FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
Commission File No. 0-7770
MCCLAIN INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
STATE OF MICHIGAN 38-1867649
State of Incorporation I.R.S. Employer I.D. No.
6200 ELMRIDGE ROAD
STERLING HEIGHTS, MICHIGAN 48310
(810) 264-3611
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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, as amended, 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
As of December 7, 2001, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant was $5,650,932 determined
in accordance with the highest price at which the stock was sold on such date as
reported by the Nasdaq National Market.
As of December 7, 2001, there were 4,520,746 shares of the Registrant's
common stock issued and outstanding.
The Exhibit Index Begins on Page 51
PART I
ITEM 1. BUSINESS
GENERAL
McClain Industries, Inc., a Michigan corporation ("McClain"), together
with its subsidiaries (the "Company"), is one of the nation's leading
manufacturers of a diversified line of dump truck bodies and solid waste
handling equipment. Dump truck bodies are assemblies attached to truck frames
and used to carry and dump solid materials such as dirt or gravel. Solid waste
handling equipment is used for the temporary storage, transportation and
compaction of residential, commercial and industrial waste and recycling
materials. The Company also sells truck chassis at the retail level. In
addition, the Company operates a steel tube mill to manufacture some of its
steel tubing needs. The Company also provides coiled steel cutting and
warehousing services for its own manufacturing operations and, on a limited
basis, for sale to third-party customers.
BACKGROUND
McClain was incorporated in 1968 and became a publicly-traded company
in 1973. It currently has: (i) five wholly-owned operating subsidiaries: McClain
E-Z Pack, Inc. ("E-Z Pack"); McClain Galion, Inc. ("Galion"); McClain Southland
Company ("Southland"); Shelby Steel Processing Co. ("Shelby Steel"); McClain
Tube Company (d/b/a Quality Tubing) ("Tube"); (ii) one wholly-owned lease
financing subsidiary: McClain Group Leasing, Inc. ("Leasing"); and (iii) one
wholly-owned international sales corporation, McClain International FSC, Inc.
("FSC"). All of these companies are Michigan corporations, except for FSC, which
is a Virgin Islands corporation.
The Company's executive offices are located at 6200 Elmridge Road,
Sterling Heights, Michigan 48310 and its telephone number is (810) 264-3611.
PRODUCTS
The Company manufactures and markets dump truck bodies and four solid
waste handling equipment product lines: (1) containers; (2) compactors and
baling equipment; (3) garbage and recycling truck bodies; and (4) transfer
trailers. The Company also markets truck chassis. Sales of dump truck bodies
accounted for approximately 15%, sales of solid waste handling equipment
accounted for approximately 66%, and truck chassis accounted for approximately
19% of the Company's consolidated net sales for the fiscal year ended September
30, 2001.
Dump Truck Bodies and Hoists
Galion manufactures steel and aluminum dump truck bodies varying in
capacity from two to twenty-five cubic yards at its Winesburg, Ohio facility.
E-Z Pack, under license from Galion, also manufactures dump truck bodies at its
Oklahoma City, Oklahoma facility. Dump truck bodies are assemblies that are
attached to a truck's frame or chassis, to allow the truck to carry and dump
solid materials such as dirt, gravel or waste materials. Hoists are the
hydraulic lift mechanisms used to tilt the dump body. Trucks with a dump body
and hoist are commonly seen in use as "dump trucks". The products manufactured
by Galion are sold under the registered trademark "Galion".
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Containers
Detachable Roll-Off Containers and Roll-Off Hoists. E-Z Pack
manufactures several types of detachable roll-off containers and roll-off hoists
at the Company's facilities in Sterling Heights, Michigan, Macon, Georgia,
Demopolis, Alabama, and Oklahoma City, Oklahoma. Detachable roll-off containers
vary in capacity from ten to forty-five cubic yards and are transported with
their contents to recycling centers, incinerators or landfill sites. Roll-off
hoists consist of frames mounted on truck chassis which are hydraulically
operated to load, transport and dump roll-off containers. Roll-off hoists are
advertised and sold under the trade name "MAGNA-HOIST.
Intermodal, Water-Tight and Sludge Containers. The Company manufactures
various types of intermodal, water-tight and sludge containers at the Company's
facilities in Sterling Heights, Michigan, Demopolis, Alabama, and Oklahoma City,
Oklahoma. Intermodal containers vary in capacity from nineteen cubic yards to
thirty-five cubic yards and are designed for highway, railroad and marine
movement of waste products. Water-tight containers vary in capacity from ten to
forty cubic yards and are designed for highway movement of wet waste. Sludge
containers vary in capacity from ten to thirty-five cubic yards and are designed
for highway movement of slurry type waste products.
Compactors and Baling Equipment
The Company manufactures compactors at its facilities in Sterling
Heights, Michigan, Demopolis, Alabama, and Oklahoma City, Oklahoma. Compactors
consist of a compaction unit and separate power source. Compaction units force
deposited refuse through an opening at one end of the unit into a roll-off body
coupled to the compaction unit. When the roll-off body is filled, the compactor
is detached and the roll-off body is removed for dumping. The Company also
manufactures unitized compaction systems consisting of a compactor and roll-off
container manufactured as a single unit. Compactors are sold under the trade
name "MAGNUM" and unitized compactor systems are sold under the trade name
"OCTAMAG". E-Z Pack manufactures, at the Winesburg, Ohio facility, several
models of balers which compact plastic and paper products, primarily cardboard.
Balers are either vertical downstroke or closed door horizontal balers.
Garbage and Recycling Truck Bodies
E-Z Pack manufactures at its Galion, Ohio facility traditional garbage
truck bodies comprised of front, rear and side loading truck bodies and a
recycling truck body used in solid waste handling and disposal. The front
loading truck bodies vary in capacity from thirty-two cubic yards to forty-three
cubic yards, the rear loading truck bodies vary in capacity from eighteen cubic
yards to thirty-one cubic yards, and the side loading truck bodies vary in
capacity from twenty-nine cubic yards to thirty-nine cubic yards. The recycling
truck bodies vary in capacity from thirty cubic yards to forty cubic yards. The
products manufactured by E-Z Pack are sold under the registered trademark "E-Z
Pack". Within this line, E-Z Pack sells its rear loading truck bodies under the
trademarks "Goliath", "Goliath II", and "Apollo", and its front loading truck
bodies under the trademark "Hercules". The side loading truck bodies and the
recycling truck bodies are principally identified by the E-Z Pack name only. The
Company has several patents covering these products.
3
Transfer Trailers
E-Z Pack manufactures at its Galion, Ohio facility, various types of
steel and aluminum transfer trailers, including open-top walking floor trailers,
closed-top walking floor trailers, ejection trailers and open-top tipper
trailers, varying in capacity from thirty cubic yards to 124 cubic yards.
Transfer trailers are used to transport compacted solid waste from transfer
stations to landfills or incinerators.
Truck Chassis
Truck chassis are purchased and combined with either a roll-off hoist
or garbage truck body for sale as a road ready package. This program gives the
Company the opportunity to provide a more complete product to its customers and
gives it the ability to react quickly to unexpected customer needs. Since the
trucks are purchased rather than manufactured by the Company, lower margins are
expected on the sales of these package units then the sales of products
manufactured by the Company.
Leasing
Leasing provides the Company's customers with financing options through
both finance type and operating leases. The operating leases are T.R.A.C.
(Terminal Rental Adjustment Clause) leases.
CUSTOMERS AND DISTRIBUTION
For the fiscal year ended September 30, 2001 the Company's consolidated
net sales were divided approximately 45% to distributors, 45% to solid waste
handling companies, and 10% to other entities.
During the fiscal years ended September 30, 2001, 2000 and 1999,
approximately 17.0%, 22.6% and 23.1%, respectively, of the Company's total sales
were made to Waste Management, Inc. The Company has no contracts with any of its
customers, except Waste Management, Inc. (see footnote 16 to the consolidated
financial statements of the Company, included under Item 8 of the Form 10-K, for
additional information) and, accordingly, sells its products pursuant to
purchase orders placed from time to time in the ordinary course of business. The
Company delivers its products to its customers through the use of its own trucks
or common carriers.
The Company obtains its municipal as well as certain private contracts
through the process of competitive bidding. There can be no assurance that
municipalities or others will continue to solicit bids, or if they do, that the
Company will continue to be successful in having its bids accepted.
Additionally, inherent in the competitive bidding process is the risk that if a
bid is submitted and a contract is subsequently awarded, actual performance
costs may exceed the projected costs upon which the submitted bid or contract
price was based.
Historically, foreign sales have not accounted for a significant
portion of the Company's revenues, The Company anticipates that future foreign
sales will remain steady or increase slightly.
SALES AND MARKETING
Historically, the Company's products have been marketed by the
Company's executive officers and sales personnel who have worked closely with
customers to
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solicit orders and to render technical assistance and advice. The Company's
executive officers will continue to devote a significant amount of time to
developing and maintaining continuing relations with the Company's customers.
The Company also engages independent distributors and dealers in
various regions throughout the United States and certain foreign countries, for
marketing its products to customers. The Company's dealers are generally
responsible in their respective geographic markets for identifying customers and
soliciting customer orders. As of December 7, 2001, there were approximately 225
authorized Company dealers located in numerous states and 20 authorized Company
dealers, licensees and commissioned district managers in 10 foreign countries,
each of which is independently owned. The Company is dependent on such dealers
for a significant portion of its revenues. These dealers typically specialize in
specific products and areas and, accordingly, have specific knowledge of and
contacts in particular markets. The Company believes that its dealers have
enhanced and will continue to enhance the scope of the Company's marketing and
sales efforts and have, to a certain extent, also enabled the Company to avoid
certain significant costs associated with creating a more extensive direct sales
network.
The Company advertises its products under trade names and under its
name in trade journals and brochures. Other marketing efforts include articles
in trade publications, attendance at trade shows and presentations by the
Company's personnel at industry trade conferences.
The Company, through Leasing, also provides both sales-type financing
and operating leases. At September 30, 2001, Leasing held net lease receivables
of approximately $27.8 million.
RAW MATERIALS
The Company is dependent on third-party suppliers and manufacturers for
the raw materials and a significant portion of the parts it uses in the
manufacture of its products. The major raw materials used by the Company are
steel in sheet, plate, structural and tubular form and aluminum in sheet and
extruded form. The Company purchases its steel, principally in coils, and its
sheet and extruded aluminum from domestic mills, warehouses and importers.
Coiled steel is received by the Company at various manufacturing facilities
where it is then cut, bent, sheared and formed for assembly by welding. Electric
and hydraulic components incorporated into the power units of compactors, balers
and hoists used with dump bodies manufactured by the Company are brand name
items purchased from various sources and assembled by the Company or to their
specifications by outside sources. The assembled products are then painted to
customers' specifications.
While the Company attempts to maintain alternative sources for the
Company's raw materials and believes that multiple sources are currently
available for all of the raw materials that it uses, the Company's business is
generally subject to periodic shortages of raw materials which could have an
adverse effect on the Company.
The Company generally has no supply agreements with any of its
suppliers and, accordingly, generally purchases raw materials pursuant to
purchase orders placed from time to time in the ordinary course of business.
Failure or delay by suppliers in supplying necessary raw materials to the
Company could adversely affect the Company's ability to obtain and deliver its
products on a timely and competitive basis. In addition, the Company has
experienced price fluctuations for the raw materials that it
5
purchases, particularly with respect to steel and aluminum. Any significant
price fluctuations in the future could also have an adverse effect on the
Company.
The Company uses a forecasting and purchasing system to monitor the
quantity and cost of necessary raw materials. Such cost controls allow the
Company to minimize its operating costs by purchasing from the lowest priced
suppliers the appropriate amount of raw materials in light of the Company's
needs. The Company often orders raw materials in amounts in excess of its
anticipated short-term needs in order to take advantage of price discounts
available on large volume purchases of raw materials.
To reduce its cost of raw materials, the Company processes coiled steel
and manufactures some of its own tubing, rather than purchasing tubing and
processed sheet steel from third parties. The Company believes that it is the
only manufacturer of dump truck bodies and solid waste handling equipment to
process coiled steel and to operate a steel tube mill.
Steel Processing
Shelby Steel, a wholly-owned subsidiary of the Company, receives coiled
steel and either warehouses or cuts and processes the steel at its River Rouge,
Michigan facility to prescribed specifications. In addition to processing coiled
steel for use by the Company, Shelby Steel also offers steel processing and
warehousing services to third parties. Shelby Steel's ability to warehouse
customers' steel attracts customers such as steel brokers who do not maintain
facilities of their own to warehouse steel. Its steel processing and warehousing
sales are generally limited to customers in the Detroit metropolitan area. Sales
to third parties represented 88.5%, 93.8%, and 92.6% of Shelby Steel's business
and 1.7%, 1.4%, and 1.5% of the Company's consolidated net sales for the fiscal
years ended September 30, 2001, 2000 and 1999, respectively.
Tube Manufacturing
Tube, a wholly-owned subsidiary of the Company, began operating its
tube manufacturing line in the Company's Kalamazoo facility in mid-1994. The
facility receives coiled steel, slits the coil to proper width and forms it into
square and rectangular tubing. The tubing produced by this facility provides the
Company with approximately 95% of its steel tubing requirements.
COMPETITION
The Company faces intense competition in the solid waste handling
equipment and dump truck bodies industries. Certain of the Company's competitors
offer as wide a range of products, and have greater market share and financial,
marketing, manufacturing and other resources than the Company. At present, the
Company's order backlogs are approximately two to four weeks. In addition, the
Company believes that several of its competitors have added or are in the
process of adding additional manufacturing capacity, which could reduce order
backlogs and price levels, and consequently adversely affect the Company.
Moreover, the absence of highly sophisticated technology results in a number of
small regional companies entering the container and dump truck body industries
periodically and competing with the Company.
Although the Company believes that its products are superior to those
of most of its competitors because of the quality and amount of steel used in
its products,
6
consumers generally find the products relatively interchangeable. Consequently,
price, product availability and delivery, design and manufacturing quality and
service are the principal means of competition. The Company believes that it can
continue to compete and further strengthen its competitive position through
proper pricing, marketing and cost-effective distribution of the Company's
products.
The steel processing industry is also highly competitive, with quality,
price and delivery the principal means of competition. The Company believes that
it will generally continue to maintain its competitive position in the
marketplace with respect to steel processing. Shelby Steel's ability to
warehouse customers' steel attracts customers such as steel brokers who do not
maintain facilities of their own to warehouse steel.
BACKLOG AND INVENTORY
The Company generally produces solid waste handling equipment and dump
truck bodies pursuant to customer purchase orders. The Company includes in its
backlog only firm product orders, which are subject to termination at will and
rescheduling, without penalty. The Company's backlog was approximately $11.2
million and $12.9 million at September 30, 2001 and 2000, respectively.
Substantially all of the Company's backlog is delivered within four to six weeks
of the Company's receipt of purchase orders. Due to numerous factors, including
termination of orders, rescheduling, possible change orders and delays, which
affect production and delivery of the Company's products, there can be no
assurance as to if or when cash receipts will be recognized from the Company's
backlog. In addition, year to year comparisons of backlog are not necessarily
indicative of future operating results. Although most of the Company's sales are
based on orders for goods to be manufactured, the Company nevertheless carries
certain amounts of finished goods inventory in order to meet customer delivery
dates. In addition, from time to time, the Company manufactures units in excess
of ordered units to "round out" production runs or to maintain base stock
levels. At September 30, 2001, 2000 and 1999, the Company had inventory of $36.7
million, $52.0 million and $63.3 million, respectively.
EMPLOYEES
The Company had approximately 560 employees as of December 7, 2001.
Sixty-eight of the Company's hourly employees are represented by the McClain
Hourly Employees' Union pursuant to a collective bargaining agreement that
expires September 16, 2002. The 104 hourly employees of E-Z Pack (E-Z Pack
Division) are represented by the International Association of Machinists and
Aerospace Workers Union pursuant to a collective bargaining agreement which
expires June 12, 2003. The 45 hourly employees of E-Z Pack (Ohio Division) are
represented by the International Association of Machinists and Aerospace Workers
Union pursuant to a collective bargaining agreement which expires November 1,
2002. The Shopmen's Local Union No. 616 of the International Association of
Bridge, Structional and Ornamental Workers represent certain hourly employees at
the Company's facility in Macon, Georgia. E-Z Pack has conducted extensive
negotiations with this union toward a collective bargaining agreement which, at
this time, has not been finalized.
ENVIRONMENTAL
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning, among
other things, emissions into the air, discharges into the waters and the
generation, handling, storage, transportation, treatment and disposal of waste
and other materials. Inherent in
7
manufacturing operations and in owning real estate is the risk of environmental
liabilities as a result of both current and past operations, which cannot be
predicted with certainty. The Company has incurred and will continue to incur
costs, on an ongoing basis, associated with environmental regulatory compliance
in its business. The Company has budgeted approximately $1.0 million to make
capital additions and improvements to its painting processes and enhance the
related environmental controls at its facilities in Sterling Heights, Michigan
and Oklahoma City, Oklahoma.
State and local agencies have become increasingly active in the
environmental area. The increased regulation by multiple agencies can be
expected to increase the Company's future environmental costs. In particular,
properties under federal and state scrutiny frequently result in significant
clean-up costs and litigation expenses related to a party's clean-up obligation.
However, the Company believes that the ever-increasing waste stream and the
continuing initiatives of government authorities relating to environmental and
waste disposal problems, including restrictions on landfill locations and
operations and extensive regulation relating to the disposal of waste, create
significant opportunities for companies in the solid waste handling equipment
industry.
ITEM 2. PROPERTIES
In the aggregate, the Company owns or leases approximately 961,000
square feet of real property located in Michigan, Ohio, Georgia, Oklahoma,
Alabama and Florida. The Company owns three facilities in Michigan, two
facilities in Ohio, one facility in Georgia, one facility in Oklahoma, one
facility in Alabama and one facility in Florida. The properties that the Company
owns or leases consist of the following:
OWNED SQUARE
LOCATION OR LEASED FOOTAGE
-------- --------- -------
Sterling Heights, Michigan Owned 37,000
Sterling Heights, Michigan Leased 18,000
Kalamazoo, Michigan Owned 55,000
River Rouge, Michigan Owned 50,000
Galion, Ohio Owned 365,000
Winesburg, Ohio Owned 113,500
Macon, Georgia Owned 114,500
Oklahoma City, Oklahoma Owned 100,000
Demopolis, Alabama Owned 102,000
Bartow, Florida Owned 6,000
The Company's main office and manufacturing facilities are located in a
37,000 square foot facility situated on 8 2/3 acres in Sterling Heights,
Michigan owned by the Company. This facility is used to manufacture roll-off
containers, roll-off hoists and compactors. The Company also owns a 55,000
square foot facility located in Kalamazoo, Michigan which is home to the
Company's tube mill. The Company leases, under a verbal month-to-month lease, an
18,000 square foot manufacturing facility also located in Sterling Heights,
Michigan from siblings of Messrs. Kenneth and Robert McClain. This facility is
used by the Company as a fabrication facility. The monthly rental for this
facility is $3,500, with the lessor responsible for the payment of real estate
taxes, assessments, insurance premiums and replacement in case of damage by
fire, and the Company responsible for maintenance of the building. The Company
believes that the terms and conditions of this lease are comparable to the terms
and conditions which would be available from an unrelated party with respect to
similar facilities,
8
although other similarly situated unrelated parties would, in all likelihood,
require a long-term written lease.
Shelby Steel owns a 50,000 square foot steel processing facility on six
acres of land in River Rouge, Michigan, where all of its operations are
conducted.
E-Z Pack owns three buildings comprising approximately 365,000 square
feet situated on approximately 38 acres of land in Galion, Ohio. This facility
manufactures front, side and rear loading garbage truck bodies and recycling
trucks as well as transfer trailers.
E-Z Pack's Georgia facility is an approximately 114,500 square foot
manufacturing facility on 13.2 acres in Macon, Georgia where it manufactures
roll-off hoists.
E-Z Pack's Oklahoma facility consists of four buildings in Oklahoma
City, aggregating 100,000 square feet. This facility is used to fabricate and
process steel for its own use and to manufacture roll-off containers, compactors
and dump bodies.
E-Z Pack owns an approximately 102,000 square foot manufacturing
facility in Demopolis, Alabama on approximately 84 acres of land. This facility
is used to fabricate and process steel for its own use and to manufacture
roll-off containers and compactors.
Galion owns a 113,500 square foot manufacturing facility situated on 20
acres of land in Winesburg, Ohio where it manufactures dump bodies, hoists and
balers.
The Company's Southland facility owns a building that is approximately
6,000 square feet on approximately 3.43 acres of land. This property provides
administration offices and service facilities for Southland.
The Company's Sterling Heights, Michigan facility and Galion, Ohio
facility are currently operating at approximately 60% of capacity. The Oklahoma
facility is currently operating at 65% of capacity. The Georgia facility is
currently operating at 30% of capacity. The Alabama facility is currently
operating at 60% capacity. The Winesburg, Ohio facility is currently operating
at 80% of capacity. The Kalamazoo, Michigan facility is currently operating at
60% of capacity. The determination of the productive capacity on each facility
actually used by the Company is a function of the mix of products being produced
at such facility and the pricing of such products. The production capacity
figures set forth in this paragraph reflect the mix of products presently
produced by each facility and the present pricing of such products. The Company
enjoys expandable capacity at most of these facilities depending on
double-shifting and other performance enhancing activities.
The facilities owned and leased by the Company are well maintained and
in good operating condition. Its plants and equipment are subject to various
liens and encumbrances that collateralize certain obligations. See Notes 6 and 7
of Notes to Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to various claims from
existing or former employees alleging gender, age or racial discrimination and
anti-union activity, none of which are expected to have a material adverse
affect on the Company. In addition, as a manufacturer of industrial products,
the Company is, from time to time, subjected to various product liability
claims. Such claims typically involve personal injury or wrongful death
associated with the use or misuse of the Company's products. While such claims
have not been material to the Company in any year and the Company believes that
it maintains adequate product liability insurance, there can be no assurance
that such insurance will continue to be available on terms acceptable to the
Company. Any product liability claim not fully covered by insurance, as well as
any adverse publicity from a product liability claim, could have a material
adverse effect on the Company.
The Company is currently defending a number of legal proceedings
involving product liability claims relating to McClain, Galion and E-Z Pack
brand products. Although the Company believes that it can continue to
successfully resolve pending and future product liability claims, there can be
no assurance that the Company will be able to do so.
The International Association of Bridge, Structual, Ornamental and
Reinforcing Iron Workers, Local Union 526 (the "Local 526") filed unfair labor
practices with regard to the Company's Macon, Georgia operations in 1995 which
were subsequently upheld by the National Labor Relations Board and the U.S.
Court of Appeals for the Eleventh Circuit. The Company is negotiating with the
NLRB in an effort to reach a settlement as to the extent of the liability
arising from the matter. Local 526 filed additional unfair labor practices in
1996. On October 4, 2001 the NLRB issued an Order Consolidating Cases, Second
Amended Consolidated Complaint and Notice of Hearing which set a hearing date of
March 11, 2002. The Second Amended Consolidated Complaint asserts various unfair
labor practices including violations of Sections 8(a)(1) and (3) and (5) and
8(d) of the National Labor Relations Act. The NLRB seeks backpay, reinstatement,
and an order requiring transfer of work. While the Company believes these
lawsuits will be settled, there can be no assurance that they will be. If they
are not settled, there can be no assurance that the amounts awarded will not
have a material adverse effect on the Company.
The Company is not presently a party to any material legal proceedings
except as described above in this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded and quoted on the Nasdaq National
Market ("Nasdaq/NMS") under the trading symbol "MCCL." The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock as reported by Nasdaq/NMS. These per share quotations represent
inter-dealer prices on the Nasdaq/NMS, and do not include retail mark-ups or
commissions.
SALES PRICE
OF
COMMON STOCK
------------
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter 6.25 3.875
Second Quarter 6.812 4.187
Third Quarter 5.437 4.625
Fourth Quarter 5.625 3.875
FISCAL YEAR ENDED SEPTEMBER 30, 2001
First Quarter 4.50 3.75
Second Quarter 3.12 2.12
Third Quarter 2.75 2.12
Fourth Quarter 2.75 1.25
On December 7, 2001, the last reported sales price for the Common Stock
as reported by Nasdaq/NMS was $1.25. As of such date there were approximately
199 holders of record of the Common Stock. The Company believes there are a
substantial number of beneficial owners of the Company's Common Stock whose
shares are held in street name. The Company has never paid any cash dividends.
The payment of dividends by the Company is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition, as well as other relevant factors. The Board of
Directors does not intend to declare any dividends in the foreseeable future,
but instead intends to retain earnings for use in the Company's operations.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's last five fiscal
years ended September 30 are as follows:
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========================================================================================================================
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Gross Sales $ 92,499,362 $ 142,978,636 $ 142,079,475 $ 118,487,052 $ 95,255,641
Sales, Net of $ 91,549,939 $ 141,117,959 $ 140,604,885 $ 116,554,031 $ 95,255,641
Customer Discounts
Net Income (Loss) $ (4,989,041) $ (85,854) $ 4,181,938 $ 3,383,892 $ (1,703,780)
Net Earnings (Loss)
Per Common and
Common Equivalent $ (1.11) $ (.02) $ .90 $ .72 $ (.36)
Share,(1)
Working Capital
(Deficit) $ (12,409,479) $ 59,987,560 $ 58,689,965 $ 41,919,687 $ 33,520,003
Total Assets $ 102,646,275 $ 123,684,913 $ 129,923,989 $ 100,246,967 $ 87,185,567
Long-Term Debt(2) $ 0 $ 67,476,117 $ 62,648,684 $ 42,530,105 $ 38,513,490
Stockholders'
Investment $ 25,005,663 $ 30,207,456 $ 30,890,965 $ 26,835,306 $ 23,837,091
Weighted Average
Number of Common
Equivalent Shares
Outstanding(1) 4,504,341 4,565,661 4,673,027 4,711,741 4,729,281
Current Ratio(2) 0.83:1 3.67:1 2.79:1 2.57:1 2.63:1
Funded Debt to Equity 2.38:1 2.24:1 2.03:1 1.59:1 1.62:1
========================================================================================================================
1 Weighted average number of shares outstanding includes, as appropriate,
adjustments for the effect of common stock equivalents.
2 For 2001, current liabilities include long term debt subject to a
forbearance agreement. See Note 7 of the Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements, including the notes to them, appearing
elsewhere in this report.
Certain statements in this Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, and in the Company's
written and oral statements made by or with the approval of an authorized
executive officer, constitute "forward-looking statements" within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. The Company intends that such forward-looking statements be subject
to the safe harbors created by such acts. The words "believe", "expect",
"anticipate"; and similar expressions identify forward-looking statements. These
forward-looking statements reflect the Company's current views with respect to
future events and financial performance, but are subject to many uncertainties
and factors relating to the Company's operations and business environment which
may cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking
12
statements. Examples of such uncertainties include, but are not limited to,
changes in customer demand and requirements, interest rate fluctuations, changes
in federal income tax laws and regulations, competition, industry specific
factors and both national and world wide economic and business conditions. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
The following table presents, as a percentage of net sales, certain
selected financial data for the Company for the years indicated:
-----------------------------------------------------------------------------
YEAR ENDED
SEPTEMBER 30,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Sales 100.00% 100.00% 100.00% 100.0% 100.00%
Cost of Sales 86.71 84.47 82.40 82.18 83.68
------ ------ ------ ----- ------
Gross Profit 13.29 15.53 17.60 17.82 16.32
Selling, General &
Administrative Expenses 18.82 12.76 11.55 11.47 14.33
Restructuring and Impairment
Charge 0.00 0.00 0.00 0.00 1.84
------ ------ ------ ----- ------
Operating Profit (Loss) (5.53) 2.77 6.05 6.35 .15
Other Expense 2.71 2.86 1.54 2.22 2.24
------ ------ ------ ----- ------
Income (Loss) Before Income
Taxes (8.24) (.09) 4.51 4.13 (2.09)
Income Taxes (Benefit) (2.79) (.03) 1.53 1.23 (.30)
------ ------ ------ ----- ------
Net Income (Loss) (5.45)% (.06)% 2.98% 2.90% (1.79)%
====== ====== ====== ====== ======
RESULTS OF OPERATIONS
Comparison of year ended September 30, 2001 to year ended September 30, 2000
Net sales decreased 35.1% to $91.6 million for the fiscal year ended
September 30, 2001 (Fiscal 2001) from $141.1 million for the fiscal year ended
September 30, 2000 (Fiscal 2000). The decrease was due primarily to slumping
sales resulting from the slowdown in the economy. McClain E-Z Pack's sales
decreased 36.1% or $31.0 million during Fiscal 2001 compared to the Fiscal 2000
while McClain Truck sales decreased 40.9% or $12.1 million during Fiscal 2001
compared to Fiscal 2000. These decreases were the result of the continuing
economic slowdown and limited capital expenditures in the hauling industry.
Sales of the Company's dump body products decreased by 28.8% or $5.5 million for
Fiscal 2001 compared to Fiscal 2000 due to the continued slump and excess
production capacity in the dump body markets. Sales of the Company's other
product lines fell 22.8% due to the current economic slump for Fiscal 2001
compared to Fiscal 2000. The sales of the McClain Truck division accounted for
23.2% of the Company's sales for fiscal 2001 compared to 20.6% of the Company's
sales for Fiscal 2000.
Cost of goods sold increased to 86.7% for Fiscal 2001 from 84.5% for
Fiscal 2000. The gross profit margin on manufactured products decreased to 17.7%
for Fiscal 2001 compared to 21.8% for Fiscal 2000 due primarily to the lower
sales volume that increased the Company's fixed cost rates and continued
increases in health insurance costs. The McClain Truck division had a gross loss
of 1.1% for Fiscal 2001 compared to a gross loss of 3.15% for Fiscal 2000.
Selling, General & Administrative Expenses increased to 18.8% of net
sales for Fiscal 2001 from 12.8% of net sales for Fiscal 2000 primarily due to
the lower sales volume, increases in the reserves for the accounts and lease
receivable, continued
13
increases in health insurance costs, various severance packages for terminated
employees, and costs related to the ongoing negotiations with the principal
lender regarding the Company's debt structure (see the discussion in the
Liquidity and Capital Resources section).
Inventory has decreased to $36.7 million at September 30, 2001 from
$52.0 million at September 30, 2000. This decrease is due primarily to the
Company's efforts to liquidate inventory in order to bring the inventory levels
into line with the current sales levels.
The Company's leasing subsidiary generated pretax income of $1.0
Million for Fiscal 2001 compared to of $.70 Million for Fiscal 2000. The Company
had $27.8 Million in net finance lease receivables at September 30, 2001
compared to $23.6 Million at September 30, 2000.
Interest expense decreased to $5.5 million in Fiscal 2001 from $6.3 in
Fiscal 2000. This decrease was due primarily to falling interest rates,
decreased debt related to the inventory reductions and was partially offset by
increased debt related to the leasing company.
Income taxes are calculated based on the current statutory rates. No
significant differences between the Company's effective rate and the statutory
rates exist.
The Company had a Net Loss of $4,989,041 for Fiscal 2001 compared to a
Net Loss of $85,854 for Fiscal 2000. The loss was due primarily to reduced sales
volumes throughout the Company's product lines and increases in certain other
costs as previously discussed.
Comparison of year ended September 30, 2000 to year ended September 30, 1999
Net sales increased .4% to $141.1 million for the fiscal year ended
September 30, 2000 (Fiscal 2000) from $140.6 million for the fiscal year ended
September 30, 1999 (Fiscal 1999). The Company experienced increases in the sales
of its commodity products and truck chassis while refuse truck and dump body
sales decreased. Sales for the commodity products increased 5.14% or $2.7
million, while truck chassis sales increased 11.3% or $3.0 million. Dump body
sales decreased 5.4% or $1.1 million due primarily to an overall slump in the
dump body industry. During Fiscal 2000, E-Z Pack sales fell 9.41% or $3.4
million after an increase of 49.6% or $11.8 million in Fiscal 1999. This
decrease was due primarily to the national haulers limiting their capital
purchases while they implemented integration plans following ongoing
consolidations in the waste hauling industry. Sales of the Company's other
product lines increased slightly or were flat for Fiscal 2000 compared to Fiscal
1999. The sales of the McClain truck division accounted for 20.6% of the
Company's sales for Fiscal 2000 compared to 18.8% of the Company's sales for
Fiscal 1999.
The Company's overall gross profit as a percentage of sales decreased
to 15.53% for Fiscal 2000 from 17.60% for Fiscal 1999, while the gross profit
margin for products the Company manufactured increased to 21.8% for Fiscal 2000
compared to 21.4% for Fiscal 1999. This increase results from reduced steel
prices and increased production efficiencies at certain of the Company's
production facilities. The truck chassis division had a gross loss of 3.15%
during Fiscal 2000 compared to a gross profit of 6.8% for Fiscal 1999. During
Fiscal 2000 the Company determined that due to the current slump in the tandem
dump truck market and certain other market factors it would not be able to
compete effectively in the package dump truck market. Based on
14
this determination and the costs to continue carrying the dump truck chassis
inventory, the Company decided to liquidate the entire portion of this inventory
in the fourth quarter of Fiscal 2000. This liquidation resulted in a realized
loss on disposal of approximately $1.75 million.
Selling, General & Administrative Expenses increased to 12.76 % of net
sales for Fiscal 2000 from 11.55% of net sales for the Fiscal 1999 due primarily
to increases in marketing activity, health insurance costs, professional fees
and additional trucking expenses necessary to ship commodity products made at
E-Z Pack's Demopolis, Alabama facility to regions outside the Southeast in order
to reduce a build up of the finished goods inventory at that facility.
Inventory has decreased to $52.0 million at September 30, 2000 from
$63.3 million at September 30, 1999. This decrease is due primarily to the
liquidation of the dump truck chassis inventory as discussed above.
The Company's leasing subsidiary generated pretax income of $.70
Million for Fiscal 2000 compared to of $.5 Million for Fiscal 1999. The Company
had $23.6 Million in net finance lease receivables at September 30, 2000
compared to $18.8 Million at September 30, 1999.
Interest expense increased to $6.3 million in Fiscal 2000 from $4.0 in
Fiscal 1999. This increase was due primarily to rising interest rates, increased
debt related to the leasing company and the debt service on the dump truck
chassis inventory prior to the liquidation previously discussed.
Income taxes are calculated based on the current statutory rates. No
significant differences between the Company's effective rate and the statutory
rates exist.
The Company had a net loss of $85,854 for Fiscal 2000 compared to a net
profit of $4,181,938 for Fiscal 1999. This decrease was due primarily to losses
incurred by the Company's truck chassis division and increased interest expense
as previously discussed as well as reduced profits from the Company's refuse
truck and dump body divisions due to slower than expected sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of $12.4 million at September
30, 2001 compared to positive working capital $59.9 million at September 30,
2000. The ratio of current assets to current liabilities was 0.83:1 at September
30, 2001 and 3.63:1 at September 30, 2000. The decline in working capital is
primarily a result of classifying long term debt as current at September 30,
2001 due to noncompliance with debt covenants at that date. The Company's cash
and cash equivalents totaled $0.8 million at September 30, 2001. Cash flows
provided by operations were $13.3 million for the year ended September 30, 2001.
The Company's working capital needs decreased during Fiscal 2001 from
Fiscal 2000 due to the Company's ongoing efforts to reduce its inventory to
levels more consistent with the current sales volumes.
The Company has a Revolving Credit Facility with Standard Federal Bank,
a federal savings bank ("Standard"), which provides maximum availability of
$22.0 for working capital needs. At September 30, 2001 the Company had borrowed
approximately $20.7 million under the working capital line. Borrowings under the
15
working capital line are limited to 80% of eligible accounts receivable and 50%
of qualified inventory
The Company has a second Revolving Credit Facility with Standard used
to finance certain of its lease receivables. The agreement calls for a maximum
availability of $20.0 million with borrowing limited to 80% of eligible lease
receivables. At September 30, 2001 approximately $18.8 million had been drawn on
this facility.
All borrowings with Standard are secured by substantially all of the
assets of the Company. The Company's debt agreements contain certain restrictive
covenants that require the Company to, among other things, meet certain net
worth and working capital requirements along with maintaining various financial
ratios. As the result of non compliance with certain of the financial covenants,
the Company entered into a forbearance agreement with its principal lending
institution in June of 2001 and expiring August 31, 2001. This agreement was
extended to October 31, 2001 and further extended through January 31, 2002.
Under the most recent amended and extended forbearance agreement, the line of
credit is capped at $22 million, effective December 4, 2001, interest will
accrue at the default rate of prime plus 2 1/2%, the leasing credit limit is
reduced to the lesser of $19 million or the borrowing base, as defined, and the
Company has been placed under a dominion of funds arrangement. Accordingly, the
debt related to these agreements has been shown as a current liability.
Management's plans to resolve this matter include, exploring other financing
options while continuing to negotiate with its principal lender to extend the
forbearance period or amend its current agreements to among other things reset
those covenants that are currently out of compliance and extend the maturity
dates on certain of its revolving credit agreements, continuing to evaluate the
need for additional personnel reductions, analyzing all plant operations and
product lines to determine the viability of each facility, and continuing
inventory reductions to match forecasted operating levels. While management
believes it will be successful in its negotiations with it principal lender or
in obtaining an alternative financing source, that outcome is not certain. If
either of these options are ultimately unavailable to the Company and the
principal lender exercises it right to accelerate the repayment of the
outstanding debt, the Company would be unable to pay the amount outstanding. The
revolving credit agreements expire in May 2002.
The Company has agreements with three financial institutions to provide
financing for its TRAC (Terminal Rental Adjustment Clause) Leasing Agreements.
The agreements call for maximum availability of $19.5 million in lease
commitments. Under these facilities, the Company may finance 100% of eligible
lease receivables over the term of the related lease at a fixed interest rate
determined at the time of the lease closing. The notes are secured by the
related lease receivable. At September 30, 2001, approximately $14.0 million had
been drawn on the facilities.
Management believes, that if its principal lender extends the
forbearance period, the negotiations discussed above are successful or the
Company secures an alternative financing source, that the Company's cash flow,
together with the credit available to it under existing debt facilities, will
provide it with adequate cash for its working capital needs for the next 12
months. If these options are ultimately unavailable to the Company and the
principal lender exercises it right to accelerate the repayment of the
outstanding debt, the Company would be unable to pay the amount outstanding.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed under Item 14 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in the Company's independent public
accountants during the past two fiscal years and the Company does not disagree
with such accountants on any matter of accounting principles, practices or
financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
APPROXIMATE
DATE
SERVICE
NAME AGE OFFICE BEGAN
---- --- ------ -----
Kenneth D. McClain(1) 60 Chairman of the Board, Chief
Executive Officer and President 3/68
Robert W. McClain(1) 65 Senior Vice President, Assistant
Secretary and Director 3/68
Raymond Elliott 67 Director 8/90
Walter J. Kirchberger 66 Director 11/95
Ronald B. Briggs 66 Director 6/01
Carl Jaworski 58 Secretary 10/72
Mark S. Mikelait 41 Treasurer 5/97
(1) Kenneth D. McClain and Robert W. McClain are brothers.
KENNETH D. MCCLAIN is Chairman of the Board and President of the
Company. He has been a director and officer of the Company since its inception
in March 1968. He also serves as Vice President and a director of Shelby Steel.
Mr. McClain is also a director and the Chairman of the Board of E-Z Pack and
Galion.
ROBERT W. MCCLAIN is Senior Vice President and Assistant Secretary of
the Company. He has been a director and officer of the Company since its
inception in March 1968. He also serves as President of Shelby Steel.
17
RAYMOND ELLIOTT has been a director of the Company since August 1990.
He is President of Hartland Insurance Group, Inc. From January 1, 1997 to
October 2, 1998, he was a Vice President of First of America Insurance (now
National City) Group since October 1996. Prior to that he was President and a
director of Elliott & Sons Insurance Agency, Inc. and Michigan Benefit Plans
Insurance Agency, Inc. since 1967. Mr. Elliott also serves as a director of the
Boys and Girls Club of Troy, a charitable organization located in Troy,
Michigan.
WALTER J. KIRCHBERGER was elected to the Board of Directors in November
1995. Mr. Kirchberger is a Director at UBS Warburg LLC and has served in such
capacity for more than 25 years. Until recently he also served as a director of
Simpson Industries, Inc.
RONALD BRIGGS was elected to the Board of Directors in June 2001. Mr.
Briggs is a former shareholder/director of Doeren Mayhew, Certified Public
Accountants located in Troy, Michigan. He started his career with the firm in
1960, became audit director in 1967 and served as managing director of the firm
from 1984 to 1996 and retired in 1997. Mr. Briggs is a member of the American
Institute of Certified Public Accountants and the Michigan Association of
Certified Public Accountants.
CARL JAWORSKI has served as Secretary since October 1972. Mr. Jaworski
was also a director and the Treasurer of the Company from October 1972 until
April 1992. Mr. Jaworski also serves as Secretary and a director of Shelby
Steel. Mr. Jaworski is the Secretary of E-Z Pack and Galion.
MARK S. MIKELAIT has served as Treasurer of the Company since May 1997
and joined the Company in September 1994. Prior to that time Mr. Mikelait, a
CPA, was employed as a senior manager by Rehmann Robson, the Company's
independent auditors, beginning in November 1985.
The Company is required to identify each person who was an officer,
director or beneficial owner of more than 10% of the Company's registered equity
securities during the Company's most recent fiscal year and who failed to file
on a timely basis reports required by Section 16(a) of the Securities Exchange
Act of 1934. Based solely upon its review of copies of such reports received by
it during or with respect to the fiscal year ended September 30, 2001, the
Company believes that all officers, directors and beneficial owners of more than
10% of the Company's registered equity securities timely filed all required
reports.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth all cash compensation paid to the Chief
Executive Officer of the Company and the other executive officers whose total
annual salary and bonus from the Company exceeded $100,000 during the fiscal
year ended September 30, 2001.
18
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
------------------ ---- ------ ----
Kenneth D. McClain,
President/ CEO 2001 $277,083 ---
2000 294,792 ---
1999 275,000 25,000
Robert W. McClain,
Senior Vice
President 2001 $150,000 ---
2000 150,000 ---
1999 143,751 25,000
Carl Jaworski
Secretary 2001 $112,750 ---
2000 111,373 ---
1999 108,750 5,000
Mark S. Mikelait
Treasurer 2001 $126,075 ---
2000 122,781 ---
1999 126,250 5,000
====================================================================================
AGGREGATED OPTION/SAR EXERCISES AND
FISCAL YEAR-END OPTION/SAR VALUES TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Shares No. of Unexercised Value of Unexercised
Acquired Options/SARs at In-The-Money Options/SARs at
on Fiscal Year-End (1) Fiscal Year-End(2)
Exercise Value
in 2001 Realized
-------------------------------------------------------------------------
Not Not
Exercisable Exercisable(1) Exercisable Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Kenneth D. McClain -0- -0- 16,666 8,334 $ -0- $ -0-
Robert W. McClain -0- -0- 13,333 6,667 $ -0- $ -0-
Carl Jaworski -0- -0- 10,000 -0- $ -0- $ -0-
Mark S. Mikelait -0- -0- 15,000 -0- $ -0- $ -0-
==================================================================================================================================
(1) Stock options granted between February 9, and May 7,1999 pursuant to
the Company's 1989 and 1999 Incentive Stock Plans (the "Incentive
Plans"). Options must be exercised by May 7, 2004. Exercise prices vary
from $5.08 to $5.50 per share.
(2) Value based on the average of the September 30, 2001 closing bid high
and low price which was $1.38 per share.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive compensation
for serving on the Board or on the Board's committees. Directors who are not
employees of the Company are entitled to a quarterly retainer fee of $4,000, a
$1,000 fee for each regular or special meeting of the Board and a $1,000 fee for
each committee meeting attended on a day other than a regular or special Board
meeting date (collectively, the "Fees"). A Director may elect to receive payment
of the Fees in shares of Common Stock pursuant to the Company's 1999 Retainer
Stock Plan for Non-Employee
19
Directors (the "Retainer Plan"). To participate in the Retainer Plan, an
eligible director must elect prior to December 31 of each year the percentage,
if any, of Fees he desires to receive in the form of shares of Common Stock. The
Common Stock is issued quarterly during the following calendar year. The number
of shares of Common Stock to be issued to an eligible director is determined by
dividing the dollar amount of the percentage of fees such director elects to
receive in Common Stock by the "fair market value" of Common Stock on the day
prior to the date of issuance of the Common Stock to such director. The term
"fair market value" means the average of the highest and lowest selling price
for the Common Stock as quoted on Nasdaq/NMS for the day prior to the date of
issuance or for the first date prior to the date of issuance for which shares of
Common Stock are quoted, if not quoted on the day prior to the date of issuance.
Any fractional share of Common Stock derived from such calculation is paid in
cash.
The aggregate fair market value of the shares of Common Stock issued to
any eligible director in a given year cannot exceed 100% of such eligible
director's fees. Fees may not be increased more often than annually.
For the fiscal year ended September 30, 2001, 19,939 shares of Common
Stock were issued under the Retainer Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 7, 2001, certain
information regarding the beneficial ownership of Common Stock, of: (i) each
person known to the Company to be the beneficial owner of more than five (5%)
percent of the Common Stock; (ii) each director of the Company; (iii) each
executive officer listed in the Summary Compensation Table; and (iv) all
executive officers and directors of the Company as a group, based upon
information available to the Company.
AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2)
- ------------------------------- ------------ ---------
Kenneth D. McClain 1,423,662(3) 31.49%
6200 Elmridge Road
Sterling Heights, MI 48310
Robert W. McClain 998,361(4) 22.08%
6200 Elmridge Road
Sterling Heights, MI 48310
June McClain 337,178 7.46%
6200 Elmridge Road
Sterling Heights, MI 48310
Robert J. Gordon 899,233(5) 19.89%
Suite 2400
One Woodward Avenue
Detroit, MI 48226
Raymond Elliott 37,844 0.84%
290 Town Center
P.O. Box 890
Troy, Michigan 48084
Walter J. Kirchberger 15,890 0.35%
2301 West Big Beaver Rd., Suite 800
Troy, Michigan 48084
Ronald B. Briggs 4,026 0.09%
755 West Big Beaver RD
Troy, MI 48084
20
AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2)
- ------------------------------- ------------ ---------
Carl Jaworski 124.493 2.75%
6200 Elmridge Road
Sterling Heights, MI 48310
Mark S Mikelait 15,000 0.33%
500 Sherman Street
Galion, OH 44833
All current executive officers and 2,619,276(6) 57.24%
Directors as a group (6 persons)
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares that such person has a right to acquire within
60 days.
(2) Based on 4,520,746 shares of Common Stock issued and outstanding as of
December 7, 2001. In addition, for purposes of computing the percentage
of outstanding shares held by each person or group of persons named
above, any security that such person or persons has or have the right
to acquire within 60 days is also deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(3) Includes 2,430 shares of Common Stock owned by Kenneth D. McClain's
wife. Mr. McClain disclaims beneficial ownership of these shares.
(4) Includes 337,178 shares of Common Stock owned by Robert W. McClain's
wife. Mr. McClain disclaims beneficial ownership of these shares.
(5) Represents shares of common stock held by Mr. Gordon as trustee of
trusts established for family members of Messrs. Kenneth D. McClain and
Robert W. McClain. Messrs. Kenneth D. McClain, Robert W. McClain and
Robert J. Gordon disclaim beneficial ownership of these shares.
(6) Includes 54,999 shares which executive officers and directors have the
right to acquire pursuant to stock options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases one of its facilities from siblings of Messrs.
Kenneth and Robert McClain. See "Properties." The Company believes that the
terms and conditions of this lease are comparable to those available from an
unrelated party with respect to similar facilities.
The Company had sales of approximately $103,500 in Fiscal 2000 to
McClain Leasing Corporation, an entity controlled by certain officers and
directors of the Company.
The Hartland Insurance Group, an entity owned by Raymond Elliott, a
director of the Company, provided insurance to the Company during Fiscal 2001.
Sales from this entity to the Company aggregated approximately $2,050,000
million during Fiscal 2001, for which this entity received fees and commissions
in the approximate amount of $210,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form 10-K:
(1) A list of the financial statements required to be filed as a part
of this Form 10-K is shown in the "Index to the Consolidated Financial
Statements and Schedules" filed herewith.
21
(2) A list of financial statement schedules required to be filed as a
part of this Form 10-K is shown in the "Index to the Consolidated Financial
Statements and Schedules" filed herewith.
(3) A list of the exhibits required by Item 601 of Regulation S-K to be
filed as a part of this Form 10-K is shown on the "Index to Exhibits" filed
herewith.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 9, 2002 McCLAIN INDUSTRIES, INC.
By:/s/ Kenneth D. McClain
--------------------------------------
Kenneth D. McClain, President
(Principal Executive Officer)
And By:/s/ Mark S. Mikelait
----------------------------------
Mark S. Mikelait, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: January 9, 2002 /s/ Kenneth D. McClain
-----------------------------------------
Kenneth D. McClain, Director
Dated: January 9, 2002 /s/ Robert W. McClain
-----------------------------------------
Robert W. McClain, Director
Dated: January 9, 2002 /s/ Raymond Elliott
------------------------------------
Raymond Elliott, Director
Dated: January 9, 2002 /s/ Walter J. Kirchberger
------------------------------------
Walter J. Kirchberger, Director
Dated: January 9, 2002 /s/ Ronald B Briggs
------------------------------------
Ronald B. Briggs, Director
23
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
Form 10-K
For Corporations
ANNUAL REPORT
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000, and 1999
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
-24-
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - September 30, 2001 and 2000
Consolidated Statements of Operations for the years ended September 30, 2001,
2000 and 1999
Consolidated Statements of Stockholders' Investment for the years ended
September 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended September 30, 2001,
2000 and 1999
Notes to Consolidated Financial Statements
SCHEDULES
The information required to be submitted in Schedule II - Valuation and
Qualifying Accounts is included in the consolidated financial statements and
notes thereto.
The following schedules are omitted as not required or not applicable:
I, III, IV and V.
-25-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
McClain Industries, Inc. and Subsidiaries
Sterling Heights, Michigan
We have audited the accompanying consolidated balance sheets of McClain
Industries, Inc. and Subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of operations, stockholders' investment, and
cash flows for each of the three years in the period ended September 30, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McClain Industries,
Inc. and Subsidiaries as of September 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, the Company's recent losses from operations
and its attendant difficulties in generating sufficient cash flow to meet its
obligations have resulted in noncompliance with certain financial covenants
contained in its debt agreements. The Company's principal lender has not waived
its rights to call the debt arising from such noncompliance and has renewed a
forbearance agreement only through January 31, 2002. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
REHMANN ROBSON
Troy, Michigan
December 28, 2001
-26-
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30
---------------------------------------------
2 0 0 1 2 0 0 0
--------------------- ---------------------
CURRENT ASSETS
Cash and cash equivalents $ 763,635 $ 1,401,810
Accounts receivable, net of allowance for doubtful
accounts of $1,147,000 ($520,000 in 2000) 11,818,760 20,692,647
Inventories 36,729,464 52,031,112
Net investment in sales-type leases, current portion 10,600,000 7,500,000
Refundable federal and state taxes 2,733,572 587,612
Prepaid expenses 142,539 238,404
--------------------- ---------------------
TOTAL CURRENT ASSETS 62,787,970 82,451,585
PROPERTY, PLANT AND EQUIPMENT, NET 21,620,641 23,298,832
Net investment in sales-type leases net of
allowance for doubtful collections of $900,000
($400,000 in 2000), less current portion 17,200,109 16,086,444
Equipment under construction 777,643 1,012,690
Goodwill, net of amortization 188,495 616,624
Other 71,417 218,738
--------------------- ---------------------
TOTAL ASSETS $ 102,646,275 $ 123,684,913
===================== =====================
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
LIABILITIES AND
STOCKHOLDERS' INVESTMENT SEPTEMBER 30
-------------------------------------------
2 0 0 1 2 0 0 0
-------------------- --------------------
CURRENT LIABILITIES
Accounts payable $ 11,555,975 $ 14,523,573
Current portion of long-term debt (Note 7) 59,415,504 4,200,000
Accrued expenses 4,225,970 3,740,452
-------------------- --------------------
TOTAL CURRENT LIABILITIES 75,197,449 22,464,025
Long-term debt, net of current portion - 67,476,117
Product liability 897,163 1,182,315
Deferred income taxes 1,546,000 2,355,000
-------------------- --------------------
TOTAL LIABILITIES 77,640,612 93,477,457
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDERS' INVESTMENT
Common stock, no par value; authorized 10,000,000 shares,
issued and outstanding, 4,520,746 shares
(4,560,086 shares in 2000) 4,061,123 4,273,875
Retained earnings 20,944,540 25,933,581
-------------------- --------------------
TOTAL STOCKHOLDERS' INVESTMENT 25,005,663 30,207,456
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 102,646,275 $ 123,684,913
==================== ====================
-28-
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
------------------- -------------------- --------------------
Net sales $ 91,549,939 $ 141,117,959 $ 140,604,885
Cost of sales 79,379,375 119,208,522 115,863,228
------------------- -------------------- --------------------
GROSS PROFIT 12,170,564 21,909,437 24,741,657
Selling, general and administrative
expenses 17,229,156 18,002,259 16,234,546
------------------- -------------------- --------------------
(LOSS) INCOME FROM OPERATIONS (5,058,592) 3,907,178 8,507,111
------------------- -------------------- --------------------
OTHER INCOME (EXPENSE)
Interest expense (5,482,236) (6,343,380) (3,982,325)
Interest income 3,300,014 2,457,524 1,575,188
Other, net (304,227) (151,176) 236,964
------------------- -------------------- --------------------
OTHER EXPENSE - NET (2,486,449) (4,037,032) (2,170,173)
------------------- -------------------- --------------------
(LOSS) INCOME BEFORE INCOME TAXES (7,545,041) (129,854) 6,336,938
Income taxes benefit (expense) 2,556,000 44,000 (2,155,000)
------------------- -------------------- --------------------
NET (LOSS) INCOME $(4,989,041) $ (85,854) $ 4,181,938
=================== ==================== ====================
Net (loss) income per share:
Basic $ (1.11) $ (0.02) $ 0.90
=================== ==================== ====================
Assuming dilution $ (1.11) $ (0.02) $ 0.90
=================== ==================== ====================
Weighted average shares outstanding,
basic and diluted 4,504,341 4,560,086 4,673,027
=================== ==================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
COMMON STOCK RETAINED
--------------------------------------
SHARES AMOUNT EARNINGS TOTALS
---------------- ------------------ -------------------- -------------------
Balance at October 1,
1998 4,686,727 $ 4,997,809 $ 21,837,497 $ 26,835,306
Shares issued 4,505 25,123 - 25,123
Shares repurchased (30,354) (151,402) - (151,402)
Net income - - 4,181,938 4,181,938
---------------- ------------------ -------------------- -------------------
Balance at September 30,
1999 4,660,878 4,871,530 26,019,435 30,890,965
Shares issued 7,350 32,970 - 32,970
Shares repurchased (108,142) (630,625) - (630,625)
Net loss - - (85,854) (85,854)
---------------- ------------------ -------------------- -------------------
Balance at September 30,
2000 4,560,086 4,273,875 25,933,581 30,207,456
Shares issued 19,939 34,486 - 34,486
Shares repurchased (59,279) (247,238) - (247,238)
Net loss - - (4,989,041) (4,989,041)
---------------- ------------------ -------------------- -------------------
BALANCE AT SEPTEMBER 30,
2001 4,520,746 $ 4,061,123 $ 20,944,540 $ 25,005,663
================ ================== ==================== ===================
-30-
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------
2 0 0 1 2 0 0 0 1 9 9 9
------------------- -------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (4,989,041) $ (85,854) $ 4,181,938
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Depreciation and amortization 3,345,633 3,425,281 3,280,109
Deferred income taxes (benefit) (809,000) 155,000 (15,000)
Provision for doubtful accounts 1,375,000 230,800 146,500
Gain on disposal of plant and equipment 14,607 (28,856) (8,330)
Common stock issued to directors for services 34,486 32,970 25,123
Net changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable 7,998,887 (383,281) 3,949,095
Inventories 15,301,648 11,250,673 (24,408,308)
Net investment in sales-type leases (4,713,665) (5,214,471) (9,658,012)
Prepaid expenses and other assets 373,480 (623,411) (233,581)
Refundable federal and state taxes (2,145,960) (587,612) -
Accounts payable (2,967,598) (7,251,566) 3,369,915
Accrued expenses 485,518 (2,224,309) 1,500,945
------------------- -------------------- -------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 13,303,995 (1,304,636) (17,869,606)
------------------- -------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (1,190,345) (2,953,102) (2,768,433)
Payments on liabilities assumed upon the
Galion acquisition (285,152) (224,513) (503,077)
Proceeds from sale of plant and equipment 41,178 28,856 8,330
------------------- -------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (1,434,319) (3,148,759) (3,263,180)
------------------- -------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,499,807 9,027,433 24,303,311
Repayments of long-term debt (13,760,420) (4,450,000) (3,034,732)
Repurchase of common stock (247,238) (630,625) (151,402)
------------------- -------------------- -------------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (12,507,851) 3,946,808 21,117,177
------------------- -------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (638,175) (506,587) (15,609)
Cash and cash equivalents, beginning of year 1,401,810 1,908,397 1,924,006
------------------- -------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 763,635 $ 1,401,810 $ 1,908,397
=================== ==================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
McClain Industries, Inc. and its wholly-owned subsidiaries (the
"Company") manufacture and sell a diversified line of dump truck bodies
(assemblies attached to truck frames which are used to carry and dump
solid materials such as dirt, gravel or waste materials) and solid
waste handling equipment (including containers, compactors and baling
equipment, garbage and recycling truck bodies, and transfer trailers)
used for the temporary storage, transportation and compaction of
residential, commercial and industrial waste and recycling materials.
The Company sells its dump truck bodies primarily to truck equipment
dealers and its solid waste handling equipment primarily to
distributors, solid waste handling companies, government agencies,
shopping centers and other large retail outlets principally within the
United States. The Company also sells truck chassis at the retail
level. In addition, the Company provides coiled steel cutting and
warehousing services for its own manufacturing operations in order to
reduce its processed steel expense (one of its major cost components)
and, on a limited basis, for sale to third-party customers.
Going Concern
As indicated in Note 7, the Company, at September 30, 2001, was not in
compliance with certain restrictive covenants contained in various debt
agreements. As a result of this noncompliance, the Company entered into
a forbearance agreement with its principal lending institution in June
2001 which has been extended through January 31, 2002. The lender has
not waived its rights to call the debt arising from such noncompliance
nor given any assurance that the agreement will be extended beyond that
date; as such, all debt has been classified as current on the 2001
balance sheet, which has resulted in a significant working capital
deficit. Should the lender exercise its right to accelerate the
repayment of the outstanding debt, the Company would be unable to pay
the amount outstanding. This condition raises substantial doubt about
the Company's ability to continue operating as a going concern in the
normal course of business. Management's plans to address the above
matter, recent operating losses from operations and the Company's
ability to generate sufficient cash flows includes the following
actions:
- Exploring other financial options while the Company continues
to negotiate with its principal lender.
- Continuing to evaluate the need to reduce additional
personnel.
- Management is analyzing all plant operations to determine the
viability of each facility.
- Reduce inventory to match appropriate operating levels.
-32-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The consolidated financial statements include the accounts of McClain
Industries, Inc., and its wholly-owned subsidiaries (McClain E-Z Pack,
Inc., McClain, Galion, Inc., Shelby Steel Processing Co., McClain Group
Leasing, Inc., McClain Tube Company, McClain Southland, Inc., and
McClain International FSC, Inc., an international sales corporation).
All significant intercompany accounts and transactions have been
eliminated.
Concentration Risks
The Company grants trade credit to its customers in the normal course
of business. No collateral is required. Concentrations of credit risk
with respect to trade receivables generally are limited due to the
relatively large number of customers comprising the Company's customer
base and its geographic dispersion, with the exception of the customer
discussed below. The Company maintains reserves for potential credit
losses and such losses have historically been insignificant and
generally within management's expectations.
Sales to a major customer aggregated approximately $13,200,000,
$31,870,000, and $32,500,000 in 2001, 2000, and 1999, respectively. The
Company had receivables of approximately $1,526,000 and $2,070,000 from
this customer at September 30, 2001 and 2000, respectively. The loss of
this customer could adversely affect the Company's short-term operating
results.
Use of Estimates
The preparation of consolidated 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 consolidated financial statements and the reported
amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates. Significant estimates
include but are not limited to product liability, goodwill amortization
and the allowance for doubtful receivables.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the year plus or minus the change
during the year in deferred tax assets and liabilities. Deferred income
taxes arise from temporary basis differences principally related to
inventory, product liability, plant and equipment, receivables, and net
operating losses.
-33-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Sales-Type Leases
The Company, through McClain Group Leasing, Inc., offers lease
financing to certain purchasers of the Company's products. These
leases, along with certain TRAC leases (Note 4), meet the criteria for
classification as capitalized leases and are accounted for as
sales-type leases, whereby sales and gross profit are recognized at the
inception of the lease. Accordingly, an investment is reflected on the
accompanying balance sheets in an amount equal to the gross minimum
lease payments receivable less advance payments, deposits, unearned
finance income, and an allowance for doubtful collections. Unearned
finance income is amortized in such a manner as to produce a constant
periodic rate of return on the net investment in the lease.
Goodwill
Goodwill representing the purchase price in excess of the fair values
of net assets acquired is amortized on a straight line basis. The
amortization period is estimated based upon management's judgements and
is generally five years. Accumulated amortization as of September 30,
2001 and 2000 was $2,062,230 and $1,634,101, respectively.
Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number
of common shares outstanding during the year. The diluted amount
reflects the potential dilution of all common stock equivalents. At
September 30, 2001, 2000 and 1999 options to purchase 219,000, 262,000,
and 244,998 common shares, respectively, were excluded from the
computation of earnings per share because the options' exercise prices
were greater than the average market price of the common shares.
Fair Values of Financial Instruments
The carrying amount of cash equivalents, accounts receivable and
accounts payable approximate their fair values due to the short-term
maturity of these financial instruments. The carrying amounts of
long-term debt approximate their fair values because the interest rates
are representative of, or change with, market rates.
-34-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Issued to Directors for Services
Common stock is issued from time to time in lieu of cash for services
provided to the Company by its Directors and is recorded as
compensation expense generally at the fair value on the date of
issuance.
Revenue Recognition
Sales are recorded by the Company when the products are delivered to
independent distributors or other customers.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. The Company has historically accounted for its business
combinations using the purchase method and expects that adoption of the
new standard will not have a material effect on the Company's financial
position or results of operations.
In June 2001, the FASB also issued Statement No. 142 "Goodwill and
Other Intangible Assets" which is effective generally beginning January
1, 2002. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but, instead,
tested for impairment at least annually in accordance with the
provisions of Statement 142.
As of January 1, 2002, the Company expects to have unamortized goodwill
of approximately $188,000, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to
goodwill was approximately $428,000, $428,000 and $396,000 for the
years ended September 30, 2001, 2000, and 1999, respectively. The
Company is currently evaluating the effects of adopting the remaining
provisions of Statements 141 and 142 (which are effective January 1,
2002), including whether any transitional adjustments will be required.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement 143 is
effective for fiscal years beginning after June 15, 2002. Adoption of
this statement is not expected to impact the Company's results of
operations or financial position.
-35-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001. Statement 144
supersedes Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of
business (as previously defined under Opinion 30). The FASB issued
Statement No. 144 to establish a single accounting model for long-lived
assets to be disposed of by sale. Statement 144 broadens the
presentation of discontinued operations in the income statement to
include a component of an entity (rather than a segment of a business).
A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting
purposes, from the rest of an entity. Statement 144 also requires that
discontinued operations be measured at the lower of the carrying amount
or fair value less cost to sell, rather than net realizable value. The
Company is currently evaluating the effects of adopting Statement No.
144 and at this time cannot predict whether or not its provisions will
have a material impact on its financial position or results of
operations.
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The following is a summary of changes in the allowance for doubtful
accounts during each of the three years in the period ended September
30:
2001 2000 1999
----------- ----------- -----------
Balance, beginning of year $ 520,000 $ 570,000 $ 800,000
Add provision charged
against income 875,000 130,800 146,500
Less uncollectible accounts
written off, net of recoveries (248,000) (180,800) (376,500)
----------- ----------- -----------
BALANCE, END OF YEAR $ 1,147,000 $ 520,000 $ 570,000
=========== =========== ===========
3. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) and certain inventories on the last-in,
last-out (LIFO) method, or market. The major components of inventories
were as follows at September 30:
2001 2000
------------ -----------
Materials $16,136,116 $23,918,300
Work-in process 4,306,681 5,521,754
Finished goods 8,583,582 11,146,428
----------- -----------
29,026,379 40,586,482
Chassis 7,703,085 11,444,630
----------- -----------
$36,729,464 $52,031,112
=========== ===========
-36-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The chassis inventory above consists of the cost of the vehicle as
purchased from the manufacturer and, as applicable, includes the
Company's cost of manufacturing, assembling and mounting its truck
bodies and waste handling equipment products. The purchased cost of the
chassis on a stand-alone basis was $5,684,975 and $8,473,526 at
September 30, 2001 and 2000, respectively.
4. LEASING OPERATIONS
Sale-Leaseback-Sublease Transactions
The Company, through McClain Group Leasing, Inc., has TRAC (Terminal
Rental Adjustment Clause) leasing programs in place with three
financial institutions in order to assist customers in obtaining
financing for certain products delivered by guaranteeing a portion of
the residual values of such products. Distribution of the Company's
products in this manner has been accomplished by (i) selling the
products to the independent financial institution leasing company, (ii)
leasing the products back and providing a specified minimum guaranteed
residual value to the leasing company, and (iii) subleasing the product
to the user customer.
Sales-Type Leases
The Company provides financing contracts for the sales of various
manufactured products to certain of its customers. Such financing is
principally structured in the form of finance leases having a five-year
term, which are accounted for as sales-type leases, with the related
gross profit on sale of the products recognized as income currently.
The total net investment in these sales-type leases is comprised of the
following amounts at September 30:
2001 2000
------------ -----------
Gross minimum lease payments $35,263,432 $30,248,398
collectible in monthly installments
Less advance lease payments and
deposits received 915,193 787,093
----------- -----------
Subtotal 34,348,239 29,461,305
Less unearned finance income 5,648,130 5,474,861
----------- -----------
Subtotal 28,700,109 23,986,444
Less allowance for doubtful collection
and losses 900,000 400,000
----------- -----------
Total net investment in sales-type leases 27,800,109 23,586,444
Current portion 10,600,000 7,500,000
----------- -----------
Noncurrent portion $17,200,109 $16,086,444
=========== ===========
-37-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross minimum lease payments, net of advances and deposits, are
collectible in the following scheduled annual amounts for the years
succeeding September 30, 2001:
Year ending
September 30 Amount
- ---------------- -----------------
2002 $ 10,600,000
2003 9,400,000
2004 7,900,000
2005 4,600,000
2006 1,848,239
-----------------
Gross minimum amount collectible $ 34,348,239
================
The TRAC leasing programs in place with financial institutions allow
for maximum availability of $19,500,000 in lease commitments, which
provide for financing of 80% of eligible lease receivables and 95% of
unamortized costs of eligible leased assets over the term of the
related lease. These notes are secured by a pledge of the remittances
in the related sublease. At September 30, 2001, approximately
$16,489,214 had been drawn on these lease programs, $2,487,443 of which
is accounted for as capital lease obligations (Note 7) and $14,001,771
of which is accounted for as minimum lease payments due under operating
leases.
The following is a schedule of future minimum lease payments required
under capital lease obligations for the years succeeding September 30,
2001.
Year ending
September 30 Amount
- ---------------- -----------------
2002 $ 850,000
2003 850,000
2004 787,443
-----------------
Total 2,487,443
Less amounts representing interest imputed
at various interest rates 46,075
-----------------
Present value of net minimum lease payments $ 2,441,368
=================
Rental income from these subleasing activities was $4,513,315,
$2,817,000 and $1,221,000 in the years 2001, 2000, and 1999,
respectively, while the related rental expense for the leaseback of the
products was $4,096,972, $2,629,000 and $1,035,000 during the years
ended September 30, 2001, 2000, and 1999, respectively. Proceeds of the
subleasing activities have been, and are expected to continue to be, in
excess of the related rental expense. Minimum scheduled rental payments
and rental receipts under these operating lease arrangements in future
years are summarized as follows:
-38-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ending Rental Rental
September 30 Payments Receipts
------------ ----------------- ----------------
2002 $ 3,080,390 $ 3,782,368
2003 3,080,390 3,782,368
2004 3,080,390 3,782,368
2005 3,080,390 3,782,368
2006 1,680,211 2,063,110
----------------- ----------------
Gross minimum rental payments $ 14,001,771 $ 17,192,582
================ ================
Total residual values guaranteed by the Company under these leasing
arrangements approximates $2,405,000 as of September 30, 2001.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation for
financial reporting purposes is provided primarily using the
straight-line method over the estimated useful lives of the assets.
Accelerated depreciation methods are used for income tax purposes.
Estimated useful lives range from 20 to 40 years for buildings and
improvements, and 3 to 30 years for machinery, equipment, furniture and
fixtures, and vehicles. Expenditures for maintenance and repairs are
charged to expense as incurred, and significant betterments are
capitalized.
Property, plant and equipment consisted of the following amounts as of
September 30:
2001 2000
------------------ ----------------
Land $ 2,381,487 $ 2,366,387
Buildings and improvements 16,385,856 15,783,431
Machinery and equipment 24,217,980 24,008,223
Furniture, fixtures and vehicles 3,989,037 4,400,067
------------------ ----------------
46,974,360 46,558,108
Less accumulated depreciation 25,353,719 23,259,276
------------------ ----------------
Property, plant and equipment, net $ 21,620,641 $ 23,298,832
================== ================
-39-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LINES OF CREDIT
The Company and certain of its subsidiaries are party to the following
line-of-credit agreements with financial institutions as of September
30:
2001 2000
----------------- ----------------
Revolving line of credit providing for maximum availability of up to
$22,000,000 and $32,142,858 at September 30, 2001 and 2000, respectively.
Borrowings are limited to 80% of the eligible accounts receivable and 50%
of qualified inventory and are subject to interest at prime rate plus 2 1/2%
(default rate) (8.5% at September 30, 2001). $ 20,638,621 $ 30,341,000
The agreement is collateralized by substantially all the assets of the Company
and contains various covenants requiring the Company to maintain certain
financial ratios (see Note 7). The agreement also prohibits the Company from
incurring additional indebtedness other than subordinated indebtedness and
limits plant and equipment acquisitions to $3.0 million per fiscal year. This
agreement expires in May 2002.
Line of credit providing for maximum availability of $20,000,000 in 2001 and
2000 (see Note 7). Borrowings are limited to 80% of eligible lease receivables
and are subject to interest at the prime rate plus 2 1/2% (8.5% at September 30,
2000). The agreement is collateralized by certain equipment leases held by the
Company's leasing subsidiary.
This agreement expires in May 2002. 18,813,000 17,808,000
----------------- ----------------
Total lines of credit borrowings (Note 7) $ 39,451,621 $ 48,149,000
================= ================
-40-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt consisted of the following obligations as of September
30:
2001 2000
----------------- ----------------
Promissory note to a bank, collateralized by certain assets as disclosed in
Note 6. The note is payable in monthly installments of $220,000 plus interest
at the prime rate plus 2 1/2% (effective rate of 8.5% at September 30, 2001),
maturing in September 2006. $ 13,220,000 $ 15,860,000
Promissory notes to banks, collateralized by commercial mortgages on certain
real estate and equipment, payable in monthly installments of $28,300 plus
interest ranging from the bank prime rate to prime plus 1/4% (effective rates of
6.0% to 6.25% at September 30, 2001), maturing at various
dates through December 2002. 1,177,515 791,653
Industrial Revenue Bonds, collateralized by a bank letter of credit. The bonds
are payable in annual installments of $525,000 through April 2007. The bonds
bear interest, payable monthly, at either a fixed term, or a variable rate
(effective rate of 2.33% at September 30, 2001) as determined by the bond
holder. 3,125,000 3,650,000
----------------- ----------------
Subtotal, notes and bonds 17,522,515 20,301,653
Lines of credit borrowings (Note 6) 39,451,621 48,149,000
Capital lease obligations (Note 4) 2,441,368 3,225,464
----------------- ----------------
Total long-term debt 59,415,504 71,676,117
Less current portion 59,415,504 4,200,000
----------------- ----------------
Long-term debt, net of current portion $ - $ 67,476,117
================= ================
-41-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The debt agreements contain certain restrictive covenants which require
the Company to, among other things, meet certain net worth and working
capital requirements along with maintaining various financial ratios.
As of September 30, 2001, the Company was not in compliance with
certain of the financial covenants contained in the loan agreements
with its principal lending institution. As a result, the Company and
the lender entered into a forbearance agreement in June 2001 which
expired August 31, 2001. This agreement was extended through October
31, 2001 and further extended only through January 31, 2002. Under the
most recent amended and extended forbearance agreement, the line of
credit is capped at $22 million, interest will accrue effective
December 4, 2001 at the default rate of prime plus 2 1/2%, the leasing
credit limit is reduced to the lesser of $19 million or the borrowing
base, as defined, and the Company has been placed under a dominion of
funds arrangement.
Since there can be no assurance beyond January 31, 2002 that the lender
will continue to a) lend to the Company, b) forbear from enforcing its
rights and remedies, or c) further extend the forbearance period, all
debt is classified as current on the accompanying September 30, 2001
balance sheet. As a result, the Company has a significant working
capital deficit.
8. ACCRUED EXPENSES
Accrued expenses included on the accompanying consolidated balance
sheets consist of the following amounts at September 30:
2001 2000
---------- ----------
Sales discounts $1,792,250 $1,084,919
Compensation 313,446 300,343
Vacation and holiday pay 343,295 415,006
Taxes 360,565 439,738
Insurance 144,865 394,270
Other 1,271,549 1,106,176
---------- ----------
Total $4,225,970 $3,740,452
========== ==========
9. INCOME TAXES
The benefit (provision) for income taxes for each of the three years in
the period ended September 30, consists of the following components:
2001 2000 1999
----------- ----------- -----------
Current federal benefit (provision) $ 1,747,000 $ 199,000 $(2,170,000)
Deferred benefit (provision) 809,000 (155,000) 15,000
----------- ----------- -----------
Total $ 2,556,000 $ 44,000 $(2,155,000)
=========== =========== ===========
-42-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective income tax rate on consolidated pre-tax income differs
from the federal statutory rate for the following reasons:
2001 2000 1999
---------------------- -------------------- -----------------------
Amount % Amount % Amount %
-------------- ----- ------------- ----- ---------------- -----
Benefit (provision) $ 2,568,000 34 $ 44,000 34 $ (2,155,000) 34
computed at statutory rate
Nondeductible expenses (32,000) - (27,000) (1) (22,000) (1)
Other 20,000 - 27,000 1 22,000 1
-------------- ----- ------------- ----- ---------------- -----
$ 2,556,000 34 $ 44,000 34 $ (2,155,000) 34
============== ===== ============= ===== ================ =====
The balance of the net deferred income tax liability consists of
temporary basis differences related to the following assets and
liabilities as of September 30:
2001 2000
---------------- ----------------
Taxable differences:
Property and equipment $ 2,972,000 $ 3,101,000
Inventory 1,149,000 1,143,000
---------------- ----------------
Gross deferred tax liabilities 4,121,000 4,244,000
---------------- ----------------
Deductible differences:
Product liability 305,000 402,000
Accounts receivable 696,000 313,000
Accrued expenses 942,000 812,000
Goodwill 442,000 362,000
Net operating loss 190,000 -
---------------- ----------------
Gross deferred tax assets 2,575,000 1,889,000
---------------- ----------------
Net deferred income tax liability $ 1,546,000 $ 2,355,000
================ ================
The components which comprise gross deferred taxes are predominantly
noncurrent; as such, the entire related net liability is classified as
noncurrent.
The Company has a net operating loss of approximately $560,000,
expiring in 2015, available to offset future federal taxable income.
10. EMPLOYEE PENSION AND PROFIT SHARING PLANS
The Company and certain subsidiaries have qualified pension and profit
sharing plans covering substantially all union employees. Contributions
to the plans were calculated at an hourly rate as defined in the
various union contracts. The Company also maintains a defined
contribution pension plan qualified pursuant to Section 401(k) of the
Internal Revenue Code for certain union employees and all eligible
non-union employees. The Company makes matching contributions of
specified percentages of participants' compensation. The cost of all of
these plans was $614,032 in 2001, $729,183 in 2000 and $673,480 in
1999.
-43-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an employee stock bonus plan for full time, salaried
and non-union employees. Company contributions are discretionary each
year and are generally limited to 15% of participants' compensation. No
contributions were made for any of the years ended September 30, 2001,
2000 and 1999.
11. RELATED PARTY TRANSACTIONS
Leases
The Company leases an operating facility from siblings of the President
of McClain Industries, Inc. on a month-to-month basis with annual
rentals totaling $42,000 in each of the years ended September 30, 2001,
2000 and 1999.
Insurance Costs
Raymond Elliott, a director of the Company, is also the owner of
Hartland Insurance Group. That entity provided insurance at a cost of
approximately $2,050,000, $1,466,000 and $1,005,000 to the Company
during the years ended September 30, 2001, 2000 and 1999, respectively.
That entity received fees and commissions in connection with these
transactions of approximately $210,000, $170,000 and $117,500,
respectively.
Product Sales
The Company had product sales of approximately $103,500, $282,500 and
$231,000, during the years ended September 30, 2001, 2000 and 1999,
respectively, to a business controlled by the President of McClain
Industries, Inc.
12. STOCK BASED COMPENSATION PLANS
The Company maintains the 1999 and 1989 Retainer Stock Plans for
Non-employee Directors and the McClain 1999 and 1989 Incentive Stock
Plans.
Retainer Stock Plans
The Retainer Stock Plans as adopted call for reserving 233,333 shares
of the Company's no par common stock and allows non-employee directors
the option to receive payment of all or a portion of their directors
fees in the form of shares of common stock at the fair market value of
such shares on the date of issuance. For the years ended September 30,
2001, 2000 and 1999 the Company issued 1,999, 7,350 and 4,505 shares,
respectively, of its common stock to such directors in exchange for
services rendered.
-44-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive Stock Plan
The Incentive Stock Plans as adopted call for reserving 2,333,333
shares of the Company's no par common stock for the granting of stock
awards to officers and key management personnel. The awards consist of
incentive stock option (ISO) or non-qualified options, stock
appreciation rights (SARs) and restricted share rights, and may be
granted at the following prices at the date of grant: incentive stock
options must be equal to or greater than the fair market value of
common stock; stock appreciation rights and restricted share rights may
be issued at a price which may not be less than 50% of the price of the
common stock. Shares which have been issued under these plans vest in
annual installments from the date of grant, over a three year period,
and expire within 5 years from the date of grant.
The following table presents a summary of stock option activity for
each of the years in the three year period ended September 30:
2001 2000 1999
--------------------- --------------------- ----------------------
Exercise Exercise Exercise
Shares Price * Shares Price * Shares Price *
----------- -------- ---------- --------- ----------- ---------
Outstanding, beginning of year 219,000 $ 5.34 269,665 $5.71 199,476 $6.30
Granted - - - - 130,000 5.42
Exercised - - - - - -
Forfeited/expired - - (50,665) 7.33 (59,811) 7.06
----------- -------- ---------- --------- ----------- ---------
Outstanding, end of year 219,000 5.34 219,000 $5.34 269,665 $5.71
----------- -------- ---------- --------- ----------- ---------
Exercisable, end of year 168,660 5.34 102,982 $5.34 85,332 $6.50
=========== ======== ========== ========= =========== =========
OPTIONS AT SEPTEMBER 30, 2001
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
------------------------ ---------- ----------- -------- ---------- --------
$5.00 to $5.50 204,000 2.0 years 5.30 153,660 5.40
$5.51 to $6.00 15,000 0.2 years 5.75 15,000 5.75
---------- ----------- -------- ---------- --------
Total 219,000 1.9 years 5.34 168,660 5.43
========== =========== ======== ========== ========
*Weighted average
The Company continues to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options
issued pursuant to the 1999 and 1989 Incentive Stock Plan. Under APB
25, because the exercise price of employee stock options equals the
market price of the underlying common stock on the date of grant, no
compensation expense is recorded in the accompanying consolidated
statements of operations. There were no stock options granted during
fiscal 2001 or 2000. Had stock option compensation expense been
determined pursuant to the methodology provided in Statement of
Financial Accounting Standards No. 123, "Accounting
-45-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for Stock-Based Compensation", using the Black-Scholes option pricing
model, the following weighted average assumptions for grants in 1999
would have been employed: expected volatility of 71%, risk free
interest rate of 5.5%, and expected lives of 5 years. The pro-forma
effect on results of operations would have been a decrease in net
income of $223,000 for the year ended September 30, 1999.
13. COMMON STOCK REPURCHASES
The Board of Directors has authorized the Company to repurchase from
time to time on the open market up to 500,000 shares of the Company's
common stock. During the year ended September 30, 2001, the Company
repurchased 59,279 shares at prices ranging from $1.40 to $4.50 per
share. During the year ended September 30, 2000, the Company
repurchased 108,142 shares at prices ranging from $3.87 to $5.97.
During the year ended September 30, 1999, the Company repurchased
30,354 shares at prices ranging from $3.375 to $5.75
14. SUPPLEMENTAL CASH FLOWS INFORMATION
During the years ended September 30, 2001, 2000 and 1999, common stock
valued at $34,486, $32,970 and $25,123, respectively, was issued to
non-employee directors in exchange for services rendered.
Cash paid for interest amounted to $5,558,826 for 2001, $6,210,200 for
2000, and $3,855,735 for 1999. Cash paid for federal income taxes
amounted to $-0- for 2001, $304,000 for 2000, and $350,000 for 1999.
15. SEGMENT INFORMATION
The Company operates in three principal operating segments 1)
Manufactured Equipment, 2) Truck Chassis Sales, and 3) Leasing
Operations. The accounting policies of the reportable segments are the
same as those described in Note 1. Management evaluates the performance
of its operating segments separately to individually monitor the
different factors affecting performance. The Company measures the
performance of its operating segments based on net revenue and
operating income. Income taxes are managed on a Company-wide basis.
Segment performance is also evaluated based on profit or loss before
income taxes.
-46-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Company's operating segments follows:
Manufacturing Truck Leasing
Operations Group Operations Totals
------------------ ----------------- ----------------- -----------------
2001
Net sales $ 67,673,984 $23,875,955 $ - $ 91,549,939
Lease revenues - - 7,493,107 7,493,107
Operating (loss) income (4,972,771) (1,124,814) 1,038,993 (5,058,592)
Interest expense 2,114,539 1,642,096 1,725,601 5,482,236
Income (loss) before
income taxes (5,756,446) (2,827,588) 1,038,993 (7,545,041)
Identifiable assets 66,628,496 7,622,890 28,394,889 102,646,275
Capital expenditures 1,190,345 - - 1,190,345
Depreciation and
amortization 3,345,633 - - 3,345,633
2000
Net sales $103,648,239 $37,469,720 $ - $ 141,117,959
Lease revenues - - 5,391,613 5,391,613
Operating income 4,878,056 (1,675,215) 704,337 3,907,178
Interest expense 2,973,818 1,825,362 1,544,200 6,343,380
Income (loss) before
income taxes 2,666,386 (3,500,577) 704,337 (129,854)
Identifiable assets 86,921,342 11,641,505 25,122,066 123,684,913
Capital expenditures 2,953,102 - - 2,953,102
Depreciation
amortization 3,425,281 - - 3,425,281
1999
Net sales $105,024,800 $35,580,085 $ - $ 140,604,885
Lease revenues - - 3,597,594 3,597,594
Operating income 7,661,619 368,844 476,648 8,507,111
Interest expense 2,283,630 988,496 710,199 3,982,325
Income (loss) before
income taxes 6,247,914 (387,624) 476,648 6,336,938
Identifiable assets 80,563,757 26,162,434 23,197,798 129,923,989
Capital expenditures 2,768,433 - - 2,768,433
Depreciation and
amortization 3,280,109 - - 3,280,109
Net sales for the Truck Group include sales of products manufactured by the
Company of $8,613,903, $9,906,371 and $9,129,104 for the years ended September
30, 2001, 2000 and 1999, respectively.
-47-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net sales by product for the years ended September 30, 2001, 2000 and 1999 were
as follows:
2001 2000 1999
------------ ------------ ------------
Product type
Containers $ 19,735,213 $ 28,906,263 $ 27,255,856
Refuse bodies 18,178,816 32,353,072 35,714,049
Truck chassis 17,394,489 29,440,561 26,450,982
Dump truck bodies 13,593,146 19,083,440 20,175,160
Compactors 7,643,758 9,018,576 7,529,480
Transfer trailers 7,157,843 11,056,258 9,824,136
Parts 3,683,575 3,681,513 3,711,092
Tilt frame assemblies 2,216,699 4,475,165 5,301,279
Other 1,946,400 3,103,111 4,642,851
------------ ------------ ------------
$ 91,549,939 $141,117,959 $140,604,885
============ ============ ============
-48-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES
Product Liability
As a manufacturer of industrial products, the Company is occasionally
subjected to various product liability claims. Such claims typically
involve personal injury or wrongful death associated with the use or
misuse of the Company's products. The Company is currently defending
certain legal proceedings involving allegations of product liability
relating to products manufactured and sold by the Company.
Historically, such claims have not resulted in material losses to the
Company in any one year, and the Company maintains product liability
insurance in amounts believed by management to be adequate.
McClain E-Z Pack, Inc., as successor to Galion Holding Company (GHC),
pursuant to an indemnification it provided to the seller in connection
with GHC's July 1992 acquisition of the Galion operations, is currently
defending a number of legal proceedings involving product liability
claims arising out of products manufactured and sold prior to the
acquisition. These claims are covered by insurance and many of these
cases have been settled. In addition, the acquisition agreement called
for the seller to share in the payment of certain costs related to the
defense of these cases. On December 29, 1998, the Company reached a
settlement agreement with the seller, the terms of which called for the
Company to release the seller from its obligations related to product
liability claims under the Galion acquisition agreement in exchange for
a cash payment to the Company of $1,050,000.
A liability to provide for these product claims was established at the
acquisition date. Since many of the cases have been settled and
insurance coverage exists, management believes that the ongoing costs
to defend these claims will not exceed the amount accrued on the
accompanying consolidated balance sheet at September 30, 2001.
Nevertheless, it is not possible to predict the ultimate outcome of any
product liability claim, and any such claim not fully covered by
insurance, as well as adverse publicity from a product claim, could
have a material adverse effect on the Company.
Environmental Matters
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning,
among other things, emissions into the air, discharges into the waters
and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. Inherent in manufacturing
operations and in owning real estate is the risk of environmental
liabilities as a result of both current and past operations, which
cannot be predicted with certainty. The Company has incurred and will
continue to incur costs, on an ongoing basis, associated with
environmental regulatory compliance in its business.
-49-
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Labor Union Matters
Certain of the Company's hourly employees are represented by various
labor unions pursuant to collective bargaining agreements which expire
between September 2002 and June 2003.
In 1995, a local union filed unfair labor practices against the
Company's Macon, Georgia plant, which were subsequently upheld by the
National Labor Relations Board (NLRB) and the U.S. Court of Appeals.
The local union filed additional unfair labor practices in 1996. The
NLRB seeks back pay, reinstatement and an order requiring transfer of
work. The Company is currently negotiating with the NLRB in an effort
to reach a settlement of all of these matters. There can be no
assurance that these claims will be settled or that the amounts awarded
to the union will not have a material adverse impact on the Company.
Sales Commitment
In connection with the purchase of a manufacturing facility in 1996,
the seller of the facility agreed to use reasonable commercial efforts
to purchase annually from the Company, manufactured products in an
amount that is not less than $25,000,000 in sales per year through
December 31, 2001. In the event the $25,000,000 is reached, the Company
has agreed to pay to the customer $1,200,000 during each year. In
addition, a 5% sales discount will be paid on sales in excess of
$25,000,000. If the customer purchases less than $25,000,000 annually,
the $1,200,000 amount is to be reduced in accordance with the terms of
the acquisition agreement. For the years ended September 30, 2001,
2000, 1999 and 1998 approximately $707,000, $1,395,000, and $1,308,000
has been recorded as sales discounts in connection with
post-acquisition sales of $13,200,000, $31,870,000 and $32,500,000,
respectively, made to the customer pursuant to the agreement. On
November 29, 1999, the Company signed an amendment to this agreement
that extended the contract through December 31, 2003.
Self Health Insurance
The Company is self-insured for certain health benefits up to $100,000
per occurrence per individual, with an aggregate limitation of
$1,600,000 annually. The Company is self-insured for State of Michigan
workers' compensation up to $200,000 per occurrence, with an annual
limitation of $500,000 annually.
Other Legal Matters
The Company is also involved in routine litigation incidental to its
business. Management believes that the resolution of these matters will
not materially affect the consolidated financial statements.
* * * * *
-50-
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
3.1 Articles of Incorporation of McClain Industries, Inc. (7)
3.2 Bylaws of McClain Industries, Inc. (1)
10.1 McClain Industries, Inc. 1989 Incentive Stock Plan (2)
10.2 McClain Industries, Inc. 1989 Retainer Stock Plan for Non-Employee Directors (2)
10.3 Agreement of Purchase and Sale dated July 20, 1992 by and between Peabody International (4)
Corporation, as Seller, and Galion Holding Company, as Buyer
10.4 Manufacture and License Agreement dated as of November 2, 1992, between Galion Dump (6)
Bodies, as Licensor, and the Company, as Licensee
10.5 Loan documents dated as of March 1, 1993, between the Company and Galion Dump Bodies (6)
and E-Z Pack
10.6 Guaranty Fee Agreement dated as of March 2, 1993, between Galion Holding and the Company (6)
10.7 Purchase Agreement, dated as of March 30, 1993, between the Company and Group (7)
Properties III
10.8 Purchase Agreement, dated as of March 30, 1993, between the Company and Group Properties (7)
10.9 Purchase Agreement, dated as of March 30, 1993, between the Company and Group (7)
Properties of Georgia
10.10 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (8)
Statement Dated February 6, 1995, between Standard Federal Bank and the Company
10.11 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (8)
Statement Dated February 6, 1995, between Standard Federal Bank and the Company
10.12 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated February 6, 1995, between Standard Federal Bank and E-Z
Pack
10.13 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated February 6, 1995, between Standard Federal Bank and
Galion Dump Bodies
10.14 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) between Standard Federal Bank and Galion Dump Bodies dated
June 22, 1995.
10.15 Third Amended and Restated Promissory Note (Line of Credit) dated June 22, 1995, (8)
between Standard Federal Bank, Galion Holding, E-Z Pack, Galion Dump Bodies and McClain
Group Sales of Florida
10.16 Security Agreement dated June 22, 1995, between Standard Federal Bank and McClain Group (8)
Sales of Florida
10.17 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated June 22, 1995, between Standard Federal Bank and E-Z
Pack
10.18 Loan Agreement dated July 17, 1996, between Standard Federal Bank and Leasing (9)
51
Exhibit No. Description Location
- ----------- ----------- --------
10.19 Promissory Note (Line of Credit) dated July 17, 1996, between Standard Federal Bank and (9)
Leasing
10.20 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (9)
Statement dated August 29, 1996, between Standard Federal Bank and McClain-Alabama.
10.21 Security Agreement dated August 29, 1996, between Standard Federal Bank and (9)
McClain-Alabama
10.22 Master Lease Agreement dated July 15, 1995 between Fifth Third Leasing Company and (9)
Leasing
10.23 Master Lease Agreement dated May 17, 1996 between NBD Bank and Leasing (9)
10.24 Term Note dated January 17, 1997 between Trust Company Bank of Middle Georgia and the (10)
Company
10.25 Preliminary Placement Memorandum dated April 17, 1997 - The Industrial Development (10)
Board of the City of Demopolis Industrial Development Revenue Bonds Series 1997
(McClain of Alabama, Inc. Project)
10.26 Lease Agreement dated April 1, 1997 between the Industrial Development Board of the (10)
City of Demopolis and McClain of Alabama
10.27 Trust Indenture Agreement dated April 1, 1997 between the Industrial Development Board (10)
of the City of Demopolis and LaSalle National Bank
10.28 Bond Guaranty Agreement dated April 1, 1997 between LaSalle National Bank and (10)
McClain-Alabama
10.29 Mortgage, Assignment of Leases and Security Agreement dated April 1, 1997 from the (10)
Industrial Development Board of the City of Demopolis and McClain-Alabama to Standard
Federal Bank
10.30 Standard Federal Bank Irrevocable Letter of Credit dated April 23, 1997 (10)
10.31 Placement Agency Agreement dated April 23, 1997 - The Industrial Development Board of (10)
the City of Demopolis Industrial Development Revenue Bond Series 1997 (McClain of
Alabama, Inc. Project)
10.32 Remarketing Agreement dated April 23, 1997 among LaSalle National Bank, The Industrial (10)
Development Board of the City of Demopolis and McClain of Alabama, Inc.
10.33 Loan Agreement dated April 16, 1998 between Standard Federal Bank and McClain (11)
Industries, Inc., McClain of Alabama, Inc., McClain of Georgia, Inc., McClain of Ohio,
Inc., McClain of Oklahoma, Inc., McClain EPCO, Inc., Shelby Steel Processing Company,
McClain Tube Company, Galion Holding Company, McClain E-Z Pack, Inc., Galion Dump
Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of Florida, Inc.
10.34 Promissory Note (Line of Credit) dated April 16, 1998 between Standard Federal Bank and (11)
McClain Industries, Inc., McClain of Alabama, Inc., McClain of Georgia, Inc., McClain
of Ohio, Inc., McClain of Oklahoma, Inc., McClain EPCO, Inc., Shelby Steel Processing
Company, McClain Tube Company, Galion Holding Company, McClain E-Z Pack, Inc., Galion
Dump Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of Florida, Inc.
52
Exhibit No. Description Location
- ----------- ----------- --------
10.35 Promissory Note (Term Loan) dated April 16, 1998 between Standard Federal Bank and (11)
McClain Industries, Inc., McClain of Alabama, Inc., McClain of Georgia, Inc., McClain
of Ohio, Inc., McClain of Oklahoma, Inc., McClain EPCO, Inc., Shelby Steel Processing
Company, McClain Tube Company, Galion Holding Company, McClain E-Z Pack, Inc., Galion
Dump Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of Florida, Inc.
10.36 Promissory Note (Line of Credit Converting to Term Loan) dated April 16, 1998 between (11)
Standard Federal Bank and McClain Industries, Inc., McClain of Alabama, Inc., McClain
of Georgia, Inc., McClain of Ohio, Inc., McClain of Oklahoma, Inc., McClain EPCO, Inc.,
Shelby Steel Processing Company, McClain Tube Company, Galion Holding Company, McClain
E-Z Pack, Inc., Galion Dump Bodies, Inc., McClain Group Sales, Inc., and McClain Group
Sales of Florida, Inc.
10.37 Second Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated (11)
April 16, 1998 between Standard Federal Bank and McClain Group Leasing, Inc.
10.38 McClain Industries, Inc. 1999 Incentive Stock Plan (12)
10.39 McClain Industries, Inc. 1999 Retainer Stock Plan for Non-Employee Directors (12)
10.40 Amended and Restated Loan Agreement dated July 9, 1999 between Standard Federal Bank (12)
and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby
Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain
Southland Co.
10.41 Promissory Note (Line of Credit) dated July 9, 1999 between Standard Federal Bank and (12)
McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel
Processing Company, McClain Tube Company, McClain International FSC, and McClain
Southland Co.
10.42 Promissory Note (Term Loan) dated July 9, 1999 between Standard Federal Bank and (12)
McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel
Processing Company, McClain Tube Company, McClain International FSC, and McClain
Southland Co.
10.43 Promissory Note (Line of Credit Converting to Term Loan) dated July 9, 1999 between (12)
Standard Federal Bank and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain
Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain
International FSC, and McClain Southland Co.
10.44 Third Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated July (12)
9, 1999 between Standard Federal Bank and McClain Group Leasing, Inc.
10.45 Second Amendment Agreement dated May 10, 2000 between Standard Federal Bank and McClain (13)
Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing
Company, McClain Tube Company, McClain International FSC, and McClain Southland Co.
10.46 Fourth Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated May (13)
10, 2000 between Standard Federal Bank and McClain Group Leasing, Inc.
53
Exhibit No. Description Location
- ----------- ----------- --------
10.47 Amendment and Forbearance Agreement dated June 20, 2001 between Standard Federal Bank 55
and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby
Steel Processing Company, McClain Tube Company, McClain International FSC, McClain
Southland Co., and McClain Group Leasing, Inc.
10.48 Extension Agreement for Amendment and Forbearance Agreement dated June 20, 2001, dated 80
September 1, 2001 between Standard Federal Bank and McClain Industries, Inc., McClain
E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube
Company, McClain International FSC, McClain Southland Co., and McClain Group Leasing,
Inc.
10.49 Second Extension Agreement for Amendment and Forbearance Agreement dated June 20, 2001, 85
dated December 28, 2001 between Standard Federal Bank and McClain Industries, Inc.,
McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain
Tube Company, McClain International FSC, McClain Southland Co., and McClain Group
Leasing, Inc.
10.50 Amended and Restated Loan Agreement Between Standard Federal Bank and McClain Group 92
Leasing, Inc.
10.51 Amended and Restated Guaranty dated June 20, 2001 between Standard Federal Bank and 112
McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel
Processing Company, McClain Tube Company, McClain International FSC, and McClain
Southland Co.
10.52 Guaranty dated June 20, 2001 between Standard Federal Bank and McClain Group Leasing, Inc. 119
22 List of Subsidiaries (9)
(1) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/89
(2) Incorporated by reference to the Company's Registration Statement (33-29613)
(3) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/91
(4) Incorporated by reference to the Company's Form 8-K dated 7/27/92
(5) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/92
(6) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/93
(7) Incorporated by reference to the Company's Registration Statement on Form S-2 (33-84562)
(8) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/95
(9) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/96
(10) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/97
(11) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/98
(12) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/99
(13) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/00
54