FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7770
MCCLAIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1867649
State of Incorporation IRS Employer I.D. No.
6200 Elmridge Road
Sterling Heights, Michigan 48310
(586) 264-3611
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of February 6, 2002.
Common Stock, No Par Value 4,534,206
- --------------------------------------------------------------------------------
Class Number of Shares
1 of 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, SEPTEMBER 30,
2001 2001
(UNAUDITED)
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 454,870 $ 763,635
Accounts receivable, (Net) 9,417,676 11,818,760
Inventories 32,920,550 36,729,464
Net investment in sales-type leases, current portion 8,100,000 10,600,000
Prepaid expenses 1,296,822 142,539
Refundable federal and state income taxes 2,773,846 2,733,572
------------ ------------
TOTAL CURRENT ASSETS 54,963,764 62,787,970
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 21,179,131 21,620,641
------------ ------------
NET INVESTMENT IN SALES-TYPE LEASES, NET OF
CURRENT PORTION 18,103,932 17,200,109
------------ ------------
OTHER ASSETS 848,777 1,037,555
------------ ------------
TOTAL OTHER ASSETS 95,095,604 102,646,275
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 8,806,511 $ 11,555,975
Current portion of long-term debt 55,349,975 59,415,504
Accrued expenses 3,994,320 4,225,970
------------ ------------
TOTAL CURRENT LIABILITIES 68,150,806 75,197,449
Long-term debt, net of current portion 0 0
Product liability 530,715 897,163
Deferred income taxes 1,546,000 1,546,000
------------ ------------
TOTAL LIABILITIES 70,227,521 77,640,612
------------ ------------
STOCKHOLDERS' INVESTMENT 24,868,083 25,005,663
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 95,095,604 $102,646,275
============ ============
See notes to condensed consolidated financial statements
2 of 13
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------------------
2001 2000
----------------------- -----------------------
Net sales $ 20,087,599 $ 21,087,686
Cost of sales 17,031,032 17,928,298
------------ ------------
GROSS PROFIT 3,056,567 3,159,387
Selling, general and administrative
expenses 3,122,693 4,086,270
------------ ------------
INCOME (LOSS) FROM OPERATIONS (66,126) (926,883)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (886,650) (1,572,364)
Interest income 634,256 790,032
Other, net 87,342 8,350
------------ ------------
OTHER EXPENSE - NET (165,052) (773,982)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (231,178) (1,700,865)
Income taxes (benefit) (78,600) (578,000)
------------ ------------
NET INCOME (LOSS) $ (152,578) $ (1,122,865)
============ ============
Net income (loss) per share:
Basic $ (0.03) $ (0.25)
============ ============
Assuming dilution $ (0.03) $ (0.25)
============ ============
See notes to condensed consolidated financial statements
3 of 13
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (152,578) $(1,122,865)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 730,589 832,516
Common stock issued to directors for services 14,998 8,993
Net changes in operating assets and liabilities
which provided (used) cash:
Current assets excluding cash & cash equivalents 5,055,715 9,612,151
Other assets 1,745,931 (1,244,163)
Accounts payable (2,749,464) (1,083,802)
Accrued expenses (231,650) 607,324
Federal and state income taxes (40,274) 641,105
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,373,267 8,251,258
----------- -----------
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (250,055) (23,166)
Payments (made on) received from liabilities assumed upon the
Galion acquisition (366,448) (213,160)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (616,503) (236,326)
----------- -----------
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal reduction of long term debt (4,065,529) (7,663,340)
Repurchase of common stock -- (241,238)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (4,065,529) (7,904,578)
----------- -----------
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (308,765) 110,354
----------- -----------
Cash and cash equivalents, beginning of year 763,635 1,401,810
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 454,870 $ 1,512,164
=========== ===========
See notes to condensed consolidated financial statements
4 of 13
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of McClain
Industries, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, such Statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring items
considered necessary for a fair presentation have been included.
Operating results for the three-month period ended December 31, 2001
are not necessarily indicative of the results that may be expected for
the year ending September 30, 2002. For further information, refer to
the Consolidated Financial Statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended September
30, 2001.
2. Inventories
Inventories at December 31, 2001 and September 30, 2001 are summarized
as follows:
(Unaudited)
December 31, 2001 September 30, 2001
-----------------------------------------------
Materials and Supplies $ 15,196,697 $ 16,136,116
Work in Process 4,300,000 4,306,681
Finished Goods 8,344,853 8,583,582
Chassis 5,079,000 7,703,085
--------------- -------------
$ 32,920,550 $ 36,729,464
=============== =============
3. Earnings per Common Share and Common Equivalent Share:
Earnings per share are computed using the weighted average number of
common shares outstanding during the year. The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", effective September 30, 1998. This statement requires a
dual presentation and reconciliation of "basic" and "diluted" per share
amounts. Diluted reflects the potential dilution of all common stock
equivalents. At December 31, 2001 and 2000 options to purchase 155,331
and 146,983 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.
5 of 13
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001
4. Depreciation
For the three months ended December 31, 2001 and 2000, depreciation
charges were $691,565 and $698,805, respectively. Accumulated
depreciation totaled $26,076,890 and $25,353,719 at December 31, 2001
and September 30, 2001, respectively.
5. 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 from its obligations related to
product liability claims under the Galion acquisition agreement in
exchange for a cash payment of $1,050,000.
A reserve 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 December 31, 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.
6 of 13
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001
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.
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.
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.
6. 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.
7 of 13
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001
Information regarding the Company's operating segments follows:
Manufacturing Truck Leasing
Operations Group Operations Totals
------------------ ------------------ ----------------- ------------------
2001
Net sales $ 17,359,729 $ 2,727,870 $ -- $ 20,087,599
Lease revenues -- -- 1,864,552 1,864,552
Operating income (loss) (358,131) (12,282) 304,287 (66,126)
Interest expense, net 429,156 127,448 330,046 886,650
Income (loss) before
income taxes (401,926) (140,421) 311,169 (231,178)
Identifiable assets 63,577,410 7,181,013 24,337,181 95,095,604
Capital expenditures 250,055 -- -- 250,055
Depreciation and
amortization 730,589 -- -- 730,589
------------- ------------- ------------- -------------
2000
Net sales $ 15,446,670 $ 5,641,016 $ -- $ 21,087,686
Lease revenues -- -- 1,798,609 1,798,609
Operating income (loss) (1,090,865) (192,896) 356,877 (926,883)
Interest expense, net 933,386 250,870 388,108 1,572,364
Income (loss) before
income taxes (1,042,382) (437,360) 356,877 (1,122,865)
Identifiable assets 77,408,495 11,434,069 25,134,261 113,976,825
Capital expenditures 23,166 -- -- 23,166
Depreciation and
amortization 832,516 -- -- 832,516
8 of 13
MCCLAIN INDUSTRIES, INC.
ITEM TWO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The following discussion should be read in conjunction with the
condensed consolidated financial statements, including the notes thereto,
appearing elsewhere in this report.
Selected financial data for the Company for the periods indicated:
(Unaudited)
Three Months Ended
December 31,
2001 2000
----------------- ---------------
Net Sales $20,087,599 $21,087,686
Net Income (Loss) (152,578) (1,122,865)
Net Earnings (Loss) Per Common
Share (Basic and Diluted) $ (.03) $ (.25)
(Unaudited)
As of As of
December 31, September 30,
2001 2001
------------------ --------------
Working Capital (Deficit) $(13,187,042) $(12,409,479)
Total Assets 95,095,604 102,646,275
Long-Term Debt 0 0
Stockholder's Investment 24,868,083 25,005,663
Common Shares Outstanding
(Basic and Diluted) 4,534,206 4,565,661
Current Ratio 0.81:1 0:83:1
Funded Debt to Equity
Stockholders' Investment 2.23:1 2.28:1
9 of 13
MCCLAIN INDUSTRIES, INC.
The following table presents, as a percentage of net sales, certain selected
financial data for the Company for the periods indicated:
(Unaudited)
Three Months Ended
December 31,
2001 2000
--------------------------
Net Sales 100.00% 100.00%
Cost of Sales 84.78 85.02
-------------------------
Gross Profit 15.22 14.98
Selling, General &
Administrative Expenses 15.55 19.38
-------------------------
Operating Income (Loss) (0.33) (4.40)
Other Expenses (0.82) (3.67)
-------------------------
Income (Loss) before Income Taxes (1.15) (8.07)
Income Taxes (Benefit) (0.39) (2.74)
-------------------------
Net Income (Loss) (0.76)% (5.33)%
=========================
10 of 13
MCCLAIN INDUSTRIES, INC.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales decreased 4.7% to $20.1 million for the quarter ended
December 31, 2001 (Quarter 2001) from $21.1 million for the quarter ended
December 31, 2000 (Quarter 2000). The decrease was due primarily to reduced
truck sales and the continued limited capital expenditures by the national
hauling companies resulting from the continuing difficult economic environment.
McClain E-Z Pack's sales increased 5.4% or $0.7 million during the Quarter 2001
compared to the Quarter 2000 while McClain Truck sales decreased 50.4% or $2.0
million during the Quarter 2001 compared to the Quarter 2000. Sales of the
Company's dump body products decreased by 4.6% or $0.13 million for the Quarter
2001 compared to the Quarter 2000 due to the continued slump and excess
production capacity in the dump body markets. The sales of the McClain Truck
division accounted for 9.8% of the Company's sales for the Quarter 2001 compared
to 18.8% of the Company's sales for the Quarter 2000.
Cost of goods sold decreased to 84.79% for the Quarter 2001 from 85.02%
for the Quarter 2000. The gross profit margin on manufactured products decreased
to 16.7% for the Quarter 2001 compared to 20.3% for the Quarter 2000 due to
increased discounting related to the slow economy. McClain Truck had a gross
loss of 1.11% for the Quarter 2001 compared to a gross loss of 2.96% for the
Quarter 2000 primarily as a result of the liquidation of certain stale chassis
from inventory.
Selling, General & Administrative Expenses decreased to 15.54% of net
sales for the Quarter 2001 from 19.38% of net sales for the Quarter 2000 as the
Company continued to bring operating costs in line with the current sales
volume.
The Company had a working capital deficit of $13.2 million at December
31, 2001 compared to $12.4 million at September 30, 2001. The ratio of current
assets to current liabilities was 0.81:1 at December 31, 2001 and 0.84:1 at
September 30, 2001. The Company's cash and cash equivalents totaled $0.5 million
at December 31, 2001. Cash flows provided by operations were $4.4 million for
the three months ended December 31, 2001.
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
11 of 13
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.
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 (For further information on the Company's debt agreements, refer to the
Consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 2001). 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.
12 of 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McCLAIN INDUSTRIES, INC.
Date: February 6, 2002 By: /s/ Kenneth D. McClain
------------------------------- ------------------------------
Kenneth D. McClain, President
Date: February 6, 2002 By: /s/ Mark S. Mikelait
------------------------------- ------------------------------
Mark S. Mikelait, Treasurer
13 of 13