The Wall Street Journal-20080130-Rescue-Truck Builder Files For Chapter 11

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Rescue-Truck Builder Files For Chapter 11

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American LaFrance LLC, which builds ambulances, fire rescue and emergency vehicles, filed for bankruptcy Monday, blaming its adoption of a defective computer system that it said crippled its ability to build customized vehicles.

The Summerville, S.C., company said it aims to stay in Chapter 11 proceedings just long enough to sell its business. To finance its operations during that time, it has sought $50 million in loans from the private-equity firm that owns it, Patriarch Partners LLC, according to documents filed in the U.S. Bankruptcy Court in Wilmington, Del.

Without the new loans from Patriarch, American LaFrance, one of the largest makers of emergency vehicles, said it will "have to curtail or even cease business operations."

The company attributed its immediate cash crisis to computer troubles that made it unable to deliver orders from the cities that are its major customers. Those cities include New York, Los Angeles and Houston.

American LaFrance also cited "depressed" conditions in the market for emergency vehicles, saying many of its competitors also are in financial trouble.

Those problems, however, followed years of losses in the business after Patriarch took it over from Freightliner LLC, previously a DaimlerChrysler affiliate. Patriarch stepped into American LaFrance at the end of 2005 through a transition agreement that left Freightliner in charge of accounting, inventory, payroll and manufacturing at the company until June 2007.

American LaFrance's losses last year totaled $56 million on sales of less than $195 million, according to court documents. That followed losses of $48 million on sales of $233 million in 2006.

The company, though contractors, designed its own computer system to track inventory, purchasing, manufacturing and other critical systems in anticipation of taking over all functions from Freightliner.

Not long after the handoff, however, the company "recognized serious deficiencies with the system that had a crippling impact on . . . operations," according to court documents. Trouble included the new system's inability to reconcile data from the old system, including customer data and data about vehicle configurations.

"The conversion from the Freightliner system to the ERP System resulted in the inability to account for inventory on a reliable basis," American LaFrance said in court papers. "This, in turn, severely limited [American LaFrance's] ability to deliver completed products to its customers."

A wave of executive resignations hit American LaFrance in September and October 2007, and the company signed a deal with Patriarch to hire the firm's executives to run it. During the holidays, American LaFrance put some employees on extended furlough, citing the need to assess inventory and align production, finance and engineering work.

According to court documents, the company owes its Patriarch-led lenders $150 million already. It said it was unable to find other lenders willing to finance a bankruptcy restructuring.

Loans from company owners often get a hard look from other creditors in bankruptcy. In many private equity-related Chapter 11 proceedings, creditors suspicious that equity stakeholders are trying to cushion themselves against losses sue to ask that so-called loans be treated as equity instead of as debt.

In bankruptcy, equity stakeholders lose all unless debts are covered in full. American LaFrance has some powerful creditors, including the companies that issued letters of credit to guarantee it would perform as promised on contracts to deliver vehicles, ACE-USA and a unit of Travelers Cos.

American LaFrance owes $50 million in letters of credit issued to support performance bonds, court documents say. The company listed part of the performance-bond financing as secured debt but said it disputes some of the performance-bond debt.

In court papers, the company didn't provide details about its assets and liabilities immediately. It said only that its assets and liabilities range from $100 million to $500 million.

The case, number 08-10178, has been assigned to U.S. Bankruptcy Judge Brendan Shannon. American LaFrance has hired the law firms of Haynes & Boone and Klehn, Harrison, Harvey, Branzburg & Ellers.