1
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, 1995
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.
[X]
As of December 29, 1995, the aggregate market value of the
Registrant's voting stock held by nonaffiliates of the Registrant was
$8,441,206 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 29, 1995, there were 4,893,512 shares of the
Registrant's common stock issued and outstanding.
Exhibit Index is on Page 57
Page 1 of 347 Pages
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PART I
ITEM 1. BUSINESS
GENERAL
McClain Industries, Inc., a Michigan corporation ("McClain-Michigan"),
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. 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-Michigan was incorporated in 1968 and became a publicly-traded
company in 1973. It currently has: (i) five significant wholly-owned operating
subsidiaries: McClain of Ohio, Inc. ("McClain-Ohio"); McClain of Georgia, Inc.
("McClain-Georgia"); Shelby Steel Processing Co. ("Shelby Steel"); McClain Tube
Company (d/b/a Quality Tubing) ("Tube"); and McClain EPCO, Inc. ("EPCO"); (ii)
one wholly-owned lease financing subsidiary: McClain Group Leasing, Inc.
("Leasing"); and (iii) one wholly-owned holding company subsidiary: Galion
Holding Company ("Galion Holding"). Galion Holding is the sole shareholder of
two additional operating subsidiaries, McClain E-Z Pack, Inc. ("E-Z Pack") and
Galion Dump Bodies, Inc. ("Galion Dump Bodies"). McClain-Michigan, E-Z Pack
and Galion Dump Bodies collectively own all of the issued and outstanding stock
of McClain Group Sales, Inc. ("Sales"), which is the exclusive sales
representative of McClain-Michigan, McClain-Ohio, McClain-Georgia, E-Z Pack and
Galion Dump Bodies. All of these companies are Michigan corporations, except
for McClain-Georgia, which is a Georgia corporation, and EPCO, which is a New
York corporation.
The names of several of these companies were changed during the past
year in order to more closely identify them with McClain-Michigan. Leasing was
formerly known as Prime Leasing Corporation; McClain-Ohio was formerly known as
McClain Industries of Ohio, Inc.; E-Z Pack was formerly known as Galion Solid
Waste Equipment, Inc.; Sales was formerly known as M.E.G. Equipment Sales,
Inc.; and EPCO was formerly known as EPCO Manufacturing Corp. EPCO was
acquired during July 1995. See ITEM 1. BUSINESS, Acquisition of EPCO, below.
McClain-Michigan, McClain-Ohio, McClain-Georgia and EPCO are sometimes
collectively referred to as "McClain"; Galion Holding, E-Z Pack and Galion Dump
Bodies are sometimes collectively referred to as "Galion"; and, unless the
context otherwise requires, all references to the Company mean McClain-Michigan
and all of the entities owned or controlled by McClain-Michigan.
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The Company's executive offices are located at 6200 Elmridge Road,
Sterling Heights, Michigan 48310 and its telephone number is (810) 264-3611.
ACQUISITION OF EPCO
On July 17, 1995, McClain-Michigan purchased all of the issued and
outstanding common stock of EPCO in exchange for stock of McClain with a market
value of $1,000,000 and an agreement to issue additional McClain stock over the
next 3 years with a market value of up to $500,000 if sales of EPCO balers
exceed specified amounts during such years. The stock issued to the former
EPCO shareholders has not been registered under any federal or state securities
laws and, consequently, its transfer is restricted.
EPCO manufactures and sells high quality vertical downstroke balers
primarily for cardboard and plastics, compacting such waste for recycling.
During its fiscal year ended March 31, 1995, EPCO had operating income of
approximately $10,600 on net sales of approximately $2.5 million. Acquiring
EPCO permits the Company to offer its customers a more complete line of solid
waste handling equipment, satisfy customers which seek to purchase balers and
compactors as a unit, and remain competitive in the industry.
PRODUCTS
The Company manufactures and markets dump truck bodies and four major
solid waste handling equipment product lines: (1) containers; (2) compactors
and baling equipment; (3) garbage and recycling truck bodies; and (4) transfer
trailers.
Dump Truck Bodies and Hoists
Galion Dump Bodies manufactures steel dump truck bodies varying in
capacity from two to twenty-five cubic yards at its Winesburg, Ohio facility.
McClain-Michigan and McClain-Georgia, under license from Galion Dump Bodies,
also manufacture dump truck bodies at its Oklahoma City, Oklahoma and Macon,
Georgia facilities, respectively. Dump truck bodies are assemblies which 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 Dump Bodies are sold under the registered trademark "Galion". The
trademark registration, if not renewed, will expire in the year 2001. Sales of
dump truck bodies accounted for approximately 21% of the Company's consolidated
sales for the fiscal year ended September 30, 1995.
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Containers
Detachable Roll-Off Containers and Roll-Off Hoists. McClain-Michigan,
McClain-Ohio and McClain-Georgia manufacture several types of detachable
roll-off containers and roll-off hoists at the Company's facilities in Sterling
Heights, Michigan, Macon, Georgia, Oklahoma City, Oklahoma, and Galion, Ohio.
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". Sales of detachable roll-off containers and roll-off
hoists accounted for approximately 18% of the Company's consolidated sales for
the fiscal year ended September 30, 1995.
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, Macon, Georgia,
Oklahoma City, Oklahoma, and Galion, Ohio. 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
seventy cubic yards and are designed for highway movement of slurry type waste
products. Sales of these containers accounted for approximately 7% of the
Company's consolidated sales for the fiscal year ended September 30, 1995.
Compactors and Baling Equipment
The Company manufactures compactors at its Sterling Heights, Michigan
facility. 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 "UNIMAG". Sales of compactors and
unitized compaction systems accounted for approximately 11% of the Company's
consolidated sales for the fiscal year ended September 30, 1995. EPCO
manufactures at its Buffalo, New York facility 24 models of balers which
compact plastic and paper products, primarily cardboard. Balers are either
vertical downstroke or closed door horizontal balers. Sales of balers for the
approximately 2-1/2 months since the date of acquisition accounted for
approximately 1% of the Company's consolidated sales for the fiscal year ended
September 30, 1995.
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
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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 front loading truck bodies under the
trademarks "Goliath", "Goliath II", and "Apollo". The side loading truck
bodies and the recycling truck bodies are principally identified by the E-Z
Pack name only. These trademarks will expire in the year 2001, unless renewed.
Sales of garbage and recycling truck bodies accounted for approximately 20% of
the Company's consolidated sales for the fiscal year ended September 30, 1995.
Transfer Trailers
McClain-Ohio 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. Sales of transfer trailers
accounted for approximately 8% of the Company's consolidated sales for the
fiscal year ended September 30, 1995.
CUSTOMERS AND DISTRIBUTION
For the fiscal year ended September 30, 1995, the Company's
consolidated sales were divided approximately 43% to distributors, 54% to solid
waste handling companies and 3% to governmental agencies.
The Company traditionally has not depended on product sales to any one
customer and no single customer accounted for more than 10% of the Company's
net sales for the fiscal years ended September 30, 1995 and 1994. However, for
the year ended September 30, 1993, sales to WMX Technologies, Inc. constituted
approximately 11% of the Company's net sales. The Company has no contracts
with any of its customers 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.
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Although historically foreign sales have not accounted for a
significant portion of the Company's revenues, the Company anticipates that a
greater portion of its future net sales will be derived from sales of its
products in foreign markets.
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 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 operates Sales, a separate wholly-owned corporation, to
act as the Company's exclusive sales representative. All of the Company's
sales efforts are centralized through Sales rather than being handled by the
separate product divisions.
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 1, 1995, there were
approximately 143 authorized Company dealers located in numerous states and six
authorized Company dealers, licensees and commissioned district managers in
four 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 lease financing on a
limited basis for purchases of the Company's products. At September 30, 1995,
Leasing held lease receivables the present value of which aggregates
approximately $3.6 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 and warehouses. Coiled steel
is received by the Company at various manufacturing facilities
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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 (other than aluminum extrusions) 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
currently purchases all of its extruded aluminum from one source. The Company
is unaware of other potential providers of extruded aluminum which meets the
Company's requirements and, therefore, the failure of the Company's extruded
aluminum supplier to continue to supply the Company could have a material
adverse effect on the Company. Although to date the Company has been able to
obtain sufficient quantities of extruded aluminum to satisfy its manufacturing
needs, a prolonged shortage of such raw material could adversely affect the
Company. In addition, the Company currently purchases all of its hydraulic
cylinders from only a few major suppliers. The failure by any of such
suppliers to continue to supply the Company with cylinders on commercially
reasonable terms, or at all, could also have a material 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 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 stringent 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 has been processing
coiled steel and manufacturing 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.
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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 78.6%, 86.7% and 87.7%
of Shelby Steel's business and 1.2%, 2.0% and 2.8% of the Company's
consolidated net sales for the fiscal years ended September 30, 1995, 1994 and
1993, 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 is
expected to eventually provide the Company with 90% of its steel tubing
requirements. Currently, it provides approximately 80% of such 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, 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 industry 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, 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
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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 $8.6
million and $16.6 million at September 30, 1995 and 1994, respectively.
Substantially all of the Company's backlog is delivered within four 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, 1995, 1994 and 1993, the Company had inventory
of $31.2 million, $23.3 million and $18.4 million, respectively.
EMPLOYEES
The Company had approximately 540 employees as of December 1, 1995.
Sixty-three of the Company's hourly employees are represented by the McClain
Hourly Employees' Union pursuant to a collective bargaining agreement which
expires September 1996. The 137 hourly employees of E-Z Pack are represented
by the International Association of Machinists and Aerospace Workers Union
pursuant to a collective bargaining agreement which expires June 12, 1997. The
54 hourly employees of McClain-Ohio are represented by the International
Association of Machinists and Aerospace Workers Union pursuant to a collective
bargaining agreement which expires in November, 1996. On February 23, 1995 the
National Labor Relations Board conducted an election in response to a petition
filed by the Shopmen's Local Union No. 616 of the International Association of
Bridge, Structural and Ornamental Iron Workers (AFL-CIO) (the "Union") to
represent the hourly employees at the McClain-Georgia facility in Macon,
Georgia. Fifty-one employees or former employees voted, of which 21 voted
against Union representation and 19 voted in favor of Union representation.
The ballots of 11 employees were challenged as ineligible. The Union filed
charges against the Company asserting that it committed various unfair labor
practices which affected the election results and that the challenged ballots
should be counted. It seeks an order that it be recognized as the exclusive
bargaining agent for the hourly employees and that certain former employees be
awarded backpay, lost benefits, and reinstatement. A trial regarding these
charges was held during October 1995. The Company does not believe that Union
certification, if it occurs, or an adverse final decision regarding the charges
filed by the Union, would have a material adverse effect on the Company. The
Company believes
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that relations with the hourly employees at McClain of Georgia are generally
satisfactory. There have been no work stoppages due to labor difficulties.
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 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.
During 1994, the Company engaged the services of an outside consulting
firm to perform environmental compliance assessments of all of the Company's
facilities (the "Audits"). The Audits identified a number of regulatory
compliance issues associated with hazardous waste management and reporting,
wastewater and stormwater requirements, underground storage tank registration
and reporting requirements and air permitting requirements. The anticipated
cost to remedy these compliance deficiencies was not deemed material by the
Company. Since the date of the Audits, the Company has begun to implement
procedures and take requisite actions to remedy the deficiencies identified in
the Audits so that its facilities will comply with all applicable and material
environmental laws and regulations.
One of the properties the Company acquired as part of its acquisition
(the "Galion Acquisition") on July 27, 1992 of all of the assets and
substantially all of the liabilities of the Peabody Galion Division of Peabody
International Corporation ("Peabody") needs environmental remediation as
reflected in a Phase II environmental study issued in September, 1993 by
Stearns & Wheler in connection with the Galion Acquisition. This Phase II
study indicates that there is no groundwater contamination on the property but
that certain parcels of the property are contaminated with volatile organic
compounds and excess levels of PCBs. The purchase agreement relating to the
Galion Acquisition provides that the Company is responsible only for the first
$300,000 of costs and expenses, if any, incurred for such remediation, and
Peabody is responsible for any costs or expenses in excess of such amount. The
actual costs of remediation have not yet been determined. The indemnity
provisions of the purchase agreement may not cover environmental liabilities
arising from contamination found off-site. Although there is some indication
that such contamination exists, the Phase II environmental study did not
evaluate off-site liability issues. If such off-site contamination exists and
is traceable to the property, Galion Holding could be responsible for some or
all of the remediation costs associated with such contamination.
On July 17, 1995, the Company acquired all of the outstanding stock of
EPCO Manufacturing Corporation ("EPCO") located in the State of New York. In
connection with that acquisition, the Company performed environmental site and
compliance assessments of both the real property then being used by EPCO for
operations and the property to
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which EPCO was moving. While the assessments did identify minor environmental
compliance issues, none of the issues was material. Subsurface contamination
concerns were identified only with respect to the property to which EPCO was
moving, a property with confirmed soil and groundwater contamination. However,
the owner of the new EPCO facility has agreed to indemnify EPCO for any
pre-existing soil or groundwater contamination.
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. In addition, the trend towards classifying more
materials as "semi-hazardous" or "hazardous" waste may be expected to continue
to make handling such materials more complex, thereby further facilitating the
market for solid waste handling products.
ITEM 2. PROPERTIES
In the aggregate, the Company owns or leases approximately 866,500
square feet of real property located in Michigan, Ohio, Georgia, Oklahoma and
New York. The Company owns three facilities in Michigan, three facilities in
Ohio, one facility in Georgia and one facility in Oklahoma. The properties
that the Company owns or leases consist of the following:
OWNED SQUARE
LOCATION OR LEASED FOOTAGE
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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 67,500
Winesburg, Ohio Owned 16,000
Winesburg, Ohio Owned 15,200
Macon, Georgia Owned 114,500
Oklahoma City, Oklahoma Owned 100,000
Buffalo, New York Leased 28,300
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 McClain-Michigan. This facility is used to manufacture
roll-off containers, roll-off hoists and compactors. McClain-Michigan also
owns a 55,000 square foot facility located in
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Kalamazoo, Michigan which is home to the Company's tube mill. 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.
McClain-Michigan leases, under a verbal month-to-month lease, an 18,000 square
foot manufacturing facility also located in Sterling Heights, Michigan from the
mother 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, although other similarly situated unrelated parties would,
in all likelihood, require a long-term written lease.
E-Z Pack owns three buildings comprising approximately 365,000 square
feet situated on approximately 38 acres of land in Galion, Ohio. This
three-building facility is the sole location for its manufacturing operations.
This facility manufactures front, side and rear loading garbage truck bodies
and recycling trucks. Sales's executive offices are located in one of the
Galion, Ohio buildings under a lease arrangement and McClain-Ohio leases one of
the other buildings at this location. Galion Dump Bodies owns three
manufacturing facilities (67,500, 15,200 and 16,000 square feet) situated on 20
acres of land in Winesburg, Ohio where it manufactures dump bodies and hoists.
The Company's Georgia facility is an approximately 114,500 square foot
manufacturing facility on 13.2 acres in Macon, Georgia. McClain-Georgia
manufactures roll-off containers and fabricates and processes steel for its own
use in the manufacturing process at this facility.
The Company's Oklahoma facility consists of three 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.
EPCO leases an approximately 28,300 square foot facility outside
Buffalo, New York, where it manufacturers balers.
McClain-Michigan's Sterling Heights, Michigan facility and
McClain-Ohio's Ohio facility are currently operating at approximately 60% of
capacity. The Oklahoma facility is currently operating at 50% of capacity.
The Georgia facility is currently operating at 55% of capacity. The E-Z Pack
portion of the Galion, Ohio facility is currently operating at 70% of capacity.
The Winesburg, Ohio facility is currently operating at 75% of capacity. The
Kalamazoo, Michigan facility is currently operating at 50% of capacity. The
EPCO facility is currently operating at 50% 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.
-12-
13
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 which collateralize certain obligations. See Notes 5
and 6 of Notes to Consolidated Financial Statements.
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 few legal
proceedings involving product liability claims relating to McClain, Galion
Dump and E-Z Pack brand products. Galion Holding, pursuant to an
indemnification it provided Peabody Galion Division of Peabody International
Corporation ("Peabody")in connection with the Galion Acquisition, is currently
defending a number of legal proceedings involving product liability claims
arising out of products manufactured by Peabody prior to the date of the Galion
Acquisition. These claims are also covered by insurance. Although the Company
has already settled many of these cases and the Company believes that it can
continue to successfully resolve these product liability claims, there can be
no assurance that the Company can continue to do so. The Company is not
presently a party to any material legal proceedings except as described above.
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.
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
-13-
14
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, 1994
First Quarter . . . . . . . . . . . . . . $15.00 $9.50
Second Quarter . . . . . . . . . . . . . . 15.00 8.00
Third Quarter . . . . . . . . . . . . . . 13.00 8.25
Fourth Quarter . . . . . . . . . . . . . . 12.50 10.50
FISCAL YEAR ENDED SEPTEMBER 30, 1995
First Quarter . . . . . . . . . . . . . . 12.25 9.00
Second Quarter . . . . . . . . . . . . . . 11.50 6.625
Third Quarter . . . . . . . . . . . . . . 8.75 7.125
Fourth Quarter . . . . . . . . . . . . . . 7.88 6.38
Effective February 28, 1995, a four-for-three spilt of the Company's
Common Stock was declared.
On December 29, 1995, the last reported sales price for the Common
Stock as reported by Nasdaq/NMS was $4-7/16. As of such date there were
approximately 237 holders of record of the Common Stock. The Company believes
there are a substantial number of beneficial owners of 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.
In December 1995, the Board of Directors authorized the Company to
repurchase from time to time on the open market up to 100,000 shares of the
Company's common stock.
-14-
15
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's last five fiscal
years ended September 30 are as follows:
============================================================================================================
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Net Sales $82,263,202 $79,166,990 $61,794,822 $31,895,313 $27,035,673
Net Income $2,462,755 $3,250,996 $2,110,838 $ 1,190,385 $ 665,414
Net Earnings Per
Common and Common
Equivalent Share(1)
$.53 $.71 $.51 $.30 $.17
As of September 30,
-------------------------------------------------------------------------------
Working Capital $33,868,556 $21,997,601 $10,664,116 $12,577,620 $8,706,995
Total Assets $73,899,197 $58,189,747 $49,562,268 $36,014,382 $19,088,253
Long-Term Debt $31,170,287 $18,039,869 $7,022,215 $4,814,324 $3,700,857
Stockholders'
Investment $22,841,274 $19,359,709 $15,794,210 $11,707,722 $10,745,887
Weighted Average
Number of Common
Equivalent Shares
Outstanding(1),(2) 4,657,476 4,608,137 4,104,076 3,921,769 3,948,403
Current Ratio 3.37:1 2.49:1 1.55:1 2.20:1 3.05:1
Long Term Debt to
Equity 1.36:1 0.93:1 0.44:1 0.41:1 0.34:1
============================================================================================================
1 Average number of shares outstanding includes, as appropriate, shares
that could have been purchased by the exercise of options during the
year.
2 Adjusted to reflect a 4-for-3 stock split effective February 28, 1995.
-15-
16
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 thereto, appearing
elsewhere in this report.
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,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net Sales . . . . . . . . 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales . . . . . . 77.68 78.12 78.13 75.23 75.30
----- ----- ----- ----- -----
Gross Profit . . . . . . 22.32 21.88 21.87 24.77 24.70
Selling, General &
Administrative Expenses . 14.19 13.48 15.00 15.74 17.73
----- ----- ----- ----- -----
Operating Profit . . . . 8.13 8.40 6.87 9.03 6.97
Other Expense . . . . . . 3.59 2.19 2.18 3.01 3.31
---- ----- ----- ----- -----
Income Before Income
Taxes . . . . . . . . . . 4.54 6.21 4.69 6.02 3.66
Income Taxes . . . . . . 1.55 2.09 1.27 2.29 1.20
---- ----- ----- ----- -----
Net Income . . . . . . . 2.99% 4.12% 3.42% 3.73% 2.46%
==== ===== ===== ===== =====
The Company manufactures dump truck bodies and a variety of solid
waste handling products including: (i) detachable roll-off waste containers
("roll-off containers") and hydraulically operated roll-off hoist tilt truck
frames used to load, transport and dump roll-off containers ("roll-off
hoists"); (ii) intermodal waste containers designed for interchangeable use on
trucks, trains and ships ("intermodals"); (iii) water-tight and sludge
detachable roll-off waste containers designed to handle wet waste and slurry
type waste, respectively; (iv) compactors, unitized compactor/roll-off
container systems ("unitized compaction systems"), and balers; (v) an
assortment of front, rear and side loading garbage truck bodies; (vi) recycling
truck bodies; and (vii) transfer trailers used to transport compacted solid
waste from transfer stations to landfills or incinerators.
-16-
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The following table presents the net sales of the Company by major
product line for the years indicated (in thousands):
YEAR ENDED
SEPTEMBER 30,
---------------------------------------------
1995 1994
---------------------------------------------
AMOUNT % AMOUNT %
---------------------------------------------
(in thousands)
GARBAGE AND RECYCLING TRUCK
BODIES
$21,612 26.27% $18,027 22.77%
CONTAINERS 20,644 25.10% 19,515 24.65%
DUMP TRUCK BODIES 17,611 21.41% 18,047 22.80%
COMPACTORS, UNITIZED
COMPACTION SYSTEMS AND
BALERS 9,797 11.91% 9,357 11.82%
TRANSFER TRAILERS 6,809 8.28% 9,094 11.49%
REPLACEMENT PARTS 3,436 4.18% 3,258 4.12%
OTHER PRODUCT SALES 2,354 2.85% 1,869 2.35%
---------------------------------------------
TOTALS $82,263 100.0% $79,167 100.0%
=============================================
RESULTS OF OPERATIONS
Comparison of year ended September 30, 1995 to year ended September 30, 1994
Net sales for the fiscal year ended September 30, 1995 reached $82.3
million reflecting a 3.91% increase over sales for Fiscal 1994 of $79.2
million. This increase in sales for Fiscal 1995 was attributable to container
sales, exclusive of intermodal and sludge containers, increasing by $2.8
million for the period and garbage and recycling truck bodies sales increasing
by $3.6 million for the period. Sales of other product lines remained static
or declined in comparison to Fiscal 1994; most notably trailer sales which
declined $2.3 million and intermodal and sludge containers sales which declined
$1.8 million. The decline in trailer sales is attributable to a temporary over
supply of trailers by end users and a restructuring of the Company's sales
force. Management expects the restructuring of the trailer sales force to have
a positive effect on sales commencing in the second quarter of Fiscal 1996.
The decline in intermodal and sludge containers sales is primarily due to an
over supply of intermodal and sludge containers in rental fleet markets.
Cost of sales as a percentage of net sales was 77.68% for Fiscal 1995
compared to 78.12% for Fiscal 1994. The gross profit as a percentage of net
sales was 22.32% for Fiscal 1995 compared to 21.88% for 1994. The gross profit
margins for Fiscal 1995 are
-17-
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lower than originally forecasted as a result of increased costs incurred for
raw materials, principally steel and aluminum which were not fully recoverable
due to intense pricing competition within the Solid Waste Industry, and
start-up expenses incurred in transferring production of one of the product
lines from one manufacturing facility to another facility. Steel prices
declined in the latter part of the fourth quarter of Fiscal 1995 and this
decline is expected to have a positive effect on gross profit margins in the
latter part of the first quarter of Fiscal 1996.
Selling, general and administrative expenses as a percentage of net
sales increased modestly to 14.19% for Fiscal 1995 compared to 13.48% for
Fiscal 1994. Interest expense as a percentage of net sales increased to 3.01%
of net sales for Fiscal 1995 compared to 1.67% of net sales in Fiscal 1994 as a
result of increased long-term debt. The increase in long-term debt resulted
from acquiring approximately $4 million of fixed assets and supporting higher
inventory. Machinery and equipment was acquired to replace existing equipment
to enhance productivity levels. Higher inventories of raw materials and
supplies were maintained in order to be more responsive to customer needs and
to reduce delivery time of finished goods. Net income as a percentage of net
sales was 2.99% for Fiscal 1995 compared to 4.12% for Fiscal 1994. The decline
in net income is attributable to increased interest expense and increased
prices of raw materials which were not recoverable through higher selling
prices.
Comparison of year ended September 30, 1994 to year ended September 30, 1993
Net sales increased 28.11% to $79.2 million for the fiscal year ended
September 30, 1994 ("Fiscal 1994") from $61.8 million for the fiscal year ended
September 30, 1993 ("Fiscal 1993"), primarily due to increased unit sales
attributable to the Company's increased selling efforts and the general
economic recovery. Intermodal, water-tight and sludge container sales
accounted for 10.30% of the sales increase for such period, dump truck body
sales accounted for 6.94%, and trailer sales accounted for 6.68% of the sales
increase for such period. For Fiscal 1994, sales of dump truck bodies amounted
to $18 million or 22.80% of net sales, sales of garbage and recycling truck
bodies amounted to $18 million or 22.77% of net sales and sales of the
Company's other solid waste handling equipment amounted to $38 million or
47.96% of net sales. Cost of sales as a percentage of net sales was 78.12% for
Fiscal 1994 compared to 78.13% for Fiscal 1993. The Company's historical gross
margins prior to the Galion Acquisition have approximated 25%. The inclusion
of sales and cost of sales of E-Z Pack has had the effect of reducing the
Company's consolidated gross margins by approximately 3%. During the fourth
quarter of Fiscal 1994, the Company increased the selling prices on all E-Z
Pack product lines and, as a result of this action and other factors, the
Company anticipates an increase in the gross margins commensurate with
historical gross margins for the Company as a whole. Selling, general and
administrative expenses as a percentage of net sales declined to 13.48% for
Fiscal 1994 compared to 15% for Fiscal 1993 primarily due to the absorption of
a higher percentage of such costs, which are generally fixed in nature, by the
higher sales volume. Interest expense increased 87% to $1.3 million in Fiscal
1994 from $707,000 in Fiscal 1993. The higher interest expense is attributable
primarily to higher prevailing interest rates, additional borrowings as a
result of increased inventories associated with increased sales activity and
the purchase of
-18-
19
additional machinery and equipment. Net income was $3.3 million for Fiscal
1994 compared to $2.1 million for Fiscal 1993. As a result of the increased
sales volume and the Company's continuing cost-cutting efforts, the Company's
net income as a percentage of net sales increased to 4.12% for Fiscal 1994
compared to 3.42% for Fiscal 1993. Such cost-cutting efforts include
maintaining stringent cost controls over the purchase of raw materials and
improving labor and production efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs and capital expenditures continued
to increase significantly during Fiscal 1995 primarily due to increased
inventories and purchases of machinery and equipment. Higher inventory levels
were maintained by the Company in order to be more customer responsive, and
machinery and equipment purchases were made to improve production efficiencies.
The Company had working capital of approximately $33.9 million at
September 30, 1995, compared to approximately $22.0 million at September 30,
1994. The ratio of the Company's current assets to its current liabilities was
3.37:1 at September 30, 1995, compared to 2.49 at September 30, 1994. The
Company's cash and short term investments totaled $1.2 million at September 30,
1995. Cash flows used in operating activities were $9.0 million for Fiscal
1995 due to increased inventories, an increase in accounts receivable and a
reduction of trade accounts payable. During this period, investing activities
used $4.8 million, primarily as a result of equipment purchases. The cash
flows used in operating and investing activities were funded by financing
activities which consisted of an additional $13.3 million in borrowings.
In June 1995, the Company entered into a new Revolving Credit Facility
with Standard Federal Bank, a federal savings bank ("Standard"). Under this
agreement the Company may borrow up to $21 million. At September 30, 1995,
approximately $20 million had been drawn down under the Revolving Facility.
Borrowings under the Revolving Facility are limited to 80% of eligible accounts
receivable and 50% of qualified inventory (the "Borrowing Limit"), and bear
interest at prime. All borrowings under the Revolving Facility are due in
March 1997.
In February 1995, the Company entered into a new loan agreement with
Standard to refinance two promissory notes in the aggregate amount of $1.4
million and provide additional working capital in the amount of $600,000. The
note has a five year term, a fifteen-year amortization schedule, bears interest
at the prime rate plus 1/4%, and is secured by a mortgage on certain of the
Company's properties.
Also in February 1995, the Company and Standard entered into a new
equipment purchase credit agreement in the amount of $2.2 million. The Company
can finance up to 85% of the cost of equipment purchased over a five year term,
with interest at prime, and secured by the related equipment. At September 30,
1995, approximately $1.5 million had been drawn on this financing.
-19-
20
All borrowings with Standard are secured by substantially all of the
assets of the Company. In addition, the loans contain various covenants
including those requiring the Company to maintain certain current ratios,
levels of tangible net worth and debt ratios, and restricting the Company from
acquiring fixed assets in excess of $4.5 million/year.
In May 1995, the Company and Standard amended the revolving line of
credit used to finance its lease receivables, reducing the maximum borrowings
to $3.5 million. At September 30, 1995, approximately $2.9 million had been
drawn on this line.
In April 1995, the Company entered into a program with a financial
institution to finance its lease receivables in the amount of $3.0 million.
Under this facility, the Company may finance 100% of the Company's eligible
lease receivables over the term of the related lease at a fixed interest rate
determined at the time of the lease closing. The note is secured by the
related lease receivable. At September 30, 1995, approximately $480,000 had
been drawn on this facility.
Subsequent to September 30, 1995, the Company and Standard entered
into a demonstrator equipment line of credit in the amount of $1.5 million.
The Company can finance up to 85% of the cost of a demonstrator fleet on a
revolving basis, with interest at prime. All borrowings under this revolving
facility mature in March 1997.
The revolving credit agreements expire in March 1997 at which time the
Company expects to obtain renewals upon the same or similar terms.
The Company believes that the available credit under its debt
facilities, together with cash generated from the Company's operations, will be
adequate to meet the Company's working capital requirements for the next 12
months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed herewith under
Item 14.
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.
-20-
21
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) 54 Chairman of the Board, Chief
Executive Officer and President 3/68
Robert W. McClain(1) 59 Senior Vice President, Assistant
Secretary and Director 3/68
Raymond Elliott 61 Director 8/90
Walter J. Kirchberger 60 Director 11/95
Carl Jaworski 52 Secretary 10/72
Edward James Zabinski 53 Treasurer 4/92
(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
and President and a director of McClain-Georgia. Mr. McClain is also a
director and the Chairman of the Board of Galion Holding, E-Z Pack, Galion Dump
Bodies and Sales
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 and Vice
President of McClain-Georgia.
RAYMOND ELLIOTT has been a director of the Company since August 1990.
He has been 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 fill a vacancy in the Board of
Directors resulting from the return of Peter Sugar to his former law firm which
serves as general counsel to the Company. Mr. Kirchberger is First Vice
President - Research of
-21-
22
PaineWebber Incorporated, and has served in such capacity for more than 25
years. He also serves as a director of Simpson Industries, Inc.
CARL JAWORSKI is Secretary of the Company and has served in such
capacity since October 1972. He was also a director and the Treasurer of the
Company from October 1972 until April 1992. Mr. Jaworski also serves as
Treasurer, Secretary and a director of Shelby Steel and Treasurer and Secretary
of McClain-Georgia. Mr. Jaworski is the Secretary of E-Z Pack, the Treasurer
of Galion Dump Bodies and a Vice President and Secretary of Sales.
EDWARD JAMES ZABINSKI has been the Treasurer of the Company since
April 1992, and joined the Company in June 1991. Prior to such time, Mr.
Zabinski was a Certified Public Accountant with Rehmann Robson, the Company's
independent accountants since 1978. Mr. Zabinski worked with Rehmann Robson &
Co. for twenty years. Mr. Zabinski is also the Vice President and Treasurer of
Galion Holding and Sales and the Treasurer of E-Z Pack. He also serves as a
director of Sales.
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,
1995, 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, except that Kenneth McClain filed three late reports on Form
4 and Robert W. McClain filed two late reports on Form 4.
-22-
23
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 only other executive officer whose
total annual salary and bonus from the Company exceeded $100,000 during the
fiscal year ended September 30, 1995.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
-----------------------------------------------------------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
------------------ ---- ------ ----
Kenneth D. McClain, 1995 $219,675 13,333
President/ CEO
1994 194,250 26,667
1993 194,250 0
Robert W. McClain, 1995 216,582 6,667
Senior Vice President
1994 191,250 22,667
1993 191,250 0
OPTION/SAR GRANTS TABLE
-----------------------
Potential Realizable
Shares % of Total Value at Assumed
Underlying Options/SARs Annual Rates of Stock
Options/SARs Granted to Exercise Price Appreciation
Granted Employees Price Expiration for Option Term
Name in 1995 in 1995 ($/Sh.) Date ----------------------
5% ($) 10% ($)
------------------------------------------------------------------------------------------------------------------------
Kenneth D. McClain 13,333 26.31% $7.31 1/16/00 $26,927 $53,854
Robert W. McClain 6,667 13.16% $7.31 1/16/00 $13,465 $26,930
-23-
24
AGGREGATED OPTION/SAR EXERCISES AND
FISCAL YEAR-END OPTION/SAR VALUES TABLE
No. of Unexercised Options/SARs Value of Unexercised
at In-The-Money Options/SARs at
Shares Fiscal Year-End Fiscal Year-End
Acquired Value ---------------------------------------------------------------------
on Received Not Not
Exercise Exercisable Exercisable(1) Exercisable Exercisable(2)
in 1995
------------------------------------------------------------------------------------------------------------------------
Kenneth D. 0 8,889 17,778 $3,378 $6,756
McClain
Robert W. 0 7,556 15,111 $2,871 $574
McClain
- -----------------------
(1) Stock options granted April 18, 1994 pursuant to the Company's 1989
Incentive Stock Plan (the "Incentive Plan"). Options must be
exercised by April 17, 1999. Exercise price is $6.56 per share.
(2) Value based on the average of the September 29, 1995 closing bid high
and low price which was $6.94 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 $3,250
($2,500 for quarters ending prior to October 1, 1995), 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 1989 Retainer Stock
Plan for Non-Employee 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.
-24-
25
During the fiscal year ended September 30, 1995, 1,565 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 29, 1995, 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 1,352,300(3) 27.63%
6200 Elmridge Road
Sterling Heights, MI 48310
Robert W. McClain 1,138,734(4) 23.27%
6200 Elmridge Road
Sterling Heights, MI 48310
June McClain 337,178 6.89%
68333 DeQuindre
Oakland, MI 48368
Lisa McClain Pfeil(5) 310,474 6.34%
67667 Sisson
Romeo, MI 48065
Raymond Elliott 7,983 .16%
290 Town Center
P.O. Box 890
Troy, Michigan 48084
All current executive officers and 2,664,156(6) 53.61%
directors as a group (5 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 4,893,512 shares of Common Stock issued and outstanding as of
December 29, 1995. 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.
-25-
26
(4) Includes 337,178 shares of Common Stock owned by Robert W. McClain's
wife. Mr. McClain disclaims beneficial ownership of these shares.
(5) Of the shares beneficially owned by Mrs. Pfeil, 305,098 are held of
record by an irrevocable trust for her benefit. Mrs. Pfeil is the
daughter of Kenneth D. McClain.
(6) Includes 76,442 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
On August 2, 1993, the Company consummated the purchase of three
facilities which it had been leasing from three different entities controlled
by certain officers and directors of the Company, including its main Sterling
Heights, Michigan facility, its Kalamazoo, Michigan facility and its Macon,
Georgia facility. In each instance, the Company paid the purchase price by
issuing shares of Common Stock and assuming existing mortgages on the
facilities. The purchase prices were determined by the Company's Board of
Directors on the basis of independent appraisals of the facilities. The stock
issued was valued at $5.40 per share, based on the market price for shares of
Common Stock as of March 29, 1993, the date that definitive purchase agreements
for the facilities were executed. These shares are restricted within the
meaning of Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), meaning that it cannot be resold unless registered
under the Securities Act, or in a transaction which is exempt from such
registration. The seller of each facility owned the facility for more than two
years before the sale.
In November 1994, in connection with a contemplated public offering of
its Common Stock, the Company agreed to value the shares issued in exchange for
these facilities at a price based on the market value of shares of Common Stock
as of August 2, 1993, the date these transactions were consummated. This
revision gave effect to the fact that the shares had increased in value by
$504,000 from March 29, 1993. Messrs. Kenneth and Robert McClain have agreed
to pay this amount to the Company, with interest at Standard's prime rate, in
five equal principal installments with accrued interest, commencing September
30, 1995.
The Company leases one of its facilities from the mother 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. See also Note 12 of Notes
to Consolidated Financial Statements.
The Company had sales of approximately $239,000 in Fiscal 1995 to
McClain Leasing Corporation, an entity controlled by certain officers and
directors of the Company.
Elliott & Sons Insurance Agency, Inc. and Michigan Benefit Plans,
Inc., entities controlled by Raymond Elliott, a director of the Company,
provided insurance to the Company during Fiscal 1995. Sales from these
entities to the Company aggregated approximately $1.3 million during Fiscal
1995, for which these entities received fees and commissions in the approximate
amount of $129,000.
-26-
27
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.
(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.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K regarding events
occurring during the months included in the fourth quarter of the
Company's fiscal year.
-27-
28
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 , 1996 McCLAIN INDUSTRIES, INC.
-----
By:/s/ Kenneth D. McClain
----------------------------------
Kenneth D. McClain, President
(Principal Executive Officer)
And By:/s/ Edward James Zabinski
----------------------------------
Edward James Zabinski, 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 , 1996 /s/ Kenneth D. McClain
----- --------------------------------------
Kenneth D. McClain, Director
Dated: January , 1996 /s/ Robert W. McClain
----- --------------------------------------
Robert W. McClain, Director
Dated: January , 1996 /s/ Raymond Elliott
----- --------------------------------------
Raymond Elliott, Director
Dated: January , 1996 /s/ Walter J. Kirchberger
----- --------------------------------------
Walter J. Kirchberger, Director
-28-
29
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
Form 10-K
For Corporations
ANNUAL REPORT
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 and 1993
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
(NAME OF REGISTRANT)
CONSOLIDATED FINANCIAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORT
30
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - September 30, 1995 and September 30, 1994
Consolidated Statements of Income for each of the three years in the period
ended September 30, 1995
Consolidated Statements of Stockholders' Investment for each of the three years
in the period ended September 30, 1995
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 1995
Notes to Consolidated Financial Statements
SCHEDULES
The information required to be submitted in Schedule II 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.
31
INDEPENDENT AUDITORS' REPORT
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, 1995 and 1994, and the
related consolidated statements of income, stockholders' investment, and cash
flows for each of the three years in the period ended September 30, 1995.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of McClain Industries, Inc. and
Subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995 in conformity with generally accepted accounting principles.
REHMANN ROBSON
Farmington Hills, Michigan
January 8, 1996
32
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 and 1994
ASSETS
1 9 9 5 1 9 9 4
--------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $1,173,370 $ 1,697,713
Accounts receivable, net of allowance for doubtful
accounts of $600,000 ($425,800 in 1994)
(Notes 5, 6 and 7) 14,284,478 10,908,932
Inventories (Notes 5, 6 and 8) 31,229,399 23,340,907
Net investment in sales-type leases, current portion 1,305,800 521,302
Prepaid expenses 176,075 296,944
----------- -----------
TOTAL CURRENT ASSETS 48,169,122 36,765,798
----------- -----------
PLANT AND EQUIPMENT at cost (Notes 5 and 6):
Land 1,895,367 1,792,471
Buildings 9,701,280 8,852,933
Storage areas 1,518,928 1,411,795
Machinery and equipment 16,448,110 13,871,140
Furniture and fixtures 1,644,569 1,375,349
Transportation equipment 1,407,063 1,299,909
Leasehold improvements 462,818 230,304
----------- -----------
Total 33,078,135 28,833,901
Less accumulated depreciation and amortization (11,894,922) (10,070,253)
----------- -----------
NET PLANT AND EQUIPMENT 21,183,213 18,763,648
----------- -----------
OTHER ASSETS
Net investment in sales-type leases, net of
current portion (Notes 4 and 6) 2,255,164 1,355,387
Goodwill, net of amortization 1,737,921 479,375
Other 553,777 385,507
Equipment under construction (Note 3) -0- 440,032
----------- -----------
TOTAL OTHER ASSETS 4,546,862 2,660,301
----------- -----------
TOTAL ASSETS $73,899,197 $58,189,747
=========== ===========
See Notes to Consolidated Financial Statements.
33
LIABILITIES AND STOCKHOLDERS' INVESTMENT
1 9 9 5 1 9 9 4
--------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 9,190,309 $10,324,028
Current portion of long-term debt 2,179,449 1,791,213
Accrued expenses (Note 13) 2,331,809 2,003,884
Federal income taxes 598,999 649,072
----------- -----------
TOTAL CURRENT LIABILITIES 14,300,566 14,768,197
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 6) 31,170,287 18,039,869
PRODUCT LIABILITY (NOTE 14) 4,147,070 4,956,972
DEFERRED INCOME TAXES (NOTE 9) 1,440,000 1,065,000
----------- -----------
TOTAL LIABILITIES 51,057,923 38,830,038
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' INVESTMENT (NOTES 3 AND 15)
Common stock, no par value, authorized
10,000,000 shares, issued and outstanding
4,587,744 shares in 1995 (4,447,160 shares in 1994) 5,572,846 4,554,036
Retained earnings 17,772,428 15,309,673
Less amount due from officers (504,000) (504,000)
----------- -----------
TOTAL STOCKHOLDERS' INVESTMENT 22,841,274 19,359,709
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' INVESTMENT $73,899,197 $58,189,747
=========== ===========
34
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1995
1 9 9 5 1 9 9 4 1 9 9 3
------------ ------------ -------------
NET SALES $82,263,202 $79,166,990 $61,794,822
COST OF SALES 63,901,196 61,843,845 48,281,844
----------- ----------- -----------
GROSS PROFIT 18,362,006 17,323,145 13,512,978
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 11,673,686 10,674,043 9,271,167
----------- ----------- ------------
OPERATING PROFIT 6,688,320 6,649,102 4,241,811
------------ ----------- ------------
OTHER EXPENSE
Interest 2,478,350 1,321,533 706,672
Loss on sale of plant and equipment 22,067 24,672 14,925
Other, net 451,148 388,201 625,376
------------ ----------- ------------
TOTAL OTHER EXPENSE 2,951,565 1,734,406 1,346,973
------------ ----------- ------------
INCOME BEFORE INCOME TAXES 3,736,755 4,914,696 2,894,838
INCOME TAXES (NOTE 9) 1,274,000 1,663,700 784,000
------------ ----------- -------------
NET INCOME $ 2,462,755 $ 3,250,996 $ 2,110,838
=========== =========== ============
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARES $ .53 $ .71 $ .51
====== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (NOTE 1) 4,657,476 4,608,137 4,104,076
========== ========== ==========
See Notes to Consolidated Financial Statements.
35
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1995
Common Stock Amount
------------------------ Retained Due From
Shares Amount Earnings Officers Totals
---------- ------------ ------------ ------------ ------
BALANCE AT OCTOBER 1, 1992 3,831,171 $1,759,883 $9,947,839 $ -0- $11,707,722
PROCEEDS FROM COMMON
STOCK ISSUED (NOTE 15) 6,667 15,750 -0- 15,750
COMMON STOCK ISSUED IN
LIEU OF CASH
(NOTES 3 AND 15) 483,129 2,463,900 -0- (504,000) 1,959,900
NET INCOME -0- 2,110,838 2,110,838
---------- ---------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1993 4,320,967 4,239,533 12,058,677 (504,000) 15,794,210
PROCEEDS FROM COMMON
STOCK ISSUED (NOTE 15) 124,000 296,450 -0- 296,450
COMMON STOCK ISSUED IN
LIEU OF CASH (NOTE 15) 2,193 18,053 -0- 18,053
NET INCOME -0- 3,250,996 3,250,996
---------- ---------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1994 4,447,160 4,554,036 15,309,673 (504,000) 19,359,709
PROCEEDS FROM COMMON
STOCK ISSUED (NOTE 15) 3,416 8,389 8,389
COMMON STOCK ISSUED IN
LIEU OF CASH
(NOTE 15) 1,565 11,510 11,510
REDEMPTION OF FRACTIONAL
SHARES (98) (1,089) (1,089)
COMMON STOCK ISSUED IN
CONNECTION WITH EPCO
ACQUISITION (NOTES 2 AND 3) 135,701 1,000,000 1,000,000
NET INCOME 2,462,755 2,462,755
---------- ---------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1995 4,587,744 $5,572,846 $17,772,428 $(504,000) $22,841,274
========= ========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
36
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1995
1 9 9 5 1 9 9 4 1 9 9 3
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,462,755 $ 3,250,996 $ 2,110,838
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,179,992 1,936,191 1,617,387
Deferred income taxes 375,000 709,700 115,000
Provision for doubtful accounts, net 174,200 231,067 111,408
Loss on sale of plant and equipment 22,067 24,672 14,925
Common stock issued for services 11,510 18,053 15,888
Net changes in operating assets and liabilities
which provided (used) cash, net of effects in
1995 of the EPCO acquisition:
Accounts receivable (3,036,791) (1,171,894) (3,474,990)
Inventories (7,721,234) (4,895,119) (4,602,083)
Net investment in sales-type leases (1,684,275) (345,126) (294,234)
Prepaid expenses 120,869 90,476 30,319
Other assets (316,587) (324,580) (1,799,289)
Accounts payable (1,909,327) 2,202,094 3,630,600
Accrued expenses 327,925 (754,454) (227,068)
Federal income taxes (50,073) (29,881) (149,216)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (9,043,969) 942,195 (2,900,515)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to plant and equipment (3,995,109) (3,079,553) (2,740,832)
Payments on liabilities assumed upon the
Galion acquisition (809,902) (1,092,532) (1,398,496)
Proceeds from sale of plant and equipment 30,112 33,869 74,781
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,774,899) (4,138,216) (4,064,547)
----------- ----------- -----------
(Continued)
See Notes to Consolidated Financial Statements.
37
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONCLUDED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1995
1 9 9 5 1 9 9 4 1 9 9 3
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings $22,927,180 $6,354,350 $1,453,387
Repayments of long-term borrowings (9,639,955) (2,223,270) (882,303)
Net short-term borrowings -0- -0- 5,516,994
Sale of common stock under stock option plan 8,389 296,450 15,750
Redemption of fractional shares (1,089) -0- -0-
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 13,294,525 4,427,530 6,103,828
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (524,343) 1,231,509 (861,234)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,697,713 466,204 1,327,438
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,173,370 $ 1,697,713 $ 466,204
=========== =========== ===========
See Notes to Consolidated Financial Statements.
38
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Concentration of Credit Risk
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 or gravel) and solid
waste handling equipment (including containers, compactors,
bailers, 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 throughout the United States. 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.
The Company grants credit to its customers in the normal course of
business. No collateral is required. The Company maintains
reserves for potential credit losses and such losses have
historically been insignificant and generally within management's
expectations.
Principles of Consolidation
The consolidated financial statements include the accounts of
McClain Industries, Inc., and its wholly-owned subsidiaries
(Galion Holding Company, Shelby Steel Processing Co., McClain of
Georgia, Inc., McClain of Ohio, Inc., McClain EPCO, Inc., McClain
Group Leasing, Inc., McClain Tube Company, and McClain Group
Sales, Inc., a corporation owned jointly by McClain Industries,
Inc. and the two operating subsidiaries of Galion Holding
Company). All significant intercompany accounts and transactions
have been eliminated.
In July 1995, the Company acquired and began operating an
additional wholly-owned subsidiary, McClain EPCO, Inc., a business
incorporated in the State of New York (Note 2).
The names of several of the subsidiaries were changed during the
year ended September 30, 1995 in order to more closely identify
them with McClain Industries, Inc.
(Continued)
39
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method is utilized for certain inventories,
while the FIFO (first-in, first-out) method is utilized for the
remaining inventories.
Plant and Equipment
Plant and equipment are recorded in the accounts at cost which
does not purport to represent replacement cost or realizable
value. Depreciation is provided at annual rates sufficient to
allocate the cost of the assets over their estimated useful lives.
The principal estimated useful lives are summarized as follows:
Buildings 20-30 years
Storage areas 5-10 years
Machinery and equipment 4-30 years
Furniture and fixtures 5-10 years
Transportation equipment 3-10 years
Leaseholds 5-20 years
Depreciation and amortization are computed primarily using the
straight-line method for book purposes and accelerated methods for
federal income tax purposes.
The cost of properties retired or otherwise disposed of and the
accumulated depreciation and amortization thereon are eliminated
from the accounts at the time of retirement, and the resulting
gain or loss is taken into income. Maintenance and repairs are
charged against income as incurred, and renewals and betterments
are capitalized.
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, and plant and equipment.
(Continued)
40
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits in banks.
The Company maintains certain bank accounts which hold balances in
excess of the FDIC insured limit of $100,000.
Sales-Type Leases
The Company, through McClain Group Leasing, Inc., offers lease
financing to certain purchasers of the Company's products. These
leases meet the criteria for classification as capitalized leases
and are accounted for as sales-type leases. Accordingly, an
investment is reflected on the accompanying balance sheets in an
amount equal to the gross minimum lease payments receivable less
unearned finance income. 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 by direct charges to
its carrying value. The amortization period is estimated based
upon management's judgements and generally ranges from 15 to 40
years. Accumulated amortization at September 30, 1995 and 1994
was $116,155 and $90,800, respectively.
Common Stock Issued for Services
Common stock is issued from time to time in lieu of cash for
services provided to the Company and is recorded as compensation
expense at generally the fair value on the date of issuance.
Earnings Per Common and Common Equivalent Shares
Effective February 28, 1995, a four-for-three split of the
Company's common stock was declared and was subsequently effected
through distribution of one additional share for every three
shares issued and outstanding. All applicable share and per share
data have been restated to give retroactive effect to the stock
split.
(Continued)
41
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
Earnings per common and common equivalent shares were calculated
using the weighted average number of common shares and common
stock equivalents outstanding during the year. The number of
common shares was increased by the number of shares issuable on
the exercise of stock options when the market price of the common
stock exceeds the option price granted. This increase in the
number of common shares was reduced by the number of common shares
that are assumed to have been purchased with the proceeds from the
exercise of the stock options; those purchases were assumed to
have been made at the average price of the common stock during the
year.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation",
which requires a change in the way compensation cost arising from
stock options granted is measured. The Company intends to adopt
the disclosure aspects of this pronouncement.
Reclassifications
Certain amounts reported in 1994 and 1993 have been reclassified
to conform to the 1995 presentation.
NOTE 2: BUSINESS ACQUISITION
On July 17, 1995, the Company acquired all of the issued and
outstanding common stock of EPCO Manufacturing Corporation, Inc.
("EPCO") in a business combination accounted for as a purchase.
EPCO is a manufacturer of vertical downstroke and closed door
horizontal baling equipment used for processing of cardboard,
paper, plastic and non-ferrous metals in the recycling industry.
Concurrent with the acquisition, EPCO's name was changed to
McClain EPCO, Inc., an enterprise which operates as a wholly-owned
subsidiary of McClain Industries, Inc.
The purchase price of EPCO was $1,000,000 which was paid at
closing by the issuance of 135,701 shares of unregistered common
stock valued at the market price of approximately $7.37,
determined for a period immediately preceding the acquisition
date. The purchase price was significantly in excess of the fair
values of the net assets acquired and such excess was
substantially allocated to goodwill. Additional consideration not
to exceed $500,000 is payable in additional shares of the
Company's common stock contingent upon EPCO sales exceeding
specified amounts during the three-year period ending on September
30, 1998.
(Continued)
42
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: BUSINESS ACQUISITION (CONCLUDED)
EPCO sales (unaudited) for its most recent fiscal year preceding
the acquisition were approximately $2.5 million. Results of
operations of EPCO included in the Company's financial statements
since the date of acquisition are not significant and,
accordingly, proforma results of operations as if the transaction
had occurred at the beginning of the previous fiscal year are not
presented.
NOTE 3: SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash Investing and Financing Activities
Non-cash investing and financing transactions during the year
ended September 30, 1995 consisted of the EPCO acquisition and
placing into service certain equipment valued at approximately
$426,000, which had previously been included in other assets.
The Company issued common stock valued at $1,000,000 in connection
with the EPCO acquisition, which is summarized as follows:
Fair value of assets acquired $ 876,000
Goodwill assigned 1,203,000
Liabilities assumed (1,079,000)
----------
Total consideration exchanged $1,000,000
==========
Non-cash financing and investing transactions during the year
ended September 30, 1994 consisted of placing into service a tube
mill valued at $1,735,000, which had previously been included in
other assets, and settling $7,623,414 of short-term notes payable
for which a like amount of long-term debt was incurred as a result
of debt refinancing (Note 5).
(Continued)
43
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: SUPPLEMENTAL CASH FLOWS INFORMATION (CONCLUDED)
On August 2, 1993, the Company acquired certain real estate and
assumed certain liabilities in exchange for common stock of the
Company (refer to Note 12).
Fair value of assets acquired $ 3,723,500
Mortgages assumed (1,779,500)
-----------
Net assets acquired 1,944,000
Less value of common stock issued 2,448,000
-----------
Amount due from officers $ 504,000
===========
Other Cash Flows Information
Cash paid for interest amounted to $2,482,481 for 1995, $1,321,533
for 1994, and $706,672 for 1993. Cash paid for federal income
taxes amounted to $945,314 for 1995, $835,000 for 1994, and
$827,928 for 1993.
NOTE 4: NET INVESTMENT IN SALES-TYPE LEASES
The net investment in sales-type leases is comprised of the
following amounts at September 30:
1 9 9 5 1 9 9 4
------------ -------------
Gross minimum lease payments collectible
in monthly installments $4,727,944 $2,320,850
Less advance lease payments and deposits
received 178,780 104,027
---------- ----------
Subtotal 4,549,164 2,216,823
Less unearned finance income 988,200 340,134
---------- ----------
Total net investment in sales-type leases 3,560,964 1,876,689
Current portion 1,305,800 521,302
---------- ----------
Noncurrent portion $2,255,164 $1,355,387
========== ==========
(Continued)
44
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: NET INVESTMENT IN SALES-TYPE LEASES (CONCLUDED)
Lease receivables are collectible in the following minimum annual
amounts for the years succeeding September 30, 1995:
Year Amount
---- -----------
1996 $1,567,842
1997 1,380,470
1998 871,627
1999 434,931
2000 294,294
----------
Gross minimum amount collectible $4,549,164
==========
NOTE 5: LINES OF CREDIT
In June 1995, the Company and a subsidiary entered into a new line
of credit agreement with their bank. The Company and the
subsidiary have two lines of credit borrowing arrangements with
the bank totaling $21,000,000 at September 30, 1995. Borrowings
under the lines of credit are limited to 80% of eligible accounts
receivable and 50% of qualified inventory and are subject to
interest no greater than the bank's prime rate. The lines of
credit are secured by substantially all the assets of the Company
and contain various covenants requiring the Company to maintain
certain current ratios, levels of tangible net worth and debt
ratios. The agreement also prohibits the Company from incurring
additional indebtedness other than subordinated indebtedness and
limits plant and equipment acquisitions to $4.5 million per fiscal
year. The Company had an $11 million line of credit at September
30, 1994 and had an $8 million line of credit at September 30,
1993. Borrowings outstanding under the various lines of credit at
September 30, 1995 and 1994 were $20,093,093 and $9,179,067,
respectively.
In October 1995, the Company and the bank entered into an
additional $1,500,000 line of credit agreement in order to
finance, on a revolving basis, up to 85% of the cost of
demonstrator units. Interest on such borrowings will be charged
at the prime rate.
The credit agreements expire in March 1997 at which time the
Company expects to obtain renewals upon the same or similar terms.
(Continued)
45
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: LINES OF CREDIT (CONCLUDED)
Certain information relative to these borrowings is summarized as
follows:
1 9 9 5 1 9 9 4 1 9 9 3
------------- ------------ -------------
Average aggregate borrowings outstanding
during the year $15,069,445 $9,027,614 $4,778,179
Maximum amount of borrowings outstanding
during the year $20,093,093 $10,058,476 $7,825,500
Average interest rates on borrowings
outstanding at the end of the year 9.00% 8.00% 6.25%
Average interest rates on borrowings
outstanding during the year, based on
monthly averages 8.93% 6.85% 6.1%
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT
Long-term debt as of September 30, 1995 and 1994 consisted of the
following obligations:
1 9 9 5 1 9 9 4
--------------- --------------
Promissory notes to a bank, collateralized by certain
assets as disclosed in Note 5. The notes are payable
in monthly installments of $95,340 plus interest at
rates ranging from prime to prime plus 1/2% as
published in the Wall Street Journal (effective rate
of 8.75% at September 30, 1995), and mature at various
dates through July 2002. $6,337,964 $ 5,281,229
(Continued)
46
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT (CONCLUDED)
1 9 9 5 1 9 9 4
--------------- --------------
Promissory notes to banks, collateralized by a
commercial mortgage on certain real estate, payable in
monthly installments of $27,578 plus interest ranging
from the bank prime rate to prime plus 1/2% (effective
rate of 8.75% at September 30, 1995), maturing at
various dates through January 2000. $ 3,527,462 $ 3,166,862
Revolving credit facility with a bank, which is
limited to the lessor of $3,500,000 in 1995 and
$5,000,000 for 1994 or 80% of eligible lease
receivables. Payable in monthly installments,
including interest at prime as published in the Wall
Street Journal (effective rate of 8.75% at
September 30, 1995), due March 1997. The credit
facility is collateralized by lease receivables (Note 4). 2,908,785 2,203,924
Promissory notes to a bank. Payable in monthly
installments of $8,186 plus interest. The notes are
collateralized by the related equipment. 482,432 -0-
Lines of credit borrowings (Note 5) 20,093,093 9,179,067
------------ ------------
Total debt 33,349,736 19,831,082
Less current portion 2,179,449 1,791,213
------------ ------------
Long-term portion $31,170,287 $18,039,869
=========== ===========
Scheduled aggregate principal maturities of long-term debt for
years succeeding September 30, 1995 are presented below:
Year Ending
September 30, Amount
------------- ------------
1996 $ 2,179,449
1997 24,477,333
1998 1,523,896
1999 2,564,287
2000 2,018,711
Thereafter 586,060
------------
Total $33,349,736
===========
47
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The following is a summary of changes in the allowance for
doubtful accounts for each of the three years in the period ended
September 30, 1995:
1 9 9 5 1 9 9 4 1 9 9 3
----------- ---------- ----------
Balance beginning of year $ 425,800 $ 194,733 $ 83,325
Add provision charged
against income 205,000 276,610 111,408
Less uncollectible accounts
written off, net of recoveries (30,800) (45,543) -0-
--------- ---------- ---------
Balance end of year $ 600,000 $ 425,800 $ 194,733
========= ========= =========
NOTE 8: INVENTORIES
The major components of inventories at September 30, 1995 and 1994
were as follows:
1 9 9 5 1 9 9 4
-------------- -------------
Materials and supplies $17,400,070 $8,362,693
Work-in-process 6,255,749 7,115,786
Finished goods 7,573,580 7,862,428
----------- -----------
$31,229,399 $23,340,907
=========== ===========
NOTE 9: INCOME TAXES
The provision for income taxes for each of the three years in the
period ended September 30, 1995 consists of the following
components:
1 9 9 5 1 9 9 4 1 9 9 3
------------- ------------ ------------
Current federal provision $ 899,000 $ 954,000 $ 669,000
Deferred provision 375,000 709,700 115,000
----------- ----------- ---------
Total income taxes $1,274,000 $1,663,700 $ 784,000
========== ========== =========
(Continued)
48
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: INCOME TAXES (CONTINUED)
The effective income tax rate on consolidated pre-tax income
differs from the federal statutory rate for the following reasons:
1 9 9 5 1 9 9 4 1 9 9 3
----------------- ----------------- ----------------
Amount % Amount % Amount %
----------- ---- ----------- ---- ---------- ----
Provision computed at
statutory rate $1,270,000 34 $1,671,000 34 $ 984,000 34
Nondeductible expenses 26,000 1 14,000 - 17,000 1
Alternative minimum tax
provision (credit) (293,000) (6) (217,000) (8)
Other (22,000) (1) 271,700 6 -0- -
---------- --- ---------- --- --------- ---
$1,274,000 34 $1,663,700 34 $ 784,000 27
========== === ========== === ========= ===
The components of the deferred income tax provision are as
follows:
1 9 9 5 1 9 9 4 1 9 9 3
----------- ------------ ------------
Temporary differences resulting
primarily from differences in
depreciation, inventory, product
liability, bad debts and other
liabilities $ 403,000 $ 399,000 $ 530,000
Alternative minimum tax -0- 293,000 (215,000)
Other, net (28,000) 17,700 (200,000)
--------- ---------- ---------
$ 375,000 $ 709,700 $ 115,000
========= ========== =========
During the year ended September 30, 1994, the Company utilized its
remaining available alternative minimum tax (AMT) credits to
reduce its current tax liability.
In 1993, the Company utilized approximately $360,000 of its
available alternative minimum tax (AMT) credits to reduce its
current tax liability; such credits arose because of tax
preference items related to the Galion acquisition in 1992.
Additional AMT credits of $330,000 were used to offset existing
deferred taxes.
(Continued)
49
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: INCOME TAXES (CONCLUDED)
The balance of the net deferred income tax liability as of
September 30, 1995 and 1994 consists of temporary basis
differences related to the following assets and liabilities:
1 9 9 5 1 9 9 4
------------ ------------
Taxable differences:
Property and equipment $2,138,000 $2,110,000
Inventory 1,478,000 1,397,000
Other -0- 16,000
---------- ----------
Gross deferred tax liabilities 3,616,000 3,523,000
---------- ----------
Deductible differences:
Product liability 1,410,000 1,685,000
Accounts receivable 405,000 296,000
Accrued expenses 351,000 477,000
Other 10,000 -0-
---------- ----------
Gross deferred tax assets 2,176,000 2,458,000
---------- ----------
Net deferred income tax liability $1,440,000 $1,065,000
========== ==========
The components which comprise net deferred taxes are not expected
to reverse within the next year; as such, the entire related net
liability is classified as noncurrent.
NOTE 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 cost of these plans
was $255,503 in 1995, $236,449 in 1994, and $186,764 in 1993.
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 the
years ended September 30, 1995, 1994 and 1993.
50
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year Ended September 30
-------------------------------------------------
1 9 9 5 1 9 9 4 1 9 9 3
------------ ------------ ------------
Charged to costs and expenses:
Depreciation $2,099,192 $1,855,311 $1,528,258
Amortization of goodwill and
organizational costs 96,635 79,980 89,129
Maintenance and repairs 1,153,509 728,850 774,058
Taxes, other than payroll and
income taxes 396,276 388,348 632,128
NOTE 12: RELATED PARTY TRANSACTIONS
Leases
The Company leases an operating facility from the mother of the
President of McClain Industries, Inc. on a month-to-month basis
with annual rentals totaling $42,000 in 1995, 1994 and 1993.
Waste Stream Programs
In connection with its acquisition of EPCO in July 1995, the
Company entered into a consulting and commission agreement with
Waste Stream Associates ("Waste Stream"), a partnership consisting
of certain stockholders of the Company, to compensate Waste Stream
in an amount equal to 50% of the pre-tax profit derived by EPCO
from Waste Stream Programs, as defined. Such compensation was not
significant for the period ended September 30, 1995.
(Continued)
51
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: RELATED PARTY TRANSACTIONS - (CONCLUDED)
Note Receivable
The Company's office and operating facility, the Georgia facility
and the Kalamazoo facility were leased from related party
partnerships comprised of officers, directors and employees of
McClain Industries, Inc. On August 2, 1993, the Company acquired
these facilities in exchange for 360,000 shares of common stock.
In November 1994, in connection with an aborted securities
offering, the Company agreed to value these shares at a price
based on the market value of such shares as of August 2, 1993, the
date the transactions were consummated. This revision gives
effect to the fact that the shares increased in value by $504,000
from March 29, 1993, the date the definitive agreements for the
transactions were executed by the parties, to August 2, 1993. The
Company's principal shareholders have agreed to reimburse that
amount to the Company. A letter agreement has been executed
calling for equal annual principal payments to be received by the
Company over a five-year period beginning on September 30, 1995,
plus interest at the Company's cost of funds, which approximates
the prime rate.
Rentals on the above office and operating facilities prior to
their acquisition by the Company amounted to $215,674 during the
year ended September 30, 1993.
Other
Elliott & Sons Insurance Agency, Inc. and Michigan Defined Plans,
Inc., entities controlled by Raymond Elliott, a director of the
Company, provided insurance at a cost of approximately $1,300,000,
$1,400,000, and $1,000,000 to the Company during the years ended
September 30, 1995, 1994 and 1993, respectively. These entities
received fees and commissions in connection with these
transactions of approximately $129,000, $118,000 and $124,000,
respectively.
Product Sales
The Company had product sales of approximately $239,000, $232,000
and $314,000 during the years ended September 30, 1995, 1994 and
1993, respectively, to a business controlled by an executive
officer of McClain Industries, Inc.
52
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: ACCRUED EXPENSES
Accrued expenses included on the accompanying balance sheets
consist of the following amounts at September 30:
1 9 9 5 1 9 9 4
------------ ------------
Compensation $ 442,158 $ 411,958
Vacation & holiday pay 513,988 460,225
Taxes 374,558 181,721
Insurance 321,713 329,312
Other 679,392 620,668
---------- ----------
Total $2,331,809 $2,003,884
========== ==========
NOTE 14: 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.
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.
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 balance sheet at September 30, 1995.
(Continued)
53
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
The Company engaged the services of an outside consulting firm to
perform environmental compliance assessments of all of the
Company's facilities (the "Audits"). The Audits identified a
number of regulatory compliance issues associated with hazardous
waste management and reporting, wastewater and stormwater
requirements, underground storage tank registration and reporting
requirements and air permitting requirements. Since the date of
the Audits, the Company has begun to implement procedures and take
requisite actions to remedy the deficiencies identified in the
Audits so that its facilities will comply with all applicable and
material environmental laws and regulations. The Company
estimates that the total costs of bringing its facilities into
compliance will not have a material effect on the Company's
consolidated financial statements.
Legal Matters Other Than Product Liability
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.
Employment Agreement
In connection with the EPCO acquisition on July 17, 1995, the
Company entered into a three-year employment agreement with the
president of EPCO, which provides for a base salary of $100,000
annually. As an inducement for the Company to enter into the
employment agreement, the officer agreed to not compete with the
Company's business for a period of three years after employment is
terminated, or five years from the date of the agreement,
whichever is longer.
(Continued)
54
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Operating Lease
In connection with the EPCO acquisition in July 1995, the Company
assumed a contractual commitment to lease for a five-year period
ending on April 1, 2000 the New York facilities used in its baler
manufacturing operation. The Company is responsible for
insurance, utilities, maintenance including a percentage of common
area charges and a portion of the property taxes. Minimum rental
payments required pursuant to this noncancellable lease agreement
for the years succeeding September 30, 1995 amount to
approximately $285,000.
The Company has an option to extend the term of the lease for an
additional five-year period at a minimum fixed aggregate rental of
approximately $347,000.
Common Stock Repurchase
In December 1995, the Board of Directors authorized the Company to
repurchase from time to time on the open market up to 100,000
shares of the Company's common stock.
NOTE 15: INCENTIVE STOCK OPTION PLANS
The Company maintains the 1989 Retainer Stock Plan for
Non-employee Directors and the McClain 1989 Incentive Stock Plan.
Retainer Stock Plan
The Retainer Stock Plan as adopted calls for reserving 100,000
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, 1995, 1994 and 1993
the Company issued 1,565, 1,645 and 2,347 shares, respectively, of
its common stock to such directors in exchange for services
rendered.
(Continued)
55
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: INCENTIVE STOCK OPTION PLANS (CONTINUED)
Incentive Stock Plan
The Incentive Stock Plan as adopted calls for reserving 1,000,000
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.
In connection with the EPCO acquisition on July 17, 1995, the
Board of Directors granted to two EPCO employees options to
purchase 20,000 shares of the Company's common stock at an
exercise price of $7.37 per share, which was the fair market value
of the shares on the date of grant. The employees may exercise
one-third of the options at any time after July 1996, one-third of
the options at any time after July 1997 and one-third of the
options at any time after July 1998, but no options may be
exercised after July 2000.
On January 16, 1995, the Board of Directors granted to the
Company's President and other key employees options to purchase
30,667 shares of the Company's common stock at an exercise price
of $7.31 per share, which was the fair market value for the shares
on the date of grant. The employees may exercise one-third of the
options at any time after January 1996, one-third of the options
at any time after January 1997, and one-third of the options at
any time after January 1998, but no options may be exercised after
January 2000.
On September 12, 1994, the Board of Directors granted to key
employees options to purchase 13,333 shares of the Company's
common stock at an exercise price of $8.81 per share, which was
the fair market value for the shares on the date of the grant.
The employees may exercise one-third of the options at any time
after September 1995, one-third of the options at any time after
September 1996, and one-third of the options at any time after
September 1997, but no options may be exercised after September
1999.
On April 4, 1994, the Board of Directors granted to the Company's
President and other key employees options to purchase 52,667
shares of the Company's common stock at an exercise price of $6.56
per share, which was the fair market value for the shares on the
date of the grant. The employees may exercise one-third of the
options at any time after April 1995, one-third of the options at
any time after April 1996, and one-third of the options at any
time after April 1997, but no options may be exercised after April
1999.
(Continued)
56
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: INCENTIVE STOCK OPTION PLANS (CONCLUDED)
On December 21, 1992, the Board of Directors granted to key
employees options to purchase 72,584 shares of the Company's
common stock at an exercise price of $3.18 per share, which was
the fair market value for the shares on the date of grant. The
employees may exercise these options at any time after December
1993, but not later than December 1997.
The following table presents a summary of stock option activity
for each of the years in the three year period ended September 30,
1995:
Shares Under Option
-----------------------------------------
1 9 9 5 1 9 9 4 1 9 9 3
--------- --------- ---------
Outstanding, beginning of year 325,999 370,666 376,000
Granted during the year 50,667 73,333 73,333
Canceled during the year -0- -0- (72,000)
Exercised during the year (3,415) (124,000) (6,667)
--------- -------- ---------
Outstanding, end of year (at exercise
prices ranging from $2.36 to $8.81 per
share) 373,251 325,999 370,666
======== ======== ========
Eligible, end of year for exercise
currently (at prices ranging from $2.36
to $8.81 per share) 252,166 208,888 165,333
======== ======== ========
NOTE 16: MAJOR CUSTOMER
For the years ended September 30, 1995 and 1994, there were no
significant sales to any one customer. In 1993, 11% of net sales
were made to one customer.
NOTE 17: FOURTH QUARTER ADJUSTMENTS
During the quarter ended September 30, 1995, the Company recorded
various adjustments of approximately $1,100,000 principally
related to the valuation of inventories and carrying values of
certain liabilities. The aggregate effect of such adjustments was
to decrease net income for the fourth quarter by approximately
$720,000 ($.15 per share).
57
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ----
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 Land Contract dated November 12, 1991 between Robert and Helen J. Warzyniak and Violet and
Walter H. Urban, as Seller, and the Company, as Purchaser (3)
10.4 Agreement of Purchase and Sale dated July 20, 1992 by and between Peabody International
Corporation, as Seller, and Galion Holding Company, as Buyer (4)
10.5 Loan documents dated May 29, 1992, by and between Prime Leasing Corporation and Standard
Federal Bank (5)
10.6 Manufacture and License Agreement dated as of November 2, 1992, between Galion Dump Bodies,
as Licensor, and the Company, as Licensee (6)
10.7 Loan documents dated as of March 1, 1993, between the Company and Galion Dump Bodies and E-Z Pack (6)
10.8 Guaranty Fee Agreement dated as of March 2, 1993, between Galion Holding and the Company (6)
10.9 Loan documents dated June 29, 1993, between Standard Federal Bank and Galion Holding, E-Z Pack
and Galion Dump Bodies (6)
10.10 Term Note dated January 18, 1994 between Trust Company Bank of Middle Georgia, N.A. and the Company (7)
10.11 Loan Agreement, dated September 15, 1994, between Standard Federal Bank and the Company,
McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (7)
-57-
58
10.12 Loan Agreement, dated September 15, 1994, between Standard Federal Bank and Galion Holding,
E-Z Pack and Galion Dump Bodies (7)
10.13 Third Amendment Agreement (Promissory Note), dated September 15, 1994, between Standard Federal
Bank, the Company, McClain-Georgia and Shelby Steel (7)
10.14 Third Amendment Agreement (Promissory Note), dated September 15, 1994, between Standard Federal Bank,
the Company, McClain-Georgia and Shelby Steel (7)
10.15 Promissory Note (Term Loan), dated September 15, 1994, between Standard Federal Bank, Galion Holding,
E-Z Pack and Galion Dump Bodies (7)
10.16 Promissory Note (Line of Credit), dated September 15, 1994, between Standard Federal Bank, Galion
Holding, E-Z Pack and Galion Dump Bodies (7)
10.17 Promissory Note (Term Loan), dated September 15, 1994, between Standard Federal Bank, the Company,
McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (7)
10.18 Promissory Note (Line of Credit), dated September 15, 1994, between Standard Federal Bank, the
Company, McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (7)
10.19 Purchase Agreement, dated as of March 30, 1993, between the Company and Group Properties III (7)
10.20 Purchase Agreement, dated as of March 30, 1993, between the Company and Group Properties (7)
10.21 Purchase Agreement, dated as of March 30, 1993, between the Company and Group Properties of Georgia (7)
10.22 Letter Agreement, dated November 17, 1994, among the Company, Kenneth D. McClain and Robert W.
McClain (7)
10.23 Promissory Note (Term Loan) dated February 6, 1995, between Standard Federal Bank, the Company,
McClain-George, Shelby Steel, Quality Tube and McClain-Ohio (8)
10.24 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement Dated
February 6, 1995, between Standard Federal Bank and the Company (8)
-58-
59
10.25 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement Dated
February 6, 1995, between Standard Federal Bank and the Company (8)
10.26 Guaranty Dated February 6, 1995, between Standard Federal Bank and the Company (8)
10.27 Promissory Note (Line of Credit with term provisions) (First Line of Credit) dated February 6, 1996,
between Standard Federal Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (8)
10.28 Promissory Note (Line of Credit with Term Provisions) (Second Line of Credit) dated February 6, 1995,
between Standard Federal Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (8)
10.29 Loan Agreement Between Standard Federal Bank and the Company, McClain-Georgia, Shelby Steel, Quality
Tube and McClain-Ohio dated February 6, 1995 (8)
10.30 Loan Agreement between Standard Federal Bank and Galion Holding, Galion Solid Waste and Galion Dump Bodies
dated February 6, 1995 (8)
10.31 Promissory Note (Line of Credit with Term Provisions) (First Line of Credit) dated February 6, 1995
between Standard Federal Bank, Galion Holding Company, Galion Solid Waste and Galion Dump Bodies (8)
10.32 Promissory Note (Line of Credit with Term Provisions) (Second Line of Credit) dated February 6, 1995,
between Standard Federal Bank, Galion Holding Company, Galion Solid Waste and Galion Dump Bodies (8)
10.33 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (Secures Future
Advances) dated February 6, 1995, between Standard Federal Bank and Galion Solid Waste (8)
10.34 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (Secures Future
Advances) dated February 6, 1995, between Standard Federal Bank and Galion Dump Bodies (8)
-59-
60
10.35 Amended and Restated Promissory Note (Line of Credit) dated February 16, 1995, between Standard
Federal Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tube and McClain-Ohio (8)
10.36 First Amendment to Loan Agreement Between Standard Federal Bank, the Company, McClain-Georgia,
Shelby Steel, Quality Tube and McClain-Ohio Dated February 16, 1995 (8)
10.37 Amended and Restated Promissory Note (Line of Credit) dated February 16, 1995, between Standard
Federal Bank, Galion Holding Company, Galion Solid Waste and Galion Dump Bodies (8)
10.38 First Amendment to Loan Agreement between Standard Federal Bank, Galion Holding Company, Galion
Solid Waste and Galion Dump Bodies dated February 16, 1995. (8)
10.39 Amended and Restated Promissory Note (Line of Credit) dated May 5, 1995, between Standard Federal Bank,
Galion Holding Company, Galion Solid Waste and Galion Dump Bodies (8)
10.40 Second Amendment to Loan Agreement between Standard Federal Bank, Galion Holding Company, Galion Solid
Waste and Galion Dump Bodies dated May 5, 1995 (8)
10.41 Second Amendment to Loan Agreement between Standard Federal Bank, the Company, McClain-Georgia, Shelby
Steel, Quality Tube, McClain-Ohio and EPCO dated June 22, 1995 (8)
10.42 Second Amended and Restated Promissory Note (Line of Credit) dated June 22, 1995, between Standard Federal
Bank, McClain-Georgia, Shelby Steel, Quality Tube, McClain-Ohio and EPCO (8)
10.43 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (Secures
Future Advances) between Standard Federal Bank and Galion Dump Bodies dated June 22, 1995. (8)
10.44 Third Amendment to Loan Agreement between Standard Federal Bank, Galion Holding Company, Galion Solid
Waste, Galion Dump Bodies and M.E.G. Equipment and Sales of Florida dated June 22, 1995. (8)
10.45 Third Amended and Restated Promissory Note (Line of Credit) dated June 22, 1995, between Standard Federal
Bank, Galion Holding Company, Galion Solid Waste, Galion Dump Bodies and M.E.G. Equipment Sales of Florida (8)
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10.46 Security Agreement dated June 22, 1995, between Standard Federal Bank and M.E.G. Equipment Sales
of Florida (8)
10.47 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (Secures
Future Advances) dated June 22, 1995, between Standard Federal Bank and Galion Solid Waste (8)
10.48 Certification of Resolution of Corporation Authority to Borrow and Pledge Collateral dated June 22, 1995,
between Standard Federal Bank and M.E.G. Equipment Sales of Florida (8)
10.49 Certification of Resolution of Corporation Authority to Borrow and Pledge Collateral dated July 18, 1995,
between Standard Federal Bank and EPCO Manufacturing (8)
10.50 Promissory Note (Line of Credit with Term Provisions) (Second Line of Credit) dated July 18, 1995, between
Standard Federal Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tube, McClain-Ohio and
EPCO (8)
10.51 Promissory Note (Line of Credit with Term Provisions) (First Line of Credit) dated July 18, 1995, between
Standard Federal Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tube, McClain-Ohio and EPCO (8)
10.52 Promissory Note (Term Loan) dated July 18, 1995, between Standard Federal Bank, the Company,
McClain-Georgia, Shelby Steel, Quality Tube, McClain-Ohio and EPCO (8)
10.53 Security Agreement dated July 18, 1995, between Standard Federal Bank and EPCO (8)
10.54 Amendment Agreement Promissory Note (Line of Credit) dated September 25, 1995, between Standard Federal
Bank, Galion Holding Company, Galion Solid Waste, Galion Dump Bodies and M.E.G. Equipment Sales of Florida (8)
10.55 Second Amendment Agreement Promissory Note (Line of Credit with Term Provisions) (First Line of Credit) dated
September 25, 1995, between Standard Federal Bank, Galion Holding Company, Galion Solid Waste, Galion Dump
Bodies (8)
10.56 Third Amendment Agreement Promissory Note (Line of Credit with Term Provisions) (Second Line of Credit) dated
September 25, 1995, between Standard Federal Bank, Galion Holding Company, Galion Solid Waste, Galion Dump
Bodies (8)
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10.57 Amendment Agreement Promissory Note (Term Loan) dated September 25, 1995, between Standard Federal Bank,
Galion Holding Company, Galion Solid Waste, Galion Dump Bodies and M.E.G. Equipment Sales of Florida (8)
10.58 First Amended and Restated Loan Agreement Between Standard Federal Bank, Galion Holding Company, McClain E-Z
Pack, Galion Dump Bodies and McClain Group Sales of Florida dated October 2, 1995 (8)
21 List of Subsidiaries (6)
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(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
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