-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTUXA+ia+gZLVmZuWXgJnpeQxcA9q8aDuQpTAkk/8hzZgolZ4xW0G7+fyjYDfUhk M9nB0m/KojsqBgt1ELdbDA== 0000897069-00-000192.txt : 20000331 0000897069-00-000192.hdr.sgml : 20000331 ACCESSION NUMBER: 0000897069-00-000192 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANDAG INC CENTRAL INDEX KEY: 0000009534 STANDARD INDUSTRIAL CLASSIFICATION: TIRES AND INNER TUBES [3011] IRS NUMBER: 420802143 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07007 FILM NUMBER: 586536 BUSINESS ADDRESS: STREET 1: 2905 NORTH HIGHWAY 61 STREET 2: BANDAG HEADQUARTERS CITY: MUSCATINE STATE: IA ZIP: 52761-5886 BUSINESS PHONE: 3192621400 MAIL ADDRESS: STREET 1: 2905 N HIGHWAY 61 STREET 2: BANDAG HEADQUARTERS CITY: MUSCATINE STATE: IA ZIP: 52761-5886 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999; OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-7007 ------ BANDAG, INCORPORATED -------------------- (Exact name of registrant as specified in its charter) Iowa 42-0802143 - ---------------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2905 North Highway 61, Muscatine, Iowa 52761-5886 - ---------------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 319/262-1400 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------- ------------------------------------ Common Stock - $1 Par Value New York Stock Exchange and Chicago Class A Common Stock - $1 Par Value Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock - $1 Par Value ---------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 13, 2000: Common Stock, $150,878,977; Class A Common Stock (non-voting), $110,392,503; Class B Common Stock, $634,008. The number of shares outstanding of the issuer's classes of common stock as of March 13,2000: Common Stock, 9,089,156 shares; Class A Common Stock, 9,637,754 shares; Class B Common Stock, 2,045,075 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Annual Meeting of the Shareholders to be held May 2, 2000 are incorporated by reference in Part III. PART I ------ 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 has two reportable business segments: the manufacture and sale of precured tread rubber, equipment and supplies for retreading tires (the "Traditional Business") and the sale and maintenance of new and retread tires to principally commercial and industrial customers through its wholly-owned subsidiary Tire Distribution Systems, Inc. ("TDS"). As a result of a recapitalization of the Company approved by the Company's shareholders on December 30, 1986, and substantially completed in February 1987, the Carver Family (as hereinafter defined) obtained absolute voting control of the Company. As of March 13, 2000, the Carver Family beneficially owned shares of Common Stock and Class B Common Stock constituting 77% of the votes entitled to be cast in the election of directors and other corporate matters. The "Carver Family" is composed of (i) Lucille A. Carver, a director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J. Carver and their spouses, and (iii) certain trusts and other entitles for the benefit of the Carver Family members. Effective as of November 1, 1997, the Company acquired five franchised dealerships through TDS. The aggregate purchase price of the transactions was approximately $158.6 million, which includes the fair market value of 10,000 shares of the Company's Class A Common Stock. Since the original acquisitions, TDS has acquired 11 additional smaller dealerships. TDS is operated through Tire Distribution Systems, Inc. See "TDS" herein. On February 5, 1999, Tire Management Solutions, Inc. ("TMS"), a wholly-owned subsidiary of the Company, entered into its first tire management outsourcing contract. The contract is with Roadway Express. Pursuant to the contract, the entire fleet tire management program of Roadway Express was outsourced to TMS. TMS, in turn, subcontracts with over 160 individual Bandag franchises across the country to provide the outsourced tire services. TMS anticipates that additional tire management outsourcing contracts will be obtained in the future. Traditional Business -------------------- (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 -2- vulcanizing the tread rubber from the process of bonding the tread rubber to the tire casing, allowing for optimization of temperature and pressure levels at each stage of the retreading process. The Company and its licensees have 1,295 franchisees worldwide, with 31% located in the United States and 69% internationally. The majority of Bandag's franchisees are independent operators of full service tire distributorships. The Traditional Business' revenues primarily come from the sale of retread material and equipment to its franchisees. The Traditional Business' products compete with new tire sales, as well as retreads produced using other retread processes. The Company concentrates its marketing efforts on existing franchisees and on expanding their respective market penetration. Due to its strong distribution systems, marketing efforts and leading technology, Bandag, through its independent franchisee network, has been able to maintain the largest market presence in the retreading industry. The Traditional Business competes primarily in the light and heavy truck tire replacement market. Both new tire manufacturers and tread rubber suppliers compete in this market. While the Company has independent franchisees in over 109 countries, and competes in all of these geographic markets, its largest market is the United States. Truck tires retreaded by the Company's franchisees make up approximately 15% of the U.S. light and heavy truck tire replacement market. The Company's primary competitors are new tire manufacturers such as The Goodyear Tire & Rubber Company, Bridgestone Corporation and Groupe Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as well as in other markets as a tread rubber supplier to a combination of company owned and independent retreaders, and Groupe Michelin competes in the retread market in the United States and in other markets. The Traditional Business consists of the franchising of a patented process for the retreading of tires primarily for trucks, buses, light commercial trucks, and the production and sale of precured tread rubber and related products used in connection with this process. The Traditional Business can be divided into two main areas: (i) manufacturing the tread rubber and (ii) bonding the tread to a tire casing. Bandag manufactures over 500 separate tread designs and sizes, treads specifically designed for various applications, allowing fleet managers to fine-tune their tire programs. Bandag tread rubber is vulcanized prior to shipment to its independent franchisees. The Bandag franchisee prepares the tire casing for retreading and performs the retreading process of bonding the cured tread to the prepared tire casing. This two-step process allows utilization of the optimum temperature and pressure levels at each step. Lower temperature levels during the bonding process result in a more consistent, higher quality finished retread with less damage to the casing. Bandag has developed a totally integrated retreading system with the materials, bonding process and manufacturing equipment specifically designed to work together as a whole. -3- (b) Markets and Distribution ------------------------ The principal market categories for the Traditional Business are truck and bus, with more than 90% of the tread rubber sold by the Company used in the retreading of these tires. Additionally, the Company markets tread rubber for the retreading of off-the-road equipment, industrial and light commercial vehicle and passenger car tires; however, historically, sales of tread rubber for these applications have not contributed materially to the Company's results of operations. Trucks and Buses Tread rubber, equipment, and supplies for retreading and repairing truck and bus tires are sold by the Company primarily to independent franchisees and TDS which use the Bandag Method for that purpose. Bandag has 1,295 independent franchisees throughout North America, Central America, South America, Europe, Africa, Far East, Australia and New Zealand. These franchisees are owned and operated by independent franchisees, some with multiple franchises and/or locations. Of these franchisees, 395 are located in the United States. One hundred fifty nine (159) of Bandag's foreign franchisees are franchised by a licensee of the Company in Australia, and joint ventures in India and Sri Lanka. A limited number of franchisees are trucking companies, which operate retread shops primarily for their own needs. A few franchisees also offer "hot-cap" retreading and most sell one or more lines of new tires. The current franchise agreement offered by the Company grants the franchisee the non-exclusive retread manufacturing rights to use the Bandag Method for one or more applications and the Bandag trademarks in connection therewith within a specified territory, but the franchisee is free to market Bandag retreads outside the territory. No initial franchise fee is paid by a franchisee for its franchise. Direct Sales to Transportation Fleets The Company has entered into contracts with companies pursuant to which Bandag agrees to sell retread tires directly to transportation fleets of such companies and provide maintenance and service for the retread tires (the "Direct Sales Contracts"). Bandag subcontracts the sales, maintenance, and service components of the Direct Sales Contracts to its independent franchisees and to TDS. Other Applications The Company continues to manufacture and supply to its franchisees a limited amount of tread for off-the-road (OTR) tires, industrial tires, including solid and pneumatic, passenger car tires and light commercial tires for light trucks and recreational vehicles. (c) Competition ----------- The Company faces strong competition in the market for replacement truck and bus tires, the principal retreading market, which it serves. The competition comes not only from the major manufacturers of new tires, but also from manufacturers of retreading materials. Competitors include producers of "camelback," "strip stock," and "slab stock" for "hot-cap" retreading, as well as a number of producers of precured tread rubber. Various methods for bonding precured tread rubber to tire casings are used by competitors. -4- Bandag retreads are often sold at a higher price than tires retreaded by the "hot-cap" process as well as retreads sold using competitive precured systems. The Company believes that the superior quality and greater mileage of Bandag retreads and expanded service programs to franchisees and end-users outweigh any price differential. Bandag franchisees compete with many new-tire dealers and retreading operators of varying sizes, which include shops operated by the major new-tire manufacturers, large independent retread companies, retreading operations of large trucking companies, and smaller commercial tire dealers. For additional information on competition faced by the Traditional Business see the foregoing discussion in "General" herein. (d) Sources of Supply ----------------- The Company manufactures the precured tread rubber, cushion gum, and related supplies in Company-owned and leased manufacturing plants in the United States, Canada, Brazil, Belgium, South Africa, Mexico, Malaysia and Venezuela. The Company has entered into joint venture agreements in India and Sri Lanka. The Company also manufactures pressure chambers, tire casing analyzers, buffers, tire builders, tire-handling systems, and other items of equipment used in the Bandag retreading method. Curing rims, chucks, spreaders, rollers, certain miscellaneous equipment, and various retreading supplies, such as repair patches sold by the Company, are purchased from others. The Company purchases rubber and other materials for the production of tread rubber and other rubber products from a number of suppliers. The rubber for tread is primarily synthetic and obtained principally from sources, which most conveniently serve the respective areas in which the Company's plants are located. Although synthetic rubber and other petrochemical products have periodically been in short supply and significant cost fluctuations have been experienced in previous years, the Company to date has not experienced any significant difficulty in obtaining an adequate supply of such materials. However, the effect on operations of future shortages will depend upon their duration and severity and cannot presently be forecast. The principal source of natural rubber, used for the Company's cushion gum, is the Far East. The supply of natural rubber has historically been adequate for the Company's purposes. Natural rubber is a commodity subject to wide price fluctuations as a result of the forces of supply and demand. Synthetic prices historically have been related to the cost of petrochemical feedstocks. (e) Patents ------- The Company owns or has licenses for the use of a number of United States and foreign patents covering various elements of the Bandag Method. The Company has patents covering improved features, some of which started expiring in 1995 and others that will continue to -5- expire through the year 2011, and the Company has applications pending for additional patents. The Company does not consider that patent protection is the primary factor in its successful retreading operation, but rather, that its proprietary technical "know-how," product quality, franchisee support programs and effective marketing programs are more important to its success. The Company has secured registrations for its trademark and service mark BANDAG, as well as other trademarks and service marks, in the United States and most of the other important commercial countries. TDS ---- (a) General ------- The five dealerships that were acquired in November 1997 by TDS, an indirect wholly-owned subsidiary of the Company, were: Universal Tire, Inc. (Nashville, TN); Southern Tire Mart, Inc. (Columbia, MS); J.W. Brewer Tire Co., Inc. (Wheat Ridge, CO): Joe Esco Tire Co. (Oklahoma City, OK); and Sound Tire, Inc. (Auburn, WA). Since the original acquisitions, TDS has acquired 11 additional smaller dealerships. As of December 31, 1999, all of the acquired dealerships were merged into TDS. TDS, which provides new and retread tire products and tire management services to national, regional and local fleet transportation companies, operates 44 Bandag franchise and manufacturing locations and 109 commercial, retail and wholesale outlets in 17 states. (b) Markets and Distribution ------------------------ TDS offers complete tire management services including: the complete line of Bandag retreads, new tires (commercial, retail and off-the-road), 24-hour road service and alignment. The tire management services are provided over a broad geographic area including the northwest and all across the south. This geographic coverage allows TDS to provide consistent, cost-effective programs, information, products, and services to local, regional and national fleets. A cost effective tire management service continues to grow in importance for fleets of all sizes. The trucking industry continues to consolidate. Trucking fleets are under intense pressure to be cost competitive and reliable in their services. Tire related costs are one of the top operating expenses for trucking fleets. Bandag and its dealer alliance network (including TDS) are able to provide trucking companies comprehensive tire management services which result in lower tire operating costs for the trucking company while at the same time helping the trucking company increase its service reliability through the same tire management programs. TDS markets its products through sales personnel located at each of its commercial locations, retread production facilities and retail facilities. TDS's sales people make personal sales calls on existing customers to ensure satisfaction and loyalty. TDS facilities are generally -6- located near major highway arteries, industrial centers, and customer locations. TDS commercial locations operate as points of sale for retread tires, new tires and services. In addition, the commercial locations operate as a home base for mobile service trucks which must be able to provide customers with reliable and timely emergency service as well as regularly scheduled maintenance service. In an effort to fully service its customers, TDS sells new truck tires manufactured by Bridgestone Corporation, Continental/General, Kelly Tires, Yokahama, Cooper, and other manufacturers except for The Goodyear Tire and Rubber Company and Groupe Michelin. (c) Competition ----------- TDS competitors are other tire dealers, which offer competing retread applications, as well as those which are Bandag franchised dealers. In addition, such tire dealers typically sell and service new tires produced by new tire manufacturers and service providers such as The Goodyear Tire and Rubber Company, Bridgestone Corporation and Groupe Michelin. The Goodyear Tire and Rubber Company and Groupe Michelin compete in the U.S. market and in other markets as a tread rubber supplier to a combination of company owned and independent retreaders. (d) Sources of Supply ----------------- TDS purchases retread rubber and most of its retreading equipment and supplies from Bandag and purchases new tires from new tire companies including Bridgestone Corporation, Yokahama, Continental/General, Cooper and Kelly. Groupe Michelin and The Goodyear Tire and Rubber Company have terminated their dealer relationships with TDS dealers and will not sell new tires to TDS dealers. TDS has not experienced any material adverse effects from such terminations and has been successful in obtaining and utilizing new tires from other tire manufacturers in its business. Regulations ----------- Various federal and state authorities have adopted safety and other regulations with respect to motor vehicles and components, including tires, and various states and the Federal Trade Commission enforce statutes or regulations imposing obligations on franchisors, primarily a duty to disclose material facts concerning a franchise to prospective franchisees. Management is unaware of any present or proposed regulations or statutes which would have a material adverse effect upon its businesses, but cannot predict what other regulations or statutes might be adopted or what their effect on the Company's businesses might be. Other Information ----------------- The Company conducts research and development of new products, primarily in the Traditional Business, and the improvement of materials, equipment, and retreading processes. The cost of this research and development program was approximately $16,159,000 in 1997, $18,342,000 in 1998, and $12,325,000 in 1999. -7- The Company's business has seasonal characteristics, which are tied not only to the overall performance of the economy, but more specifically to the level of activity in the trucking industry. Tire demand does, however, lag the seasonality of the trucking industry. The Company's third and fourth quarters have historically been the strongest in terms of sales volume and earnings. The Company has sought to comply with all statutory and administrative requirements concerning environmental quality. The Company has made and will continue to make necessary capital expenditures for environmental protection. It is not anticipated that such expenditures will materially affect the Company's earnings or competitive position. As of December 31, 1999, the Company had approximately 4,441 employees. Financial Information about Business Segments and Foreign and Domestic ---------------------------------------------------------------------- Operations and Revenues of Principal Product Groups --------------------------------------------------- Financial Statement "Operating Segment and Geographic Area Information" follows on page 9. -8- Operating Segment and Geographic Area Information The Company has two reportable operating segments: the manufacture of precured tread rubber, equipment and supplies for retreading tires (Traditional Business) and the sales and maintenance of new and retread tires to principally commercial and industrial customers (TDS). Information concerning operations for the Company's two reportable operating segments and different geographic areas follows (see Note L to Notes to Consolidated Financial Statements):
Traditional Business ---------------------------------------------------------------------------------------------------- North America(4)(5) Europe(6) Latin America(4) Asia(4)(7) -------------------------- ----------------------- ------------------------ --------------------- In millions: 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 Net Sales Net sales to unaffiliated customers (1)(2) $373.8 $422.0 $483.4 $103.7 $110.9 $123.0 $99.2 $122.2 $118.1 $25.5 $28.0 $42.7 Transfers between segments 72.5 65.7 24.1 0.8 1.0 0.5 - - - - - - -------------------------- ----------------------- ------------------------ --------------------- Segment area totals $446.3 $487.7 $507.5 $104.5 $111.9 $123.5 $99.2 $122.2 $118.1 $25.5 $28.0 $42.7 Eliminations (deduction) Total Net Sales Gross Profit $214.5 $219.1 $217.9 $46.0 $49.6 $53.8 $36.3 $43.8 $41.4 $8.8 $9.1 $13.0 Intangible Amortization 0.2 0.6 1.0 - - - - - - - - - Depreciation Expense 21.5 19.8 19.5 4.9 6.1 6.7 5.1 5.9 5.1 0.6 1.1 1.4 Earnings (Expenses) Operating earnings (loss)(3) $95.2 $98.8 $89.3 $11.4 $4.9 $8.8 $13.4 $15.5 $18.9 $4.6 $(1.4) $3.2 Gain on sale of stock - - - - - - - - - - - - Interest revenue - - - - - - - - - - - - Interest expense - - - - - - - - - - - - Corporate expenses - - - - - - - - - - - - -------------------------- ----------------------- ------------------------ --------------------- Earnings (Loss) Before Income Taxes $95.2 $98.8 $89.3 $11.4 $4.9 $8.8 $13.4 $15.5 $18.9 $4.6 $(1.4) $3.2 Total Assets at December 31 $281.1 $321.8 $312.6 $52.4 $67.1 $73.9 $64.6 $80.4 $74.4 $12.1 $15.1 $21.2 Expenditures for Long-Lived Assets 20.0 33.3 15.8 3.0 4.3 7.5 4.7 10.0 15.1 0.9 1.3 1.0 Additions to Long-Lived Assets due to Acquisitions - 0.9 - - - - - - - - - - Long-Lived Assets 89.6 90.8 86.6 11.4 15.2 16.3 32.0 43.6 40.4 2.9 3.2 5.1 Sales by Product Retread products $360.1 $404.5 $462.5 $101.8 $104.4 $110.5 $95.8 $117.0 $111.4 $15.3 $15.4 $24.2 New tires - - - - - - - - - 3.0 4.8 8.2 Retread tires - - - - - - - - - 6.4 5.9 7.5 Other 13.7 17.5 20.9 1.9 6.5 12.5 3.4 5.2 6.7 0.8 1.9 2.8
TDS Other (4) Consolidated -------------------------- ---------------------- --------------------------- In millions: 1999 1998 1997 1999 1998 1997 1999 1998 1997 Net Sales Net sales to unaffiliated customers (1)(2) $393.1 $376.6 $55.3 $17.4 - - $1,012.7 $1,059.7 $822.5 Transfers between segments - - - - - - 73.3 66.7 24.6 -------------------------- ---------------------- --------------------------- Segment area totals $393.1 $376.6 $55.3 $17.4 - - $1,086.0 $1,126.4 $847.1 Eliminations (deduction) (73.3) (66.7) (24.6) ----------------------------- Total Net Sales $1,012.7 $1,059.7 $822.5 Gross Profit $92.1 $84.8 $14.0 $(5.0) $- $- $392.7 $406.4 $340.1 Intangible Amortization 9.7 8.0 1.3 - - - 9.9 8.6 2.3 Depreciation Expense 11.0 9.4 1.5 0.8 0.5 0.4 43.9 42.8 34.6 Earnings (Expenses) Operating earnings (loss)(3) $(2.5) $2.5 $(2.0) $(11.4 $(5.7) $(1.4) $110.7 $114.6 $116.8 Gain on sale of stock - - - - - 95.1 - - 95.1 Interest revenue - - - 6.1 9.0 7.5 6.1 9.0 7.5 Interest expense - - - (9.7) (10.8) (3.3) (9.7) (10.8) (3.3 Corporate expenses - - - (15.0) (13.3) (13.2) (15.0) (13.3) (13.2 -------------------------- ---------------------- --------------------------- Earnings (Loss) Before Income Taxes $(2.5) $2.5 $(2.0) $(30.0 $(20.8) $84.7 $92.1 $99.5 $202.9 Total Assets at December 31 $243.2 $217.2 $217.9 $69.0 $54.1 $199.9 $722.4 $755.7 $899.9 Expenditures for Long-Lived Assets 10.8 15.6 1.0 2.5 0.9 1.8 41.9 65.4 42.2 Additions to Long-Lived Assets due to Acquisitions 4.4 12.9 125.1 - - - 4.4 13.8 125.1 Long-Lived Assets 125.8 133.9 123.2 3.6 1.9 1.6 265.3 288.6 273.2 Sales by Product Retread products $- $- $- $- - - $573.0 $641.3 $708.6 New tires 218.2 214.1 36.5 - - - 221.2 218.9 44.7 Retread tires 96.9 86.6 11.6 - - - 103.3 92.5 19.1 Other 78.0 75.9 7.2 17.4 - - 115.2 107.0 50.1
(1) No customer accounted for 10% or more of the Company's sales to unaffiliated customers in 1999, 1998, or 1997. (2) Export sales from North America were less than 10% of sales to unaffiliated customers in each of the years 1999, 1998, and 1997. (3) Aggregate foreign exchange gains (losses) included in determining net earnings amounted to approximately $800,000, $(3,200,000) and $1,500,000 in 1999, 1998 and 1997 respectively. (4) For segment reporting purposes, Mexico and South Africa operations are included in the Latin America segment and New Zealand and Australia operations are included in the Asia segment, consistent with management's groupings for internal purposes. Other includes Corporate activities and in 1999 and 1998, the Tire Management Solutions pilot initiative. (5) Includes in 1999 non-recurring charges of $12,800,000 related to costs associated with the closure of a domestic manufacturing facility and other non-recurring costs. Includes in 1997 non-recurring charges of $16,500,000 related to the closure of a domestic manufacturing facility and exit costs from a rubber recycling venture. (6) Includes in 1999 non-recurring charges of $700,000 for termination benefits. Includes in 1998 non-recurring charges of $4,176,000 for termination benefits. (7) Includes in 1998 net non-recurring charges of $29,000 related to costs associated with the closure of foreign manufacturing facilities and other non-recurring costs. The net non-recurring charges include a gain of $3,297,000 consisting of the non-taxable recognition of accumulated translation gains due to the exit of operations in Indonesia. -9- Executive Officers of the Company The following table sets forth the names and ages of all executive officers of the Company as of March 13, 2000, the period of service of each with the Company, positions and offices with the Company presently held by each, and the period during which each officer has served in his present office:
Period of Period in Service Present Position Present Name Age with Company or Office Office ---- --- ------------ --------- ------ Martin G. Carver* 51 21 Yrs. Chairman of the Board, Chief 19 Yrs. Executive Officer and President Lucille A. Carver* 82 42 Yrs. Treasurer 41 Yrs. Nathaniel L. Derby II 57 29 Yrs. Vice President, Manufacturing Design 3 Yrs. Warren W. Heidbreder 53 18 Yrs. Vice President, Chief Financial 3 Yrs. Officer and Secretary Frederico U. Kopittke 56 5 Yrs. Vice President, Latin America and 1 Yr. South Africa John C. McErlane 46 15 Yrs. Vice President, Marketing and Sales 2 Yr.
* Denotes that officer is also a director of the Company. Mr. Martin G. Carver was elected Chairman of the Board effective June 23, 1981, Chief Executive Officer effective May 18, 1982, and President effective May 25, 1983. Prior to his present position, Mr. Carver was also Vice Chairman of the Board from January 5, 1981 to June 23, 1981. Mrs. Carver has, for more than five years, served as a Director and Treasurer of the Company. Mr. Derby joined Bandag in 1971. In December 1985, he was promoted to Vice President, Engineering and served in that position until August 1996 when he was elected to the office of Vice President, Engineering. He served in that office until May 1997, when he was elected to his current office of Vice President, Manufacturing Design effective April 28, 1997. Mr. Heidbreder joined Bandag in 1982. In 1986 he was elected to the office of Vice President, Legal and Tax Administration, and Secretary. In November 1996, he was elected to his current office of Vice President, Chief Financial Officer, and Secretary effective as of January 1, 1997. -10- Mr. Kopittke joined Bandag in July 1994 as Company Manager of Bandag do Brasil Ltda. He served in that position until March 1998 when he was elected to the office of Vice President, Latin America. In August 1998, he was elected to his current office of Vice President Latin America and South Africa, effective July 13, 1998. Before joining Bandag, Mr. Kopittke was employed for more than 16 years by Nalco Chemical Company in South America. Mr. McErlane joined Bandag in 1985. From 1985 through 1995, he held several managerial positions with the Company. In 1996, he was promoted to the position of Director, Marketing. In January 1997, he was promoted to the office of Vice President, Marketing and served in that position until March 1998, when he was elected to his current office of Vice President, Marketing and Sales effective February 16, 1998. All of the above-named executive officers have been elected by the Board of Directors and serve at the pleasure of the Board of Directors. ITEM 2. PROPERTIES - ------ ---------- Traditional Business -------------------- The general offices of the Company are located in a company-owned 56,000 square foot office building in Muscatine, Iowa. The tread rubber manufacturing plants of the Company are located to service principal markets. The Company owns thirteen of such plants. However, the Company only operates twelve of these plants, four of which are located in the United States, and the remainder in Canada, Belgium, South Africa, Brazil (two plants), Mexico, Malaysia, and Venezuela. Operations in one tread rubber manufacturing plant located in the United States were suspended in the fourth quarter of 1999 but the facility remains viable for general corporate purposes. The plants vary in size from 9,600 square feet to 194,000 square feet with the first plant being placed into production during 1959. All of the plants are owned in fee except for the plants located in Malaysia and Venezuela, which are under standard lease contracts. Retreading equipment is manufactured at Company-owned plants located in Muscatine, Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet and 10,000 square feet, respectively. In addition, the Company owns a research and development center in Muscatine of approximately 58,400 square feet and a 26,000 square foot facility used primarily for training franchisees and franchisee personnel. Similar training facilities are located in Brazil, Mexico (leased facility), South Africa and Europe. The Company also owns a 26,000 square foot office and machining facility in Muscatine. Construction of a new 83,000 square foot training and conference center was completed in early 1999 in Muscatine, Iowa. In addition, the Company mixes rubber and produces cushion gum and envelopes at a Company-owned 168,000 square foot plant in California. The Company owns its European headquarters facility in Belgium and a 129,000 square foot warehouse in the Netherlands. -11- TDS Business ------------ TDS currently owns 45 and leases 91 facilities. Forty-four contain space for TDS's retread production and 109 contain space for commercial, retail and wholesale operations. The Company believes that it will be able to renew its existing leases as they expire or find suitable alternative locations. The leases generally provide for a base rental, as well as charges for real estate taxes, insurance, maintenance and various other items. In the opinion of the Company, its properties are maintained in good operating condition and the production capacity of its plants is adequate for the near future. Because of the nature of the activities conducted, necessary additions can be made within a reasonable period of time. ITEM 3. LEGAL PROCEEDINGS - ------ ----------------- General - ------- The Company is a part to a number of lawsuits and claims arising out of the normal course of business. While the results of such litigation are uncertain, management believes that the final outcome of any such litigation will not have a material adverse effect on the Company's consolidated financial position or the result of operations. Changes in assumptions, as well as actual experience, could cause estimates made by management to change. Bandag, Incorporated vs. Michelin Technologies, Inc. and Michelin North America, - ------------------------------------------------------------------------------- Inc. - --- On September 16, 1999, the Company filed a lawsuit in the U.S. District Court for the Eastern District of Iowa against Michelin North America, Inc. and Michelin Retread Technologies, Inc. (collectively "Michelin"), subsidiaries of Compagnie Generale des Etablissements Michelin, a French based company with global distribution. According to the suit, Michelin has attempted to eliminate the Company as a competitor in the U.S. replacement tire market for the commercial trucking industry by undermining the Company's dealer network, interfering with the Company's contractual and business relationships with its dealers and fleet customers, and engaging in unfair competition, false advertising, and violating U.S. anti-trust laws. On November 17, 1999, Michelin filed a counterclaim against the Company, primarily alleging various violations of the U.S. anti-trust laws. Both the Company's lawsuit and Michelin's counterclaim seek compensatory and injunctive relief. While the results of the Company's suit and Michelin's counterclaim cannot be predicted with certainty, a victory on Michelin's counterclaim could have a material adverse effect on the Company's consolidated financial position and results of operations. Management, however, believes that its claims against Michelin are meritorious and that Michelin's counterclaim is completely without merit. The Company intends to vigorously defend its position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. -12- PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - -------------------------------------------------------------------------------- MATTERS. - ------- Information concerning cash dividends declared and market prices of the Company's Common Stock and Class A Common Stock for the last three fiscal years is as follows:
1999 % Change 1998 % Change 1997 ---- -------- ---- -------- ---- Cash Dividends Per Share- Declared First Quarter $ 0.2850 $ 0.2750 $ 0.2500 Second Quarter 0.2850 0.2750 0.2500 Third Quarter 0.2850 0.2750 0.2500 Fourth Quarter 0.2950 0.2850 0.2750 ------------------------------------------------------------------------ Total Year 1.1500 3.6 1.1100 8.3 $ 1.0250 Stock Price Comparison (1) Common Stock First Quarter $28.13 - 41.63 $53.31 - 59.13 $45.00 - 51.88 Second Quarter 28.38 - 37.25 39.00 - 59.75 46.38 - 51.75 Third Quarter 28.25 - 36.25 29.88 - 42.06 47.94 - 54.13 Fourth Quarter 23.50 - 31.75 28.31 - 39.94 48.38 - 55.75 Year-end Closing Price 24.88 39.94 53.44 Class A Common Stock First Quarter $23.38 - 37.75 $48.00 - 54.38 $45.25 - 50.38 Second Quarter 23.88 - 32.13 34.50 - 54.00 45.00 - 49.50 Third Quarter 22.50 - 29.56 28.44 - 39.50 47.50 - 53.44 Fourth Quarter 19.94 - 24.50 27.38 - 35.13 46.38 - 52.00 Year-end Closing Price 21.06 34.88 47.88 (1) High and low composite prices in trading on the New York and Chicago Stock Exchanges (ticker symbol BDG for Common Stock and BDGA for Class A Common Stock).
The approximate number of record holders of the Company's Common Stock as of March 13, 2000, was 2,179, the number of holders of Class A Common Stock was 1,200 and the number of holders of Class B Common Stock was 231. The Common Stock and Class A Common Stock are traded on the New York Stock Exchange and the Chicago Stock Exchange. There is no established trading market for the Class B Common Stock. Sale of Unregistered Securities On November 11, 1999, the Company issued 20,000 shares of Common Stock to Martin G. Carver pursuant to his exercise of stock options for an aggregate consideration of $469,000. No underwriters were engaged in connection with the foregoing sale. The issuance of the foregoing securities was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) as a transaction not involving a public offering. -13- ITEM 6. SELECTED FINANCIAL DATA - ------ ------------------------ The following table sets forth certain Selected Financial Data for the periods and as of the dates indicated:
1999 1998 1997(2) 1996 1995 ------------------------------------------------------------------------ (In thousands, except per share data) Net Sales $1,012,665 $1,059,669 $822,523 $756,925 $740,363 Net Earnings(1) 52,330 59,319 121,994 81,604 97,027 ------------------------------------------------------------------------ Total Assets $722,421 $755,729 $899,904 $588,342 $554,159 Long-term Debt and Other Obligations 111,151 109,757 123,195 10,125 11,857 Net Earnings Per Share: Basic Earnings Per Share $2.41 $2.64 $5.35 $3.46 $3.84 Diluted Earnings Per Share $2.40 $2.63 $5.33 $3.44 $3.82 Cash Dividends Per Share-Declared $1.1500 $1.1100 $1.0250 $0.9250 $0.8250 (1) Includes in 1999 the effect of non-recurring charges of $13,500,000 pre-tax, $7,671,000 after-tax, or $.35 per diluted share, related to costs associated with the closure of a domestic manufacturing facility and other non-recurring costs. Includes in 1998 the effect of net non-recurring charges of $4,205,000 pre-tax, $1,174,000 after-tax, or $.05 per diluted share, related to costs associated with the closure of foreign manufacturing facilities and other non-recurring costs. Includes in 1997 the effect of a non-recurring gain on the sale of marketable equity securities of $95,087,000 pre-tax, $55,800,000 after-tax, or $2.44 per diluted share, and non-recurring charges of $16,500,000 pre-tax, $9,900,000 after-tax, or $.43 per diluted share, related to the closing of a manufacturing facility and exit cost from a rubber recycling venture. (2) During 1997 the Company's subsidiary, Tire Distribution Systems, Inc., commenced operations with the acquisition of five tire dealerships whose operations are included in the consolidated financial statements from November 1, 1997, the effective date of the acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS - ------ ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 GENERAL Results include the Company's Traditional Business, Tire Distribution Systems, Inc. (TDS), and Tire Management Solutions, Inc., a pilot operation (TMS). The comparability of operating results between years is affected by TDS's acquisition of tire dealerships in each of the years 1999 and 1998 and by certain non-recurring items. Consolidated net sales in 1999 decreased 4% from 1998. This included a decrease of 10% in the Traditional Business. Of this Traditional Business decrease, approximately 4 percentage points were a result of the lower translated value of the Company's foreign-currency- -14- denominated sales. The remaining decrease resulted from lower equipment sales and a 6% decline in retread material unit volume from 1998. The decline in Traditional Business sales was primarily due to competitive pressures and industry consolidation in the United States, which is expected to continue into 2000 and beyond. In addition, the Company experienced some dealer separations in the United States which negatively impacted sales volume. The Company anticipates that future sales volume may continue to be negatively impacted by additional dealer separations. The Company has not received any additional notices of separations that would have a significant impact on operating results. The decline in Traditional Business sales was offset by a 4% increase in TDS sales over 1998 and sales for TMS. The increase in TDS net sales is principally attributable to dealership acquisitions during the year. The Company's seasonal sales pattern, which is tied to trucking activity, was similar to previous years with the third and fourth quarters being the strongest for both sales and earnings. All segments were similarly affected. Gross profit margin for the Traditional Business increased by 2.4 percentage points over 1998 mainly due to lower raw material costs in the United States. Consolidated gross profit margin for 1999 increased by .5 percentage points over 1998, a lower increase than seen in the Traditional Business margin due to a higher portion of consolidated sales coming from TDS, which operates at a lower gross margin, and the inclusion of TMS. Consolidated operating and other expenses in 1999 decreased 3% from 1998. Before non-recurring items, operating and other expenses of the Traditional Business decreased 15% from 1998. This decrease was offset by a 15% increase in TDS operating and other expenses over 1998 due to acquisitions. Earnings benefited from progress in efforts to return operating expenses to a more traditional level, but with the decline in unit volume, net earnings declined 1% from 1998 before non-recurring items. The Company's consolidated effective income tax rate of 43.2% was higher than the 1998 rate of 40.4% principally due to a non-recurring loss on the exit from a rubber recycling venture and non-taxable recognition of accumulated translation gains in 1998. The lower earnings resulted in diluted earnings per share of $2.40 for the year, down from diluted earnings per share of $2.63 in 1998. Earnings in 1999 included the effect of non-recurring charges of $7,671,000, net of tax benefits, or $.35 per diluted share. The prior year included the effect of net non-recurring charges of $1,174,000, net of tax benefits, or $.05 per diluted share. Refer to Note B of the notes to the consolidated financial statements for discussion of the non-recurring charges. Non-recurring charges in 1999 relate to the closure of a North American manufacturing facility, along with the elimination of certain non-manufacturing positions. These measures were taken to address a fundamental change in the nature of our business as it moves from a product-driven organization to a fully integrated provider of tire management products and services. As a result of the actions taken in 1999, the Company expects savings in 2000 to approximate $14,000,000. -15- TRADITIONAL BUSINESS The Company's Traditional Business operations located in the United States and Canada are integrated and managed as one unit, which is referred to internally as North America. Net sales in North America were 9% below 1998 primarily due to 7% lower retread material unit volume. Net sales were also negatively impacted by a 29% decline in equipment sales. The North American sales decline was due to competitive pressures and industry consolidation in the United States, which is expected to continue into 2000 and beyond, as well as some dealer separations in the United States. A 5% decrease in average raw material costs from 1998 yielded a 3.2-percentage-point improvement in North America's gross profit margin over 1998. North American operating expenses, which included $12,800,000 of non-recurring charges, were 8% lower than 1998. However, operating expenses exclusive of non-recurring charges decreased by 18% due to decreases in R&D projects, marketing programs, promotional expenses, and personnel-related costs. Earnings before income taxes for 1999 decreased 4% from 1998. The Company's operations located in Europe principally service markets in European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as Europe. Net sales in Europe declined 7% from 1998 on a 5% retread material unit volume decrease. The 2 percentage point spread between the net sales decrease and the retread material unit volume decrease is due to the lower translated value of the Belgium franc. Gross profit margin decreased .4 percentage points from 1998 due to the inclusion of lower margin service revenue. Operating expenses decreased 21% from 1998 due to lower personnel and marketing costs in the current year and non-recurring costs included in 1998. The increase in earnings before income taxes over 1998 reflected the decline in operating expenses. The Company's exports from North America to markets in the Caribbean, Central America and South America, along with operations in Brazil, Mexico, Venezuela and South Africa are combined under one management group referred to internally as Latin America. In general, Latin American operating results were significantly affected by the devaluation of the Brazilian real. Net sales in Latin America declined 19% from 1998 on a retread material unit volume decrease of 3% and lower translated value of foreign-currency-denominated sales. The decline in retread material unit volume was driven by fewer exports from North America coupled with lower shipments in South Africa due to South African economic constraints and increased competition. The gross profit margin increased by .7 percentage points over 1998 due to price increases in South Africa and lower production costs and higher margins on locally produced products in Mexico. Operating expense levels for each country were comparable to 1998 relative to the respective change in unit volume, except for Mexico, which experienced lower operating expenses in 1999 due to higher severance, bad debt, and staffing expense incurred in 1998. Primarily as a result of lower sales, earnings before income taxes were 13% below 1998. The Company's exports from North America to markets in Asian countries, along with operations in New Zealand, Indonesia and Malaysia and a licensee in Australia, are combined under one management group referred to internally as Asia. Net sales in Asia declined 9% as a result of a 4% decrease in retread material unit volume, lower exported equipment sales, and -16- reduced new tire sales in New Zealand. Lower raw material costs and higher margins on export shipments in Malaysia were partially offset by the higher cost of imported retread materials in New Zealand, resulting in a 2.1-percentage-point increase in the gross profit margin over 1998. Operating expenses for the year declined 54% from 1998 mainly due to the non-recurring charges in 1998 which reduced personnel-related costs and managerial and administrative support costs. Earnings before income taxes for 1999 showed significant improvement principally due to lower operating expenses. TIRE DISTRIBUTION SYSTEMS, INC. Excluding the effect of acquisitions, TDS sales declined 2% from 1998, from $376,557,000 to $369,944,000, due primarily to discontinuing the sale of certain off-the-road tires. From an operating perspective, TDS continued to make progress in integrating the dealerships it has acquired since 1997. TDS's operating expenses were 15% above 1998. Operating expenses were unfavorably impacted in 1999 by the integration of new acquisitions and the consolidation of the Central Division office into the Eastern Division headquarters. In 1999, TDS recorded a loss before interest and taxes of $2,510,000 compared to earnings before interest and taxes of $2,517,000 in 1998. The decrease in earnings before interest and taxes from 1998 reflect the unfavorable impact of current year acquisitions and the cost of consolidating certain operations. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 GENERAL Results include both the Company's Traditional Business and TDS. The comparability of operating results between years is affected by TDS, which commenced operations effective November 1, 1997 with the acquisition of five tire dealerships and which acquired several additional dealerships throughout 1998, and also by certain non-recurring items. Consolidated net sales in 1998 increased 29% from 1997. This increase was solely attributable to the TDS operations, as Traditional Business net sales were 5% below 1997. Of this 5% decrease, approximately 2 percentage points were a result of lower translated value of the Company's foreign-currency-denominated sales. The remaining 3-percentage-point decrease resulted from lower equipment sales. The Company's seasonal sales pattern was similar to previous years and both business segments were similarly affected. Gross profit margin for the Company's Traditional Business increased by 1.7 percentage points due to lower raw material costs in the U.S. and Mexico. Gross profit margins in Europe, Brazil and South Africa remained steady. Inclusion of the TDS operations, which operate at a lower gross margin, decreased consolidated gross margin by 3.1 percentage points. Consolidated operating and other expenses in 1998 increased 30% from 1997. A full year of TDS operating and other expenses accounted for 27 percentage points of this increase. The remaining 3-percentage-point increase in operating and other expenses was attributable to continued business development, and the rationalization of unnecessary infrastructure to -17- improve profitability. The additional business development spending was to improve capabilities to further build the dealer alliance and to prepare the Company for the introduction of tire management outsourcing in early 1999. The lower Traditional Business sales and the higher operating expenses resulted in a net earnings decline of 20% in 1998 before non-recurring items. The Company's consolidated effective income tax rate of 40.4% was higher than the 1997 rate of 39.9% principally due to the impact of a full year of nondeductible TDS goodwill amortization. Diluted earnings per share were $2.63 in 1998 compared to $5.33 in 1997. Diluted earnings per share in 1997 included the effect of a non-recurring gain on the sale of marketable equity securities of $55,800,000 after tax, or $2.44 per diluted share, and non-recurring charges of $9,900,000, net of tax benefits, or $.43 per diluted share, related to the closing of a manufacturing facility and exit costs from a rubber recycling venture. Fourth quarter and full year 1998 diluted earnings per share benefited by $.12 per diluted share as a result of a lower effective tax rate in the fourth quarter compared to 1997. Refer to Note B of the notes to the consolidated financial statements for discussion of non-recurring items. Non-recurring charges in 1998 relate to the closure of foreign manufacturing facilities, employee reductions and other exit costs. In 1998, the Company closed manufacturing facilities in Indonesia and New Zealand and a regional office in Hong Kong, all in response to the economic crisis in the area. The Company also took actions in Europe to bring expenses more in line with lower sales volume expectations. TRADITIONAL BUSINESS Net sales in North America were 4% below 1997 due to 1% lower retread material unit volume, 2% from the absence of sales from the rubber recycling venture, and 1% attributable to product mix. Gross profit margin improved 2 percentage points because average raw material costs were lower than 1997's average. As a result of the higher gross profit margin and lower expenses, earnings before income taxes in 1998 increased 11% from 1997. Net sales in Europe declined 9% from 1997, despite a slight increase in retread material unit volume. Four percentage points of the decline were due to the lower translated value of the Belgian franc. The remaining 5-percentage-point decline resulted mainly from lower equipment sales. Gross profit margin in 1998 increased 1 percentage point from 1997,resulting from decreased lower-margin equipment sales and lower-per-unit-capacity costs due to higher production. Operating expenses decreased 1% from 1997 due to the lower translated value of the Belgian franc. In local currency, 1998 operating expenses were 3% over 1997 due to non-recurring costs and additional bad debt expense. Principally as a result of the lower sales, earnings before income taxes declined by 45% from 1997. Latin America exceeded 1997 retread material unit volume by 11%, but net sales increased only 3% due to lower equipment sales in Brazil, Mexico, the Andean area and South Africa and the lower translated value of foreign currencies. Gross profit margin increased by 1 percentage point over 1997 mainly due to lower raw material costs and higher production in Mexico. The other areas were basically even with 1997. The volume growth in Brazil and -18- Mexico drove a 25% increase over 1997 in operating expenses. Also contributing to the operating expense increase were severance and higher staffing expense. Principally because of the higher operating expenses, earnings before income taxes were 18% below 1997. Net sales declined 34% in Asia as a result of a 17% decline in retread material unit volume, lower equipment sales in Malaysia, reduced new tire sales in New Zealand and the devaluation of currencies throughout Asia. Gross profit margin increased 2 percentage points over 1997 due to the absence of lower-margin equipment sales in Malaysia, increased higher-margin export sales from Malaysia and higher production in Indonesia. Operating expenses increased slightly over 1997 with the inclusion of non-recurring charges in 1998. The decline in earnings before income taxes from 1997 reflect the significant drop in net sales. TIRE DISTRIBUTION SYSTEMS, INC. TDS operating results reflect a full year for 1998. Net sales and earnings before income taxes and interest for TDS were $376,557,000 and $2,517,000, respectively. TDS had to replace two major new tire brands during the year, but same store-sales were down only slightly. From an operating perspective, TDS continued to make progress in integrating the acquired dealerships. The TDS integration strategy calls for the sale of acquired retail or manufacturing locations in markets more appropriately served by other independent Bandag dealers. For this reason, during 1998 several locations were sold to independent Bandag dealers. In addition, a wholesale business was closed and several retail locations were consolidated. IMPACT OF INFLATION AND CHANGING PRICES It has generally been the Company's practice to adjust its selling prices and sales allowances to reflect changes in production and raw material costs in order to maintain its gross profit margin. In the past three years, costs have remained relatively constant and the Company has not found it necessary to implement general price increases. However, the Company foresees a rise in raw material costs in 2000 due to increasing oil prices. Accordingly, the Company may adjust prices in the near future. The Company's gross profit margin could be negatively impacted if resulting price adjustments fail to fully offset any increase in raw material costs. Replacement of fixed assets requires a greater investment than the original asset cost due to the impact of general price level increases over the useful lives of plant and equipment. This increased capital investment would result in higher depreciation charges affecting both inventories and cost of products sold. CAPITAL RESOURCES AND LIQUIDITY At the end of 1999, current assets exceeded current liabilities by $274,065,000. Cash and cash equivalents totaled $50,633,000 at December 31, 1999, increasing by $12,721,000 during the year. The Company invests excess funds over various terms, but only instruments with an original maturity date of over 90 days are classified as investments. These investments decreased by $260,000 from 1998. -19- The only changes in working capital requirements are for normal business growth. The Company funds its capital expenditures from the cash flow it generates from operations. During 1999, the Company spent $41,903,000 for capital expenditures. The Company believes that spending in recent years is representative of future capital spending needs. In addition, the Company made $6,899,000 in cash payments in 1999 for acquisitions of TDS businesses. As of December 31, 1999, the Company had available uncommitted lines of credit totaling $71,924,000 in the United States for working capital purposes. Also, the Company's foreign subsidiaries had approximately $34,343,000 in credit and overdraft facilities available to them. From time to time during 1999, the Company borrowed funds to supplement operational cash flow needs or to settle intercompany transactions. The Company's long-term liabilities totaled $111,151,000 at December 31, 1999, which is approximately 20% of the combined total of long-term liabilities and stockholders' equity; this is an increase of $1,394,000 from December 31, 1998. During the year, the Company purchased 1,214,000 shares of its outstanding Common Stock and Class A Common Stock for $25,082,000 at prevailing market prices and paid cash dividends amounting to $25,001,000. The Company generally funds its dividends and stock repurchases from the cash flow generated from its operations. Historically, the Company has utilized excess funds to purchase its own shares. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Risk Management The Company is exposed to market risk from changes in interest rates, foreign exchange rates, and commodity prices. To mitigate such risks, the Company enters into various hedging transactions. All hedging transactions are authorized and executed pursuant to clearly defined Company policies and procedures, which strictly prohibit the use of financial instruments for trading purposes. Analytical techniques and selective hedging instruments are applied to manage and monitor such market exposures. Foreign Currency Exposure Foreign currency exposures arising from cash flow transactions include firm commitments and anticipatory transactions. Translation exposure is also part of the overall foreign exchange risk. The Company's exposure to foreign currency risks exists primarily with the Brazilian real, Canadian dollar, Mexican peso, Japanese yen and major European currencies. The Company regularly enters into foreign currency contracts primarily using foreign exchange forward contracts and options to hedge most of its firm commitment exposures. The Company also employs foreign exchange forward contracts as well as option contracts to hedge approximately 40% - 60% of its anticipated future cash flow transactions over a period of one year. The notional amount of these contracts at December 31, 1999, was $7,688,000. The Company also limits its exposure to foreign currency fluctuations by entering into offsetting asset or liability positions and by establishing and monitoring limits on unmatched positions. The Company's -20- pretax earnings from foreign subsidiaries and affiliates translated into U.S. dollars using a weighted average exchange rate was $42,904,000 for the year ending December 31, 1999. On that basis, the potential loss in the value of the Company's pretax earnings from foreign subsidiaries resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates would amount to $3,522,000. Interest Rate Exposure In order to mitigate the impact of fluctuations in the general level of interest rates, the Company generally maintains a large portion of its debt as fixed rate in nature by borrowing on a long-term basis. At December 31, 1999, the Company had no outstanding short-term debt. The total outstanding long-term debt was $100,000,000. At year-end, the fair value of the Company's long-term debt was $98,170,000. In addition, at December 31, 1999, the fair value of securities held for investment was $11,440,000. The fair value of the Company's total long-term debt and its securities held for investment would not be materially affected by a hypothetical 10% adverse change in interest rates. Therefore, the effects of interest rates changes in the fair value of the Company's financial instruments are limited. Commodities Exposure Due to the nature of its business, the Company procures almost all of its synthetic rubber used in manufacturing tire tread at quarterly fixed rates using contracts with the Company's main suppliers. Therefore, the Company's exposure to changes in commodity prices is insignificant. IMPACT OF YEAR 2000 The Company completed all Year 2000 readiness work by December 31, 1999, and, as a result, experienced no significant problems during, and subsequent to, the change to the new calendar year. The Company does not expect to have any further exposure to the Year 2000 issue. The cumulative amount spent related to the Year 2000 issue totaled $11,266,000. Of this total, $6,665,000 was recorded as expense in the year incurred and the remaining $4,601,000, which was spent to replace hardware and software and upgrade existing hardware, was capitalized. The Company does not expect to have significant expenditures in the future relating to the Year 2000 issue. EURO CONVERSION On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between their existing currencies ("legal currencies") and one common currency, the euro. The euro is now trading on currency exchanges and may be used in certain transactions such as electronic payments. Beginning in January 2002, new euro-denominated notes and coins will be issued, and legal currencies will be withdrawn from circulation. The conversion to the euro has eliminated currency exchange rate risk for transactions between the member -21- countries, which for the Company primarily consists of sales to certain customers and payments to certain suppliers. The Company has addressed the issues involved with the new currency, which include converting information technology systems and recalculating currency risk, and revised its processes for preparing accounting and taxation records. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements. These forward-looking statements can be identified as such because the context of the statement includes phrases such as "is expected," "the Company anticipates," "the Company expects," "the Company foresees," "the Company believes," "the Company does not expect," or other words of similar import. Similarly, statements that describe future plans or strategies are also forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. Factors which could affect actual results include the effect of currency exchange rates; the devaluation of foreign currencies, particularly the Brazilian real; the effectiveness of the Company's hedging techniques; additional dealer separations; and the increase in raw material costs. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The forward-looking statements included herein are made as of the date hereof and Bandag, Incorporated undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- See the discussion under the caption "Quantitative and Qualitative Disclosures About Market Risk" in Item 7 of this Form 10-K, "Management's Discussion and Analysis of Operations and Financial Condition," which is incorporated herein by reference. -22- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- Index to Consolidated Financial Statements ------------------------------------------ Page ---- Report of Independent Auditors 24 Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997 25 Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998 and 1997 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 27 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 28 Notes to Consolidated Financial Statements 30 -23- Report of Independent Auditors Stockholders and Board of Directors Bandag, Incorporated We have audited the accompanying consolidated balance sheets of Bandag, Incorporated and subsidiaries as of December 31, 1999, 1998, and 1997, and the related consolidated statements of earnings, cash flows and changes in stockholders' equity for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bandag, Incorporated and subsidiaries at December 31, 1999, 1998, and 1997, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Chicago, Illinois January 27, 2000 -24
Consolidated Balance Sheets December 31 In thousands 1999 1998 1997 ----------- ----------- ----------- Assets Current Assets Cash and cash equivalents $ 50,633 $ 37,912 $ 196,400 Investments - Note D 9,461 9,721 1,575 Accounts receivable, less allowance (1999 - $20,761; 1998 - $18,724; 1997 - $12,707) 199,710 217,299 231,648 Inventories: Finished products 94,278 96,889 90,228 Material and work in process 16,244 14,845 17,295 ----------- ----------- ----------- 110,522 111,734 107,523 Deferred income tax assets 46,804 48,097 41,505 Prepaid expenses and other current assets 10,988 14,361 20,343 ----------- ----------- ----------- Total Current Assets 428,118 439,124 598,994 Property, Plant, and Equipment, on the basis of cost: Land 12,651 12,444 8,494 Buildings and improvements 119,157 107,240 98,769 Machinery and equipment 357,906 351,949 326,632 Construction and equipment installation in progress 13,073 32,112 25,551 ----------- ----------- ----------- 502,787 503,745 459,446 Less allowances for depreciation and amortization (304,802) (290,699) (261,846) ----------- ----------- ----------- 197,985 213,046 197,600 Intangible Assets, less accumulated amortization (1999 - $24,071; 1998 - $14,157; 1997 - $5,516) 67,331 75,539 75,627 Other Assets 28,987 28,020 27,683 =========== =========== =========== Total Assets $ 722,421 $ 755,729 $ 899,904 =========== =========== =========== Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 33,472 $ 38,286 $ 52,100 Accrued employee compensation and benefits 25,530 27,498 28,874 Accrued marketing expenses 27,190 37,044 32,608 Other accrued expenses 39,696 40,623 66,921 Dividends payable 6,127 6,257 6,274 Income taxes payable 18,998 13,704 20,039 Short-term notes payable and current portion of other obligations 3,040 11,497 99,726 ----------- ----------- ----------- Total Current Liabilities 154,053 174,909 306,542
Long-Term Debt and Other Obligations - Note E 111,151 109,757 123,195 Deferred Income Tax Liabilities 3,142 3,766 6,753 Stockholders' Equity - Note I Common Stock; $1.00 par value; authorized - 21,500,000 shares; issued and outstanding - 9,088,403 shares in 1999; 9,083,797 shares in 1998; 9,751,063 shares in 1997 9,088 9,084 9,751 Class A Common Stock; $1.00 par value; authorized - 50,000,000 shares; issued and outstanding - 9,637,187 shares in 1999; 10,824,974 shares in 1998; 11,013,561 shares in 1997 9,637 10,825 11,014 Class B Common Stock; $1.00 par value; authorized - 8,500,000 shares; issued and outstanding - 2,045,251 shares in 1999; 2,046,577 shares in 1998; 2,048,785 shares in 1997 2,045 2,047 2,049 Additional paid-in capital 7,476 7,287 6,052 Retained earnings 456,247 452,274 445,887 Accumulated other comprehensive income (30,418) (14,220) (11,339) ----------- ----------- ----------- Total Stockholders' Equity 454,075 467,297 463,414 =========== =========== =========== Total Liabilities and Stockholders' Equity $ 722,421 $ 755,729 $ 899,904 =========== =========== ===========
See notes to consolidated financial statements. -25-
Consolidated Statements of Earnings Year Ended December 31 In thousands, except per share data 1999 1998 1997 ----------- ----------- ----------- Income Net sales $ 1,012,665 $ 1,059,669 $ 822,523 Gain on sale of marketable equity securities - Note D - - 95,087 Other income 15,213 19,829 14,092 ----------- ----------- ----------- 1,027,878 1,079,498 931,702 Costs and Expenses Cost of products sold 619,926 653,301 482,387 Engineering, selling, administrative and other expenses 292,635 311,707 226,560 Non-recurring charges - Note B 13,500 4,205 16,500 Interest expense 9,727 10,772 3,339 ----------- ----------- ----------- 935,788 979,985 728,786 ----------- ----------- ----------- Earnings Before Income Taxes 92,090 99,513 202,916 Income Taxes - Note F 39,760 40,194 80,922 =========== =========== =========== Net Earnings $ 52,330 $ 59,319 $ 121,994 =========== =========== =========== Net Earnings Per Share - Note G: Basic $ 2.41 $ 2.64 $ 5.35 =========== =========== =========== Diluted $ 2.40 $ 2.63 $ 5.33 =========== =========== ===========
See notes to consolidated financial statements. -26-
Consolidated Statements of Cash Flows Year Ended December 31 In thousands 1999 1998 1997 ----------- ----------- ----------- Operating Activities Net earnings $ 52,330 $ 59,319 $ 121,994 Adjustments to reconcile net earnings to net cash provided by operating activities: Provisions for depreciation and amortization 53,764 51,410 36,857 Change in deferred income taxes 579 (9,758) (13,375) Gain on sale of marketable equity securities - - (95,087) Other (4,173) (2,306) (9,680) Change in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable 13,481 16,964 11,863 Inventories (2,007) (1,378) 847 Prepaid expenses and other current assets 1,466 4,771 (6,824) Accounts payable and other accrued expenses (9,284) (26,246) 16,577 Income taxes payable 6,263 (6,168) 8,130 ----------- ----------- ----------- Net Cash Provided by Operating Activities 112,419 86,608 71,302 Investing Activities Additions to property, plant and equipment (41,903) (65,375) (42,223) Proceeds from dispositions of property, plant, and equipment 3,503 4,128 4,117 Purchases of investments (11,784) (20,941) (3,645) Maturities of investments 12,044 12,795 4,159 Payments for acquisitions of businesses (6,899) (17,542) (47,659) Sale of marketable equity securities - - 119,558 ----------- ----------- ----------- Net Cash Provided by (Used in) Investing Activities (45,039) (86,935) 34,307 Financing Activities Proceeds from short-term notes payable 538 48,590 11,491 Proceeds from issuance of long-term debt - - 100,000 Principal payments on short-term notes payable and long-term obligations (2,717) (151,328) (18,422) Cash dividends (25,001) (24,867) (23,395) Purchases of Common Stock and Class A Common Stock (25,082) (29,353) (8,643) ----------- ----------- ----------- Net Cash Provided by (Used in) Financing Activities (52,262) (156,958) 61,031 Effect of exchange rate changes on cash and cash equivalents (2,397) (1,203) (1,693) ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents 12,721 (158,488) 164,947 Cash and cash equivalents at beginning of year 37,912 196,400 31,453 =========== =========== =========== Cash and Cash Equivalents at End of Year $ 50,633 $ 37,912 $ 196,400 =========== =========== ===========
See notes to consolidated financial statements. -27- Consolidated Statements of Changes in Stockholders' Equity
Common Stock Class A Common Class B Common Accumulated Issued and Stock Issued Stock Issued Additional Other In thousands, except per Outstanding and Outstanding and Outstanding Paid-In Retained Comprehensive Comprehensive share data Shares Amount Shares Amount Shares Amount Capital Earnings Income Income ---------- ------ ---------- ------- --------- ------ --------- -------- ------------- ------------- Balance at January 1, 1997 9,842,861 $9,843 11,027,759 $11,028 2,051,984 $2,052 $4,069 $355,663 $28,212 Net earnings for the year 121,994 $121,994 Other comprehensive income, net of tax: Unrealized gain on securities available- for-sale (33,854) (33,854) Adjustment from foreign currency translation (5,697) (5,697) --------- Other comprehensive income for the year (39,551) --------- Comprehensive income for the year $82,443 ========= Cash dividends - $1.0250 per share (23,395) Conversion of Class B Common Stock to Common Stock - Note I 3,199 3 (3,199) (3) Common Stock and Class A Common Stock issued under Restricted Stock Grant Plan - Note I 6,840 6 6,840 7 663 Forfeitures of Common Stock and Class A Common Stock under Restricted Stock Grant Plan - Note I (2,145) (2) (1,765) (2) (193) Common Stock and Class A Common Stock issued under Stock Award Program Plan - Note I 2,708 3 2,708 3 245 Purchases of Common Stock and Class A Common Stock (122,400) (122) (51,981) (52) (94) (8,375) Stock options exercised - Note I 20,000 20 20,000 20 885 Stock issued in acquisition of businesses - Note C 10,000 10 477 --------- ------ ----------- ------- --------- ------ ------ -------- --------- Balance at December 31, 1997 9,751,063 $9,751 11,013,561 $11,014 2,048,785 $2,049 $6,052 $445,887 $(11,339) Net earnings for the year 59,319 $59,319 Other comprehensive income, net of tax - Adjustment from foreign currency translation (2,881) (2,881) ------- Comprehensive income for the year $56,438 ======= Cash dividends - $1.1100 per share (24,867) Conversion of Class B Common Stock to Common Stock - Note I 2,208 2 (2,208) (2) Common Stock and Class A Common Stock issued under Restricted Stock Grant Plan - Note I 10,635 11 10,635 10 753 Forfeitures of Common Stock and Class A Common Stock under Restricted Stock Grant Plan - Note I (3,865) (4) (2,685) (3) (330) Common Stock and Class A Common Stock issued under Stock Award Program Plan - Note I 2,838 3 2,838 3 297 Purchases of Common Stock and Class A Common Stock (699,082) (699) (219,375) (219) (370) (28,065) Stock options exercised - Note I 20,000 20 20,000 20 885 --------- ------ ---------- ------- --------- ------ ------ -------- -------- Balance at December 31, 1998 9,083,797 $9,084 10,824,974 $10,825 2,046,577 $2,047 $7,287 $452,274 $(14,220)
-28- Consolidated Statements of Changes in Stockholders' Equity (continued)
Common Stock Class A Common Class B Common Accumulated Issued and Stock Issued Stock Issued Additional Other In thousands, except per Outstanding and Outstanding and Outstanding Paid-In Retained Comprehensive Comprehensive share data Shares Amount Shares Amount Shares Amount Capital Earnings Income Income ---------- ------ ---------- ------- --------- ------ --------- -------- ------------- ------------- Net earnings for the year 52,330 $52,330 Other comprehensive income, net of tax - Adjustment from foreign currency translation (16,198) (16,198) -------- Comprehensive income for the year $36,132 ======== Cash dividends - $1.1500 per share (24,871) Conversion of Class B Common Stock to Common Stock - Note J 1,326 1 (1,326) (2) Common Stock and Class A Common Stock issued under Restricted Stock Grant Plan - Note J 5,115 5 5,115 5 218 Forfeitures of Common Stock and Class A Common Stock under Restricted Stock Grant Plan - Note J (3,720) (4) (3,180) (3) (305) Common Stock and Class A Common Stock issued under Stock Award Program Plan- Note J 3,018 3 3,018 3 209 Purchases of Common Stock and Class A Common Stock (21,133) (21) (1,192,740) (1,193) (382) (23,486) Stock options exercised - Note I 20,000 20 449 ---------- ------ ---------- ------ --------- ------ ------ -------- -------- Balance at December 31, 1999 9,088,403 $9,088 9,637,187 $9,637 2,045,251 $2,045 $7,476 $456,247 $(30,418) ========== ====== ========= ====== ========= ====== ====== ======== ========
See notes to consolidated financial statements. -29- Notes to Consolidated Financial Statements A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts and transactions of all subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value. Accounts Receivable and Concentrations of Credit Risk: Concentrations of credit risk with respect to accounts receivable are limited due to the number of customers the Company has and their geographic dispersion. The Company maintains close working relationships with these customers and performs ongoing credit evaluations of their financial condition. No one customer is large enough to pose a significant financial risk to the Company. The Company maintains an allowance for losses based upon the expected collectibility of accounts receivable. Credit losses have been within management's expectations. Inventories: Inventories are valued at the lower of cost or market. Approximately 43%, 47% and 52% of year end inventory amounts at December 31, 1999, 1998 and 1997, respectively, were determined by the last in, first out (LIFO) method and on the first in, first out method for the remainder. The excess of current cost over the amount stated for inventories valued by the LIFO method amounted to approximately $20,138,000, $21,932,000, and $22,635,000, at December 31, 1999, 1998, and 1997, respectively. Property, Plant, and Equipment: Provisions for depreciation of plant and equipment is computed using straight-line and declining-balance methods, over the following estimated useful lives: Buildings 5 to 50 years Building Improvements 3 to 40 years Machinery and Equipment 3 to 15 years -30- Depreciation expense approximated $43,850,000, $42,769,000, and $34,576,000 in 1999, 1998, and 1997, respectively. Intangible Assets: Intangible assets, which principally represent the cost in excess of the fair value of the net assets acquired in acquisitions of businesses, are amortized using the straight-line method over 10 years. At December 31, 1999, 1998, and 1997, net goodwill amounted to $64,621,000, $72,161,000, and $74,600,000, respectively. Amortization expense approximated $9,914,000, $8,641,000, and $2,281,000 in 1999, 1998, and 1997, respectively. Foreign Currency Translation: Assets and liabilities of foreign subsidiaries are translated at the year end exchange rate and items of income and expense are translated at the average exchange rate for the year. Exchange gains and losses arising from translations denominated in a currency other than the functional currency of the foreign subsidiary and translation adjustments in countries with highly inflationary economies or in which operations are directly and integrally linked to the Company's U.S. operations are included in income. Long Lived Assets: In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", when indicators of impairment are present, the Company evaluates the carrying value of property, plant, and equipment and intangibles, including goodwill, in relation to the operating performance and future undiscounted cash flows of the underlying businesses. The Company adjusts the net book value of the underlying assets to fair value if the sum of the expected future cash flows is less than book value. Research and Development: Expenditures for research and development, which are expensed as incurred, approximated $12,325,000, $18,342,000, and $16,159,000, which includes $1,050,000, $5,709,000, and $1,407,000 relating to costs associated with the conceptual design of Tire Management Solutions, Inc. (TMS) business processes, in 1999, 1998, and 1997, respectively. Advertising: The Company expenses all advertising costs in the year incurred. Advertising expense was $5,305,000, $9,057,000, and $10,931,000 in 1999, 1998, and 1997, respectively. Revenue Recognition: Sales and associated costs are recognized at the time of delivery of products or performance of services. Derivative Instruments and Hedging Activities: In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal -31- years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not anticipate that the effect of SFAS No. 133 on the earnings and the financial position of the Company will be significant. Stock Based Compensation: SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Reclassification: Certain prior year amounts have been reclassified to conform with the current year presentation. B. NONRECURRING CHARGES During the fourth quarter 1999, the Company recorded non-recurring charges totaling $13,500,000 ($7,671,000 net of tax benefits) for termination benefits. These termination benefits cover the company-wide reduction of 175 employees through a combination of voluntary early retirements, the closing of a North American tread rubber manufacturing facility and other position eliminations. Of the total number of employees affected, benefit payments of $2,161,000 have been made during the year for 56 employees. Further employee termination costs of $6,433,000 are accrued at December 31, 1999. The majority of these payments will be made in 2000. No charge related to the manufacturing facility has been expensed as the Company expects to use the facility in the future for general Corporate purposes. The early retirement program announced in the fourth quarter of 1999 offered unreduced retirement benefits to employees over the age of 55 and who have accumulated 65 points (points = age + years of service). The early retirement program charges primarily represent a $4,906,000 increase in the pension benefit obligation which resulted when 62 employees elected this program. During 1998, the Company recorded net non-recurring charges totaling $4,205,000 ($1,174,000 net of tax benefits). The net non-recurring charges included a provision of -32- $7,502,000 ($4,471,000 net of tax benefits) for facility closures, personnel reductions, and other exit costs. Additionally, the net non-recurring charges include a gain of $3,297,000 consisting of the non-taxable recognition of accumulated translation gains due to the exit of operations in Indonesia. Included in the non-recurring charges is $4,845,000 related to personnel reductions. In 1998, the Company paid $1,035,000 related to the termination of 13 employees. In 1999, the Company paid $2,950,000 related to the termination of 99 employees and reduced the original provision by $159,000. Remaining employee termination costs of $701,000 have been accrued at December 31, 1999. Included in the non-recurring charge is $2,657,000 for facility closure and other exit costs which contains $642,000 for the write down of assets. In 1999, the Company paid $905,000 for facility closure and other exit costs and reduced the original provision by $192,000 due to costs lower than original estimates. The Company's remaining obligation to be paid in 2000 for facility closure and other exit costs as of December 31, 1999 is $918,000. During the fourth quarter of 1997, the Company recorded non-recurring charges totaling $16,500,000 ($9,900,000 net of tax benefits). The non-recurring charges include a provision of $13,000,000 to adjust the asset carrying amounts of $9,733,000 and to cover exit costs from a rubber recycling venture. During 1998, the Company completed the sale of its investment in the rubber recycling venture. There were no significant adjustments related to the sale. During 1997, $3,500,000 was recorded for the 1998 closing of a domestic manufacturing facility, including attendant personnel reductions. As of December 31, 1998, the Company had paid $2,270,000 related to the closure of the facility. In 1999, the Company paid $662,000 to complete the closure of the domestic manufacturing facility. The remainder of $568,000 was adjusted to income due to reduced costs on the demolition and disposal of the building. The net sales and results of operations of the rubber recycling venture included in the Company's consolidated statements of earnings in 1998 and 1997 were not significant. C. ACQUISITIONS During 1999, the Company acquired four tire dealerships that are a part of Tire Distribution Systems, Inc. (TDS), a wholly-owned subsidiary of the Company. The dealerships were acquired for a total of $7.1 million in cash and short-term payables. During 1998, the Company acquired five tire dealerships and two retread tire facilities that are a part of TDS. The dealerships were acquired for a total of $20.5 million in cash and short-term payables. Also, during the fourth quarter of 1997, TDS acquired five tire dealerships for a total of $158.6 million in cash, short-term notes payable and 10,000 shares of Bandag Class A Common Stock. All of these dealerships were Bandag franchisees at the time of acquisition and are in the business of selling and servicing new and retread tires, primarily for commercial and industrial vehicles. The acquisitions were accounted for using the purchase method of accounting. Accordingly, the purchase price for each acquisition was allocated to the respective assets and liabilities based on their estimated fair values as of the date of acquisition. The accounts and transactions of the acquired businesses have been included in the consolidated financial statements from the respective effective dates of the acquisitions. -33- Pro forma results of operations for 1999 and 1998, assuming the purchase transaction occurred as of January 1, 1998, would not differ materially from reported amounts. Certain supplemental non-cash information related to the Company's acquisitions of businesses are as follows: In thousands 1999 1998 1997 --------------------------------------------- Assets acquired $7,413 $22,187 $248,724 Less liabilities (1) (514) (4,630) (177,387) Less stock issued (2) - - (487) ------------------------------------------ Cash paid 6,899 17,557 70,850 Less cash acquired - (15) (23,191) ========================================== Net cash paid for acquisitions $6,899 $17,542 $ 47,659 ========================================== (1) Includes short-term payables to sellers of $160,000, $2,960,000 and $87,224,000 in 1999, 1998, and 1997, respectively. (2) Represents fair market value of Class A Common Stock issued to sellers. NOTE D. INVESTMENTS Debt securities are classified as held-to-maturity based upon the positive intent and ability of the Company to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Interest on securities classified as held-to-maturity is included in investment income. The cost of securities sold is based on the specific identification method. During the fourth quarter 1997, the Company sold its investment in marketable equity securities. As a result, a realized gain of $95,087,000 was included in the Consolidated Statements of Earnings for 1997. Dividends on securities classified as available-for-sale are included in investment income. The following is a summary of securities held-to-maturity:
Gross Gross Estimated Unrealized Unrealized Fair In thousands Cost Gains (Losses) Value --------------------------------------------- December 31, 1999 Securities Held-to-Maturity Obligations of states and political subdivisions $11,461 $ 1 $(22) $11,440 ============================================= December 31, 1998 Securities Held-to-Maturity Obligations of states and political subdivisions $21,221 $15 - $21,236 =============================================
-34-
December 31, 1997 Securities Held-to-Maturity Obligations of states and political subdivisions $38,561 - - $38,561 Investment in Eurodollar time deposits 2,600 - - 2,600 ============================================= $41,161 - - $41,161 =============================================
At December 31, 1999, 1998 and 1997, securities held-to-maturity are due in one year or less and include $2,000,000, $11,500,000, and $39,586,000, respectively, reported as cash equivalents. NOTE E. FINANCING ARRANGEMENTS The following summarizes information concerning the Company's short-term notes payable: Year Ended December 31 In thousands 1999 1998 1997 -------------------------------- Total short-term notes payable at year end $ - $2,091 $90,628 Weighted average interest rate at year end - 3.6% 6.4% Weighted average interest rate for the year 3.9% 5.0% 6.0% At December 31, 1997, short-term notes payable includes $87,224,000 related to the businesses acquired in 1997 (See Note C). The following is a summary of the Company's long-term debt and other obligations as of December 31: Interest In thousands Rates 1999 1998 1997 -------------------------------------- Senior Unsecured Notes Payable, maturing 2002 6.41% $ 60,000 $ 60,000 $ 60,000 Senior Unsecured Notes Payable, maturing 2007 6.50% 40,000 40,000 40,000 ------------------------------ Total long-term debt 100,000 100,000 100,000 Other obligations 11,151 9,757 23,195 ============================== Total long-term debt and other obligations $111,151 $109,757 $123,195 ============================== The aggregate amount of scheduled annual maturities of long-term debt and other obligations for each of the next five years is: $3,040,000 in 2000, $6,713,000 in 2001, $66,594,000 in 2002, $6,138,000 in 2003, $5,930,000 in 2004, and $25,776,000 thereafter. Cash payments for interest on debt were $9,189,000, $10,869,000, and $3,143,000 in 1999, 1998, and 1997, respectively. -35- The fair values of the Company's financing arrangements were estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1999, 1998 and 1997, the fair value of the Company's outstanding long-term debt was approximately $98,170,00, $105,656,000, and $100,673,000, respectively. Total available funds under unused lines of credit at December 31, 1999 amounted to $106,267,000. NOTE F. INCOME TAXES Significant components of the Company's deferred tax assets (liabilities) reflecting the net tax effects of temporary differences are summarized as follows: December 31 In thousands 1999 1998 1997 ----------------------------------- Employee benefits $ 4,977 $ 4,698 $ 2,749 Marketing programs 20,381 24,916 15,174 Accounts receivable valuation allowances 3,957 3,746 3,111 Unremitted earnings of foreign subsidiaries (9,909) (6,776) (5,625) Excess pension funding (7,248) (6,297) (4,482) Purchased tax benefits - - (445) Cost to exit rubber recycling venture 115 766 4,980 Basis difference in fixed assets 4,085 523 (1,527) Other nondeductible reserves 4,906 4,984 4,583 Obsolescence and valuation reserves 2,105 2,820 2,824 Insurance and legal reserves 3,412 2,647 3,387 Foreign tax credits and net operating loss carryforwards 6,844 3,126 - Equipment and plant reserves 52 496 2,707 Other, net 9,985 8,682 7,316 =================================== Net deferred tax assets $43,662 $44,331 $34,752 =================================== The components of earnings before income taxes are summarized as follows: Year Ended December 31 In thousands 1999 1998 1997 --------------------------------------- Domestic $49,186 $69,341 $167,126 Foreign 42,904 30,172 35,790 ======================================= Earnings before income taxes $92,090 $99,513 $202,916 ======================================= -36- Significant components of the provision for income tax expense (credit) are summarized as follows: Year Ended December 31 In thousands 1999 1998 1997 -------------------------------------- Current: Federal $20,640 $38,071 $70,354 State 2,894 4,526 14,667 Foreign 9,240 7,176 8,886 Deferred: Federal 6,238 (8,844) (11,619) State - - - Foreign 748 (290) (786) Equivalent credit relating to purchased income tax benefits - (445) (580) ====================================== Income taxes $39,760 $40,194 $80,922 ====================================== A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows: Year Ended December 31 1999 1998 1997 ------------------------------ Computed at the expected statutory rate 35.0% 35.0% 35.0% State income tax - net of federal tax benefit 1.8% 2.9% 4.7% Amortization of goodwill not deductible 2.7% 2.5% -% Deferred tax on unremitted earnings of foreign subsidiaries 2.8% 1.1% 0.3% Other 0.9% (1.1)% (0.1)% ============================= Income tax at the effective rate 43.2% 40.4% 39.9% ============================= Undistributed earnings of subsidiaries on which deferred income taxes have not been provided are not significant. Income taxes paid amounted to $33,197,000, $56,108,000, and $86,122,000 in 1999, 1998, and 1997, respectively. NOTE G. EARNINGS PER SHARE Earnings per share amounts are based on the weighted average number of shares of Common Stock, Class A Common Stock, Class B Common Stock and dilutive potential common shares (non-vested restricted stock and stock options) outstanding during the year. The following table sets forth the computation of basic and diluted earnings per share: -37- Year Ended December 31 In thousands , except per share data 1999 1998 1997 -------------------------------------- Numerator - Net Earnings $52,330 $59,319 $121,994 Denominator: Weighted-average shares - Basic 21,707 22,471 22,786 Effect of dilutive: Non-vested restricted stock 40 34 36 Stock options 17 54 86 ------------------------------------- 57 88 122 Weighted-average shares - Diluted 21,764 22,559 22,908 ===================================== Net Earnings Per Share: Basic $2.41 $2.64 $5.35 ===================================== Diluted $2.40 $2.63 $5.33 ===================================== Options to purchase 60,200 shares of Class A Common Stock at an option price of $33.875 were outstanding during 1999 but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would have been antidilutive. NOTE H. LEASES Certain equipment and operating properties are rented under non-cancelable and cancelable operating leases. Total rental expense under operating leases was $14,049,000, $12,508,000, and $8,303,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, future minimum lease payments under operating leases having initial lease terms in excess of one year are: $8,000,000 in 2000, $5,199,000 in 2001, $3,727,000 in 2002, $2,390,000 in 2003, $1,629,000 in 2004, and $5,639,000 thereafter NOTE I. STOCKHOLDERS' EQUITY Class A Common Stock and Class B Common Stock have the same rights regarding dividends and distributions upon liquidation as Common Stock. However, Class A Common Stockholders are not entitled to vote, Class B Common Stockholders are entitled to ten votes for each share held and Common Stockholders are entitled to one vote for each share held. Transfer of shares of Class B Common Stock is substantially restricted and must be converted to Common Stock prior to sale. In certain instances, outstanding shares of Class B Common Stock will be automatically converted to shares of Common Stock. Unless extended for an -38- additional period of five years by the Board of Directors, all then-outstanding shares of Class B Common Stock will be converted to shares of Common Stock on January 16, 2002. Under the terms of the Bandag, Incorporated Restricted Stock Grant Plan, the Company is authorized to grant up to an aggregate of 100,000 shares of Common Stock and 100,000 shares of Class A Common Stock to certain key employees. The shares granted under the Plan will entitle the grantee to all dividends and voting rights; however, such shares will not vest until seven years after the date of grant. If a grantee's employment is terminated prior to the end of the seven-year period for any reason other than death, disability or termination of employment after age 60, the shares will be forfeited and made available for future grants. A grantee who has attained age 60 and whose employment is then terminated prior to the end of the seven-year vesting period does not forfeit the non-vested shares. During the years ended December 31, 1999, 1998, and 1997, 5,115 shares, 10,635 shares and 6,840 shares of Common Stock, respectively, were granted under the Plan. During the years ended December 31, 1999, 1998 and 1997, 5,115 shares, 10,635 shares and 6,840 shares of Class A Common Stock, respectively, were also granted under the Plan. The resulting charge to earnings amounted to $385,000, $1,300,000, and $1,177,000, in 1999, 1998, and 1997, respectively. During the year ended December 31, 1999, 3,720 shares of Common Stock and 3,180 shares of Class A Common Stock were forfeited. During the year ended December 31, 1998, 3,865 shares of Common Stock and 2,685 shares of Class A Common Stock were forfeited. During the year ended December 31, 1997, 2,145 shares of Common Stock and 1,765 shares of Class A Common Stock were forfeited. The credit to 1999, 1998 and 1997 earnings related to the shares forfeited was approximately $312,000, $337,000, and $197,000, respectively. At December 31, 1999, 29,295 shares of Common Stock and 36,965 shares of Class A Common Stock are available for grant under the Plan. Under the terms of the Bandag, Incorporated Nonqualified Stock Option Plan, the Company was authorized through November 13, 1997 to grant options to purchase up to 500,000 shares of Common Stock and 500,000 shares of Class A Common Stock to certain key employees at an option price equal to the market value of the shares on the date of grant. During 1999, options to purchase 20,000 shares of Common Stock were exercised and during each of 1998 and 1997 options to purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock were exercised. At December 31, 1999, options to purchase 40,000 shares of Common Stock and 40,000 shares of Class A Common Stock were outstanding and exercisable at $23.458 per share for Common Stock options and $22.792 per share for Class A Common Stock options. Options to purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock expire on November 13, 2000, and November 13, 2001. Under the terms of the Bandag, Incorporated Stock Award Plan, the Company may award to certain eligible employees and directors incentive stock options, nonqualified stock options, and restricted stock. Up to 900,000 shares of Class A Common Stock is authorized for issuance under the Plan. All employees of Bandag and its subsidiaries and directors of Bandag who are not employees of Bandag or its subsidiaries are eligible to participate in the Plan. In 1999, the Company granted options to purchase 60,200 shares of Class A Common Stock to -39- certain key employees at an option price of $33.875 per share. The options granted under this plan vest over five years and have an option term of ten years. As of December 31, 1999, options to purchase 60,200 shares of Class A Common Stock were outstanding at an average exercise price of $33.875 per share. No options issued under this plan were exercisable at December 31, 1999. The fair value of the options granted is estimated on the grant date using the Black-Scholes model. The estimated fair value of the options granted assumes a dividend yield of 2.15%, a risk free interest rate of 4.9%, an expected option life of 10 years, and a stock price volatility of 20.67%. The fair value of options granted during 1999 is $9.96 per option. The Company did not award any restricted Class A Common Stock under this Plan during the year. The Company has a stock award program covering substantially all U.S. and Canadian Traditional Business, corporate, and TMS employees which was established to promote employee commitment and ownership in the Company. In 1999, 1998, and 1997, $120,000, $225,000, and $283,000, respectively, were charged to earnings for the estimated cost of awards to be made under the stock award program. NOTE J. RETIREMENT BENEFIT PLANS The Company sponsors defined-benefit pension plans covering full-time employees directly employed by Bandag, Incorporated, Bandag Licensing Corporation (BLC), Bandag Canada Ltd., and certain employees in the Company's European operations. Certain employees of TDS are also covered by defined-benefit plans. In addition to providing pension benefits, the Company provides certain postretirement medical benefits to certain individuals who retired from employment before January 1, 1993. Employees who retire after December 31, 1992 and are at least age 62 with 15 years of service of direct employment with Bandag, Incorporated, BLC, and Kendon are eligible for temporary medical benefits that cease at age 65. The reconciliations of the benefit obligations, the reconciliations of the fair value of plan assets, and the reconciliations of funded status of the plans, as determined by consulting actuaries are as follows: -40-
Pension Benefits Postretirement Benefits In thousands 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------ Change in benefit obligations: Benefit obligations at the beginning of the year $ 73,603 $62,305 $58,357 $4,432 $5,899 $5,427 Service cost 3,796 3,117 2,420 213 264 247 Interest cost 4,785 4,326 3,382 283 407 375 Participants' contributions 51 40 46 - - - Plan amendments 347 - (539) - - - Plan merger - - 2,204 - - - Exchange rate changes 164 (180) (96) - - - Curtailment gain (459) - - - - - Settlement loss 190 - - - - - Special termination benefits 5,629 - - - - - Settlement payments (898) - - - - - Benefits paid (2,125) (2,232) (1,637) (67) (85) (306) Actuarial (gain) or loss (11,445) 6,227 (1,832) (735) (2,053) 156 ================================================================== Benefit obligations at end of year $ 73,638 $73,603 $62,305 $4,126 $4,432 $5,899 ================================================================== Change in plan assets at fair value: Fair value of plan assets at beginning of year $115,347 $116,304 $ 90,775 $ - $ - $ - Actual return on plan assets 18,378 966 23,582 - - - Plan merger - - 2,798 - - - Employer contributions 100 477 859 67 85 306 Participants' contributions 51 40 46 - - - Benefits paid (2,125) (2,232) (1,637) (67) (85) (306) Settlement payments (898) - - - - - Exchange rate changes 171 (208) (119) - - - ================================================================== Fair value of plan assets at end of year $131,024 $115,347 $116,304 $ - $ - $ - ================================================================== Reconciliation of funded status: Funded status $ 57,386 $ 41,744 $ 53,999 $(4,126) $(4,432) $(5,899) Unrecognized actuarial gain (41,026) (22,119) (38,737) (3,099) (2,386) (334) Unrecognized transition asset (3,509) (4,171) (4,968) - - - Unrecognized prior service cost 748 413 1,054 51 54 58 ================================================================== Prepaid (accrued) benefit cost $ 13,599 $ 15,867 $ 11,348 $(7,174) $(6,764) $(6,175) ================================================================== Weighted average assumptions: Discount rate 7.5% 6.5% 7.0% 7.5% 6.5% 7.0% Rate of increase in future compensation 4.0% 4.5% 4.5% N/A N/A N/A Expected long-term rate of return on assets 8.0% 8.0% 8.0% N/A N/A N/A
Assets of the plans are principally invested in U.S. domestic common stocks, and short term notes and bonds (fixed income securities) with maturities under five years. Net periodic (benefit) cost is composed of the following: -41-
Pension Benefits Postretirement Benefits In thousands 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------ Components of net periodic (benefit) cost: Service cost $3,796 $3,117 $2,420 $213 $264 $247 Interest cost 4,785 4,326 3,382 283 407 375 Expected return on plan assets (9,262) (9,421) (6,950) - - - Amortization of prior service cost 110 88 123 3 3 3 Amortization of transitional assets (820) (749) (748) - - - Recognized actuarial gain (617) (1,547) (622) (112) - - ================================================================== Net periodic (benefit) cost $(2,008) $(4,186) $(2,395) $387 $674 $625 ================================================================== Additional (gain) or loss recognized due to: Curtailment $5,090 - - - - - Settlement (184) - - - - -
The assumed health care cost trend rate is 7% for 2000 and is assumed to decrease to 6% in 2001. A one-percentage-point change in the assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage- Point Increase Point Decrease ----------------- --------------- In thousands ----------------- --------------- Effect on total of service and interest cost components $71 $(59) Effect on postretirement benefit obligation $508 $(435) The Company also sponsors defined-contribution plans, covering substantially all employees in the United States. Annual contributions are made in such amounts as determined by the Company's Board of Directors. Although employees may contribute up to 15% of their annual compensation from the Company, they are generally not required to make contributions in order to participate in the plans. The Company currently provides plans with a variety of contribution levels (including employee contribution match provisions). The Company recorded expense for contributions in the amount of $4,132,000, $4,626,000, and $3,439,000 in 1999, 1998, and 1997, respectively. Employees in most foreign countries are covered by various retirement benefit arrangements generally sponsored by the foreign governments. The Company's contributions to foreign plans were not significant in 1999, 1998, and 1997. NOTE K. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into agreements (derivative financial instruments) to manage the risks associated with certain aspects of its business, but does not actively trade such instruments nor enter into such agreements for speculative purposes. The Company principally utilizes foreign currency forward exchange contracts and foreign currency option contracts. -42- Option contracts that are designated as hedges are marked to market with realized and unrealized gains and losses deferred and recognized in earnings as an adjustment to sales when the future sales occur (the deferral accounting method). Realized and unrealized gains and losses on options that are not designated as hedges, that fail to be effective hedges, or that relate to sales that are no longer probable of occurring would be included in income as foreign exchange gains or losses. The unrealized gains and losses are included in other assets and liabilities. The Company periodically uses foreign currency forward exchange contracts to reduce its exposure to foreign currency risk from receivables denominated in foreign currencies and certain firm purchase commitments. For contracts that are designated and effective as hedges, discounts or premiums are accreted or amortized to other operating expenses over the contract lives using the straight line method while the realized and unrealized gains and losses resulting from changes in the spot exchange rate, net of related taxes, are included in the cumulative translation adjustment account in stockholders' equity. The related amounts due to or from counterparties are included in other assets or other liabilities. Contract amounts, after considering tax effects, in excess of the carrying value of the Company's obligations are marked to market, with changes in market value recorded in earnings as foreign exchange gains or losses. Realized and unrealized gains or losses at the time of maturity, termination, sale or repayment of a derivative contract or designated item are recorded in a manner consistent with the original designation of the derivative in view of the nature of the termination, sale, or repayment transaction. Amounts arising at the settlement of currency forward or option contracts require no special accounting because such amounts are periodically recorded. Realized and unrealized changes in fair value of derivatives designated with items that no longer exist or are no longer probable of occurring are recorded as a component of the gain or loss arising from the disposition of the designated item. At December 31, 1999, 1998 and 1997, the Company had approximately $7,688,000, $4,781,000, and $12,301,000, respectively, in foreign currency forward exchange contracts and foreign currency option contracts designated and effective as hedges which become due in various amounts and at various dates through the following year. The difference between the contract amounts and their fair value, in the aggregate, was insignificant at December 31, 1999, 1998 and 1997. NOTE L. OPERATING SEGMENT AND GEOGRAPHIC AREA INFORMATION Description of Types of Products and Services: The Company has two reportable operating segments: the Traditional Business and TDS. The Traditional Business manufactures precured tread rubber, equipment and supplies for retreading tires and operates on a worldwide basis. SFAS No. 131 requires segment information to be reported based on how management internally evaluates the operating performance of their business units. The operations of the Traditional Business segment are -43- evaluated by worldwide geographic region. For segment reporting purposes, the Company's operations located in the United States and Canada are integrated and managed as one unit, which is referred to internally as "North America." The Company's operations located in Europe principally service those European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. Exports from North America to markets in the Caribbean, Central America and South America, along with operations in Brazil, Mexico, Venezuela and South Africa are combined under one management group referred to internally as "Latin America." Exports from North America to markets in Asian countries, along with operations in New Zealand, Indonesia and Malaysia and a licensee in Australia are combined under one management group referred to internally as "Asia." TDS operates retreading locations and commercial, retail, and wholesale outlets throughout the United States for the sale and maintenance of new and retread tires to principally commercial and industrial customers. Measurement of Segment Profit and Loss and Segment Assets: The Company evaluates performance and allocates resources based primarily on profit or loss before interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at fair market value less a discount between geographic areas within the Traditional Business and for transactions between the Traditional Business and TDS at a value consistent with that to unaffiliated customers. Other segment assets are principally cash and cash equivalents, investments, corporate office and related equipment, and assets relating to TMS operations. The information regarding segment operations and other geographic information is presented on page 9 of this report, and is incorporated herein by reference. The following tables present information concerning net sales and long-lived assets for countries which exceed 5% of the respective totals: Net Sales (a) Year Ended December 31 (In thousands) 1999 1998 1997 -------------------------------------------------- United States $727,030 $762,549 $499,043 Brazil 54,935 73,488 67,470 Other 230,700 223,632 256,010 ================================================= Consolidated $1,012,665 $1,059,669 $822,523 ================================================= -44- Long-lived Assets (b) December 31 (In thousands) 1999 1998 1997 ---------------------------------------------- United States $216,896 $224,277 $208,598 Brazil 17,434 27,030 26,324 Other 30,986 37,278 38,305 ---------------------------------------------- Consolidated $265,316 $288,585 $273,227 ============================================== (a) Revenues are attributed to countries based on the location of customers. (b) Corporate long-lived assets are included in the United States. NOTE M. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS Unaudited quarterly results of operations for the years ended December 31, 1999 and 1998 are summarized as follows: Quarter Ended 1999 In thousands, except per share data Mar. 31 Jun. 30 Sep. 30 Dec. 31 ------------------------------------------- Net sales $224,138 $252,120 $273,240 $263,167 Gross profit 88,940 98,792 103,118 101,889 Net earnings 10,037 16,126 18,056 8,111 Net earnings per share: Basic $0.46 $0.74 $0.83 $0.38 Diluted $0.46 $0.73 $0.82 $0.38 Quarter Ended 1998 In thousands, except per share data Mar. 31 Jun. 30 Sep. 30 Dec. 31 ------------------------------------------- Net sales $235,931 $266,127 $282,636 $274,975 Gross profit 90,747 102,571 109,137 103,913 Net earnings 9,150 14,168 17,456 18,545 Net earnings per share: Basic $0.40 $0.62 $0.78 $0.84 Diluted $0.40 $0.62 $0.77 $0.84 Fourth quarter 1999 earnings reflect a non-recurring after-tax charge of $7,671,000 ($.35 per diluted share) as a result of a restructuring of North American operations which includes a company-wide reduction in jobs through a combination of voluntary early retirements, the closure of a North American tread rubber manufacturing facility, and other position eliminations. See Note B. Third quarter 1998 earnings reflect a non-recurring after-tax charge of $2,491,000 ($.11 per diluted share) and fourth quarter 1998 earnings reflect a net non-recurring after-tax gain of $1,317,000 ($.06 per diluted share). The non-recurring items in the third and fourth quarters of 1998 relate to the closure of two manufacturing facilities, the elimination of employee positions, and other exit costs. See Note B. -45- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- ---------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- The information called for by Item 10 (with respect to the directors of the registrant and with respect to the information required to be furnished under Rule 405 of Regulation S-K) is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1999. In accordance with General Instruction G (3) to Form 10-K, the information with respect to executive officers of the Company required by Item 10 has been included in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION - ------- ---------------------- The information called for by Item 11 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- The information called for by Item 12 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- The information called for by Item 13 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1999. -46- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------- (a)(1) Financial Statements The following consolidated financial statements are included in Part II, Item 8: Page ---- Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997....................................25 Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998 and 1997.............................26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 ............................27 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997...............................................................28 Notes to Consolidated Financial Statements..........................30 (2) Financial Statement Schedule Schedule II - Valuation and qualifying accounts and reserves. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits Exhibit No. Description 3.1 Bylaws: As amended August 24, 1999 3.2 Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended December 31, 1992.) 3.3 Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.) 4.1 Instruments defining the rights of security holders. (Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the Company's Form 10-K for the year ended December 31, 1992.) -47- 4.2 Note Purchase Agreement dated December 15, 1997 for $60,000,000 of 6.41% Senior Notes due December 15, 2002. (Incorporated by reference to Exhibit 4.2 to the Company's Form 10-K for the year ended December 31, 1997.) 4.3 Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due December 15, 2007. (Incorporated by reference to Exhibit 4.3 to the Company's Form 10-K for the year ended December 31, 1997.) 10.1* Bandag, Incorporated Restricted Stock Grant Plan, as amended August 24, 1999. 10.2 U.S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by reference to Exhibit No. 10.2 to the Company's Form 10-K for the year ended December 31, 1993.) 10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus Tires, as revised April 1996. (Incorporated by reference to Exhibit No. 10.2(a) to the Company's Form 10-K for the year ended December 31, 1996.) 10.2(b) Bandag System Franchise Agreement, as revised November 1998 (Incorporated by reference to Exhibit 10.2(a) to the Company's form 10-K for the year ended December 31, 1998.) 10.3* Miscellaneous Fringe Benefits for Executives. (Incorporated by reference to Exhibit No. 10.3 to the Company's Form 10-K for the year ended December 31, 1996.) 10.4* Nonqualified Stock Option Plan, as amended November 12, 1996 (Incorporated by reference to Exhibit No. 10.4 to the Company's Form 10-K for the year ended December 31, 1996.) 10.5* Nonqualified Stock Option Agreement of Martin G. Carver dated November 13, 1987, as amended by an Addendum dated June 12, 1992. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1992.) 10.6* Form of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant Plan. (Incorporated by reference as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.) 10.7* Separation and Release Agreement with Henry H. Li regarding termination of employment, effective July 31, 1998. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1998). 10.8* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Martin G. Carver (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). -48- 10.9* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Nathaniel L. Derby, II (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.10* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Sam Ferrise II (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.11* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Warren W. Heidbreder (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.12* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and John C. McErlane (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.13* Bandag, Incorporated Stock Award Plan, as amended August 24, 1999. 21 Subsidiaries of Registrant. 27 Financial Data Schedule (with EDGAR filing only) 27.1 Revised December 1998 Financial Data Schedule (EDGAR filing only) *Represents a management compensatory plan or arrangement. (b) Reports on Form 8-K A Current Report on Form 8-K was filed on October 21, 1999 reporting under Item 5. The Current Report included unaudited condensed consolidated balance sheets for the quarter ended September 30, 1999 and the year ended December 31, 1998, unaudited condensed consolidated statements of earnings for the three and nine month periods ended September 30, 1999 and 1998, respectively, and unaudited condensed consolidated statements of cash flows for the nine months periods ended September 30, 1999 and 1998. -49- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES BANDAG, INCORPORATED AND SUBSIDIARIES
COL. C COL. A COL. B ADDITIONS COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------- 1 2 Balance at Charged to Charged to Other Balance at Beginning Costs and Accounts - Deductions - End of DESCRIPTION of Period Expenses Describe Describe Period ----------------------------------------------------------------------------------- Year ended December 31, 1999: Allowance for doubtful accounts $18,724,000 $9,286,000 $7,249,000(1) $20,761,000 Year ended December 31, 1998: Allowance for doubtful accounts $12,707,000 $8,460,000 $2,443,000(1) $18,724,000 Year ended December 31, 1997: Allowance for doubtful accounts $13,320,000 $3,491,000 $4,104,000(1) $12,707,000 (1) - Uncollectible accounts written off, net of recoveries and foreign exchange fluctuations.
-50- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANDAG, INCORPORATED By /s/ Martin G. Carver -------------------------------- Martin G. Carver Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer) Date: March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Robert T. Blanchard - -------------------------------- --------------------------------------- Robert T. Blanchard Lucille A. Carver Director Director /s/ Roy J. Carver, Jr. /s/ Gary E. Dewel - -------------------------------- --------------------------------------- Roy J. Carver, Jr. Gary E. Dewel Director Director /s/ James R. Everline /s/ Phillip J. Hanrahan - -------------------------------- --------------------------------------- James R. Everline Phillip J. Hanrahan Director Director /s/ Edgar D. Jannotta /s/ R. Stephen Newman - -------------------------------- --------------------------------------- Edgar D. Jannotta R. Stephen Newman Director Director /s/ Martin G. Carver /s/ Warren W. Heidbreder - -------------------------------- --------------------------------------- Martin G. Carver Warren W. Heidbreder Chairman of the Board, Vice President, Chief Financial Chief Executive Officer, Officer(Principal Financial Officer) President and Director (Principal Executive Officer) /s/ Charles W. Vesey --------------------------------------- Charles W. Vesey Corporate Controller (Principal Accounting Officer) Date: March 28, 2000 -51- EXHIBIT INDEX ------------- Exhibit No. Description 3.1 Bylaws: As amended August 24, 1999 3.2 Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended December 31, 1992.) 3.3 Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.) 4.1 Instruments defining the rights of security holders. (Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the Company's Form 10-K for the year ended December 31, 1992.) 4.2 Note Purchase Agreement dated December 15, 1997 for $60,000,000 of 6.41% Senior Notes due December 15, 2002. (Incorporated by reference to Exhibit 4.2 to the Company's Form 10-K for the year ended December 31, 1997.) 4.3 Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due December 15, 2007. (Incorporated by reference to Exhibit 4.3 to the Company's Form 10-K for the year ended December 31, 1997.) 10.1* Bandag, Incorporated Restricted Stock Grant Plan, as amended August 24, 1999. 10.2 U.S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by reference to Exhibit No. 10.2 to the Company's Form 10-K for the year ended December 31, 1993.) 10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus Tires, as revised April 1996. (Incorporated by reference to Exhibit No. 10.2(a) to the Company's Form 10-K for the year ended December 31, 1996.) 10.2(b) Bandag System Franchise Agreement, as revised November 1998 (Incorporated by reference to Exhibit 10.2(a) tot he Company's form 10-K for the year ended December 31, 1998.) 10.3* Miscellaneous Fringe Benefits for Executives. (Incorporated by reference to Exhibit No. 10.3 to the Company's Form 10-K for the year ended December 31, 1996.) 10.4* Nonqualified Stock Option Plan, as amended November 12, 1996 (Incorporated by reference to Exhibit No. 10.4 to the Company's Form 10-K for the year ended December 31, 1996.) 10.5* Nonqualified Stock Option Agreement of Martin G. Carver dated November 13, 1987, as amended by an Addendum dated June 12, 1992. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1992.) -52- 10.6* Form of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant Plan. (Incorporated by reference as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.) 10.7* Separation and Release Agreement with Henry H. Li regarding termination of employment, effective July 31, 1998. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1998). 10.8* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Martin G. Carver (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.9* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Nathaniel L. Derby, II (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.10* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Sam Ferrise II (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.11* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Warren W. Heidbreder (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.12* Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and John C. McErlane (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q/A for the quarter ended June 30, 1999). 10.13* Bandag, Incorporated Stock Award Plan, as amended August 24, 1999. 21 Subsidiaries of Registrant. 27 Financial Data Schedule (with EDGAR filing only) 27.1 Revised December 1998 Financial Data Schedule (EDGAR filing only) *Represents a management compensatory plan or arrangement. -53- EX-3.1 2 BYLAWS BY-LAWS OF BANDAG, INCORPORATED As Amended August 24, 1999 ARTICLE I --------- OFFICES ------- The principal office of the Corporation in the State of Iowa shall be located in the City of Muscatine, County of Muscatine. The Corporation may have such other offices, either within or without the State of Iowa, as the Board of Directors may designate or as the business of the Corporation may require from time to time. The registered office of the Corporation required by the Iowa Business Corporation Act to be maintained in the State of Iowa may be, but need not be, identical with the principal office in the State of Iowa, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II ---------- SHAREHOLDERS ------------ Section 1. Annual Meeting. An annual meeting of the shareholders shall be held at such time during the month of May in each year as shall be designated by the Board of Directors at least sixty (60) days prior to the date of the meeting, or if no such date is designated by the Board of Directors then at 10 o'clock in the forenoon on the third Wednesday in May, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated as herein provided for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as conveniently may be. Section 2. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman of the Board, the Board of Directors or the holders of not less than one-tenth of all the outstanding shares of the Corporation entitled to vote at the meeting. Section 3. Place of Meeting. The Board of Directors may designate any place, either within or without the State of Iowa, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of Iowa, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the registered office of the Corporation in the State of Iowa. Section 4. Notice of Meeting. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the President, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Section 5. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such lists or transfer books or to vote at any meeting of shareholders. Section 6. Quorum. A majority of the votes entitled to be cast, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the votes entitled to be cast are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient votes to leave less than a quorum. Section 7. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation 2 before or at the time of the meeting. Proxies shall apply only to the meeting for which they are solicited. Section 8. Voting of Shares. Each outstanding share of Common Stock shall be entitled to one (1) vote per share, and each outstanding share of Class B Common Stock shall be entitled to ten (10) votes per share, upon each matter submitted to a vote at a meeting of shareholders. Section 9. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, in case of a meeting of shareholders, not less than ten days prior to the date of which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. ARTICLE III ----------- BOARD OF DIRECTORS ------------------ Section 1. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors. Section 2. Number, Tenure and Qualifications. The number of directors of the Corporation shall be nine (9). Each director shall serve for the term for which elected and until a successor shall have been elected and qualified, except in the event of resignation, removal, death or other incapacity. Directors need not be residents of the State of Iowa or shareholders of the Corporation. Section 3. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Iowa, for the holding of additional regular meetings without other notice than such resolution. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Iowa, 3 as the place for holding any special meeting of the Board of Directors called by them. Section 5. Notice. Notice of any special meeting shall be given at least two days previously thereto by written notice delivered personally or mailed to each director at his business address, or by telegram. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 6. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Section 7. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 8. Vacancies. During the intervals between annual meetings of shareholders, any vacancy occurring in the Board of Directors caused by resignation, removal, death or incapacity, and any newly created directorships resulting from an increase in the number of directors, shall be filled by a majority vote of the directors then in office, whether or not a quorum. Each director chosen to fill a newly created directorship or to fill a vacancy shall hold office until the next annual meeting of the shareholders. Section 9. Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 10. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless 4 his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 11. Informal Action by Directors. Any action required to be taken at a meeting of the directors, or any other action which may be taken at a meeting of the directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. Section 12. Indemnification (1) The Corporation shall indemnify every person who is or was a party or involved (as a witness or otherwise) or is threatened to be made a party or involved (as a witness or otherwise) (hereafter "Indemnitee") in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including a grand jury proceeding), formal or informal, and whether or not by or in the right of the Corporation or otherwise (hereafter a "Proceeding"), by reason of the fact that he is or was a director or officer of the Corporation, or while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, or by reason of any action alleged to have been taken or not taken by him while acting in any such capacity, against reasonable expenses (including counsel fees and expenses when incurred) (hereafter "Expenses") and all liability and loss, including judgments, fines, (including excise taxes assessed with respect to an employee benefit plan), and penalties and amounts paid or to be paid in settlement (whether with or without court approval) (hereafter "Liabilities"), actually incurred by him in connection with such Proceeding, to the fullest extent permitted by law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment). Notwithstanding anything in this Section 12 to the contrary, except with respect to a proceeding to enforce rights to indemnification or advancement of Expenses under this Section 12, the Corporation shall provide indemnification and advancement of Expenses under this Section 12 to persons seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors. In addition to the foregoing mandatory modification provisions, the Corporation may indemnify an 5 employee of the Corporation to the same extent as to an officer or director pursuant to the provisions of this Section 12. (2) The right to indemnification conferred in this Section 12 shall include the right to be paid or reimbursed by the Corporation the Expenses incurred in connection with the Proceeding in advance of the final disposition thereof promptly after a written request therefor; provided, however, that to the extent required by law, the payment of such Expenses in advance of the final disposition of a proceeding shall be made only upon the Corporation's receipt of a written undertaking by or on behalf of such person to repay such amounts if it shall ultimately be determined that he is not entitled to be indemnified under this Section 12 or otherwise (this undertaking need not be secured and must be accepted without reference to the ability to repay). (3) Any indemnification, under this Section 12 (unless ordered by a court or as otherwise provided in Section 12(2) for the advancement of Expenses) shall be made by the Corporation upon a determination that the indemnification of the Indemnitee is proper in the circumstances because he has met the applicable standard of conduct required by Section 490.851 of the Iowa Business Corporation Act. Such determination shall be made (a) by the Board of Directors by majority vote of a quorum consisting of directors not at the time parties to the Proceeding, (b) if a quorum cannot be obtained, by a majority vote of a committee duly designated by the Board of Directors, in which designation directors who are parties may participate, consisting solely of two or more directors not at the time parties to the Proceeding, (c) by special legal counsel selected by the Board of Directors by vote as set forth in clause (a) or (b) of this Section 12(3), or, if a quorum of the Board of Directors cannot be obtained and a committee cannot be designated, selected by majority vote of the full Board of Directors, in which selection directors who are parties may participate, or (d) by the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the Proceeding shall not be voted on the determination. (4) If a person is entitled under this Section 12 to indemnification by the Corporation for some or a portion of Liabilities and Expenses but not, however, for all of the total amounts thereof, the Corporation shall nevertheless indemnify such person for the portion thereof to which he is entitled. (5) Notwithstanding anything in these By-laws to the contrary, the Corporation shall not be obligated to make any payment under this Section 12 for indemnification for Liabilities and Expenses in connection with Proceedings settled without the consent of the Corporation, which consent, however, shall not be unreasonably withheld. 6 (6) If a claim for indemnification or advancement of Expenses under this Section 12 is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, the claimant may, at anytime thereafter, bring suit against the Corporation to recover the unpaid amount of the claim. The claimant shall also be entitled to be paid the expenses of prosecuting such claim to the extent he is successful in whole or in part on the merits or otherwise in establishing his right to indemnification or to the advancement of Expenses. Neither (a) the failure of the Corporation (including its Board of Directors, special legal counsel or the shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 490.851 of the Iowa Business Corporation Act, nor (b) the fact that there has been an actual determination by the Corporation (including its Board of Directors, special legal counsel or the shareholders) that the claimant has not met such applicable standard of conduct, shall create a presumption that the claimant has not met the applicable standard of conduct. (7) The right to indemnification, including the right to the advancement of Expenses, conferred in this Section 12 shall not be exclusive of any other rights to which a person seeking indemnification or advancement of Expenses hereunder may be entitled under any Articles of Incorporation, By-laws, agreement, vote of shareholders or directors, or otherwise. Subject to applicable law, to the extent that any rights to indemnification or advancement of Expenses of such person under any such Article of Incorporation, By-law, agreement, vote of shareholders or directors, or otherwise, are broader or more favorable to such person, the broader or more favorable rights shall control. The Corporation shall have the express authority to enter into such agreements as the Board of Directors deems appropriate for the indemnification of, including the advancement of Expenses to, present or future directors or officers of the Corporation in connection with their service to, or status with, the Corporation or any other corporation, partnership, joint venture, trust or other enterprise, including any employee benefit plan, for whom such person is serving at the request of the Corporation. (8) The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any Liability asserted against such person and incurred by such person in such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such Liability under the provisions of this Section 12, the Iowa Business Corporation Act or otherwise. The Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, 7 surety bonds and/or similar arrangements), as well as enter into contracts providing for indemnification to the maximum extent permitted by law and including as part thereof any or all of the foregoing, to ensure the payment of such sums as may become necessary to effect full indemnification. The Corporation's obligation to make indemnification and pay Expenses pursuant to this Section 12 shall be in excess of any insurance purchased and maintained by the Corporation and such insurance shall be primary. To the extent that indemnity or Expenses of a person entitled to indemnification and payment of Expenses pursuant to this Section 12 are paid on behalf of or to such person by such insurance such payments shall be deemed to be in satisfaction of the Corporation's obligation to such person to make indemnification and pay Expenses pursuant to this Section 12. (9) The right to indemnification, including the right to advancement of Expenses provided herein, shall be a contract right, shall continue as to a person who has ceased to be a director or officer or to serve in any other of the capacities described in this Section 12, and shall inure to the benefit of the heirs, personal representatives, executors and administrators of such person. Notwithstanding any amendment, alteration, or repeal of this Section 12 or any of its provisions or the adoption of any provision inconsistent with this Section 12 or any of its provisions, any person shall be entitled to indemnification, including the right to the advancement of Expenses, in accordance with the provisions hereof with respect to any action taken or omitted prior to such amendment, alteration, or repeal or adoption of such inconsistent provision, except to the extent such amendment, alteration, repeal, or inconsistent provision provides broader rights with respect to indemnification, including the advancement of Expenses, than the Corporation was permitted to provide prior to the amendment, alteration, repeal, or the adoption of such inconsistent provision or to the extent otherwise prescribed by law. (10) In the event of any payment under this Section 12, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (11) Indemnitee agrees promptly to notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder, but Indemnitee's omission to so notify the Corporation shall not relieve the Corporation from any liability which it may have to Indemnitee under this Section 12 unless such omission materially prejudices the rights of the Corporation (including, without limitation, the Corporation having lost significant substantive or procedural rights with respect to the defense of any Proceeding). If such omission does materially prejudice the rights of the Corporation, the 8 Corporation shall be relieved from liability under this Section 12 only to the extent of such prejudice; but such omission will not relieve the Corporation from any liability which it may have to Indemnitee otherwise than under this Section 12. (12) The Corporation will be entitled to participate at its own expense in any Proceeding of which it has notice. The Corporation jointly with any other indemnifying party similarly notified of any Proceeding will be entitled to assume the defense of Indemnitee therein, with counsel reasonably satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election to assume the defense of Indemnitee in any Proceeding, the Corporation will not be liable to Indemnitee under this Section 12 for any Expenses subsequently incurred by Indemnitee in connection with the defense thereof, except as otherwise provided below. Indemnitee shall have the right to employ its own counsel in any such Proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) the employment of counsel by Indemnitee has been authorized by the Corporation; or (ii) the Corporation shall not in fact have employed counsel to or cannot in good faith without conflict assume the defense of Indemnitee in such Proceeding or such counsel has not in fact assumed such defense; in each of which case the fees and expenses of Indemnitee's counsel shall be advanced by the Corporation. (13) A director or officer is considered to be serving an employee benefit plan at the Corporation's request if such person's duties to the Corporation also imposed duties on, or otherwise involves services by, that person to the plan or to the participants in or beneficiaries of the plan. (14) Notwithstanding anything to the contrary herein contained, no indemnification shall be made pursuant to this Section 12 for (i) breach of a person's duty of loyalty to the Corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, (iii) a transaction from which the person seeking indemnification derives an improper personal benefit, or (iv) for liability under Section 490.833 of the Iowa Business Corporation Law. Section 13. Committees. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in such resolution or in the articles of incorporation or the By-Laws of the Corporation, shall have and may exercise all the authority of the Board of Directors, except that no such committee shall have the authority to: (1) Authorize distributions; 9 (2) Approve or propose to shareholders action required by Chapter 490 of the Iowa Business Corporation Act to be approved by shareholders; (3) Fill vacancies on the Board of Directors or any of its committees; (4) Amend the articles of incorporation of the Corporation; (5) Approve a plan of merger not requiring shareholder approval; (6) Adopt, amend or repeal the By-Laws of the Corporation; (7) Authorize or approve the reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or (8) Authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the Board of Directors; however, the Board of Directors, having acted regarding general authorization for the issuance or sale of shares, or any contract for issuance or sale, and, in the case of a series, the designation of the series, may, pursuant to a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan, authorize a committee to fix the terms of any contract for the sale of the shares and to fix the terms upon which such shares may be issued or sold, including, without limitation, the price, the dividend rate, provisions for redemption, sinking fund, conversion, voting or preferential rights, and provisions for other features of a class of shares, or a series of a class of shares, with full power in such committee to adopt any final resolution setting forth all the terms and to authorize the statement of the terms of a series for filing with the Secretary of State. Written notice of all Executive Committee actions shall be mailed or delivered to all Directors of the Corporation within three (3) days after such action is taken. Neither the designation of any such committee, the delegation to it of authority, nor action by such committee pursuant to such authority shall alone constitute compliance by any member of the Board of Directors, not a member of the committee in question, with such director's responsibility to act in good faith, in a manner such director reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. 10 Section 14. Meetings by Conference Telephone. Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or committee by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. Section 15. Removal of Directors. A director may be removed from office at any time by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote for the election of directors at a meeting of the shareholders called for that purpose. Section 16. Composition of the Board of Directors. So long as any shares of Class B Common Stock, $1.00 par value, remain outstanding, the Nominating Committee shall not recommend to the Board of Directors any individual or individuals for election or appointment to the Board of Directors, and the Board of Directors shall not nominate, elect or appoint any such individual or individuals if, after such election or appointment, a majority of the members of the Board of Directors shall not consist of "independent directors" (as defined below). For purposes of determining an "independent director" eligible for membership on the Board of Directors, an "independent director" is a director who, at the time of determination, and at any time within the three years preceding such time, was not employed by the Corporation or any of its subsidiaries in any capacity and who is not (i) a surviving spouse of Roy J. Carver, (ii) a brother or sister of a surviving spouse of Roy J. Carver, or a child (including an adopted child) of any such person, (iii) a lineal descendant of Roy J. Carver, (iv) a spouse of a lineal descendant of Roy J. Carver, (v) a brother-in-law or sister-in-law of a lineal descendant of Roy J. Carver, and (vi) a brother or sister of Roy J. Carver or a child (including an adopted child) of any such person. For purposes of the foregoing definition, the term "lineal descendant" includes an adopted child. No substantive amendment to this Section 16 may be made except with the affirmative vote of the holders of a majority of the then outstanding shares of Common Stock and Class B Common Stock, each voting separately as a class. ARTICLE IV ---------- OFFICERS -------- Section 1. Corporate Officers. The officers designated as Corporate Officers shall be elected by the Board of Directors and shall consist of a Chairman of the Board, a President, one or more Senior Vice Presidents, one or 11 more Vice Presidents, a Treasurer, a Secretary, one or more Assistant Treasurers, and one or more Assistant Secretaries. The Board of Directors from time to time also may elect one or more Vice Chairmen of the Board and one or more Executive Vice Presidents. Any two or more of such offices may be held by the same person. Corporate officers shall have the power, authority and duties hereinafter set forth relative to their respective offices. Section 2. Appointive Officers. Upon approval of the Chairman of the Board, an appropriate title may be given from time to time to certain employees of the Corporation who are managing one or several groups, divisions or other operations of the Corporation, provided, however, that any employee who has been given a title shall not be deemed to be a Corporate Officer of the Corporation for any purpose solely by virtue of such title. Each person given any such title shall hold such title at the will of the Chairman of the Board and shall cease to use such title when directed by the Chairman of the Board. He shall have such powers and perform such duties with respect to a group, division or other operation of the Corporation as shall be assigned to him by the Chairman of the Board. Vacancies in appointive offices may be filled by the Chairman of the Board. Section 3. Election and Term of Office. The Corporate Officers shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each Annual Meeting of the Shareholders or as soon thereafter as conveniently may be. Each Corporate Officer shall hold office until his successor is elected and shall have qualified or until his death or until he shall resign or have been removed from office in the manner hereinafter provided. Vacancies may be filled and new offices created and filled at any meeting of the Board of Directors. Section 4. Removal. Any Corporate Officer elected by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 5. Vacancies. A vacancy in any Corporate Office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. Section 6. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and directors. He shall be the chief executive officer of the Corporation and shall have general supervision of the business, affairs and property of the Corporation and over its several officers, subject, however, to the control of the Board of Directors. He shall be ex officio a member of all standing committees, other than the Audit Committee and the Stock Option Committee, and shall see that all orders of the Board of Directors 12 and resolutions of the Board of Directors are carried into effect. He shall have authority to execute bonds, mortgages and other contracts requiring the seal, under the seal of the Corporation, except where required and permitted by law to be otherwise signed and executed, and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 6 (a). Vice Chairman of the Board. Each Vice Chairman of the Board shall perform such duties as may be assigned to him by the Board of Directors. Section 7. The President. The President shall perform such duties as may be assigned to him by the Board or Directors. In the absence or disability of the Chairman of the Board, the President shall preside at meetings of the shareholders and of the Board of Directors. He shall have authority to execute bonds, mortgages and other contracts requiring the seal, under the seal of the Corporation, except where required and permitted by law to be otherwise signed and executed, and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 8. Executive Vice Presidents. Each Executive Vice President shall perform such duties as may be assigned to him by the Board of Directors. Section 9. Senior Vice Presidents - Vice Presidents. Each Senior Vice President and each Vice President elected as a Corporate Officer shall perform such duties as from time to time may be assigned to him by the Chairman of the Board or by the Board of Directors. Section 10. The Secretary. The Secretary shall: (a) keep the minutes of the Shareholders' and Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholders; (e) sign with the Chairman of the Board, or the President, or an Executive Vice President, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of the Secretary and such other duties as from time to time may be assigned to him by the Chairman of the Board or by the Board of Directors. 13 Section 11. The Treasurer. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. He shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Article V of these By-Laws; and (b) in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board or by the Board of Directors. Section 12. Assistant Secretary. The Assistant Secretary, when authorized by the Board of Directors, may sign with the President or an Executive Vice President certificates for shares of the Corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Secretary, in general, shall perform such duties as shall be assigned to him by the Chairman of the Board. Section 13. Salaries. The salaries of the Corporate Officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. ARTICLE V --------- CONTRACTS, LOANS, CHECKS AND DEPOSITS ------------------------------------- Section 1. Contracts. The Board of Directors, the President or any officer designated by the Chairman of the Board, may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances, subject to such limitations as the Board may prescribe. Section 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors, or, subject to such limitations as the Board may prescribe, unless authorized in writing by the Chairman of the Board or any officer designated by the Chairman of the Board. Any such authority may be general or confined to specific instances. Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of 14 the Corporation and in such manner as shall from time to time be determined by resolutions of the Board of Directors. Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may select or may be selected by officers pursuant to authority granted by the Board of Directors. ARTICLE VI ---------- CERTIFICATES FOR SHARES AND THEIR TRANSFER ------------------------------------------ Section 1. Certificates for Shares. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board, the President or a Senior Vice President and by the Secretary or an Assistant Secretary. The signatures of the Chairman of the Board, the President or a Senior Vice President and the Secretary or an Assistant Secretary upon a certificate may be facsimiles if the certificates is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself, or an employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate for the Corporation shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. 15 Section 3. Issuance of Fractional Shares or Script. No fractional shares of the Corporation shall be issued and no transfer of a fraction of a share shall be permitted. In lieu of issuing a fraction of a share the Board of Directors may authorize payment in cash of the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or may authorize the issuance of script in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such script aggregating a full share. The Board of Directors may cause such script to be issued subject to the condition that it shall become void if not exchanged for certificates representing full shares before a specified date or subject to the condition that the shares for which such script is exchangeable may be sold by the Corporation and the proceeds thereof distributed to the holders of such script or subject to any other conditions which the Board of Directors may deem advisable. ARTICLE VII ----------- FISCAL YEAR ----------- The fiscal year of the Corporation shall end on the thirty-first day of December in each year. ARTICLE VIII ------------ DIVIDENDS --------- The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its articles of incorporation. ARTICLE IX ---------- SEAL ---- The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the Corporation and the state of incorporation and the words "Corporate Seal." The Corporation may use the seal by causing it, or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. ARTICLE X --------- WAIVER OF NOTICE ---------------- 16 Whenever any notice is required to be given to any shareholder or director of the Corporation under the provisions of the articles of incorporation or under the provisions of the Iowa Business Corporation Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XI ---------- AMENDMENTS ---------- These By-Laws may be altered, amended or repealed and new By-Laws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors, but only in a manner consistent with the provisions of the Restated Articles of Incorporation of the Corporation, as amended from time to time. 17 EX-10.1 3 RESTRICTED STOCK GRANT PLAN BANDAG INCORPORATED RESTRICTED STOCK GRANT PLAN (As Amended August 24, 1999) 1. PURPOSE. The purpose of the Bandag Incorporated Restricted Stock Grant Plan (the "Plan") of BANDAG, INCORPORATED and its subsidiaries (the "Company") is to promote the long-term financial interest of the Company, including its growth, through the award of Restricted Stock by the Board of Directors of Bandag, Incorporated (the "Board") in accordance with the terms and conditions of the Plan, by (i) attracting and retaining executive personnel possessing outstanding ability; (ii) motivating executive personnel, by means of growth-related incentives, to achieve long-range goals; (iii) providing incentive compensation opportunities which are competitive with those of other major corporations; and (iv) furthering the identity of interests of Participants with those of the Company's stockholders through opportunities for increased stock ownership. 2. DEFINITIONS. The following definitions are applicable to this Plan: (a) "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (i) A sale, exchange, transfer, or other disposition of any ownership interest in the Company which results in the "Carver Family" as defined in Section 4.(f).(iv) of the Restated Articles of Incorporation of the Company, owning, in the aggregate, directly or indirectly, less than 51% voting control of the Company; provided that the conversion of Class B Common Stock into Common Stock pursuant to Section 4.(f) of Article IV of the Company's Restated Articles of Incorporation shall not be deemed to be a "sale, exchange, transfer or other disposition" for purposes of this Section 2.(a); (ii) The consummation of a transaction that results in a sale, exchange, transfer, or other disposition of all, or substantially all, of the assets of the Company; or (iii)The consummation of a transaction that results in the merger or consolidation of the Company with or into any other corporation under circumstances where the shareholders of the Company immediately prior to such merger or consolidation, will own, directly or indirectly, after such merger or consolidation, securities representing less than 51% voting control of the corporation surviving any such merger or consolidation. (b) The term "Common Stock" means the Common Stock of the Company. (c) The term "Non-Employee Director" means a person who is so defined for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. (d) The term "Disability" shall mean a physical or mental condition which in the judgment of the Committee, based on medical examination by a doctor or clinic appointed by the Committee, totally and permanently prevents a Participant from engaging in any substantial gainful activity. (e) The term "Participant" means any employee who is selected by the board to participate in the Plan. (f) The term "Plan Year" means the Company's fiscal year, beginning with its 1984 fiscal year. (g) The term "Restricted Period" has the meaning ascribed to it in Section 5 hereof. (h) The term "Restricted Stock" has the meaning ascribed to it in Section 5 hereof. (i) The term "Subsidiary" means any corporation of which Bandag, Incorporated owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock entitled to vote. 3. ADMINISTRATION. The Plan shall be administered by the Stock Option Committee (the "Committee") which shall consist of not less than two directors, each of whom shall qualify as a Non-Employee Director. The Committee shall, subject to the express provisions of the Plan, have sole and complete authority to (i) select the Participants, (ii) determine the number of shares of Common Stock (subject to the limitations of Section 6 hereof) to be awarded to each of the Participants in the Plan and (iii) interpret the Plan and make all determinations deemed necessary or advisable for the administration of the Plan. 2 A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be the acts of the Committee. 4. PARTICIPATION. After the end of the third quarter of each Plan Year, and no later than the end of November of the Plan Year involved, the Committee shall select the persons who are to be Participants in the Plan for that Plan Year and shall determine the number of shares of Restricted Stock to be awarded to each participant in the Plan for that Plan Year. Participants are to be selected from those employees of the Company who, in the opinion of the Committee, have the capacity for contributing in a substantial measure to the successful performance of the Company. No director who is not also a full-time employee of the Company shall be selected to be a Participant. The date that the Committee makes such selections and determinations shall be deemed to be the effective date of the awards of Restricted Stock for such Plan Year. 5. TERMS AND CONDITIONS OF AWARDS. All shares of Common Stock awarded to Participants under the Plan (the "Restricted Stock") shall be subject to the following terms and conditions and to such other terms and conditions, not inconsistent with the Plan, as may be prescribed by the Committee in its sole discretion: (a) Restricted Stock awarded to a Participant may not be sold, assigned, transferred, pledged or otherwise encumbered for a period (the "Restricted Period") ending as of the earlier of (i) seven (7) years after the effective date of the award of such stock or (ii) the Participant's termination of employment for any reason after attainment of age sixty (60) or (iii) the death or disability of the Participant. So long as such shares are subject to such restrictions, they shall be held by a nominee of the Committee. The nominee shall have no obligation to solicit proxies or vote shares. (b) Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws or by the rules and regulations of any governing governmental agencies or national securities exchanges, the Restricted Period shall end and restrictions imposed on the Restricted Stock which are not performance-based shall lapse. Notwithstanding any other provision of this Plan, the provisions of this Section 5(b) may not be terminated, amended or modified on or after the date of a Change in Control to affect adversely any award granted under the Plan without the prior written consent of the Participant with respect to said Participant's outstanding awards; provided, however, the Board may terminate, amend, or modify this Section 5(b) at any time prior to the date of a Change in Control. (c) Within thirty (30) days after the effective date of an award of Restricted Stock, a Participant may file an election pursuant to and in accordance 3 with Section 83(b) of the Internal Revenue Code of 1986, as amended, to have the appropriate value of such award included in gross income for the taxable year in which that award occurs. In the event such an election is made, the Company shall, prior to the end of such taxable year, pay to the Participant the amount determined by the Committee to be sufficient remuneration for the resultant income tax consequences. Any dividends paid on shares of Restricted Stock subject as to which an election has been made, shall be distributed to the Participant at such times as dividends on the Company's Common Stock are generally payable. In the event the Participant does not exercise the Section 83(b) election, all dividends attributable to such shares shall be held by the nominee until distributed or forfeited as hereinafter provided. The account in which these dividends are held need not be interest bearing. (d) At the end of the Restricted Period as to any given Restricted Stock award, the shares constituting such award shall cease to be Restricted Stock, and shall be delivered free of all restrictions to the Participant or, in the event such Restricted Period ends as a result of death, the Participant's legal representative, beneficiary or heir. The Committee shall deliver to the Participant a certificate or certificates for such shares and a check for all undistributed dividends accumulated on such shares during the Restricted Period. (e) In the event of the death or disability of a Participant, the Restricted Period shall end as to any shares already awarded, but neither the Participant nor the legal representative of his estate, his beneficiary or his heir shall have any interest in awards of stock made after the date of death or disability. (f) A Participant whose employment with the Company is terminated, whether voluntarily or involuntarily, for any reason other than death or disability, shall forfeit all shares of Restricted Stock and any undistributed dividends thereon then being held, and any other rights under the Plan, upon such termination of employment. Such shares shall be forfeited to the Company and may be awarded again to Participants in the Plan. (g) The Participant shall enter into an Agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the award and such other matters as the Committee shall in its sole discretion determine. 6. SHARES SUBJECT TO THE PLAN; REGISTRATION UNDER THE SECURITIES ACT. The shares to be awarded under the Plan shall be shares of Common Stock and may be authorized but unissued shares, or shares acquired by the Company and held in its treasury, as the Committee may from time to time determine. Subject to adjustment in the number and kind of shares as provided 4 in Section 7 hereof, fifty thousand (50,000)* shares of Common Stock may be awarded to Participants pursuant to the Plan. All shares to be awarded under the Plan will be listed on such stock exchanges as the Common Stock of the Company is listed from time to time. 7. CHANGES IN CAPITALIZATION AND SIMILAR CHANGES. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the maximum aggregate number and class of shares as to which awards may be granted under the Plan shall be equitably adjusted by the Committee. Any shares of stock or other securities distributable or deliverable with respect to Restricted Stock will be subject to the same restrictions as such Restricted Stock. If the Company shall be consolidated or merged with another corporation, any stock, securities or other property (including cash) distributable with respect to Restricted Stock or into which any share of Restricted Stock shall be converted, shall also be subject to the same restrictions as such Restricted Stock. If any person files a statement under Section 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act") in connection with a tender offer within the meaning of Section 14(d) of the Exchange Act or the Regulations thereunder for Common stock, the Participant shall have the right to direct the nominee which holds Restricted Stock awarded to the Participant whether or not to tender such Restricted Stock pursuant to the Offer, including tendering in whole or in part or conditionally or unconditionally; provided, however, no Participant shall have the foregoing right if counsel to the Company advises it that tendering such Restricted Stock would be prohibited by any provision of the Exchange Act or any Regulation thereunder, including without limitation Rule 10b-4. Any consideration received with respect to Restricted Stock which is tendered shall be subject to the same restrictions as such Restricted Stock. In the event any cash is received in connection with the conversion or disposition of Restricted Stock, the Committee shall direct its nominee to invest such cash and any earnings thereon in such investment media as the Committee deems appropriate. All earnings from such investments (and any loss thereon or diminution in the value there) shall be for the account of the Participant. If any of the events referred to in this Section occurs or is pending, and the Committee is advised by counsel to the Company that disposition of Restricted - ---------------- * Due to issuance of the Class B Stock dividend and the Class A Stock dividend in 1987 and 1992, respectively, the number of shares authorized under the Plan consists of 100,000 shares of Common Stock and 100,000 shares of Class A Common Stock. 5 Stock will result in the recognition of taxable income to the Participant awarded such Restricted Stock, the Committee shall have discretion to enter into such arrangements as it deems appropriate to minimize or eliminate the recognition of such taxable income, provided that any property substituted for Restricted Stock pursuant to any such arrangement shall be subject to the same restrictions as Restricted Stock. 8. WITHHOLDING TAX. With respect to any payments made to Participants under the Plan, the Company shall have the right to withhold any taxes required by law. 9. EMPLOYEE RIGHTS UNDER THE PLAN. No employee or other person shall have any claim or right to be granted Common Stock under the Plan except as shall have been conferred in accordance with the terms and conditions of the Plan. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Company. 10. AMENDMENT OR TERMINATION. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, but no amendment shall be made without stockholder approval which shall (i) increase the total number of shares which may be awarded under Section 6 of the Plan (subject to Section 7 hereof) or (ii) withdraw the administration of the Plan from the Committee; provided that no amendment, suspension or termination shall impair the rights of any Participant, without his consent, in any Restricted Stock awarded pursuant to the Plan prior to such action by the Board. 11. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective as of January 1, 1984, if and only if approved by the stockholders of Bandag, Incorporated and shall continue in effect until the last expiration date of any Restricted Period operative under the Plan; provided, however, that no awards of Restricted Stock shall be made after the Company's fiscal year ending in 2000 or such earlier date as the Board may specify pursuant to Section 10 hereof. The Plan was adopted by the Board of Directors of Bandag, Incorporated on March 1, 1984. 6 EX-10.13 4 STOCK AWARD PLAN Stock Award Plan Bandag, Incorporated (As amended August 24, 1999) Approved by Shareholders on 5-4-99 Amended 8-24-99 Contents - -------------------------------------------------------------------------------- Article 1. Establishment, Objectives, and Duration 1 Article 2. Definitions 1 Article 3. Administration 4 Article 4. Shares Subject to the Plan and Maximum Awards 4 Article 5. Eligibility and Participation 5 Article 6. Stock Options 5 Article 7. Restricted Stock 6 Article 8. Performance Measures 8 Article 9. Beneficiary Designation 9 Article 10. Deferrals 9 Article 11. Rights of Employees/Directors 9 Article 12. Change in Control 9 Article 13. Amendment, Modification, and Termination 10 Article 14. Withholding 10 Article 15. Indemnification 11 Article 16. Successors 11 Article 17. Legal Construction 11 Approved by Shareholders on 5-4-99 Amended 8-24-99 Bandag, Incorporated Stock Award Plan Article 1. Establishment, Objectives, and Duration 1.1 Establishment of the Plan. Bandag, Incorporated, an Iowa corporation (hereinafter referred to as the "Company"), hereby establishes a compensation reward plan to be known as the "Bandag, Incorporated Stock Award Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, and Restricted Stock. Subject to approval by the Company's shareholders, the Plan shall become effective as of February 8, 1999 (the "Effective Date") and shall remain in effect as provided in Section 1.3 hereof. 1.2 Objectives of the Plan. The objectives of the Plan are to 1) create a better link between the interests of the Participants and the Company's shareholders; 2) promote teamwork and provide Participants with rewards for excellence in the Company's performance; 3) provide flexibility to the Company in its ability to compensate, attract, and retain the services of individuals who make significant contributions to the Company's success; and 4) allow Participants to further share in the success of the Company. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 13 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized: 2.1 "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, or Restricted Stock. 2.2 "Award Agreement" means an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to Awards granted to the Participant under this Plan. 2.3 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.4 "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (a) A sale, exchange, transfer, or other disposition of any ownership interest in the Company which results in the "Carver Family" as defined in Section 4. (f). (iv) of the Restated Articles of Incorporation of the Company, owning, in the aggregate, directly or indirectly, less Approved by Shareholders on 5-4-99 Amended 8-24-99 1 than 51% voting control of the Company; provided that the conversion of Class B Common Stock into Common Stock pursuant to Section 4. (f) of Article IV of the Company's Restated Articles of Incorporation shall not be deemed t be a "sale, exchange, transfer or other disposition" for purposes of this Section 2.4; (b) The consummation of a transaction that results in a sale, exchange, transfer, or other disposition of all, or substantially all, of the assets of the Company; or (b) The consummation of a transaction that results in the merger or consolidation of the Company with or into any other corporation under circumstances where the shareholders of the Company immediately prior to such merger or consolidation, will own, directly or indirectly, after such merger or consolidation, securities representing less than 51% voting control of the corporation surviving any such merger or consolidation. 2.5 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 "Committee" means any committee appointed by the Board to administer the Plan, as specified in Article 3 herein, except for any Awards to Directors which shall only be granted by the Board. Any such committee shall be comprised entirely of Directors. 2.7 "Company" means Bandag, Incorporated, an Iowa corporation, including any and all Subsidiaries, and any successor thereto as provided in Article 16 herein. 2.8 "Director" means any individual who is a member of the Board of Directors of the Company or any Subsidiary and who is not an employee of the Company or any Subsidiary. 2.9 "Disability" shall have the meaning ascribed to such term in the Company's or Subsidiary's long-term disability plan governing a Participant, or if no such plan exists, at the discretion of the Board. 2.10 "Effective Date" shall have the meaning ascribed to such term in Section 1.1 hereof. 2.11 "Employee" means any employee of the Company or a Subsidiary. 2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.13 "Fair Market Value" of a Share shall be determined on the basis of the average of the opening and closing sale prices on the principal securities exchange or market on which the Shares are traded or, if no such sale prices are available on the relevant date, then on the last previous day on which a sale was reported. If the above methods are otherwise Approved by Shareholders on 5-4-99 Amended 8-24-99 2 inapplicable, then the Fair market Value of the Shares shall be determined in good faith by the Board. 2.14 "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 herein and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Code Section 422. 2.15 "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6 herein and which is not intended to meet the requirements of Code Section 422. 2.16 "Option" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein. 2.17 "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option. 2.18 "Participant" means an Employee or Director who has been selected to receive an Award or who has outstanding an Award granted under the Plan. 2.19 "Performance-Based Exception" means the performance-based exception from the tax deductibility limitations of Code Section 162(m). 2.20 "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Board, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 7 herein. 2.21 "Restricted Stock" means an Award granted to a Participant pursuant to Article 7 herein. 2.22 "Retirement" means the Participant's termination of employment (other than due to death or Disability) on or after age 60 with ten or more years of service for vesting purposes as determined under any qualified retirement plan of the Company or any Subsidiary covering the Participant. 2.23 "Shares" means the shares of Class A common stock of the Company. 2.24 "Subsidiary" means any company during any period in which it is a "subsidiary corporation" (as that term is defined in Code Section 424(f)) with respect to the Company. Article 3. Administration 3.1 General. The Plan shall be administered by the Board, or (subject to the following) by any Committee appointed by the Board. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. The Board may delegate Approved by Shareholders on 5-4-99 Amended 8-24-99 3 to the Committee any or all of the administration of the Plan; provided, however, that the administration of the Plan with respect to Awards granted to Directors may not be so delegated. To the extent that the Board has delegated to the Committee any authority and responsibility under the Plan, all applicable references to the Board in the Plan shall be to the Committee. 3.2 Authority of the Board. Except as limited by law or by the Restated Articles of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Board shall have full power to select Employees and Directors who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend, or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 13 herein) amend the terms and conditions of any outstanding Award as provided in the Plan. Further, the Board shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law (and subject to Section 3.1 herein), the Board may delegate its authority as identified herein. 3.3 Decisions Binding. All determinations and decisions made by the Board pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Directors, Employees, Participants, and their estates and beneficiaries. Article 4. Shares Subject to the Plan and Maximum Awards 4.1 Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.2 herein, the number of Shares hereby reserved for issuance to Participants under the Plan shall be nine hundred thousand (900,000), no more than three hundred thousand (300,000) of which may be granted in the form of Restricted Shares. The Shares may be authorized, but unissued, or reacquired Shares. The Board shall determine the appropriate methodology for calculating the number of shares issued pursuant to the Plan. If any Shares covered by an Award are forfeited or if any Award otherwise terminates, expires or is cancelled prior to the delivery of all the Shares, then the number of Shares counted against the number of Shares available under the Plan in connection with the grant of such Award, to the extent of any such forfeiture, termination, expiration or cancellation, shall again be available for granting of additional Awards under the Plan. Unless and until the Board determines that an Award shall not be designed to comply with the Performance-Based Exception, the following rules shall apply to grants of such Awards under the Plan: (a) Stock Options: The maximum aggregate number of Shares that may be granted in the form of Stock Options, pursuant to any Award granted in any one fiscal year to any one single Participant shall be ninety thousand (90,000). (b) Restricted Stock: The maximum aggregate grant with respect to Awards of Restricted Stock granted in any one fiscal year to any one single Participant shall be thirty thousand (30,000). 4.2 Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Approved by Shareholders on 5-4-99 Amended 8-24-99 4 Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under Section 4.1, in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and in the Award limits set forth in subsections 4.1(a) and 4.1(b), as may be determined to be appropriate and equitable by the Board, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. Article 5. Eligibility and Participation 5.1 Eligibility. Persons eligible to participate in this Plan shall be all Employees and Directors. 5.2 Actual Participation. Subject to the provisions of the Plan, the Board may, from time to time, select from all Employees and Directors, those to whom Awards shall be granted and shall determine the nature and amount of each Award. Article 6. Stock Options 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Board. 6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Board shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO whose grant is intended not to fall under the provisions of Code Section 422. 6.3 Option Price. The Option Price for each grant of an Option under this Plan shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. 6.4 Duration of Options. Each Option granted to a Participant shall expire at such time as the Board shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for each grant or for each Participant. 6.6 Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares, except that, in the case of a cashless exercise as described below, payment shall be made as soon as practicable after exercise. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired shares of stock of the Company having an aggregate Fair Market Value at the time of exercise equal to the total Option Price Approved by Shareholders on 5-4-99 Amended 8-24-99 5 (provided that the shares of stock of the Company which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Board also may allow cashless exercises as permitted under the Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Board determines to be consistent with the Plan's purpose and applicable law. Subject to any governing rules or regulations, as soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 Restrictions on Share Transferability. The Board may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 6.8 Termination of Employment/Directorship. Each Participant's Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment or directorship with the Company. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination. 6.9 Nontransferability of Options. (a) Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be exercisable during his or her lifetime by only such Participant. (b) Nonqualified Stock Options. Except as otherwise provided in a Participant's Award Agreement, no NQSO granted under this Article 6 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all NQSOs granted to a Participant under this Article 6 shall be exercisable during his or her lifetime by only such Participant, or the Participant's legal representative. Article 7. Restricted Stock 7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Board, at any time and from time to time, may grant Shares of Restricted Stock to Participants in such amounts as the Board shall determine. Approved by Shareholders on 5-4-99 Amended 8-24-99 6 7.2 Restricted Stock Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Board shall determine. 7.3 Transferability. Except as provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Board and specified in the Restricted Stock Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Board in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime to only such Participant. 7.4 Other Restrictions. Subject to Article 9 herein, the Board shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, etc.), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable federal or state securities laws. The Company may retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Article 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction. 7.5 Voting Rights. To the extent applicable, Participants holding Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to those Shares during the Period of Restriction. 7.6 Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may be entitled to receive regular cash dividends paid with respect to the underlying Shares while they are so held. The Board may apply any restrictions to the dividends that the Board deems appropriate. Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted Shares is designed to comply with the requirements of the Performance-Based Exception, the Board may apply any restrictions it deems appropriate to the payment of dividends declared with respect to such Restricted Shares, such that the dividends and/or the Restricted Shares maintain eligibility for the Performance-Based Exception. The Board may also approve payments by the Company to Participants in cash or its equivalent, amounts of which the Board deems appropriate to be sufficient remuneration for all or a portion of the resulting income tax consequences to the Participant of the Restricted Shares. The conditions under which such payments, if any, shall be made shall be set forth in the Participant's Award Agreement. Approved by Shareholders on 5-4-99 Amended 8-24-99 7 7.7 Termination of Employment/Directorship. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares following termination of the Participant's employment or directorship with the Company. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination; provided, however that, except in the cases of terminations connected with a Change in Control and terminations by reason of death or Disability, the vesting of Shares of Restricted Stock which qualify for the Performance-Based Exception shall occur at the time they otherwise would have, but for the termination. Article 8. Performance Measures Unless and until the Board proposes for shareholder vote and shareholders approve a change in the general performance measures set forth in this Article 8, the attainment of which may determine the degree of payout and/or vesting with respect to Awards which are designed to qualify for the Performance-Based Exception, the performance measure(s) to be used for purposes of such grants shall be chosen from among: (a) Earnings per share; (b) Net income (before or after taxes); (c) Return measures (including, but not limited to, return on assets, equity, or sales); (d) Cash flow return on investments which equals net cash flows divided by owners equity; (e) Earnings before or after taxes; (f) Gross revenues; (g) Share price (including, but no limited to, growth measures and total shareholder return); and (h) Economic profit (generally defined as, but not limited to, after-tax operating profit less the cost of capital). The Board shall have the discretion to adjust the amount of the Award depending upon the degree of attainment of the preestablished performance goals; provided, however, that no discretion may be exercised with respect to Awards which are designed to qualify for the Performance-Based Exception (other than discretion by the Board to decrease the amount of the Award otherwise payable upon attainment of the preestablished performance goals). In the event that applicable tax laws change to permit Board discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Board shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Board determines that it is advisable to grant Awards which shall not qualify for the Approved by Shareholders on 5-4-99 Amended 8-24-99 8 Performance-Based Exception, the Board may make such grants without satisfying the requirements of Code Section 162(m). Article 9. Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. Article 10. Deferrals The Board may permit or require a Participant to defer such Participant's receipt of the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or the lapse or waiver of restrictions with respect to Restricted Stock. If any such deferral election is required or permitted, the Board shall, in its sole discretion, establish rules and procedures for such payment deferrals. Article 11. Rights of Employees/Directors 11.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. 11.2 Participation. No Employee or Director shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. Article 12. Change in Control 12.1 Treatment of Outstanding Awards. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges: (a) Any and all Options granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term; (b) Any restriction periods and restrictions imposed on Restricted Stock which are not performance-based shall lapse; 12.2 Termination, Amendment, and Modifications of Change-in-Control Provisions. Notwithstanding any other provision of this Plan (but subject to the limitations of Section 12.3 hereof) or any Award Agreement provision, the provisions of this Article 12 may not be terminated, amended, or modified on or after the date of a Change in Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to said Participant's outstanding Awards; provided, however, the Board may terminate, amend, or modify this Article 12 at any time and from time to time prior to the date of a Change in Control. Approved by Shareholders on 5-4-99 Amended 8-24-99 9 12.3 Pooling of Interests Accounting. Notwithstanding any other provision of the Plan to the contrary, in the event that the consummation of a Change in Control is contingent on using pooling of interests accounting methodology, the Board may take any action necessary to preserve the use of pooling of interests accounting, including, but not limited to, unilateral amendment of existing Award Agreements. Article 13. Amendment, Modification, and Termination 13.1 Amendment, Modification, and Termination. Subject to the terms of the Plan, the Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part. 13.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Board may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Board determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that, unless the Board determines otherwise at the time such adjustment is considered, no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. 13.3 Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary (but subject to Section 12.3 hereof), no termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. 13.4 Compliance with Code Section 162(m). At all times when Code Section 162(m) is applicable, all Awards granted under this Plan shall comply with the requirements of Code Section 162(m); provided, however, that in the event the Board determines that such compliance is not desired with respect to any Award or Awards available for grant under the Plan, then compliance with Code Section 162(m) will not be required. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Board may, subject to this Article 13, make any adjustments it deems appropriate. Article 14. Withholding 14.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan. 14.2 Share Withholding. With respect to withholding required upon the exercise of Options, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Board, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, Approved by Shareholders on 5-4-99 Amended 8-24-99 10 signed by the Participant, and shall be subject to any restrictions or limitations that the Board, in its sole discretion, deems appropriate. Article 15. Indemnification Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgement in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. Article 16. Successors All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase of all or substantially all of the business and/or assets of the Company, or the result of a merger, consolidation or otherwise. Article 17. Legal Construction 17.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 17.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 Governing Law. To the extent not preempted by federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the state of Iowa. Approved by Shareholders on 5-4-99 Amended 8-24-99 11 EX-21 5 SUBSIDIARIES EXHIBIT 21 ---------- SUBSIDIARIES OF REGISTRANT - -------------------------- The Company has the following subsidiaries including significant subsidiaries as defined in Regulation S-X, each incorporated in the jurisdiction stated opposite its name. All of the following subsidiaries are 100% owned by the Company. The Company has additional subsidiaries, which, if considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" as such term is defined in Regulation S-X. Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Bandag A.G. ........................................................Switzerland Bandag Canada Ltd. ......................................................Canada Bandag Europe N.V. .....................................................Belgium Bandag Licensing Corporation. ............................................Iowa Bandag Incorporated of S.A. (Proprietary) Limited .................South Africa Bandag New Zealand Limited .........................................New Zealand Bandag do Brasil Ltda ...................................................Brazil Bandag B.V. ........................................................Netherlands Bandag de Mexico, S.A. de C.V. ..........................................Mexico BTC, Inc. .............................................................Delaware Tire Distribution Systems, Inc. .......................................Delaware Tire Management Solutions, Inc. ...........................................Iowa EX-27 6 FDS -- BANDAG, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED STATEMENT OF EARNINGS AND THE AUDITED CONSOLIDATED BALANCE SHEETS OF THE REGISTRANT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 50,633 9,461 220,471 20,761 110,522 428,118 502,787 304,802 722,421 154,053 111,151 0 0 20,770 433,305 722,421 1,012,665 1,027,878 619,926 619,926 306,135 9,286 9,727 92,090 39,760 52,330 0 0 0 52,330 2.41 2.40
EX-27.1 7 FDS -- BANDAG, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED STATEMENT OF EARNINGS AND THE AUDITED CONSOLIDATED BALANCE SHEETS OF THE REGISTRANT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 37,912 9,712 236,023 18,724 111,734 439,124 503,745 290,699 755,729 174,909 109,757 0 0 21,956 445,341 755,729 1,059,669 1,079,498 653,301 653,301 315,912 8,460 10,772 99,513 40,194 59,319 0 0 0 59,319 2.64 2.63
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