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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24354
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DORSEY TRAILERS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2110729
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(State of Incorporation) (IRS Employer
Identification Number)
2727 Paces Ferry Road
One Paces West, Suite 1700
Atlanta, Georgia 30339
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Registrant's telephone number, including area code: (770) 438-9595
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares of common stock outstanding at November 13, 1998, was
5,020,280.
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DORSEY TRAILERS, INC.
FORM 10-Q
Quarter ended October 3, 1998
Index
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - October 3, 1998 and December 31, 1997 3
Statements of Operations - For the thirteen weeks and thirty-nine weeks
ended October 3, 1998 and for the thirteen weeks and thirty-eight weeks
ended September 27, 1997, respectively 4
Statements of Cash Flows - For the thirty-nine and thirty-eight weeks
ended October 3, 1998 and September 27, 1997, respectively 5
Statement of Changes in Stockholders' Deficit-
For the thirty-nine weeks ended October 3, 1998 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information 18
</TABLE>
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
DORSEY TRAILERS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 3,
1998 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 8 $ 8
Accounts receivable, net 8,512 6,811
Inventories 13,694 11,479
Prepaid expenses and other assets 169 540
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Total current assets 22,383 18,838
Property, plant and equipment, net 7,686 8,447
Deferred income taxes 4,179 4,179
Other assets, net 1,717 1,903
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Total assets $ 35,965 $ 33,367
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 543 $ 350
Accounts payable 15,941 12,638
Accrued wages and employee benefits 3,921 4,348
Accrued expenses 1,210 3,156
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Total current liabilities 21,615 20,492
Long-term revolving line of credit 8,254 5,571
Long-term debt, net of current maturities 8,566 9,014
Accrued pension liability 1,600 1,600
Accrued warranty 1,000 1,000
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Total liabilities 41,035 37,677
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Stockholders' deficit
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued or outstanding
Common stock, $.01 par value, 30,000,000 shares
authorized; 5,020,280 and 5,013,422 shares issued
and outstanding 50 50
Additional paid-in capital 2,625 2,595
Accumulated deficit (7,668) (6,878)
Unrecognized pension liability (77) (77)
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Total stockholders' deficit (5,070) (4,310)
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Commitments and contingencies -- --
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Total liabilities and stockholders' deficit $ 35,965 $ 33,367
======== ========
</TABLE>
See notes to condensed financial statements.
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DORSEY TRAILERS, INC.
STATEMENTS OF OPERATIONS--UNAUDITED
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
(13 WEEKS) (13 WEEKS) (39 WEEKS) (38 WEEKS)
<S> <C> <C> <C> <C>
Net sales $35,741 $37,598 $111,007 $118,591
Cost of sales 34,064 37,392 106,536 122,417
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Gross profit 1,677 206 4,471 (3,826)
Selling, general and
administrative expenses 1,239 1,666 4,171 5,181
Provision for (benefit from) plant closing 84 (43) 279 40
------- ------- -------- --------
Income (loss) from operations 354 (1,417) 21 (9,047)
Interest expense, net (603) (528) (1,379) (1,550)
Gain on property sales 568
------- ------- -------- --------
Loss before income taxes (249) (1,945) (790) (10,597)
Benefit from income taxes (200)
------- ------- -------- --------
Net loss $ (249) $(1,945) $ (790) $(10,397)
======= ======= ======== ========
Loss per share - Basic $ (.05) $ (.39) $ (.16) (2.09)
Average Shares Outstanding
Basic 5,020 4,986 5,017 4,981
</TABLE>
See notes to condensed financial statements.
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DORSEY TRAILERS, INC.
STATEMENTS OF CASH FLOWS--UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
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(39 WEEKS) (38 WEEKS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (790) $(10,397)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,328 1,310
Gain on property sales (568)
Issuance of common stock to non-employee directors 30 30
Change in assets and liabilities-
Increase in accounts receivable (1,701) (932)
(Increase) decrease in inventories (2,215) 6,132
Decrease in prepaid expenses
and other current assets 371 2,568
Increase in other assets (75) (1,153)
Increase (decrease) in accounts payable 3,303 (5,014)
(Decrease) increase in accrued expenses (2,373) 394
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Net cash used in operating activities (2,690) (7,062)
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Cash flows from investing activities:
Capital expenditures (477) (130)
Net proceeds from property sales 739
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Net cash provided by (used in) investing activities 262 (130)
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Cash flows from financing activities:
Net borrowings under line of credit agreement 2,683 7,492
Payments on long-term debt (356) (394)
Deferred interest capitalized to long-term debt 101
------- --------
Net cash provided by financing activities 2,428 7,098
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Decrease in cash and cash equivalents 0 (94)
Cash and cash equivalents at beginning of period 8 101
------- --------
Cash and cash equivalents at end of period $ 8 $ 7
======= ========
</TABLE>
See notes to condensed financial statements.
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DORSEY TRAILERS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Unrecognized
-------------------- Paid-in (Accumulated Pension
Shares Amount Capital (Deficit) Liability Total
--------- ------ ------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 5,013,422 $ 50 $ 2,595 $ (6,878) $ (77) $ (4,310)
Net loss (790) (790)
Issuance of common stock to
non-employee directors 6,858 30 30
--------- ------ -------- ---------- -------- --------
Balance, October 3, 1998 (Unaudited) 5,020,280 $ 50 $ 2,625 $ (7,668) $ (77) $ (5,070)
========= ====== ======== ========== ======== ========
</TABLE>
See notes to condensed financial statements.
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DORSEY TRAILERS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. GENERAL
The financial statements included herein have been prepared by Dorsey Trailers,
Inc. (the "Company") without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. The
condensed financial statements included herein should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Registrant, the accompanying financial statements contain
all material adjustments (consisting only of normal recurring adjustments),
necessary to present fairly the financial position of the Company at October 3,
1998, and December 31, 1997, and its results of operations for the thirteen and
thirty-nine weeks ended October 3, 1998 and for the thirteen and thirty-eight
weeks ended September 27, 1997, and its cash flows for the thirty-nine weeks
and thirty-eight weeks ended October 3, 1998, and September 27, 1997,
respectively.
NOTE 2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
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(In thousands)
<S> <C> <C>
Raw material $ 8,980 $ 7,781
Work-in-process 3,033 2,760
Finished trailers 1,215 321
Used trailers 466 617
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$13,694 $11,479
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</TABLE>
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NOTE 3. REVOLVING LINE OF CREDIT
On March 28, 1997, the Company entered into a $14.0 million, five-year line of
credit (Financing Agreement), including a $4.0 million term loan which was to
amortize evenly over the next four months and a letter of credit facility of up
to $3.0 million, with an asset-based lender. In August and November 1997, the
Company's term loan was revised. With the revisions, the term loan at August 1,
1997 was $2.0 million with interest only for sixty days. The revised term loan
was paid in eight installments with the final payment being made on July 1,
1998. On August 31, 1998, the Company's Financing Agreement was amended to
provide additional availability of $2.0 million until December 31, 1998.
Management has begun discussions with the Company's asset-based lender to
continue this $2.0 million of additional availability until March 31, 1998, if
the flexibility of this additional availability is needed based upon
management's review. However, no assurances can be given that the Company will
be successful in obtaining this extension.
In connection with the closing of the $14.0 million Financing Agreement, the
Company incurred debt origination costs of approximately $1.2 million which
will be amortized over the life of the Financing Agreement. The Financing
Agreement bears interest at prime plus 2.0%, with interest payable monthly. The
term loan accrued interest at prime plus 2.0% until April 30, 1998 and prime
plus 3.0% thereafter. At October 3, 1998, the interest rate was 10.5% for the
Financing Agreement. Annual commitment fees for the unused portion of the
Financing Agreement and outstanding letters of credit are .375% and 2.0%,
respectively. Additionally, the Company is required to pay monthly a $5,000
servicing fee and an annual facility fee of .50% of the $14.0 million. The
Financing Agreement allows advances of up to the lesser of $14.0 million less
the outstanding principal amount of the term loan and letters of credit
obligations, or 80.0% of eligible accounts receivable plus 30.0 % of eligible
raw material, 40.0 % of eligible used trailers, and 60.0% of eligible finished
goods inventory less the outstanding principal amount of the term loan and
letters of credit obligations. The Company has certain limitations on the
maximum amount of advances the Company can receive against inventory.
As of October 3, 1998, the Company had $8.3 million in borrowings and $1.8
million in letters of credit outstanding under the Financing Agreement. As of
November 13, 1998, the Company had $6.0 million in borrowings and $1.9 million
in letters of credit outstanding under its Financing Agreement (See Note 5).
The Financing Agreement is secured by a first security interest in the
Company's accounts receivable and inventory. The Financing Agreement, as
amended, contains certain operational and financial covenants and other
restrictions with which the Company must comply. The covenants include, but are
not limited to, the following: minimum earnings before interest, income taxes,
depreciation, and amortization; minimum net worth; and maximum amount of
capital expenditures. As of October 3, 1998 and November 13, 1998, the Company
was in compliance with the covenants of the Financing Agreement, as amended.
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NOTE 4. RELATED PARTY TRANSACTIONS
During the first quarter of 1997, the Company sold used trailers at various
dates, upon the approval of the Board of Directors of the Company, in the
amount of approximately $4.7 million to TYM, Inc. TYM, Inc. is a corporation
wholly-owned by Marilyn R. Marks, Chief Executive Officer of the Company. The
Company incurred losses in 1997 of approximately $0.8 million on the sales to
TYM, Inc. In the opinion of management, based upon actual third-party offers,
the terms of the sale of these used trailers are no less favorable than terms
that could have been obtained from unaffiliated parties. There were no such
transactions subsequent to March 28, 1997.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Workers' compensation insurance and letters of credit
The Company is self-insured for workers' compensation claims up to $350,000 per
occurrence. In order to secure the Company's obligation to fund its
self-insured retention, the Company has obtained standby letters of credit of
$1.8 million as of October 3, 1998 under its Financing Agreement (See Note 3).
As of November 13, 1998, the balance on the standby letters of credit had been
increased to $1.9 million. The accompanying condensed financial statements
include an insurance accrual based upon third party administrators' and
management's evaluation of estimated future ultimate costs of outstanding
claims and an estimated liability for claims incurred, but not reported, on an
undiscounted basis. The ultimate cost of these claims will depend on the
individual claims given the potential for these claims to increase or decrease
over time. Management believes that any claims as of October 3, 1998 arising
under this self-insurance program will not have a material adverse effect on
the financial position, results of operations, or cash flows of the Company.
Customer Financing
Effective December 31, 1997, the Company terminated its agreement with a
finance company that provided retail financing to certain end users for some
trailers sold through the Company's independent dealer network. Under this
agreement the Company was contingently liable to repurchase trailers from the
finance company. Effective January 1, 1998, the agreement does not require the
Company to be contingently liable for such retail repurchases. The new
agreement does not contain any material terms or commitments by the Company.
The Company has maintained an agreement with the same finance company, which
provides wholesale floor plans for certain of the Company's independent
dealers. The Company is contingently liable under repurchase agreements with
the finance company for approximately $10.1 million at October 3, 1998. In the
opinion of management, it is not probable that the Company will be required to
satisfy this contingent liability.
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Litigation
In December 1997, an Administrative Law Judge of the National Labor Relations
Board ordered the Company to reinstate operations at the Company's closed
Northumberland, Pennsylvania facility, reinstate striking employees and
compensate effected employees for any loss of earnings. The Company has
appealed this decision, a procedure that could take up to several years. No
part of this order will take effect during the appeal process. The Company does
not have sufficient information to estimate the cost that would be incurred if
the Company was required to carry out this order. Management intends to
vigorously defend against this order and believes the Company will prevail in
the appeal process.
In November 1997, a declaratory judgment action was filed by an insurance
company (GAN North American Insurance Co. v. Dorsey Trailers, Inc.) in United
States District Court for the Northern District of Georgia, Atlanta Division,
as to coverage of a previously paid claim of $1 million by that insurance
company in the settlement of product liability litigation. The documentary
discovery phase is now complete. The Company expects to file a motion for
summary judgment. Management intends to vigorously defend such litigation and
believes that the ultimate resolution of the litigation will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In April 1995, a class action lawsuit (James Starks et al. v. Dorsey Trailers,
Inc. et al.) alleging racial discrimination was filed in the United States
District Court for the Middle District of Alabama against the Company. The
Court has not issued a class certification as of this date. Due to the lack of
a class certification, management is unable to determine the potential damages,
if any, associated with this litigation. Management intends to vigorously
defend such litigation and believes that the ultimate resolution of the
litigation will not have a material impact on the Company's financial position,
results of operations, or cash flows.
In the normal course of business, the Company is a defendant in certain other
litigation, in addition to the matters discussed above. Management, after
reviewing available information relating to the above matters and consulting
with the legal counsel, has determined with respect to each such matter either
that it is not reasonably possible that the Company has incurred liability in
respect thereof or that any liability ultimately incurred will not exceed the
amount, if any, recorded at October 3, 1998 in respect thereof which would have
a materially adverse impact on the Company's financial position, results of
operations, or cash flows. However, in the event of an unanticipated adverse
final determination in respect to these matters, the Company's financial
position, results of operations, and its cash flows in which period such
determination occurs could be materially affected.
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Environmental Matters
Subsequent to the closing of the Company's Edgerton, Wisconsin plant in 1989,
the Wisconsin Department of Natural Resources conducted an environmental
inspection that identified certain environmental response requirements. The
Company and certain prior owners of the Edgerton plant are cooperating in
conducting remediation at the plant site and in joining with other potentially
responsible parties in addressing the landfill site. The Company has paid its
appropriate share of the total costs needed to finalize the remediation work at
this site. In the first quarter of 1998, the Company sold this facility, and
management believes that it has no additional environmental liability related
to this site.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
Condensed Financial Statements of the Company and the related Notes thereto
appearing elsewhere in this Quarterly Report.
INCLUSION OF FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," may be deemed to be
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements included herein have been
included based upon facts available to management as of the date of the
statement. Any forward-looking statement is, however, inherently subject to the
uncertainty of future events, whether economic, competitive or otherwise, many
of which are beyond the control of the Company, or which may involve
determinations which may be made by management in the future. There can,
therefore, be no assurances that the events or results described in such
forward-looking statements will occur, and actual events or results may vary
materially from those included herein. The following are some of the factors
which may affect whether the events or results described in such
forward-looking statements will occur: increased competition, dependence on key
management, continued availability of credit from vendors, continued
advancement of funds from lender, reliance on certain customers, shortages of
raw materials, component prices, labor shortages or work stoppage, dependence
on current industry trends and demand for product, manufacturing interruption
due to unfavorable natural events, government regulations, unfavorable results
of outstanding litigation, and new technologies or products. Readers should
review and consider the various disclosures included in this Quarterly Report
and in the Company's 1997 Annual Report on Form 10-K and other reports to
stockholders and public filings.
RESULTS OF OPERATIONS
OVERALL On March 8, 1998, the Company's manufacturing facility in Elba,
Alabama, which accounts for approximately 80% of the Company's new trailer
production, was affected by flooding in the plant and surrounding area. The
Company lost approximately two weeks of new trailer production in the first
quarter of 1998 due to the flood. The Elba facility has fully recovered from
the effects of the flood and the Company experienced no residual effects of the
flood in subsequent quarters.
NET SALES Net sales for the quarter ended October 3, 1998 decreased to $35.7
million from $37.6 million for the quarter ended September 27, 1997. The
decrease in sales was due to a decrease in used trailer sales. Used trailer
sales for the quarter ended October 3, 1998 were $6,000 compared to $2.8
million for the quarter ended September 27, 1997. This reduction in used
trailer sales corresponds to the reduction in the Company's used trailer
inventory. The Company's used trailer inventory has decreased from $1.9 million
at September 27, 1997 to $0.5 million at October 3, 1998. The reduction in used
trailer inventory and corresponding decline in used trailer sales can be
attributed to the strong demand for equipment by the trucking industry. As a
result, the requirement on a manufacturer to take used equipment in order to
obtain new trailer sales orders has diminished; however, if the demand for
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<PAGE> 13
equipment should decrease, the requirement on manufacturers to take used
equipment could increase. The Company's strategy of focusing on its independent
dealer network and customized niche markets should diminish the Company's
requirement to take used trailers as the used trailer requirements are
primarily a focus of the large fleet business. The Company is reducing its
focus on those large fleets requiring the trade-in of their used trailers. The
Company believes that its strategy of developing its independent dealer market
will also assist in diminishing the requirements of the Company to take used
trailers as these independent dealers will accept and market the majority of
used trailer equipment for resale. However, no assurances can be given that the
Company will not be required to take on used trailers as part of a new sales
order.
New trailer sales for the quarter ended October 3, 1998 were $34.5 million, a
2.4% increase over new trailer sales revenues for the quarter ended September
27, 1997 of $33.7 million. This increase in new trailer sales revenue is due to
product mix and increased pricing as the volume of units decreased by 3.7%. The
improvement in product mix is a result of the Company targeting higher unit
priced product such as refrigerated vans and dumps, highly customized trailers,
and smaller quantity orders as compared to lower unit priced product such as
standard dry freight vans. Management attributes the improvements made in
pricing and product mix to our focus on customized trailers and niche markets
through our independent dealer organization. The Company's new trailer sales
revenues were negatively impacted by the Company's one-week vacation shutdown
taken during July, 1998 in the Company's Elba, Alabama plant. During that week,
in addition to addressing routine maintenance issues, the Company reconfigured
and consolidated the dry freight manufacturing production lines for more
efficient production, and added subassembly capabilities. These related process
changes should result in lower manufacturing costs and more efficient
operations. During the corresponding quarter last year the Company did not take
a vacation shutdown week.
Net sales for the nine months ended October 3, 1998 decreased 6.4% to $111.0
million from $118.6 million for the nine months ended September 27, 1997. The
decrease in sales is due to the decrease in used trailer sales. Used trailer
sales for the nine months ended October 3, 1998 were $0.3 million compared to
$14.2 million for the nine months ended September 27, 1997. This reduction in
used trailer sales corresponds with the reduction in the Company's used trailer
inventory, as discussed above. New trailer sales revenues for the nine months
ended October 3, 1998 increased 5.9% to $107.0 million from $101.0 million for
the nine months ended September 27, 1997. The unit volume of new trailers sold
remained flat as compared to the same period in 1997. The increase in new
trailer sales revenue is due to the improved product mix and increased pricing
in the Company's targeted customer markets of independent dealers and
customized trailers, as discussed above. Although the Company had an increase
in new trailer sales revenue for the first nine months of 1998 as compared to
the corresponding period in 1997, new trailer sales revenues were negatively
impacted by the flood and the one-week vacation shutdown at the Elba, Alabama
plant, as discussed previously.
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GROSS PROFIT Gross profit was $1.7 million for the third quarter of 1998 or
4.7% of sales compared to a gross profit of $0.2 million for the third quarter
of 1997 or 0.5% of sales. The improvement in gross profit for the third quarter
of 1998 was due to the Company's more profitable product mix and improved
pricing, which management believes was primarily a result of the Company's
strategy of rebuilding its independent dealer organization and targeting
profitable customized niche markets. The gross margin in the third quarter of
1998 was adversely affected by the one-week vacation shutdown taken at the
Company's Elba, Alabama plant. The negative gross margin in the third quarter
of 1997 was primarily due to a heavy mix of low margin fleet business, which
primarily consisted of standard dry freight vans.
Gross profit for the nine months ended October 3, 1998 was $4.5 million or 4.0%
of sales as compared to a gross profit of ($3.8 million) or (3.2%) of sales for
the corresponding period in 1997. The negative gross profit for the first nine
months of 1997 was primarily due to $3.3 million in actual and accrued losses
on the sale of the Company's used trailer inventory, and to a lesser extent,
the heavy mix of large fleet orders for standard dry freight vans produced
during 1997. The improvement in the gross profit margin during the first nine
months of the year as stated above, is due to improved product mix and improved
pricing on new trailers in the Company's targeted customer markets. The
Company's gross profit was negatively impacted by certain flood related costs
in the first quarter of 1998 and the one-week vacation shutdown during the
third quarter of 1998 at the Elba, Alabama plant, discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative ("SG&A") expenses for the third quarter of 1998 decreased
approximately 29.4% to $1.2 million as compared to $1.7 million for the third
quarter of 1997. SG&A expenses as a percent of net sales declined to 3.5% for
the quarter ended October 3, 1998 as compared to 4.4% for the quarter ended
September 27, 1997. The decrease in SG&A expenses between quarters is
reflective of management's plan of overall cost reductions. The decrease is
primarily due to a $0.2 million reduction in salaries and benefit expenses and
$0.3 million in professional fees.
SG&A expenses for the first nine months of 1998 decreased approximately 19.5%
to $4.2 million as compared to $5.2 million for the first nine months of 1997.
SG&A as a percent of sales was 3.8% for the nine months ended October 3, 1998
as compared to 4.4% for the nine months ended September 27, 1997. The primary
components of SG&A expense were salaries and employee benefits for 60% and 54%
and professional fees for 11% and 19% of total SG&A expenses for the nine
months ended October 3, 1998 and September 27, 1997, respectively. The decrease
in SG&A expense is primarily due to a 53% decrease in professional fees related
to fees incurred with the Company's unsuccessful acquisitions targets and an
11% reduction in salaries and related employee costs.
PROVISION FOR PLANT CLOSING Costs related to the Company's closed facilities
increased in the third quarter of 1998 over the same period in 1997 which
includes costs related to the closed Northumberland, Pennsylvania plant which
occurred during the fourth quarter of 1995. In March 1998, the Company
completed the sale of its closed facilities in Edgerton, Wisconsin and Griffin,
Georgia to private real estate investors. The Company received aggregate net
proceeds on the sales of $0.7 million and recognized a net gain on the sale of
these properties of $0.6 million during the first quarter of 1998.
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<PAGE> 15
INTEREST EXPENSE, NET Interest expense, net for the quarter ended October 3,
1998 was $0.6 million as compared to interest expense, net of $0.5 million for
the quarter ended September 27, 1997. The increase in interest expense between
quarters is due to the Company maintaining a higher average balance on its
revolving line of credit during the third quarter of 1998 as compared to the
same period in 1997. The increase in interest expense was also due to the fees
incurred with the amendments to the Company's revolving line of credit.
Interest expense, net for the first nine months of 1998 was $1.4 million as
compared to $1.6 million for the same period in 1997. The higher interest
expense for the first nine months of 1997 is primarily due to a $0.3 million
write-off of unamortized financing costs.
NET LOSS Net loss for the quarter ended October 3, 1998 was $249,000, or $0.05
per share on a basic per share basis, as compared to a net loss of $1.9
million, or $0.39 per share, for the quarter ended September 27, 1997. As
discussed previously, the loss is primarily due to the loss of revenue incurred
from the Company's one-week vacation shutdown in July 1998 at the Elba, Alabama
plant.
The Company's net loss in the first nine months of 1998 is attributed primarily
to the impact of the loss of revenue from the flood and the one-week vacation
shutdown at the Elba, Alabama plant on the Company's profitability.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $8,000 at October 3, 1998 and December 31, 1997.
Net cash used in operating activities was $2.7 million for the period ended
October 3, 1998 as compared to net cash used in operating activities of $7.1
million for the period ended September 27, 1997. The cash used in operating
activities the first nine months of 1998 primarily resulted from an increase in
accounts receivable of $1.7 million and inventory of $2.2 million and a
decrease in accrued expenses of $2.4 million. The increase in accounts
receivable is primarily due to a large order for one of the Company's
independent dealers which was paid subsequent to the end of the quarter. The
increase in inventory is due to the following: change in product mix has
resulted in higher raw material content, increased production in certain types
of customized vans and trailers, and increased purchases of laminated wood
flooring all of which resulted in a $1.2 million increase in raw materials; and
a higher level of work-in-process and finished goods which had not completely
cycled through production as of quarter-end October 3, 1998 which resulted in a
combined increase of $1.2 million. The decrease in accrued expenses of $2.4
million is primarily due to a decrease in reserve for closed plants which were
sold in the first quarter of 1998, decrease in accrued interest expense,
decrease in accrued warranty expense, and a decrease in accrued liability of
parts owed to a customer. The uses of cash were primarily funded through a $3.3
million increase in accounts payable. Net cash used in operating activities for
the first nine months of 1997 was $7.1 million, which was due to the Company's
net losses of $10.4 million. This net loss was offset by a $6.1 million
reduction in inventory.
- 15 -
<PAGE> 16
Net cash provided by investing activities was $0.3 million for the period ended
October 3, 1998 as compared to net cash used in investing activities of $0.1
million for the period ended September 27, 1997. The net cash provided by
investing activities in 1998 was the result of the Company's sale of two closed
facilities in Edgerton, Wisconsin and Griffin, Georgia for net proceeds of $0.8
million in the first quarter of 1998. The net cash proceeds were offset by
capital expenditures of $0.5 million. Net cash used in investing activities in
1997 was for capital expenditures.
Net cash provided by financing activities was $2.4 million for the period ended
October 3, 1998 as compared to net cash provided by financing activities of
$7.1 million for the period ended September 27, 1997. Net cash provided by
financing activities for 1998 primarily came from net borrowings of $2.7
million under the Company's line of credit agreement. Net cash provided by
financing activities in 1997 came from net borrowings of $7.5 million from the
Company's line of credit agreement.
On March 28, 1997 the Company entered into a $14.0 million five-year working
capital line of credit ("Financing Agreement") with an asset-based lender. The
Company's availability under the Financing Agreement changes daily based on the
level of eligible accounts receivable and inventories. As of November 13, 1998,
the Company had $6.0 million in borrowings and $1.9 million in letters of
credit outstanding under the Financing Agreement, and had $2.1 million in
availability under the Financing Agreement. In August and November of 1997, the
Company's $4.0 million term loan included as part of the Financing Agreement
was revised. With the revisions, the term loan as of August 1, 1997 was $2.0
million with interest only for sixty days. The revised term loan was paid in
eight installments with the final payment being on July 1, 1998. In August of
1998, the Company's Financing Agreement was amended to provide additional
availability of $2.0 million until December 31, 1998. Management has begun
discussions with the Company's asset-based lender to continue this $2.0 million
of additional availability until March 31, 1998, if the flexibility of this
additional availability is needed based on management's review. However, no
assurances can be given that the Company will be successful in obtaining this
extension. As of November 13, 1998, the Company was in compliance with the
covenant requirements of the Financing Agreement. The Financing Agreement has
continuous financial and operational covenants.
The Company experienced a significant tightening of its liquidity beginning in
the fourth quarter of 1996. The situation resulted primarily from operating
losses in 1996 and 1997 and an abnormally high level of used trailer inventory
during the first half of 1997. This reduced cash position caused the Company to
incur production downtime during the first half of 1997, which negatively
affected operating results during the first half of 1997. With many customers
purchasing replacement trailers only during the first quarter of 1997, the
Company had to increase its acceptance of used trailers as trade-ins to obtain
certain new trailer orders. By accepting trade-ins, the full cash value was not
received until after the subsequent sale of the used trailers. As of October 3,
1998, the Company's inventory of used trailers was $0.5 million with no
purchase commitments for used trailers. This level of used trailer inventory
represents a $10.4 million decline in used trailer inventory and commitments
from the Company's high of $10.9 million in March 1997. With the current strong
demand for equipment by the trucking industry, the requirement on manufacturers
to take used equipment has diminished. However, if the demand for equipment
decreases, manufacturers may be required to take used equipment in order to
obtain new trailer sales orders. The Company's strategy of developing its
independent dealer network, focusing on customized niche markets, and reducing
its reliance on large fleet orders should diminish the Company's requirements
to participate in the used trailer market.
- 16 -
<PAGE> 17
In addition to the amendment of its Financing Agreement described above, the
United States Small Business Administration modified the Company's term loan,
deferred all payments for six months which ended December 31, 1997 and
re-amortized the balance of the term loan as of January 1998, which reduced the
Company's monthly payments. The Company has other long-term obligations
consisting of a mortgage on its Cartersville, Georgia location and an unsecured
loan for the acquisition of its Dillon, South Carolina operation. The current
portion of these three long-term obligations as of October 3, 1998 was $0.5
million with a remaining balance of $8.6 million. Management believes that the
Company will continue to meet these obligations through the cash flow generated
through operations and availability under its Financing Agreement.
The $14.0 million Financing Agreement allowed the Company to improve payment
conditions with its vendors and provided the liquidity necessary for a
consistent production flow. However, with the shutdown of the Elba facility
production for two weeks due to flooding and the one-week vacation shutdown and
the resulting losses, the Company's liquidity position continues to remain
tight. However, the Company has seen improvement in its liquidity position in
comparison to the corresponding period in the prior year. Earnings before
interest, taxes, depreciation and amortization have improved by $9.7 million
from ($7.8 million) for the nine months ended September 27, 1997 to $1.9
million for the nine months ended October 3, 1998. Management believes that the
Company can generate some additional liquidity by: reducing inventories,
continuing to improve product mix and reduce manufacturing costs, and improving
credit limits and terms with vendors as the Company continues to show improved
financial performance. No assurances can be given that the Company will be
successful in these efforts.
BACKLOG
The Company's backlog of orders was approximately $25.4 million at October 3,
1998 and $25.0 million at December 31, 1997. The backlog includes only those
orders for trailers for which a confirmed customer order has been received. The
Company expects to fill these orders over the next twelve months. The Company
manufactures trailers primarily to customer or dealer order and does not
generally maintain an inventory of "stock" trailers in anticipation of future
orders. However, many of the Company's independent dealers do maintain an
inventory of stock trailers.
The current industry demand remains healthy as a strong freight market
continues to require more equipment. However, in the event of a major economic
downturn, the demand for equipment may see a significant decrease. The Company
has added several new key independent dealers during the year and expects to
see improvement in its independent dealer distribution as this network matures,
and the Company obtains deeper penetration in its targeted customized markets.
Additionally, the Company has successfully recruited several new experienced
sales professionals during the latter part of 1998. Management believes that a
strong dealer network provides a more stable and diverse customer base less
susceptible to industry swings. Additionally, the new sales professionals
should allow for more market penetration. However, no assurances can be given
that the Company will not incur a decrease in demand for product if the
industry demand for product diminishes.
- 17 -
<PAGE> 18
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve the issue. The Company is
utilizing both internal and external resources to identify and correct the
Company's computer systems. The Year 2000 issue is the result of computer
hardware and programs being designed to use two digits rather than four digits
to define the applicable year. Any of the Company's hardware and programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This factor could result in system failure or
miscalculations. The Company does not currently have significant manufacturing
operations systems which would be affected by the Year 2000 issue. The
Company's systems which rely on time sensitive information include primarily
the accounting and purchasing systems. The Company presently believes that with
modification to existing hardware and software and conversions to new software,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as modified and converted. Maintenance and
modification costs will be expensed as incurred, while the costs of new
hardware and software will be capitalized and amortized over the assets' useful
lives. At this time, management can not provide a reasonable estimate of the
amount of costs to be incurred for these modifications and conversions. It is
anticipated that all modifications and conversions will be completed in a
timely manner which will allow for proper testing. With the limited reliance on
time sensitive computer systems, management does not believe that the Year 2000
issue will have a materially adverse affect on the Company's operations and
that such systems which currently rely on time sensitive information could be
performed by other methods. However, if such modifications and conversions are
not completed timely, the Year 2000 issue may have a material impact on the
operations of the Company
Year 2000 related issues may also adversely affect the operations and financial
performance of one or more of the Company's customers or suppliers. The failure
of the Company's customers or suppliers to be Year 2000 ready could have a
material adverse effect on the operations of the Company. Other than utilities,
the third parties on which the Company relies most heavily are its suppliers of
raw materials and customers. The Company is in the process of obtaining
information from key suppliers and customers on their company's computer
systems compliance with the Year 2000 issue. While the Company obtains its
materials from a number of vendors and sells its products to a number of
customers, if a sufficient number of these vendors or customers experience Year
2000 problems that prevent or substantially impair their ability to continue to
transact business with the Company as they currently do, the Company would be
required to find alternative sources of these materials or customers. The
inability to find or delay in finding such alternatives could have a material
adverse effect on the Company's operations.
- 18 -
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a. The exhibits filed as part of this Report are as follows:
10.47 Amendment No. 6 dated as of August 31, 1998 to the Loan
and Security Agreement dated March 28, 1997 between Foothill
Capital Corporation and Dorsey Trailers, Inc.
27 Financial Data Schedule [ For SEC Purposes Only]
b. No reports on Form 8-K were filed during the period.
- 19 -
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
DORSEY TRAILERS, INC.
Date: November 13, 1998 By: /s/ Kurt Herbst
---------------------- -----------------------------------
Kurt Herbst
Vice President - Finance
(Principal Financial Officer and
Principal Accounting Officer)
- 20 -
<PAGE> 21
DORSEY TRAILERS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- - -------------- -----------
<S> <C>
10.47 Amendment No.6 dated as of August 31, 1998 to the Loan
and Security Agreement dated March 28, 1997 between Foothill
Capital Corporation and Dorsey Trailers, Inc.
27 Financial Data Schedule (For SEC use only)
</TABLE>
-21-
<PAGE> 1
EXHIBIT 10.47
AMENDMENT NO. 6 TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 6, dated as of August 31, 1998, to the LOAN AND
SECURITY AGREEMENT, dated as of March 28, 1997, as amended by the FIRST
AMENDMENT dated as of April 10, 1997, the SECOND AMENDMENT dated as of July 1,
1997, the THIRD AMENDMENT dated as of August 1, 1997, the FOURTH AMENDMENT
dated as of November 22, 1997 and the FIFTH AMENDMENT dated as of July 10, 1998
(as so amended, the "Loan and Security Agreement"), between FOOTHILL CAPITAL
CORPORATION, a California corporation, with a place of business located at
11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333,
and DORSEY TRAILERS, INC., a Delaware corporation, with its chief executive
offices located at 2727 Paces Ferry Road, One Paces Ferry West, Suite 1700,
Atlanta, Georgia 30339.
Preamble
The Borrower has requested Foothill to amend the Loan and Security
Agreement to provide for an overadvance not to exceed $2,000,000 through and
including December 31, 1998. Accordingly, the Borrower and Foothill hereby
agree as follows:
1. Definitions. All terms used herein which are defined in the Loan
and Security Agreement and not otherwise defined herein are used herein as
defined therein.
2. Section 1.1 of the Loan and Security Agreement. Section 1.1 of
the Loan and Security Agreement is hereby amended and restated as follows:
(a) EBTDA. The definition of "EBTDA" is hereby added to read as
follows:
"EBTDA" shall mean, with respect to any fiscal period of
Borrower, an amount equal to the sum for such fiscal period of (i)
Net Income, plus (ii) provision for taxes based on income, plus
(iii) depreciation, amortization and other non-cash charges."
(b) Overadvance Amount. The definition of the term "Overadvance
Amount" is hereby amended in its entirety to read as follows:
"Overadvance Amount" means (i) $2,000,000, from September 1,
1998 through and including December 31, 1998, and (ii) $0.00, after
December 31, 1998; provided, however, if at any time the Borrower
shall hold less than 180
<PAGE> 2
units of Designated Work In Process Trailer Inventory, Foothill may
in its sole discretion reduce the Overadvance Amount in whole or in
part."
3. Section 2.10 of the Loan and Security Agreement. Section 2.10(g)
of the Loan and Security Agreement is hereby amended in its entirety to read as
follows:
"(g) Overadvance Fee. The Borrower shall pay to Foothill a
non-refundable fee of $30,000 on October 1, 1998, November 1, 1998,
and December 1, 1998, which fee is earned in full on the date of
each respective payment thereof. If, on any day after December 31,
1998, an Overadvance exists, at the election of Foothill, the
Borrower will pay Foothill a fee equal $1,000 per day for each day
that an Overadvance exists."
4. Section 7.20 of the Loan and Security Agreement. Section 7.20 of
the Loan and Security Agreement is hereby amended by adding the
following Subsection (c) to the end of Section 7.20.
(c) EBTDA. EBTDA for each period of two consecutive preceding
months on the date set forth below of at least the amount set forth
opposite such date.
<TABLE>
<CAPTION>
Two Month Period Ending EBTDA
----------------------- -----
<S> <C>
October 31, 1998 $600,000
December 31, 1998 $750,000
</TABLE>
5. Conditions. This Amendment shall become effective only upon
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the
"Effective Date"):
(a) The representations and warranties contained in this Amendment
and in Section 5 of the Loan and Security Agreement and each other Loan
Document shall be correct on and as of the Effective Date as though made on and
as of such date (except where such representations and warranties relate to an
earlier date in which case such representations and warranties shall be true
and correct as of such earlier date); no Default or Event of Default shall have
occurred and be continuing on the Effective Date or result from this Amendment
becoming effective in accordance with its terms.
(b) Foothill shall have received a counterpart of this Amendment,
duly executed by the Borrower.
(c) The Borrower shall pay to Foothill a non-refundable fee of
$30,000, which fee is earned in full on the date hereof.
2
<PAGE> 3
(d) All legal matters incident to this Amendment shall be
satisfactory to Foothill and its counsel.
5. Representations and Warranties. The Borrower hereby
represents and warrants to Foothill as follows:
(a) The Borrower (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (ii)
has all requisite corporate power, authority and legal right to execute,
deliver and perform this Amendment, and to perform the Loan and Security
Agreement, as amended hereby.
(b) The execution, delivery and performance of this Amendment by
the Borrower, and the performance by the Borrower of the Loan and Security
Agreement, as amended hereby (i) have been duly authorized by all necessary
corporate action, (ii) do not and will not contravene its charter or by-laws or
any applicable law, and (iii) except as provided in the Loan Documents, do not
and will not result in the creation of any Lien upon or with respect to any of
its respective properties.
(c) This Amendment and the Loan and Security Agreement, as amended
hereby, constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with its terms.
(d) No authorization or approval or other action by, and no notice
to or filing with, any Governmental Authority is required in connection with
the due execution, delivery and performance by the Borrower of this Amendment
and the performance by the Borrower of the Loan and Security Agreement as
amended hereby.
(e) The representations and warranties contained in Section 7 of
the Loan and Security Agreement and each other Loan Document are correct on and
as of the Effective Date as though made on and as of the Effective Date (except
to the extent such representations and warranties expressly relate to an
earlier date in which case such representations and warranties shall be true
and correct as of such earlier date), and no Default or Event of Default has
occurred and is continuing on and as of the Effective Date or will result from
this Amendment becoming effective in accordance with its terms.
6. Continued Effectiveness of the Loan and Security Agreement and
Loan Documents. The Borrower hereby (i) confirms and agrees that each Loan
Document to which it is a party is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects except that on and
after the Effective Date of this Amendment all references in any such Loan
Document to "the Loan and Security Agreement", the "Agreement", "thereto",
"thereof", "thereunder" or words of like import referring to the Loan and
Security Agreement shall mean the Loan and Security Agreement as amended by
this Amendment; and (ii) confirms and agrees that to the extent that any such
Loan Document purports to assign or pledge to Foothill, or to grant a security
interest in or Lien on, any collateral as security for the obligations of the
Borrower from time to time existing in respect of the Loan and Security
Agreement and
3
<PAGE> 4
the Loan Documents, such pledge, assignment and/or grant of the security
interest or Lien is hereby ratified and confirmed in all respects.
7. Miscellaneous.
(a) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall
be deemed to be an original but all of which taken together shall constitute
one and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of California.
(d) The Borrower will pay on demand all reasonable fees, costs and
expenses of Foothill in connection with the preparation, execution and delivery
of this Amendment including, without limitation, reasonable fees disbursements
and other charges of Schulte Roth & Zabel LLP, counsel to Foothill.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed and delivered.
DORSEY TRAILERS, INC.,
a Delaware corporation
By: /s/ Kurt Herbst
-----------------------------------------
Title: Vice President - Finance
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Victor Barwig
------------------------------------------
Title: Vice President
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORSEY TRAILERS, INC. FOR THE NINE MONTHS ENDED OCTOBER
3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 8,647
<ALLOWANCES> (135)
<INVENTORY> 13,694
<CURRENT-ASSETS> 22,383
<PP&E> 17,533
<DEPRECIATION> (9,847)
<TOTAL-ASSETS> 35,965
<CURRENT-LIABILITIES> 21,615
<BONDS> 16,820
0
0
<COMMON> 50
<OTHER-SE> (5,120)
<TOTAL-LIABILITY-AND-EQUITY> 35,965
<SALES> 111,007
<TOTAL-REVENUES> 111,007
<CGS> 106,536
<TOTAL-COSTS> 106,536
<OTHER-EXPENSES> 4,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,379
<INCOME-PRETAX> (790)
<INCOME-TAX> 0
<INCOME-CONTINUING> (790)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (790)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
