on numerous assumptions of future events, including the continued availability of certain resources, third party plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the complexity of the Year 2000 Issue due to dispersed operating units and geographic locations and similar uncertainties.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8.
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, 1997, 1996 and 1995 25
Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28
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, 1997, 1996 and 1995, 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 generally accepted auditing standards. 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, 1997, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. 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 February 3, 1998
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 amount reported in the consolidated balance sheet 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. At December 31, 1997, cost was determined by the last in, first out (LIFO) method for approximately 52% of the inventories, and on the first in, first out method for the remainder. At December 31, 1996 and 1995 cost was determined by the LIFO method for all inventories.
The excess of current cost over the amount stated for inventories valued by the LIFO method amounted to approximately $22,635,000, $23,111,000 and 24,479,000 at December 31, 1997, 1996, and 1995, 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 5 to 39 years Machinery and equipment 3 to 11 years
Goodwill: Goodwill, which at December 31, 1997, principally represents the cost in excess of the fair value of the net assets acquired in the Tire Distribution Systems, Inc. business acquisitions (See Note C), is amortized using the straight-line method over 10 years. Goodwill amortization approximated $2,281,000, $998,000, and $1,037,000 in 1997, 1996, and 1995, respectively.
Foreign Currency Translation: Assets and liabilities of foreign subsidiaries are translated at the current 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 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 if the sum of the expected future cash flows is less than book value. During the year ended December 31, 1997, $13,000,000 was recorded as a nonrecurring charge for the impairment related to the Company's decision to exit its investment in a rubber recycling venture (See Note B).
Research and Development: Expenditures for research and development, which are expensed as incurred, approximated $21,113,000, $15,909,000, and $10,525,000 in 1997, 1996, and 1995, respectively.
Revenue Recognition: Sales and associated costs are recognized at the time of delivery of products or performance of services.
Earnings Per Share: In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share (See Note G). Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of stock options and unvested restricted stock grants. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements.
Comprehensive Income: As of January 1, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in the Consolidated Statements of Changes in Shareholders' Equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.
Segment Disclosures: In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for years beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements retroactively in 1998. Management has not completed its review of SFAS No. 131, but anticipates that the adoption of this statement will not have a significant effect on the Company's reported segments.
Reclassification: Certain prior year amounts have been reclassified to conform with the current year presentation.
B. NONRECURRING CHARGES
During the fourth quarter 1997, the Company recorded non-recurring charges totaling $16,500,000 or $9,900,000 net of tax benefits. The non-recurring charges include a provision of $13,000,000 to adjust asset carrying amounts and to cover exit costs from a rubber recycling venture and $3,500,000 for the 1998 closing of a domestic manufacturing facility, including attendant personnel reductions. The net sales and results of operations of the rubber recycling venture included in the Company's consolidated statements of earnings were not significant during any of the years presented.
C. ACQUISITIONS
During the fourth quarter 1997, Tire Distribution Systems, Inc. (TDS), the Company's newly formed subsidiary, acquired all of the outstanding shares of common stock of five tire dealerships (Acquisitions). These dealerships were Bandag franchises 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 five dealerships: J.W. Brewer Tire Company, Inc. (Wheat Ridge, CO), Joe Esco Tire Co. (Oklahoma City, OK), Sound Tire, Inc. (Seattle, WA), Southern Tire Mart, Inc. (Columbia, MS), and Universal Tire, Inc. (Nashville, TN) were acquired for a total of $158.6 million in cash, short-term notes payable and 10,000 shares of Bandag Class A Common Stock.
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 purchase price allocations have been completed on a preliminary basis, subject to adjustment should new or additional facts about the businesses become known. The accounts and transactions of the acquired businesses have been included in the consolidated financial statements from November 1, 1997, the effective date of the acquisitions.
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and the acquired businesses as if the Acquisitions had occurred as of January 1, 1996. The pro forma information is presented for informational purposes only and includes certain adjustments, such as additional depreciation expense as a result of the write-up to fair value of fixed assets, amortization of goodwill, and increased interest expense on acquisition debt. They do not purport to be indicative of the results of operations that actually would have been achieved had the Acquisitions been consummated as of January 1, 1996.
Year Ended December 31, in thousands, except per share data: 1997 1996
Net Sales $1,113,300 $1,077,900 Cost of Products sold 684,500 671,300 Net Earnings $ 123,700 $ 78,600 Earnings per share: Basic $5.43 $3.33 Diluted $5.40 $3.31
The following unaudited pro forma information presents the results of the acquired businesses as a stand alone entity as if the acquisitions had occurred as of January 1, 1996:
Year Ended December 31, in thousands 1997 1996
Net Sales $389,085 $365,969 Cost of products sold 287,788 274,048 Goodwill amortization 7,779 7,779 Net Loss $ (1,298) $ (3,050)
Certain supplemental non-cash information related to the Company's acquisitions of businesses in 1997 is as follows:
in thousands Assets acquired $248,724 Less liabilities(1) (177,387) Less stock issued(2) (487) ------- Cash paid 70,850 Less cash acquired 23,191 ------- Net cash paid for acquisitions $47,659 =======
(1) Includes notes payable to sellers of $87,224,000. (2) Represents fair market value of Class A common stock issued to sellers.
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.
Marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are 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 the year ended December 31, 1997. Dividends on securities classified as available-for-sale are included in investment income.
The following is a summary of securities held-to-maturity and available- for-sale:
At December 31, 1997, 1996 and 1995, securities held-to-maturity are due in one year or less and include $39,586,000, $14,955,000 and $20,805,000, respectively, reported as cash equivalents.
E. FINANCING ARRANGEMENTS
The following summarizes information concerning the Company's short term notes payable:
December 31, in thousands 1997 1996 1995
Total short-term notes payable at year end $90,628 $43 $261 Weighted average interest rate at year end 6.4% 6.0% 10.7% Weighted average interest rate for the year 6.0% 5.8% 7.9%
At December 31, 1997, short-term notes payable includes $87,224,000 payable in January 1998 to the former shareholders of certain of 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:
in thousands Interest Rates 1997 1996 1995
Senior Unsecured Notes Payable, maturing 2002 6.41% $ 60,000 $ - $ - Senior Unsecured Notes Payable, maturing 2007 6.50% 40,000 - - ----------------------------- Total long-term debt $100,000 - - Other obligations 23,195 10,125 11,857 ----------------------------- Total long-term debt and other obligations $123,195 $10,125 $11,857 =============================
The aggregate amount of scheduled annual maturities of long-term debt and other obligations for each of the next five years is: $9,098,000 in 1998; $6,476,000 in 1999; $3,662,000 in 2000; $7,206,000 in 2001; $67,385,000 in 2002; and $38,466,000 thereafter.
Cash payments for interest on debt were $3,143,000, $1,764,000 and $2,231,000 in 1997, 1996, and 1995, respectively.
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, 1997, the fair value of the Company's outstanding long- term obligations approximate its carrying amount.
Total available funds under unused lines of credit at December 31, 1997 amounted to $111,000,000.
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:
No item, other than state income taxes in 1997, 1996, and 1995 affects the Company's effective income tax rate by an amount which exceeds 5% of the income tax expense computed at the statutory rate.
Undistributed earnings of subsidiaries on which deferred income taxes have not been provided are not significant.
Income taxes paid amounted to $85,804,000, $52,992,000 and $58,238,000 in 1997, 1996, and 1995, respectively.
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:
in thousands, except per share amounts 1997 1996 1995
Numerator: Net Earnings $121,994 $ 81,604 $ 97,027
Denominator: Denominator for basic earnings per share-weighted-average shares 22,786 23,613 25,273
Effect of dilutive securities: Non-vested restricted stock 36 28 30 Stock options 86 105 117 -------- ------- ------- Dilutive potential common shares: 122 133 147
Denominator for diluted earnings per share - weighted-average shares and dilutive potential common shares 22,908 23,746 25,420 ========= ======= =======
Net Earnings Per Share: Basic $5.35 $3.46 $3.84 ========= ======= ======= Diluted $5.33 $3.44 $3.82 ========= ======= =======
H. 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 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, 1997, 1996, and 1995, 6,840 shares, 7,610 shares and 4,430 shares of Common Stock, respectively, were granted under the Plan. During the years ended December 31, 1997, 1996 and 1995, 6,840 shares, 7,610 shares and 4,430 shares of Class A Common Stock, respectively, were also granted under the Plan. The resulting charge to earnings amounted to $1,177,000, $1,245,000, and $770,000, in 1997, 1996, and 1995, respectively. During the year ended December 31, 1997, 2,145 shares of Common Stock and 1,765 shares of Class A Common Stock were forfeited. During the year ended December 31, 1996, 110 shares of Common Stock and 110 shares of Class A Common Stock were forfeited. The credit to 1997 and 1996 earnings related to the forfeited shares was approximately $197,000 and $12,000, respectively. At December 31, 1997, 37,460 shares of Common Stock and 46,850 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. No options were granted under the Plan in 1997, 1996 or 1995. During 1997, options to purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock were exercised. At December 31, 1997, options to purchase 80,000 shares of Common Stock and 80,000 shares of Class A Common Stock are 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, 1998, and each of the three anniversaries thereafter.
The Company has a stock award program covering substantially all U.S. and Canadian employees, except for employees of its subsidiary, TDS, which was established to promote employee commitment and ownership in the Company. In 1997, 1996 and 1995, $283,000, $250,000 and $284,000, respectively, were charged to earnings for the estimated cost of awards to be made under the stock award program.
I. EMPLOYEE PENSION PLANS
The Company sponsors defined-benefit pension plans covering full-time employees directly employed by Bandag, Incorporated, Bandag Licensing Corporation, Bandag Canada, Ltd., and certain employees in the Company's European operations. For the year ended December 31, 1997, certain employees of TDS are also covered by defined-benefit plans. Benefits are based on years of service and, for salaried employees, the employee's average annual compensation for the last five years of employment. The Company's funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes. Contributions are intended to provide for benefits attributed to service to date and those expected to be earned in the future.
Aggregate accumulated benefit obligations, projected benefit obligations, as estimated by consulting actuaries, plan net assets and funded status are as follows:
December 31 in thousands 1997 1996 1995
Actuarial present value of accumulated benefit obligations: Vested $ 45,823 $ 40,944 $ 33,787 Non-vested 2,401 3,145 5,810 -------- --------- -------- $ 48,224 $ 44,089 $ 39,597 ======== ========= ======== Plan net assets at fair value $116,304 $ 90,775 $ 79,291 Projected benefit obligations 62,305 58,357 54,496 -------- --------- -------- Plan net assets in excess of projected benefit obligations 53,999 32,418 24,795 Unrecognized prior service cost 1,054 1,187 1,278 Unamortized actuarial net gain (38,737) (19,557) (12,988) Unamortized net transition gain (4,968) (5,591) (6,332) -------- --------- ------- Prepaid pension cost included in the consolidated balance sheet $ 11,348 $ 8,457 $ 6,753 ======== ========= ========
Assumptions used in the determination of the actuarial present value of the projected benefit obligations and net pension cost are as follows:
December 31 1997 1996 1995
Weighted average discount rate 7.00% 7.00% 7.00% Rate of increase in future compensation 4.50% 4.50% 4.75% Expected long-term rate of return on assets 8.00% 8.00% 8.00%
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.
Pension expense (credit) is composed of the following:
Year Ended December 31 in thousands 1997 1996 1995
Service cost for benefits earned during the year $ 2,420 $ 2,193 $ 1,929 Interest cost on projected benefit obligations 3,382 3,153 2,899 Investment return on plan assets (25,807) (12,025) (14,510) Net amortization and deferral 17,610 5,045 8,964 -------- ------- ------- Net periodic pension expense (credit) $(2,395) $(1,634) $ (718) ======== ======= =======
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 $3,439,000, $2,796,000, and $3,578,000 in 1997, 1996, and 1995, 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 1997, 1996, and 1995.
J. OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The Company provides medical benefits under its self-insured health benefit plan 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 after direct employment with Bandag, Incorporated, Bandag Licensing Corporation, or Kendon Corporation are eligible for temporary medical benefits that cease at age 65. The program is contributory, with retiree contributions adjusted periodically. The program also contains co-insurance provisions, which result in shared costs between the Company and the retiree. The Company's postretirement medical obligations are unfunded.
The following table sets forth amounts recognized in the Company's consolidated financial statements:
December 31 in thousands 1997 1996 1995
Accumulated postretirement benefit obligation: Retirees $2,173 $2,146 $2,109 Fully eligible active plan participants 80 104 111 Other active plan participants 3,646 3,177 2,754 ------- ------ ------ Accumulated postretirement benefit obligation 5,899 5,427 4,974 Unrecognized net gain and prior service cost 375 429 351 ------- ------ ------ Accrued postretirement benefit cost $6,274 $5,856 $5,325 ======= ====== ======
Net periodic postretirement benefit cost includes the following components: Service cost $247 $231 $200 Interest cost on accumulated postretirement benefit obligation 375 344 321 Net amortization and deferral 3 3 33 ------- ------ ------ Net periodic postretirement benefit cost $ 625 $578 $554 ======= ====== ======
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits is 9% for 1998 and is assumed to decrease gradually to 6% for 2001 and remain at that level thereafter. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $837,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $103,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% for 1997, 1996 and 1995.
Substantially all United States employees with the Company on and after January 1, 1993, excluding the employees of TDS, are covered by the Bandag Security Program, which provides fully vested benefits after 5 years of service. Benefits under this program are available upon retirement or separation for any other reason and may be used in connection with medical expense, insurance premiums, or for any other purpose. The periodic cost and benefit obligation information for the Bandag Security Program is reflected in Note I.
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.
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 assets representing the fair value of open positions and deferred amounts are included in other assets and liabilities, respectively.
The Company periodically uses forward foreign 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 transaction adjustment account in shareholders' 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, 1997, 1996 and 1995, the Company had approximately $12,301,000, $23,862,000 and $18,156,000, 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 throughout the following year. The difference between the contract amounts and their fair value, in the aggregate, was insignificant at December 31, 1997, 1996 and 1995.
L. BUSINESS INFORMATION BY GEOGRAPHIC AREA
The information regarding operations in different segments and geographic areas is presented on page 10 of this report, and is incorporated herein by reference.
M. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 1997 and 1996 are summarized as follows:
Earnings per share amounts for 1996 and the first three quarters of 1997 have been restated to comply with SFAS No. 128, as described in Note A. Fourth quarter 1997 net earnings reflect a non-recurring after tax gain of $55,800,000 ($2.44 per diluted share) as a result of the sale of marketable equity securities which is further described in Note D. As further described in Note B, net earnings for the fourth quarter 1997 also reflect non-recurring charges totaling $9,900,000 ($.43 per diluted share), relating to costs to exit a rubber recycling venture and closing a domestic manufacturing facility.
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
The information called for by Item 10 (with respect to the directors of the registrant) 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, 1997. 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.
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, 1997.
ITEM 12.
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, 1997.
ITEM 13.
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, 1997.
PART IV
ITEM 14.
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, 1997, 1996 and 1995 25 Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 26 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 27 Notes to Consolidated Financial Statements 28
(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 February 5, 1997 (Incorporated by reference to Exhibit No. 3.1 to the Company's Form 10- K for the year ended December 31, 1996.) 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. 4.3 Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due December 15, 2007. 10.1* Bandag, Incorporated Restricted Stock Grant Plan, as amended November 12, 1996 (Incorporated by reference to Exhibit No. 10.1 to the Company's Form 10-K for the year ended December 31, 1996.) 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 is 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.) 10.3* 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* Agreement with William A. Sweatman regarding termination of employment dated May 21, 1997. 10.8* Agreement with William D. Herd regarding termination of employment, dated September 12, 1995 (Incorporated by reference to Exhibit 10.8 to the Company's Form 10- K for the year ended December 31, 1995.) 21 Subsidiaries of Registrant. 27 Financial Data Schedule (with EDGAR filing only) 27.1 Revised 1996 Financial Data Schedule (with EDGAR filing only) 27.2 Revised 1995 Financial Data Schedule (with EDGAR filing only)
*Represents a management compensatory plan or arrangement.
(b) Reports on Form 8-K dated were filed by the Company under date of November 26, 1997 and November 12, 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.
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 27, 1998
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 /s/ Lucille A. Carver 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/ R. Stephen Newman /s/ Edgar D. Jannotta R. Stephen Newman Edgar D. Jannotta Director Director /s/ Warren W. Heidbreder /s/ Martin G. Carver Warren W. Heidbreder Martin G. Carver Vice President, Chairman of the Board, Chief Financial Officer Chief Executive Officer, (Chief Accounting Officer) President and Director (Principal Executive Officer) /s/ Charles W. Vesey Charles W. Vesey Corporate Controller (Principal Accounting Officer)
Date: March 27, 1998
EXHIBIT INDEX
Exhibit No. Description
3.1 Bylaws: As amended February 5, 1997 (Incorporated by reference to Exhibit No. 3.1 to the Company's Form 10-K for the year ended December 31, 1996.)
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.
4.3 Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due December 15, 2007.
10.1 *Bandag, Incorporated Restricted Stock Grant Plan, as amended November 12, 1996. (Incorporated by reference to Exhibit No. 10.1 to the Company's Form 10-K for the year ended December 31, 1996.)
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 is 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.)
10.3 *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 to Exhibit No. 10.7 to the Company's Form 10- K for the year ended December 31, 1994.)
10.7 *Agreement with William A. Sweatman regarding termination of employment dated May 21, 1997.
10.8 *Agreement with William D. Herd regarding termination of employment dated September 12, 1995 (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 1995.)
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
27.1 Revised 1996 Financial Data Schedule (with EDGAR filing only)
27.2 Revised 1995 Financial Data Schedule (with EDGAR filing only)
* Represents a management compensatory plan or arrangement.