<PAGE> 1
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 JULY 4, 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
- ---------------------------- ------------------------
(State of Incorporation) (IRS Employer
Identification Number)
2727 Paces Ferry Road
One Paces West, Suite 1700
Atlanta, Georgia 30339
- ---------------------------- ------------------------
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 August 14, 1998, was
5,020,280.
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DORSEY TRAILERS, INC.
FORM 10-Q
Quarter ended July 4, 1998
Index
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Condensed Financial Statements
Balance Sheet - July 4, 1998 and December 31, 1997 3
Statement of Operations - For the thirteen weeks and twenty-six weeks
ended July 4, 1998 and for the thirteen weeks and twenty-five weeks
ended June 28, 1997, respectively 4
Statement of Cash Flows - For the twenty-six weeks and twenty-five weeks
ended July 4, 1998 and June 28, 1997, respectively 5
Statement of Changes in Stockholders' Deficit -
For the twenty-six weeks ended July 4, 1998 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information 16
</TABLE>
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
DORSEY TRAILERS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 4, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7 $ 8
Accounts receivable, net 11,420 6,811
Inventories 14,389 11,479
Prepaid expenses and other assets 117 540
-------- --------
Total current assets 25,933 18,838
Property, plant and equipment, net 7,729 8,447
Deferred income taxes 4,179 4,179
Other assets, net 1,810 1,903
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Total assets $ 39,651 $ 33,367
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 430 $ 350
Accounts payable 17,632 12,638
Accrued wages and employee benefits 4,040 4,348
Accrued expenses 2,004 3,156
-------- --------
Total current liabilities 24,106 20,492
Long-term revolving line of credit 8,941 5,571
Long-term debt, net of current maturities 8,825 9,014
Accrued pension liability 1,600 1,600
Accrued warranty 1,000 1,000
-------- --------
Total liabilities 44,472 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 (7,419) (6,878)
Unrecognized pension liability (77) (77)
-------- --------
Total stockholders' deficit (4,821) (4,310)
-------- --------
Commitments and contingencies - -
-------- --------
Total liabilities and stockholders' deficit $ 39,651 $ 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>
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
(13 WEEKS) (13 WEEKS) (26 WEEKS) (25 WEEKS)
<S> <C> <C> <C> <C>
Net sales $ 39,911 $ 40,032 $ 75,266 $ 80,993
Cost of sales 37,828 40,696 72,472 85,025
-------- -------- -------- --------
Gross profit 2,083 (664) 2,794 (4,032)
Selling, general and
administrative expenses 1,575 1,770 2,932 3,515
Provision for plant closing 50 35 195 83
-------- -------- -------- --------
Income (loss) from operations 458 (2,469) (333) (7,630)
Interest expense, net (352) (505) (776) (1,022)
Gain on property sales - - 568 -
-------- -------- -------- --------
Income (loss) before income taxes 106 (2,974) (541) (8,652)
Benefit from income taxes - - - (200)
-------- -------- -------- --------
Net income (loss) $ 106 $ (2,974) $ (541) $ (8,452)
======== ======== ======== ========
Income (loss) per share - Basic $ .02 $ (.60) $ (.11) $ (1.70)
Income (loss) per share - Diluted $ .02 $ (.60) $ (.11) $ (1.70)
Average Shares Outstanding
Basic 5,017 4,971 5,015 4,978
Diluted 5,019 4,971 5,015 4,978
</TABLE>
See notes to condensed financial statements.
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DORSEY TRAILERS, INC.
STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 4, JUNE 28,
1998 1997
-------- --------
(26 WEEKS) (25 WEEKS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (541) $(8,452)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 808 793
Gain on property sales (568)
Insuance of common stock to non-employee directors 30 30
Change in assets and liabilities-
(Increase) decrease in accounts receivable (4,609) 722
(Increase) decrease in inventories (2,910) 3,533
Decrease in prepaid expenses
and other current assets 423 2,703
Increase in other assets - (1,081)
Increase (decrease) in accounts payable 4,994 (3,951)
(Decrease) increase in accrued expenses (1,460) 75
------- -------
Net cash used in operating activities (3,833) (5,628)
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Cash flows from investing activities:
Capital expenditures (168) (106)
Net proceeds from property sales 739 -
------- -------
Net cash provided by (used in) investing activities 571 (106)
------- -------
Cash flows from financing activities:
Net borrowings under line of credit agreement 3,370 5,963
Payments on long-term debt (210) (319)
Deferred interest capitalized to long-term debt 101 -
------- -------
Net cash provided by financing activities 3,261 5,644
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Decrease in cash and cash equivalents (1) (90)
Cash and cash equivalents at beginning of period 8 101
------- -------
Cash and cash equivalents at end of period $ 7 $ 11
======= =======
</TABLE>
See notes to condensed financial statements.
-5-
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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 (541) (541)
Issuance of common stock to
non-employee directors 6,858 - 30 - - 30
---------- ---------- ---------- ---------- ---------- ----------
Balance, July 4, 1998 (Unaudited) 5,020,280 $ 50 $ 2,625 $ (7,419) $ (77) $ (4,821)
========== ========== ========== ========== ========== ==========
</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 July 4,
1998, and December 31, 1997, and its results of operations for the thirteen and
twenty-six weeks ended July 4, 1998 and for the thirteen and twenty-five weeks
ended June 28, 1997, and its cash flows for the twenty-six weeks and twenty-five
weeks ended July 4, 1998, and June 28, 1997, respectively.
NOTE 2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 4, December 31,
1998 1997
--------- ------------
(In thousands)
<S> <C> <C>
Raw material $ 8,905 $ 7,781
Work-in-process 3,585 2,760
Finished trailers 1,433 321
Used trailers 466 617
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$14,389 $11,479
======= =======
</TABLE>
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NOTE 3. REVOLVING LINE OF CREDIT
On March 28, 1997, the Company entered into a $14 million, five-year line of
credit (Financing Agreement), including a $4 million term loan which was to
amortize evenly over the next four months and a letter of credit facility of up
to $3 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 July 10, 1998, the Company's Financing Agreement was amended to provide
additional availability of $2 million until August 31, 1998. The Company expects
that under a proposed arrangement with its lender that the $2 million of
additional availability will be extended through December 31, 1998. However, no
assurances can be given that the Company will be successful in obtaining this
extension.
In connection with the closing of the $14 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 July 4, 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 million. The Financing Agreement
allows advances of up to the lesser of $14 million less the outstanding
principal amount of the term loan and letters of credit obligations, or 80% of
eligible accounts receivable plus 30 % of eligible raw material, 40 % of
eligible used trailers, and 60% 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 July 4, 1998, the Company had $8.9 million in borrowings and $2.3 million
in letters of credit outstanding under the Financing Agreement. As of August 14,
1998, the Company had $9.9 million in borrowings and $1.8 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 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 July 4, 1998 and
August 14, 1998, the Company was in compliance with the covenants of the
Financing Agreement.
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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 has incurred losses of approximately $819,000 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 $2.3 million as
of July 4, 1998 under its Financing Agreement (See Note 3). As of August 14,
1998, the balance on the standby letters of credit had been reduced to $1.8
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 July 4, 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 $8.9 million at July 4, 1998. In the opinion of
management, it is not probable that the Company will be required to satisfy this
contingent liability.
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.
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<PAGE> 10
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 Stark 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 July 4, 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.
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 the second
quarter of 1998.
NET SALES Net sales for the quarter ended July 4, 1998 decreased to $39.9
million from $40.0 million for the quarter ended June 28, 1997. The decrease in
sales was due to a decrease in used trailer sales. Used trailer sales for the
quarter ended July 4, 1998 were $95,000 compared to $3.7 million for the quarter
ended June 28, 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 $4.1 million at June 28, 1997 to $0.5 million at
July 4, 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 equipment should decrease,
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<PAGE> 12
the requirement on manufacturers to take used equipment could increase. New
trailer sales for the quarter ended July 4, 1998 were $38.6 million, a 9.7%
increase over new trailer sales revenues for the quarter ended June 28, 1997 of
$35.2 million. This increase in new trailer sales revenue is due to product mix
and increased pricing. The improvement in product mix and pricing come from the
Company targeting higher unit priced product such as refrigerated vans, highly
customized trailers, and dump trailers as compared to lower unit priced product
such as standard dry freight vans.
Net sales for the six months ended July 4, 1998 decreased 7.0% to $75.3 million
from $81.0 million for the six months ended June 28, 1997. The decrease in sales
is due to the decrease in used trailer sales. Used trailer sales for the six
months ended July 4, 1998 were $0.3 million compared to $11.3 million for the
six months ended June 28, 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 six months ended July 4, 1998 increased 7.7%
to $72.5 million from $67.3 million for the six months ended June 28, 1997. The
unit volume of new trailers sold increased 11% during the first six months of
1998 as compared to the same period in 1997. The increase in new trailer sales
corresponds with the increase reflected in the industry as a whole. Additionally
with the increased demand, the Company has seen improved product mix and pricing
in its targeted customer markets of independent dealers and customized trailers,
as discussed above. Although the Company had a significant increase in new
trailer sales revenue for the first six months of 1998 as compared to the
corresponding period in 1997, new trailer sales revenues were negatively
impacted by the flood in Elba, Alabama, as discussed previously. Management
estimates that the loss of revenue from the two-week shutdown in Elba was
approximately $6 million.
GROSS PROFIT Gross profit was $2.1 million for the second quarter of 1998 or
5.2% of sales compared to a gross profit of ($.7 million) for the second quarter
of 1997 or (1.7%) of sales. The improvement in gross profit for the second
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. This gross profit margin is the
highest the Company has reported since 1995. The negative gross margin in the
second quarter of 1997 was primarily due to a heavy mix of low margin fleet
business.
Gross profit for the six months ended July 4, 1998 was $2.8 million or 3.7% of
sales as compared to a gross profit of ($4.0 million) or (5.0%) of sales for the
corresponding period in 1997. The negative gross profit for the first six 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 loss
was due to the heavy mix of large fleet orders produced during 1997. The
improvement in the gross profit margin during the first six 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 in the Elba, Alabama facility.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative
("SG&A") expenses for the second quarter of 1998 decreased approximately 11.0%
to $1.6 million as compared to $1.8 million for the second quarter of 1997. SG&A
expenses as a percent of net sales declined to 4.0% for the quarter ended July
4, 1998 as compared to 4.4% for the quarter ended June 28, 1997. The decrease in
SG&A expenses between quarters is reflective of management's plan of overall
cost reduction. No single component of SG&A expenses had a significant change
between periods.
SG&A expenses for the first six months of 1998 decreased approximately 16.6% to
$2.9 million as compared to $3.5 million for the first six months of 1997. SG&A
as a percent of sales was 3.9% for the six months ended July 4, 1998 as compared
to 4.3% for the six months ended June 28, 1997. The primary components of SG&A
expense were salaries and employee benefits for 49% and 56% and professional
fees for 17.6% and 21.4% of total SG&A expenses for the six months ended July 4,
1998 and June 28, 1997, respectively. The decrease in SG&A expense is primarily
due to a 32% decrease in professional fees related to fees incurred with the
Company's unsuccessful acquisitions targets and 5.2% reduction in salaries and
related employee costs.
PROVISION FOR PLANT CLOSING Costs related to the Company's closed facilities
increased in the second 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 sales of these
properties of $0.6 million during the first quarter of 1998.
INTEREST EXPENSE, NET Interest expense, net for the quarter ended July 4, 1998
was $0.4 million as compared to interest expense, net of $0.5 million for the
quarter ended June 28, 1997. The decrease in interest expense between quarters
is due to the Company maintaining a lower average balance on its revolving line
of credit during the second quarter of 1998 as compared to the same period in
1997.
Interest expense, net for the first six months of 1998 was $0.8 million as
compared to $1.0 million for the same period in 1997. The higher interest
expense for the first six months of 1997 is primarily due to a $0.3 million
write-off of unamortized financing costs.
NET INCOME (LOSS) Net income for the quarter ended July 4, 1998 was $106,000, or
$0.02 per share on both a basic and diluted per share basis, as compared to a
net loss of $3.0 million, or $.60 per share, for the quarter ended June 28,
1997. The improved net income is attributable to the improved gross profit,
decrease in SG&A expenses and a reduction in interest costs, each of which is
described above.
The Company's net loss in the first six months of 1998 is attributed primarily
to the impact of the Elba flood on the Company's profitability. Management
estimates that the Elba flood resulted in approximately a $6 million reduction
in new trailer sales revenue. Management does not expect the flood to impact
subsequent quarterly results.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at July 4, 1998 were $7,000 as compared to $11,000 at
June 28, 1997.
Net cash used in operating activities was $3.8 million for the period ended July
4, 1998 as compared to net cash used in operating activities of $5.6 million for
the period ended June 28, 1997. The cash used in operating activities the first
six months of 1998 primarily resulted from an increase in accounts receivable of
$4.6 million and inventory of $2.9 million. The increase in accounts receivable
primarily relates to a large balance with one customer that was paid subsequent
to July 4, 1998. The increase in inventory is due to the following: change in
product mix has resulted in higher component priced material, increased
production in certain types of vans and trailers, increased purchases of
laminated wood flooring, and higher levels of work-in-process and finished goods
which had not completely cycled through production as of quarter-end July 4,
1998. The uses of cash were primarily funded through a $5.0 million increase in
accounts payable. Net cash used for the first six months of 1997 was $5.6
million, which was due to the Company's net losses of $8.5 million. This net
loss was offset by a $3.5 million reduction in inventory.
Net cash provided by investing activities was $0.6 million for the period ended
July, 1998 as compared to net cash used in investing activities of $106,000 for
the period ended June 28, 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
$168,000. Net cash used in investing activities in 1997 was for capital
expenditures.
Net cash provided by financing activities was $3.3 million for the period ended
July 4, 1998 as compared to net cash provided by financing activities of $5.6
million for the period ended June 28, 1997. Net cash provided by financing
activities for 1998 primarily came from net borrowings of $3.4 million under the
Company's line of credit agreement, which occurred, primarily in the second
quarter of 1998. Net cash provided by financing activities in 1997 came from net
borrowing of $6.0 million from the Company's line of credit agreement
On March 28, 1997 the Company entered into a $14 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
levels of eligible accounts receivable and inventories. As of August 14, 1998,
the Company had $9.9 million in borrowings and $1.8 million in letters of credit
outstanding under the Financing Agreement, and had $1.3 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 July of 1998, the
Company's Financing Agreement was amended to provide additional availability of
$2 million until August 31, 1998. The Company expects that under a proposed
arrangement with its lender that the $2 million of additional availability will
be extended through December 31, 1998. However, no assurances can be given that
the Company will be successful in obtaining this extension. As of August 14,
1998, the Company was in compliance with the covenant requirements of the
Financing Agreement. The Financing Agreement has continuous
-14-
<PAGE> 15
financial and operational covenants. The financial covenants are required to be
measured on a quarterly basis and require a higher threshold at each quarterly
reporting period.
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, cash was not received until
after the subsequent sale of the used trailers. As of July 4, 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.
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 long-term obligations as of July 4, 1998 was $0.4 million with
a remaining balance of $8.8 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 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 resulting losses, the Company's
liquidity position continues to remain tight. Management believes that the
Company can generate some additional liquidity by: reducing inventories,
continuing to improve pricing and margins during this time of strong demand for
product and improving credit limits and terms with vendors as the Company
continues to show financial improvement. Actions continue to be under way to
implement these plans. No assurances can be given that the Company will be
successful in these efforts.
BACKLOG
The Company's backlog of orders was approximately $31 million at July 4, 1998
and $25 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 dealers do maintain an inventory of stock
trailers.
-15-
<PAGE> 16
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:
10.46 Amendment No. 5 dated as of July 10, 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.
-16-
<PAGE> 17
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: August 14, 1998 By: /s/ Kurt Herbst
----------------------- ------------------------------------
Kurt Herbst
Vice President - Finance
(Principal Financial Officer and
Principal Accounting Officer)
-17-
<PAGE> 18
DORSEY TRAILERS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- ------------
<S> <C>
10.46 Amendment No. 5 dated as of July 10, 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>
-18-
<PAGE> 1
EXHIBIT 10.46
AMENDMENT NO. 5 TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 5, dated as of July 10, 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 and the FOURTH AMENDMENT dated as of
November 22, 1997 (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 August 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 as follows:
(a) Designated Work in Process Trailer Inventory. The definition of
the term "Designated Work in Process Trailer Inventory" is hereby added to read
as follows:
""Designated Work in Process Trailer Inventory" means Inventory
consisting of work in process trailers that upon completion shall be held for
sale in the ordinary course of Borrower's business, that are located at
Borrower's premises identified on Schedule E-1, that strictly comply with each
and all of the representations and warranties respecting and applicable to work
in process Inventory made by Borrower to Foothill in the Loan Documents, and
that are and at all times continue to be acceptable to Foothill in all respects;
provided, however, that standards of eligibility may be fixed and revised from
time to time by Foothill in Foothill's reasonable credit judgment. An item of
work in process Inventory shall not be included in Designated Work in Process
Trailer Inventory if:
(a) it is not owned solely by Borrower or Borrower does not have
good, valid, and marketable title thereto;
<PAGE> 2
(b) it is not located at one of the locations set forth on Schedule
E-1;
(c) it is not located on property owned or leased by Borrower or in
a contract warehouse, in each case, subject to a Collateral Access Agreement
executed by the mortgagee, lessor, the warehouseman, or other third party, as
the case may be, and segregated or otherwise separately identifiable from goods
of others, if any, stored on the premises;
(d) it is not subject to a valid and perfected first priority
security interest in favor of Foothill;
(e) it constitutes spare parts, packaging and shipping materials,
supplies used or consumed in Borrower's business, Inventory subject to a Lien in
favor of any third Person, bill and hold goods, defective goods, "seconds," or
Inventory acquired on consignment; or
(f) it is subject to any licensing or similar requirements that
would limit the right of Borrower or Foothill to sell such item."
(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 July 1, 1998
through and including August 31, 1998, and (ii) $0.00, after August 31,
1998; provided, however, if at any time the Borrower shall hold less
than 180 units of Designated Work In Process Trailer Inventory,
Foothill may in its sole discretion reduce the Overadvance Amount in
whole or in part."
3. Borrowing Base. Clause (z) of Section 2.1(a) of the Loan and
Security Agreement is hereby amended in its entirety to read as follows and the
following subsection (aa) is added to the end of Section 2.1(a):
"(z) the aggregate amount of reserves, if any, established by
Foothill under Section 2.1(b), minus
(aa) the positive difference if any of (A) the Overadvance Amount,
minus (B) an amount equal to twenty five percent (25%) of the amount of
the credit availability created by clauses (x), (y) and (z) above."
4. 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. If, on any day after August 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."
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"):
2
<PAGE> 3
(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 amendment fee
of $50,000, which fee is earned in full on the date hereof.
(d) All legal matters incident to this Amendment shall be satisfactory
to Foothill and its counsel.
6. 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
3
<PAGE> 4
and is continuing on and as of the Effective Date or will result from this
Amendment becoming effective in accordance with its terms.
7. 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 the Loan Documents, such pledge, assignment and/or grant of the
security interest or Lien is hereby ratified and confirmed in all respects.
8. 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/ James E. Clements
---------------------------------------
Name: James E. Clements
Title: Vice-President Finance
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Victor D. Barwig
---------------------------------------
Name: Victor D. 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 SIX MONTHS ENDED JULY 4,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUL-04-1998
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 11,533
<ALLOWANCES> (113)
<INVENTORY> 14,389
<CURRENT-ASSETS> 25,933
<PP&E> 17,224
<DEPRECIATION> (9,495)
<TOTAL-ASSETS> 39,651
<CURRENT-LIABILITIES> 24,106
<BONDS> 17,776
0
0
<COMMON> 50
<OTHER-SE> (4,871)
<TOTAL-LIABILITY-AND-EQUITY> 39,651
<SALES> 75,266
<TOTAL-REVENUES> 75,834
<CGS> 72,472
<TOTAL-COSTS> 72,472
<OTHER-EXPENSES> 3,127
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 776
<INCOME-PRETAX> (541)
<INCOME-TAX> 0
<INCOME-CONTINUING> (541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (541)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
