ITEM 2 - PROPERTIES AND INSURANCE
The Company's design and manufacture of truck trailers are performed at three facilities. Dry freight vans and refrigerated vans are produced at a 400,000 square foot facility on 74 acres in Elba, Alabama. Platform trailers are produced at a 150,000 square foot facility on 16 acres in Cartersville, Georgia. Dump trailers are produced at a 45,100 square foot facility in Dillon, South Carolina. Management believes these facilities have sufficient manufacturing capacity to produce the Company's current market share of the estimated industry shipments for the foreseeable future.
The Company owns an inactive 343,000 square foot plant in Edgerton, Wisconsin, an inactive 92,000 square foot facility in Griffin, Georgia, and an inactive 144,000 square foot facility in Northumberland, Pennsylvania. On February 20, 1998, the Company entered into a contract to sell its Griffin, Georgia plant for $475,000 to a private real estate investor. The Company expects the net proceeds from the sale of this vacant plant to exceed its current basis. The Company's principal executive offices are located in an approximately 7,000 square foot office in Atlanta, Georgia, which is leased by the Company.
The Company maintains insurance to limit certain risks associated with its business activities. The Company's comprehensive property policy insures business interruption losses in addition to the Company's buildings, machinery and inventory. The property insurance has a total limit of $75 million and a flood sub-limit of $16 million, subject to a $100,000 deductible per occurrence.
In addition, the Company maintains insurance covering general, product and workers' compensation liabilities with a per occurrence and annual aggregate limit of $21 million, subject to a self-insured retention of $250,000 for each occurrence ($350,000 for workers' compensation losses).
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
See "Business -- Environmental Matters" for a description of certain legal proceedings.
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. Management intends to vigorously defend against this order and believes that the Company will prevail in the appeal process.
In November 1997, a declaratory judgment action was filed by an insurance company as to coverage of a previously paid claim by that insurance company in the settlement of product liability 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 or results of operations.
In April, 1995, a class action lawsuit alleging racial discrimination was filed against the Company, and in the normal course of business, the Company is a defendant in certain other litigation, in addition to the matters discussed above. 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 or results of operations.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Incorporated by reference from the Registrant's Form 10-Q for the quarter ended March 29, 1997.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the period indicated, the high and low sales prices per share of the Common Stock as reported on The Nasdaq Stock Market and OTC -- Bulletin Board.
As of March 16, 1998, the Common Stock was held by approximately 95 holders of record and approximately 1,300 beneficial owners.
STOCK TRADING
Effective August 8, 1997, the Company's shares were conditionally listed on the Nasdaq SmallCap Market under the trading symbol DSYTC and were no longer listed on the Nasdaq National Market. Effective October 1, 1997, the Company's shares began trading on the OTC-Bulletin Board under the symbol DSYT and were no longer listed on the Nasdaq SmallCap Market. These actions resulted from the Company's inability to meet the terms of an exception which was granted to bring its capital and surplus up to $2.0 million by September 30, 1997.
DIVIDEND POLICY
The Company intends to retain any future earnings to provide funds for the operation and expansion of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 6
ITEM 6 - SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth selected financial and operating data of the Company. The selected financial data, except for the unaudited pro forma data, as of December 31, 1997, 1996, 1995, 1994 and 1993 and for each of the five years then ended have been derived from the Financial Statements of the Company which have been audited by Price Waterhouse LLP, the Company's independent accountants. Unaudited pro forma adjustments for 1994 and 1993 have been shown to reflect the income tax provision which would have been made if the Company had been a taxable corporation throughout such period. In December 1997, the Company adopted the requirements of Statement of Financial Accounting Standards ("FAS") No. 128 "Earnings Per Share," and as a result, the Company has restated weighted average shares for the prior years. The information set forth below should be read in
conjunction with the Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
- ---------------
(1) From inception of the Company in 1987 until the Company's initial public offering in July 1994, the Company elected to be treated as an S Corporation and, accordingly, was not subject to corporate income taxes. Following the initial public offering, the Company became subject to corporate income tax. Unaudited pro forma net income has been computed as if the Company were subject to federal and state income taxes for all periods presented, based on tax laws in effect during the respective periods.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's sales are derived primarily from the sale of new truck trailers and, to a lesser extent, replacement parts and accessories, and used trailers. The Company recognizes revenue from the sale of trailers after manufacturing is complete, at which time title is transferred to the customer. Materials represent approximately 75% of cost of sales, with the remainder consisting of labor and factory overhead.
INCLUSION OF FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Letter To Our Stockholders" 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, reliance on certain customers, shortages of raw materials, labor shortages or work stoppage, dependence on industry trends, government regulations and new technologies or products. Readers should review and consider the various disclosures included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of expense items to net sales for the periods indicated:
Net Sales
Net sales for 1997 decreased $400,000 to $157 million for 1997 as compared to $157.4 million for 1996. The Company was able to maintain sales revenue at relatively the same level between years even though the number of new trailers sold between years decreased 8%, because of the increase in used trailers sales. New trailer sales for 1997 were $136.7 million compared to $148.6 million for 1996, an 8% decrease. The decrease in new trailer sales primarily occurred in the first nine months of 1997 while the fourth quarter sales between years remained the same. Used trailer sales were $15.7 million for 1997 compared to $3 million for 1996. The increase in used trailer sales was due to the increased level of used trailers being taken in as trades on new trailer orders accepted at the end of 1996. Current market conditions appear to have reduced the necessity to accept used trailers on trade as a condition to the awarding of new trailer sales contracts.
Net sales for 1996 decreased 31.0% to $157.4 million from $227.9 million for 1995. The 31% decrease in net sales represented a 30% decrease in the number of trailers sold. The decrease in net sales and the number of trailers sold was a direct result of the decrease in demand for trailers from customers, overcapacity in the industry and, as a result of these factors, severe pricing pressure.
Net sales for 1995 increased 10.9% to $227.9 million from $205.6 million for 1994. The increase in 1995 net sales represented a 2.2% increase in new trailer units sold. Net sales and number of units sold were adversely
affected by the labor strike and eventual shutdown of the Pennsylvania plant. The increase in net sales reflected the strong demand for the product as well as the increased manufacturing capacity resulting from the 1994 expansion of a dry freight line at the Elba, Alabama plant.
Gross Profit
Gross profit as a percentage of net sales, or gross margin, decreased to (1.0%) in 1997, from .7% for 1996 and gross profit decreased to ($1.5) million from $1.2 million for 1996. The negative gross profit was primarily due to the following: heavy mix of low margin fleet orders completed in the first nine months of the year, losses on used trailers of $3.3 million, and an increase of approximately $400,000 in wood floor prices in the first half of the year which the Company was not able to pass on to its customers. The Company returned to a positive gross profit in the third quarter of 1997 and recorded its highest quarterly gross profit margin in eight straight quarters in the fourth quarter of 1997 at $2.3 million. Current order intake is priced at somewhat better margins, as the industry is experiencing improved demand and more stable component prices.
Gross margin decreased to 0.7% in 1996, from 5.7% in 1995, and gross profit decreased to $1.2 million in 1996. The decrease was largely due to the factors affecting the decrease in net sales including substantially lower volume of trailers sold and depressed selling prices resulting from very weak market demand on excess production capacity in the industry. Also contributing to the decrease was significant start-up costs at the Company's new flatbed facility in Cartersville, Georgia.
Gross margin decreased to 5.7% in 1995 from 7.9% in 1994, and gross profit decreased 20.2% to $12.9 million in 1995. This was largely due to the production inefficiencies caused by the use of temporary workers to replace certain striking union employees at the now closed Pennsylvania plant and raw material shortages.
Selling, General and Administrative Expenses
Selling, general and administrative ("S, G & A") expenses decreased $866,000 to $7.3 million for 1997 from $8.1 million for 1996. S, G & A expenses decreased between years primarily from a reduction in professional fees and an overall reduction in S, G & A expenses as a result of management's plan of cost reduction. S, G & A as a percentage of sales decreased to 4.6% in 1997 from 5.2% for 1996.
S, G & A expenses increased 10.8% to $8.1 million for 1996 from $7.3 million for 1995. The increase in expenses was primarily due to professional fees on certain matters. S, G & A, as a percentage of net sales, increased from 3.2% in 1995 to 5.2% in 1996; this increase was due primarily to the decrease in net sales.
S, G & A expenses for 1995 increased 8.5% to $7.3 million from $6.8 million for 1994, but declined as a percentage of net sales to 3.2% from 3.3%. The reduction in S, G & A expenses as a percentage of net sales in 1995 was due to efficiencies gained through increased sales volume and the effects of the Company's cost containment efforts.
Provision for Plant Closing
The Company's provision for plant closing decreased by $515,000 to $96,000 for 1997 as compared to $611,000 for 1996. The provision for plant closing includes costs related to the closing of the Northumberland, Pennsylvania plant which occurred during the fourth quarter of 1995.
The Company recorded $611,000 and $350,000 in 1996 and 1995, respectively, for expenses relating to its closed facilities in Edgerton, Wisconsin and Northumberland, Pennsylvania. The 1996 provision primarily relates to salaries, repairs, maintenance and depreciation expense at the Northumberland plant. The 1995 provision includes the expenses relating to severance pay due to the 1995 shutdown of the Pennsylvania facility, in addition to depreciation expense on the Wisconsin facility.
The Company believes it has accrued adequate carrying costs for the period it expects to hold the Pennsylvania and Wisconsin facilities, this period may be extended due to the uncertainty involved in the environmental remediation. See "Business -- Environmental Matters."
Interest Expense, Net
- ---------------
* Represents less than 0.1%.
Net interest expense increased $1.2 million to $1.6 million for 1997 as compared to $408,000 for 1996. The increase in interest expense is due to the use of the long-term revolving line of credit in 1997 and the write-off of $300,000 in unamortized financing costs associated with replacing the Company's previous line of credit, partially offset by $400,000 in interest income received upon renegotiation of the Company's retail financing agreement ( See Note 9).
Net interest expense increased $346,000 to $408,000 for 1996. The increase in interest expense is a result of the notes payable for the purchases of the Cartersville, Georgia facility and the Dillon, South Carolina operation and the reduction in interest income between the years 1996 and 1995. Net interest expense decreased from $647,000 in 1994 to $62,000 in 1995. This decrease primarily reflects a lower principal amount of debt outstanding and an increase in interest income earned.
PROVISION FOR (BENEFIT FROM) INCOME TAXES AND NET INCOME (LOSS)
The Company reported a net loss of $10.2 million, or $2.03 loss per share, for 1997 as compared to a net loss of $4.9 million, or $.99 loss per share, for 1996. After eight straight quarters of losses, the Company returned to profitability in the fourth quarter of 1997. The Company recorded a benefit from income taxes of $387,000 for 1997 resulting in an effective income tax rate of 3.7% compared to a benefit from income taxes of $3.1 million for 1996 resulting in an effective income tax rate of 38.5%. The lower effective tax rate is due to the fact that the Company recorded a $3.4 million valuation reserve for certain income tax benefits which the Company may ultimately use to offset against future taxable income.
The Company reported a net loss of $4.9 million, or $.99 loss per share, for 1996 as compared to net income of $4.2 million, or $0.85 per share for 1995. The Company recorded a benefit for income taxes of $3.1 million in 1996 for an effective income tax benefit rate of 38.5% as compared to a provision for income taxes of $891,000 in 1995 for an effective income tax provision rate of 17.4%. The lower effective income tax provision rate in 1995 was due to the utilization of the deferred tax valuation reserve, which reduced the provision for income taxes by $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1997 were $8,000 as compared to $101,000 at December 31, 1996.
Net cash used in operating activities was $5.1 million for 1997 and $4.3 million for 1996 as compared to net cash provided by operating activities of $3.7 million for 1995. Cash used in operating activities for 1997 was primarily used to fund the Company's loss of $10.2 million and a $5.5 million decrease in accounts payable. This cash used was offset by a $7.5 million decrease in inventories, primarily used trailers; a $1.5 million decrease in accounts receivable and a $2.5 million decrease in prepaid and other current assets, primarily receipt of the tax refund from 1996. Cash used in operating activities for 1996 was primarily used to fund the increase in inventory of $1.8 million, a $2.4 million increase in income tax receivable, and operating losses of $4.9 million. The increase in inventory was due to a $3.6 million increase in used trailers which was offset by a decrease in raw materials of $1.9 million. The cash used for 1996 was primarily funded by the Company's cash and cash equivalents and an increase in accounts payable. Cash provided by operations for 1995 was primarily provided by net income.
Net cash used in investing activities was $300,000, $2.5 million, and $15,000 for 1997, 1996 and 1995, respectively. Net cash used in investing activities for 1997 was used for capital expenditures. Net cash used in investing activities for 1996 was used to fund $1.3 million for capital expenditures and $1.1 million for the cash payment portion of the purchase of a dump trailer manufacturing operation. In July 1996, the Company purchased the operations of a dump trailer manufacturer for $1.8 million. An unsecured note payable of $577,000 was issued to the seller at a floating prime interest rate. For 1995 capital expenditures were $4.0 million of which the Company funded $2.0 million with cash. In November 1995, the Company purchased a facility in Cartersville, Georgia for $2.0 million for the manufacture of flatbed trailers. A note payable to the seller in the amount of $2.0 million was issued bearing interest at a fixed rate of 8.5%.
Net cash provided by financing activities was $5.3 million for 1997 as compared to cash used in financing activities of $800,000 and $5.2 million for 1996 and 1995, respectively. Net cash provided in 1997 was from net advances under the Company's long-term revolving line of credit of $5.2 million which funded the net cash used in operating activities of $5.1 million in 1997. Net cash used in financing activities for 1996 was used for the scheduled repayment of long-term debt. The net cash used in 1995 was primarily used for the distribution to stockholders of $5.0 million which represented the previously taxed and undistributed earnings of the Company as a result of the termination of the Company's S Corporation election.
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 level of eligible accounts receivable and inventories. As of March 16, 1998, the Company had $4.7 million outstanding under the Financing Agreement, including $1 million outstanding under the term loan and $2.2 million in letters of credit and had $1.6 million in availability under the Financing Agreement. In August and November of 1997, the Company's $4 million term loan included as part of the Financing Agreement was revised. Prior to the revision, the term loan was to be completely amortized at August 1, 1997. With the revisions, the term loan at August 1, 1997 was $2 million with interest only for sixty days. The revised term loan is to be paid in eight installments with the final payment being on July 1, 1998. As of March 16, 1998, the Company was in compliance with the covenant requirements of the Financing Agreement. The Financing Agreement has continuous financial and operational covenants. The financial covenants are required to be measured on a quarterly basis and require specific thresholds 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 continued operating losses and an abnormally high level of used trailer inventory. 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 prior new trailer orders. By accepting trade-ins, cash was not received until after the subsequent sale of the used trailers. As of December 31, 1997, the Company's inventory of used trailers was $617,000 with no purchase commitments for used trailers. This level of used trailer inventory represents a $10.3 million decline in used trailer inventory and commitments from the Company's high of $10.9 million in March of 1997. During the
first quarter of 1997, management decided to sell certain used trailers quickly at lower than normal pricing in order to generate sufficient cash to meet its obligations. As a result, the Company incurred losses on the sale of used trailers of $3.3 million during 1997.
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 from $69,326 to $40,500.
The closing of 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 losses, the Company's liquidity position continues to remain tight. Management believes that the Company can generate some additional liquidity by reducing inventories and improve margins on new trailer sales orders and actions are underway to implement its plan. No assurances can be given that the Company will be successful in these efforts.
On February 20, 1998, the Company entered into a contract to sell its idle Griffin, Georgia plant for $475,000 to a private real estate investor. The Company expects to close this transaction within 30 days. The Company expects the net proceeds from the sale of this plant to exceed its current basis.
ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board issued FAS No. 130, "Reporting Comprehensive Income." FAS No. 130 establishes presentation and disclosure requirements and does not address recognition or measurement issues. FAS No. 130 is effective for fiscal years beginning after December 15, 1997.
In June of 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires enterprises to report selected information about operating segments and related disclosures about products and services, geographic areas, and major customers. The Company believes that no significant changes to current reporting will be required by FAS No. 131, which is effective for fiscal years beginning after December 15, 1997.
In February of 1998, the FASB issued FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. FAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The Company believes that no significant changes to current reporting will result upon the adoption of FAS No. 132.
SEASONALITY AND INFLATION
Unit sales of new trailers are generally not affected by seasonal factors. However, new trailer unit sales have historically been subject to cyclical variation based upon general economic conditions. The federal government also regulates certain trailer features, particularly with respect to safety. Any changes in these regulations apply generally to all manufacturers in the industry and can have a significant impact on industry sales. Long-term domestic growth in demand for truck trailers has generally been in line with increases in the United States Gross Domestic Product. However, in the short to intermediate term, new trailer sales can be very cyclical. The short to intermediate term cycle of trailer sales is also impacted by the environment for new business investment in equipment particularly in the trucking industry.
The Company has not been materially impacted by inflation in the past three years.
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 major system failure or miscalculations. 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. It is anticipated that all modifications and conversions will be completed in a timely manner which will allow for proper testing. 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.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in Part IV, Item 14 of this report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information under the headings "Proposal I -- Election of Directors -- Director and Director Nominee Information" and -- "Executive Officers of the Company" from its definitive Proxy Statement to be delivered to the stockholders of the Company in connection with the 1998 Annual Meeting of Stockholders to be held April 27, 1998.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained under the headings "Executive Compensation" from its definitive Proxy Statement to be delivered to the stockholders of the Company in connection with the 1998 Annual Meeting of Stockholders to be held April 27, 1998. In no event shall the information contained in the Proxy Statement under the headings "Stockholder Return Comparison" and "Report of the Compensation Committee of the Board of Directors" be incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information contained under the heading "Principal Stockholders of the Company" from its definitive Proxy Statement to be delivered to the stockholders of the Company in connection with the 1998 Annual Meeting of Stockholders to be held April 27, 1998.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained under the headings "Proposal I -- Executive Compensation", "Compensation Committee Interlocks and Insider Participation" and "-- Certain Transactions" from its definitive Proxy Statement to be delivered to the stockholders of the Company in connection with the 1998 Annual Meeting of Stockholders to be held April 27, 1998. Additionally, see Note 12 of the Notes to Financial Statements for related party transactions.
PART IV
ITEM 14
ITEM 14 - FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. Financial Statements
The following financial statements of Dorsey Trailers, Inc., incorporated by reference into Item 8, are attached hereto:
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter-ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 16, 1998.
DORSEY TRAILERS, INC.
By: /s/ MARILYN R. MARKS -------------------------------------- Marilyn R. Marks Chief Executive Officer and Chairman of the Board of Directors
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 16, 1998.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Dorsey Trailers, Inc.
In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 14 present fairly, in all material respects, the financial position of Dorsey Trailers, Inc. at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia January 28, 1998
DORSEY TRAILERS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these financial statements.
DORSEY TRAILERS, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
DORSEY TRAILERS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these financial statements.
DORSEY TRAILERS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company designs, manufactures and markets truck trailers. Significant accounting policies followed by the Company are summarized below:
INITIAL PUBLIC OFFERING
On July 28, 1994, the Company sold 1,400,000 shares of common stock in an initial public offering (the "Offering") and selling stockholders sold 670,000 shares including the over-allotment option of shares. The net proceeds received by the Company were $16.2 million and were used to reduce debt, repurchase stock options from a director, fund capital expenditures and fund a distribution to the S Corporation stockholders (see Note 7).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investment instruments with an original maturity of three months or less.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from the sale of trailers when title and risks of ownership are transferred to the customer, which generally is upon shipment or customer pick-up. A customer may be invoiced for and receive title to trailers prior to taking physical possession when the customer has made a fixed, written commitment to purchase, the trailers have been completed and are available for pick-up or delivery, and the customer has requested the Company to hold the trailers until the customer determines the most economical means of taking physical possession. Upon such a request, the Company has no further obligation except to segregate the trailers, invoice them under normal billing and credit terms, and hold them for a short period of time as is customary in the industry, until pick-up or delivery. Trailers are built to customer specification and no right of return or exchange privileges are granted. Accordingly, no provision for sales allowances or returns is recorded.
For the year ended 1997, sales to United Parcel Services were $21.3 million, which exceeded 10% of the Company's total sales. For the year ended 1996, sales to U.S. Xpress exceeded 10% of the Company's total sales. For 1995, no one customer represented greater than 10% of total sales of the Company. The Company markets its products directly to national accounts and through a nationwide network of dealers into all of the major segments of the trucking industry. The diverse customer base reduces the risk of concentration in any market segment or geographical area. Although the Company is affected by the credit worthiness of its customers, management does not believe significant credit risk exists at December 31, 1997. The Company generally does not require collateral or maintain reserves for potential credit losses.
INVENTORIES
Inventories are stated primarily at the lower of first-in, first-out (FIFO) cost or market values. Used trailers are carried at the lower of their estimated net realizable value or cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated lives of the assets ranging from three to twenty years. Maintenance and repairs are charged to expense as incurred; expenditures for renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is credited or charged to income.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees' active service period in accordance with Statement of Financial Accounting Standards ("FAS") No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions".
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rate in effect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and income tax basis of assets and liabilities. A valuation reserve is recorded when it is more likely than not that all or a portion of all deferred tax assets may not be realized.
ACCRUED WARRANTY
The Company provides a limited five-year warranty against defects in material and workmanship on van trailers and platform trailers. The Company provides a similar two-year warranty on dump trailers. The Company provides for warranty costs at the time of sale based on experience and management's judgment. The portion of the warranty reserve expected to be paid beyond one year is classified as noncurrent in the accompanying financial statements.
ENVIRONMENTAL ACCRUAL
The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. Estimated costs associated with closure/postclosure are accrued over the facilities' estimated remaining useful lives. Accruals for environmental liabilities are included in accrued expenses at undiscounted amounts and exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity or mitigate or prevent future contamination.
GOODWILL
Goodwill represents the excess of the aggregate price paid by the Company in acquisitions accounted for as purchases over the fair market value of the net tangible assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. The carrying value of the goodwill is evaluated for indications of possible impairment whenever events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable.
Goodwill was $922,000 at December 31, 1997 net of accumulated amortization of $103,000. Goodwill was $991,000 at December 31, 1996 net of accumulated amortization of $34,000. There was no goodwill in 1995.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE ("EPS")
In December of 1997, the Company adopted the requirements of FAS No. 128 "Earnings Per Share," which replaced primary and fully diluted EPS with basic and diluted EPS, respectively. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
period. Diluted EPS includes the effect of all potentially dilutive stock options outstanding during the year. Common stock equivalents consist of the Company's common shares issuable upon the exercise of stock options using the treasury stock method.
In 1997 and 1996, potentially dilutive securities not included in the calculation of basic earnings per share and dilutive earnings per share consisted of options to purchase shares of the Company's common stock of 187,000 and 30,000, respectively. These options were not included due to the Company reporting a net loss for both periods.
Prior earnings per share amounts have been restated to conform to requirements of the new accounting standard effective at year-end 1997.
2. INVENTORIES
Inventories are summarized as follows:
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
Property, plant and equipment include land and buildings held for sale as idle facilities of $706,000 and $760,000 in Northumberland, Pennsylvania (see Note 10), and $186,000 and $280,000 in Edgerton, Wisconsin at December 31, 1997 and 1996, respectively. The assets are recorded at net book value which management believes is less than net realizable value.
4. 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 of 1997, the Company's term loan was revised. Prior to the revision the term loan was to be completely amortized at August 1, 1997. With the revisions, the term loan at August 1, 1997 was $2 million with interest only for sixty days. The revised term loan is to be paid in eight installments with the final payment being on July 1, 1998. This Financing Agreement replaced
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
a $10 million revolving credit agreement the Company had with a financial institution. The Company had no borrowings outstanding under this facility at December 31, 1996, although $2.0 million in letters of credit were outstanding under this facility.
In connection with the closing of the $14 million Financing Agreement, the Company incurred cost 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% with interest payable monthly. At December 31, 1997, the interest rate was 10.50% for the Financing Agreement and the interest rate is prime plus 2% until April 30, 1998 and prime plus 3% beginning May 1, 1998 for the term loan. 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 a monthly servicing fee of $5,000 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 materials, 40% of eligible used trailers, and 60% of eligible finished goods 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 December 31, 1997, the Company had $5.6 million outstanding under the Financing Agreement, including $1.5 million outstanding under the term loan, and $2.2 million in letters of credit. 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, minimum earnings before interest, income taxes, depreciation, and amortization; minimum net worth; and maximum amount of capital expenditures. As of December 31, 1997, the Company was in compliance with the covenants of the Financing Agreement.
5. LONG-TERM DEBT
Long-term debt consists of the following:
In August of 1997, the SBA 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 payment from $69,326 to $40,500.
In addition to the monthly principal and interest installments to the Small Business Administration, the Company is required to make supplemental annual payments equal to 50% of the Company's net operating income, as defined in the agreement, in excess of $3,000,000. For the years ended December 31, 1997 and 1996, no supplemental payment was required.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1997, aggregate principal maturities of long-term debt are as follows (in thousands of dollars):
6. RETIREMENT AND EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a noncontributory defined-benefit retirement plan covering certain salaried employees and two noncontributory defined-benefit plans covering certain former hourly employees who have met certain plan eligibility provisions. Benefits under the hourly employees' plans are based on years of service while benefits under the salaried employees' plan are based on years of service and the employee's compensation during the five consecutive calendar years prior to retirement. The Company makes contributions as required to maintain the plans on an actuarially sound basis.
The following tables summarize the plans' funded status and amounts recognized in the Company's financial statements:
For financial reporting purposes, a pension plan is considered underfunded when the fair value of the plan assets is less than the accumulated benefit obligation. The difference between the underfunded liability of the pension plan and the accrued pension costs is recorded net of deferred taxes as a reduction to stockholders equity. As of December 31, 1997 and 1996, the difference was $126,000 with a reduction to stockholders' equity of $77,000.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Net pension cost included the following components:
In addition to net pension cost, net losses of $35,000 were recorded in 1995 pursuant to FAS No. 88, "Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", due to termination of employees' services earlier than expected with respect to the closing of the Company's Northumberland, Pennsylvania facility (see Note 10).
The assumptions used in accounting for the pension plans, where applicable, are as follows:
For the years ended December 31, 1997, 1996 and 1995, the Company contributed $416,000, $409,000 and $492,000, respectively, to a multi-employer retirement plan sponsored by the I.A.M. National Pension Fund covering the Elba, Alabama facility's hourly employees.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, the Company provides certain medical and life insurance benefits to substantially all salaried employees upon retirement. Salaried employees are eligible for these postretirement benefits after attaining the age of 60 and providing five years of service. The Company pays for claims when submitted by the retirees. The accounting for the postretirement plan assumes future increases in annual costs will be divided equally between the Company and the retirees.
The following tables summarize the plan's obligation and amounts recognized in the Company's financial statements:
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Net postretirement benefit cost included the following components:
The discount rate used in determining the accumulated benefit obligation was 7.25% in 1997 and 1996, and 7.0% in 1995. The accrued medical trend rate used in 1997 was 8%, in 1996 was 9%, and in 1995 was 10%, decreasing 1% per year until the ultimate rate of 5% is reached.
If the medical trend rate assumptions were increased by 1%, the accumulated benefit obligation as of December 31, 1997 would be increased by approximately $75,000. The effect of this change on the service and interest components of net periodic postretirement benefit cost for the year would be an increase of approximately $9,000.
SUPPLEMENTAL RETIREMENT PLAN
The Company also maintains a 401(k) supplemental retirement plan for salaried employees. The Company, at the discretion of the Board of Directors, may match up to one-half of an employee's contributions of up to ten percent of gross salary. The Company made no accrual for matching contributions to the plan in 1997 and 1996 and accrued $139,000 for matching contributions in 1995.
Effective January 1, 1997, the Company established the "Dorsey Trailers, Inc. Hourly Employee Savings Incentive Plan" which is a 401(k) retirement plan for hourly employees not covered by the union contract. The Company, at the discretion of the Board of Directors, may match up to one-half of an employee's contributions of up to ten percent of gross salary. The Company made no accrual for matching contributions to the plan in 1997.
7. INCOME TAXES
The components of the provision for (benefit from) income taxes for the years ended December 31, 1997, 1996 and 1995 are as follows:
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company's provision for (benefit from) income taxes differs from the amount computed by applying the statutory federal income tax rate of 34% to income (loss) before income taxes of $(10,569,000), $(8,009,000) and $5,135,000 for the years ended December 31, 1997, 1996 and 1995 as a result of the following:
Deferred income taxes were recorded to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
DISTRIBUTIONS TO STOCKHOLDERS
In connection with the termination of the Company's S Corporation election, the Company distributed $5,241,000 to the S Corporation stockholders during 1994 and 1995. This amount represented the previously taxed and undistributed earnings of the Company through the offering date.
8. COMMON STOCK, OPTIONS AND WARRANTS
On March 18, 1987, the Company issued a warrant for the purchase of 1,560,672 shares of common stock to Westinghouse Credit Corporation (WCC) as part of a financing arrangement. The Company reserved 1,560,672 shares of common stock for issuance in connection with the warrant.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
On January 12, 1993, the Company's majority stockholder borrowed $400,000 from an investor and purchased the warrant from WCC at $0.256 per share. Simultaneously, the warrant was exchanged by the majority stockholder for 1,560,672 shares of the Company's common stock. As consideration of the majority stockholder's loan from the investor, the investor held the common shares as security for repayment of the loan and released the shares as note payments were made. In addition, the investor was granted an option to purchase 585,252 shares of the Company's common stock for $0.017 per share through January 12, 2013. In 1994, a portion of these options were repurchased and then canceled by the Company with some of the net proceeds of the Offering. During 1995, the investor exercised the remaining options to purchase 375,179 shares of the Company's common stock. In conjunction with the exercising of the options, the majority stockholder contributed 14,989 shares of common stock to the Company, which were immediately canceled by the Company.
Simultaneously, with the warrant repurchase and investor loan, the majority stockholder executed a loan agreement with the Company whereby the Company loaned the majority stockholder the principal and interest payments due under the investor loan at 6.5%. From January 1993 through June 1994, the Company made payments of $234,000 under this agreement. At December 31, 1993 the $400,000 note payable from the majority stockholder to the investor and the related note receivable from the majority stockholder were recorded on the Company's financial statements. The note payable to the investor was discounted to $260,000 to reflect the fair value of the options granted in connection with the debt. The note payable to the Company was repaid on December 31, 1994 by the majority stockholder.
MAJORITY STOCKHOLDER PLAN
The Company's majority stockholder sponsors a stock option plan for the benefit of the Company and its employees. The exercise price of the options is not less than the estimated fair market value of the common stock on the date of grant as determined by the Company's majority stockholder or, in the case of the January 12, 1993 grant, by comparison to a third-party transaction. Current options granted are fully vested.
LONG-TERM INCENTIVE PLAN
During 1994, the Board of Directors adopted the 1994 Long-Term Incentive Plan and reserved 250,000 shares of common stock for future issuance under the plan. Pursuant to the terms of the 1994 Incentive Plan, the Board of Directors or a committee thereof is authorized to identify officers and key employees of the Company eligible to receive incentive stock options, non-qualified stock options, or similar stock based awards under the plan. Grants have been awarded at option prices equal to the fair market value of the common stock as of the date of grant. Options vest equally over three years based on the date of grant and expire ten years after date of grant.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's stock option plans as of December 31, 1997 and 1996, and changes during the years ending on those dates is presented below:
The following table summarizes information about stock options outstanding at December 31, 1997 and 1996:
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has adopted FAS No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of FAS 123, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its Long-term Incentive Plan. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under this plan consistent with the methodology prescribed by FAS 123, the Company's net income (loss) and basic earnings (loss) per share would be reduced to the unaudited pro forma amounts indicated below.
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively, expected volatility of 25%, 47% and 53%; and risk-free interest rates of 6.0%, 5.50% and 5.55%. An expected option term of 6 years for all periods was developed based on historical grant information.
Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Board of Directors adopted the 1994 Stock Plan for Non-Employee Directors. Pursuant to the Directors' Plan, each director (other than employees, former employees or immediate family members of current or former employees) automatically will receive on the day following each annual meeting of stockholders a grant of shares of common stock with a fair market value of $7,500 on the date of issuance. During 1997, 1996 and 1995, 16,000, 8,568 and 2,115 shares, respectively, were issued to eligible directors.
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office facilities and certain equipment under noncancelable lease agreements which expire at various times through 2004. Minimum annual rentals under these agreements at December 31, 1997 are summarized as follows (in thousands of dollars):
Rent expense under these and other lease agreements approximated $465,000, $289,000, and $209,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 $2.2 million under its Financing Agreement (See Note 4). The accompanying financial statements include an insurance accrual based upon third party administrator's and management's evaluations 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 December 31, 1997, 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 retail agreement with a finance company that provides wholesale floor plans for certain Dorsey dealers and which also provides retail financing to end users for some trailers sold through such dealers, where the Company was contingently liable under repurchase agreements with the finance company.
The Company signed a new retail agreement with the finance company which does not require that the Company be contingently liable under repurchase agreements.
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 (See Note 10), 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. Management intends to vigorously defend against this order and believes that the Company will prevail in the appeal process.
In November 1997, a declaratory judgment action was filed by an insurance company as to coverage of a previously paid claim by that insurance company in the settlement of product liability 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 or results of operations.
In April, 1995, a class action lawsuit alleging racial discrimination was filed against the Company, and in the normal course of business, the Company is a defendant in certain other litigation, in addition to the matters discussed above. Management believes such litigation is without merit and intends to contest the suits vigorously. Management believes that the ultimate resolution of the litigation will not have a material impact on the Company's financial position or results of operations.
ENVIRONMENTAL MATTERS
Subsequent to the closing of the Company's Edgerton, Wisconsin plant in 1989, the Wisconsin Department of Natural Resources (WDNR) 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 established reserves that it believes to be adequate to address its environmental liabilities associated with these matters.
DORSEY TRAILERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
10. CLOSING OF NORTHUMBERLAND, PENNSYLVANIA FACILITY
In December 1995, the Company closed its trailer manufacturing facility in Northumberland, Pennsylvania. In connection with the plant closing, the Company recorded a provision of $250,000 for employee termination costs which are included in income from operations in the accompanying financial statements. The plan of termination included 20 managerial and administrative employees and was completed by December 1996.
11. BUSINESS COMBINATIONS
In July 1996, the Company acquired certain assets of a Dillon, South Carolina based dump trailer manufacturer. The acquisition was accounted for under the purchase method. As such, the results of operations of the acquired company are included in the Company's financial statements for the period subsequent to its acquisition date. The aggregate purchase price was $1.8 million paid in the form of cash and note payable. The excess of the purchase price over the estimated fair value of the tangible and identifiable intangible assets acquired was $1,025,000 and is being amortized to earnings on a straight-line basis over 15 years. In connection with the acquisition, the Company entered into a ten year lease agreement with the former owner for the manufacturing facility. The pro forma effect of the acquisition for the years ending December 31, 1996 and 1995 is not provided since the effect of such acquisition was not material.
12. RELATED PARTY TRANSACTIONS
Subsequent to year-end 1996 through March 28, 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 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 were no less favorable than terms that could have been obtained from unaffiliated parties. There were no such transactions subsequent to March 28, 1997.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the Company has reasonably assumed that the carrying amount approximates the estimated fair value for cash and cash equivalents, accounts and other receivables, accounts payable and other accrued expenses. The estimated fair value of long-term debt instruments is based upon the current interest rate environment and remaining term to maturity. The carrying value and estimated fair value for long-term debt instruments as of December 31, 1997 and 1996 are as follows (in thousands of dollars):
In addition, the Company has certain off-balance sheet items such as letters of credit and contingent liabilities. In the opinion of management, the estimated fair value of the fees associated with these commitments is not material to the Company.
DORSEY TRAILERS, INC.
SCHEDULE VIII: VALUATION AND QUALIFYING ACCOUNTS
PART IV
ITEM 14 EXHIBITS
EXHIBITS
The exhibits indicated below are either incorporated by reference herein or are bound separately and accompany the copies of this report filed with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Copies of such exhibits will be furnished to any requesting stockholder of the Company upon payment of the costs of copying and transmitting the same.
- ---------------
* Incorporated by reference from the exhibit of the same number in the Registrant's Registration Statement on Form S-1 (File No. 33-79404) dated May 26, 1994. ** Incorporated by reference from the exhibit of the same number in the Registrant's Registration Statement on Form S-1 (File No. 33-79404) dated May 26, 1994, as amended on July 8, 1994. *** Incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1994. **** Incorporated by reference from the Registrant's Form 10-K for the year-ended December 31, 1995. ***** Incorporated by reference from the Registrant's Form 10-Q for the quarter-ended June 29, 1996. ****** Incorporated by reference from the Registrant's Form 10-K for the year-ended December 31, 1996. ******* Incorporated by reference from the Registrant's Form 10-Q for the quarter-ended March 29, 1997. ******** Incorporated by reference from the Registrant's Form 10-Q for the quarter-ended June 28, 1997. ********* Incorporated by reference from the Registrant's Form 10-Q for the quarter-ended September 27, 1998.